Insurers' Alert - Litigation Funding: In the Public Interest.

On 30 August 2006 the High Court of Australia delivered two eagerly awaited judgments in Campbells Cash & Carry Pty Limited v Fostif Pty Limited [2006] HCA 41 and Mobil Oil Australia Pty Limited v Trandlen Pty Limited [2006] HCA 42 that are likely to set the stage for future reform and possible regulation of litigation funding. As the Mobil decision followed Fostif it is only necessary to consider Fostif.

FOSTIF

In Fostif the High Court considered whether the actions of a litigation funder amounted to an abuse of process in the context of "opt-in" proceedings commenced against various wholesalers by tobacco retailers. The tobacco retailers were seeking to recover the value of tobacco licence fees collected from them by the wholesalers over the course of several weeks after the High Court, in earlier proceedings, had declared the fees invalid.

Representative proceedings were commenced in the NSW Supreme Court and financed by the litigation funding company Firmstones Pty Ltd (Firmstones). Orders were initially granted allowing the retailers to seek discovery of documents from the wholesaler defendants revealing the names and addresses of the retailers they had previously supplied, and for Firmstones to send an opt-in notice to each listed retailer inviting them to join the proceedings. Firmstones was to receive 1/3 of any amount recovered in the proceedings.

On 11 September 2003 Einstein J held that there was a lack of common interest between the retailers and on 7 November 2003 ordered, among other things, that the proceedings could not continue as representative proceedings. The retailers appealed and the Court of Appeal subsequently overturned Einstein J's orders. The wholesalers appealed to the High Court.

A 5-2 majority of the High Court upheld the appeal that the proceedings should not continue as representative proceedings. The decision turned on a lack of compliance with Part 8 rule 13 of the former Supreme Court Rules 1970 (NSW) and, in particular, a lack of common interest between multiple persons or entities at the time proceedings were commenced. That was notwithstanding that a number of unidentified retailers may have eventually fallen into a common category.

Does litigation funding amount to an abuse of process?

The High Court was also asked to consider whether the litigation funding by Firmstones constituted an abuse of process by being contrary to public policy. In a joint judgment Justices Gummow, Hayne and Crennan observed that the torts of maintenance and champerty had been abolished through common law development and through certain state based legislation such as the Maintenance, Champerty and Barratry Abolition Act 1993 (NSW) and approved the comments of Mason P in the NSW Court of Appeal where His Honour supported the principle that:

"[p]ublic policy now recognises that it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation".

In a dissenting judgment Justices Callinan and Heydon considered that the proceedings were an abuse of process based on Firmstones' motivation of profiting from the litigation of others, the small value of loss sustained by each individual retailer, the retailers' interests being wholly subservient to the interests of Firmstones, and the fact that Firmstones had sought out and encouraged people to sue who otherwise would not have done so.

The views raised in the dissenting judgment are likely to be considered very closely by those seeking to regulate the litigation funding industry.

Future legislative reform

The High Court added support for legislative reform of representative actions and greater regulation of litigation funders consistent with its earlier decision of Carnie v Esanda Finance Corporation Ltd (1995) 182 CLR 398.

LEGISLATIVE DEVELOPMENTS

In November 2005 the Standing Committee of Attorneys General (SCAG) considered litigation funding in anticipation of preparing a report for parliamentary consideration. In May 2006 SCAG released a Discussion Paper, inviting public submissions and comments by 14 September 2006.

The SCAG Discussion Paper acknowledges that litigation funding has clear benefits in the context of insolvency and more generally to provide access to justice for meritorious claims which would otherwise be abandoned, but that the industry faces some key challenges. The SCAG is particularly concerned about consumer protection issues, noting that the Trade Practices Act 1974 (Cth) and State Fair Trading laws may not provide sufficient protection, that litigation funders often enter a direct retainer with solicitors limiting the professional duties owed to the "plaintiffs", and that unfair funding arrangements are often not discovered because cases are frequently settled before trial.

SCAG's primary objectives are to ensure consumer protection and obtain legislative uniformity across jurisdictions. A number of key issues have been identified for discussion including clarification of the legal status of litigation funding where the tort or crime of maintenance and champerty still exists in some States, ensuring a direct lawyer-client relationship in funded actions, increasing transparency and disclosure requirements and ensuring the independence of lawyers from litigation funders. Many of these issues were considered by the WA Supreme Court of Appeal in Clairs Keeley v Treacy [2005] WASCA 86.

The SCAG has further raised the possibility that the Australian insurance market may follow the overseas trend by providing litigation insurance products such as Legal Expenses insurance (where legal services are funded in exchange for policy payment) and "after-the-event insurance" (where a policy covering adverse costs orders is taken out after a cause of action has risen).

COMMENT

Following the Fostif and Mobil decisions it is clear that defendants can no longer seek to stay litigation funded proceedings merely on allegations that litigation funding constitutes an abuse of process. The majority judgment arguably also allows for litigation funders to become more directly involved in actual litigation. However, it is clear from these decisions and the SCAG Discussion Paper that there is substantive judicial and political support for increased regulation of litigation funders. It is therefore possible that significant legislative reform will follow.

Some commentators consider that these decisions will lead to a wave of new class action suits. While unlikely in the short term, it is possible that potential actions that have been held back pending the High Court ruling may now be instituted.

Fostif and Mobil will provide more comfort than concern to litigation funders and underwriters should be aware that this may lead to an increase in class actions in the medium to long term. The insurance sector will no doubt be monitoring the SCAG's future recommendations. Litigation insurance products entering the Australian market may provide active litigants further opportunity to bring actions in circumstances where litigation funders have assessed the claim as being either too small or otherwise not commercially viable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Charles Thornley

Wotton & Kearney

Level 13

28 O'Connell Street 

Sydney

NSW

2000

AUSTRALIA

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