Third party funding – the business of investing in litigation is on the rise

2018 Litigation Forecast

Like group litigation (often called ‘class’ actions), litigation funding is also becoming a more established feature of the New Zealand litigation landscape. A typical model is that a litigation funder will pay for all legal and other costs relating to a proceeding in exchange for repayment of funding costs and a profit margin or share of the damages if the claim is successful. Litigation funding is attractive to claimants who may not have sufficient funds to pursue a claim and who pay nothing if the claim does not succeed. As there are no significant common law or statutory barriers to litigation funding in New Zealand, we predict increasing involvement from funders.

The hot topics for litigation funding in 2018 are likely to be:

1. Further debate on the proper role of the courts where litigation is funded: Historically, litigation funding was not permitted.  It was seen as an abuse of process because the third party funder did not have a direct interest in the claim with the key concern being that such claims were oppressive to defendants and may result in the misuse of the function of the courts.[1]  However, the New Zealand courts have, in recent years, followed overseas courts in permitting litigation funding with some safeguards.  The safeguards and the role of the courts have been considered in two key cases recently:

a. In 2017, the Supreme Court in PwC v Walker[2] considered whether the litigation funder had, in effect, improperly taken assignment of the proceedings from the claimant (refer below). The conclusion of the majority of the Supreme Court was that there was no improper assignment. However, this case displayed a tension between the wish to permit litigation funding (to allow access to justice) and the court's protective function to ensure that there is no abuse of process.

b. Another discussion on the court's role took place in the Southern Response class action litigation. In that case, the Court of Appeal observed that it is not the court’s role to approve litigation funding agreements.[3]  However, the court will review funding agreements to reassure itself that there are no obviously unfair, oppressive or misleading aspects to the arrangement.  The Court noted that the reason why the courts decline to approve funding agreements is because a potential class member might be falsely reassured by the court’s approval. The Court considered that this might result in a class member failing to undertake their own due diligence.

Our view is that the courts will continue to test where the boundaries of its protective function lie as litigation funding continues to grow and evolve in New Zealand.

2. Advertising of ‘class actions’ which are funded by third parties: The Court of Appeal in the Southern Response case was also asked to consider whether the advertising of the group litigation was misleading to some claimants.  Southern Response alleged that statements such as “no win, no fee”, “there is nothing to lose by joining”, and that claimants would be “no worse off” may be misleading for some claimants as there was uncertainty as to how the litigation funder’s fees would apply. The Court ordered that leave to bring the claims as a class would be conditional until the Group could satisfy the Court that the sub-group would in fact be no worse off by joining the class action.[4] This demonstrates that the courts will scrutinise statements made regarding the likely outcomes of funded litigation. Funders and claimants may face delays in obtaining leave to bring a group claim if inaccurate or misleading statements are made.

3. Return on investment for funders? Despite the growth in litigation funding, a key issue for funders in New Zealand is that there has not yet been a track record of substantial pay outs for litigation funders. Indeed, there was a $5m costs award in the Feltex proceeding made against the funded shareholders in Feltex.[5] The substantive Feltex claim has been appealed to the Supreme Court and the ultimate outcome could change the costs outcome. A significant adverse costs award would not be lost on the commercial litigation funders currently active in the New Zealand market.  That said, litigation funding in Australia is reportedly highly profitable[6] and funders will naturally assess opportunities on a case by case basis.

4. Litigation funding and the Law Commission’s review of class actions: Litigation funding is likely to be a hot topic in the review of the class action regime by the Law Commission which is due to commence in early 2018.  The Law Commission is likely to look closely at whether the courts should take a more active role in supervising third party funding as the Australian courts do (e.g. the Australian courts approve settlements whereas the New Zealand courts do not).  This review may, in time, lead to a more formal regime for litigation funding.  A formal regime would, in our view, be preferable to the current position, with plaintiffs’ and defendants’ legal teams alike being required to navigate the growing body of case law for the applicable principles.

Case study – PwC v Walker

One of the key litigation funding decisions in 2017 was the decision of the Supreme Court in PwC v Walker. [1] In this case, the Court considered the third party funding of claims by Property Ventures Limited (PVL) (and others) against PwC, the auditor of PVL. The claims arose out of the liquidation of PVL following a failed property development project in Queenstown. PVL alleged that had PwC not been negligent, PVL’s operations would have been wound-up earlier that they were, in which case ongoing losses would have been avoided. SPF No 10 Limited (SPF) funded PVL’s claims against PwC under a Funding Agreement and also took assignment of a General Security Agreement (GSA) over PVL’s assets.

PwC applied to the High Court to stay the proceeding on the basis that the combined effect of the Funding Agreement and the GSA was that SPF had taken assignment of PVL’s cause of action against PwC. It was alleged that SPF, as a third party to the proceedings, would receive all the proceeds of the litigation and that this was in fact an impermissible assignment of a bare cause of action. The application was heard ultimately by the Supreme Court. However, prior to the Supreme Court issuing its decision, the parties settled the substantive proceedings. Notwithstanding that a settlement had been reached, the Supreme Court took the unusual step of issuing its judgment anyway.

One of the key issues was whether the right under clause 6.3 of the GSA gave SPF control over the proceedings. Clause 6.3 gave SPF the right following PVL’s default to “bring, defend, submit to arbitration, negotiation, compromise, abandon or settle any claim or proceeding, or make any arrangement or compromise, in relation to the Secured Property.” The concern was whether the broad powers in clause 6.3 would trump the Funding Agreement which stated that the liquidator (not SPF) would instruct the lawyers. The majority of the Supreme Court expressed the preliminary view that the specific provisions of the Funding Agreement, which state that the liquidator will instruct the lawyers, would likely constrain SPF’s power under clause 6.3.

However, the majority of the Court found that since SPF had confirmed that it would not seek to rely on clause 6.3, the Court did not need to express a view on whether the combined rights under the Funding Agreement and the GSA meant that SPF had a “bare cause of action”.[1]  SPF also undertook to pay a proportion of the proceeds to the liquidator for the benefit of the unsecured creditors of PVL.[1]  As a result of these undertakings, the majority of the Supreme Court was satisfied that the concerns about the combined effect of the Funding Agreement and the GSA were unfounded.

Footnotes

[1] PwC v Walker [2017] NZSC 151 at [121] [2] [2017] NZSC 151. [3] Southern Response Earthquake Service Limited v The Southern Response Unresolved Claims Group [2017] NZCA 489 at [81]. [4] Ibid at [126]. [5] [2015] NZHC 548. [6] IMF funded cases in Australia between August 2001 and June 2010 had an internal rate of return of 75% before overhead expenses.  Abrams and Chen “A Market for Justice: A First Empirical Look at Third Party Litigation Funding” 15 U. Pa. J. Bus. L. 1075 at 1094.

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