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International Litigation Partners Pte Ltd v Chameleon Mining NL
and Anor [2011] 276 ALR 138
The NSW Court of Appeal has delivered the most recent challenge
to the Australian litigation funding industry, finding that a
funding agreement was unenforceable on the basis that the
litigation funder was dealing in a 'financial product'
without an Australian Financial Services licence.
Background
On 28 October 2008, Chameleon Mining NL
(Chameleon) entered into a litigation funding
agreement with a Singaporean litigation funder, International
Litigation Partners Pte Limited (ILP), in respect
of proceedings commenced in the Federal Court of Australia by
Chameleon against Murchison Metals Ltd and others.
ILP was entitled under the funding agreement to the repayment of
its legal costs and the payment of a percentage of the proceeds
from the litigation. The funding agreement also gave ILP the right
to a multi-million dollar Early Termination Fee in the event of
termination.
Following a change in control in Chameleon resulting from a
merger, Chameleon purported to rescind the funding agreement on the
basis that, contrary to the Corporations Act 2001 (Cth)
(the Corporations Act), ILP was providing a
financial service without an Australian Financial Services
(AFS) licence. The impact of this challenge was
that if this rescission was effective, the contract with ILP would
be unenforceable and ILP would not be able to recover the Early
Termination Fee or any other benefit under the funding
agreement.
Decision at first instance
Hammerschlag J rejected the proposition that the funding
agreement was a "financial product" issued by a
non-licensee and concluded that ILP was entitled to the Early
Termination Fee.
Court of Appeal
The Court of Appeal, in determining whether the funding
agreement was a "financial product", was required to
resolve whether the funding agreement was a facility through which
Chameleon "managed financial risk" as required by section
763A(1) of the Corporations Act. At trial, Hammerschlag J had found
that while the funding agreement minimised Chameleon's defence
costs enabling it to pursue Murchison, on no realistic view could
it be said that the funding agreement was a facility through which
Chameleon managed its financial risk.
On appeal, Chameleon submitted that his Honour wrongly confined
attention to the payment of Chameleon's defence costs without
reference to the risk of an adverse costs order or the risk that
the proceedings could not go ahead without the provision by
Chameleon of security for costs, both of which also featured in the
funding agreement.
The Court of Appeal unanimously held that the Funding Agreement
was a "financial product".
This Court however was divided as to whether the exception
contained in s 763E of the Corporations Act applied. This exception
permits dealing without an AFS licence where managing financial
risk was not the main purpose of the "financial product".
The majority concluded that managing risk was the main purpose of
the facility while Hodgson JA found that this aspect was incidental
to the main purpose which was the provision of funding.
The result was that ILP was found to have provided
"financial services" without an AFS licence contrary to
the Corporations Act which meant that the funding agreement could
be rescinded by Chameleon.
High Court - Special Leave
The High Court has granted special leave to ILP to appeal this
decision. During the Special Leave Application, Gummow J observed
that the question of licensing litigation funders was an important
one that needed to be addressed.
Implications
The litigation funding industry will be watching closely this
High Court appeal which is expected to take place this year.
ASIC has, since the Court of Appeal judgment, issued class order
11/555 which extends class order 10/333 to exempt all litigation
funding arrangements, including single member arrangements, from
the requirement to hold an AFS licence.
The Federal Government has also released details of a proposed
Corporations Amendment Regulation which, amongst other things,
seeks to carve out funded class actions from the definition of a
"financial product" in the Corporations Act.
Thus it appears that whatever the outcome of the High Court
appeal, litigation funders will not in future require AFS licences
as the issue is being dealt with by ASIC and the Federal
Government.
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