Regulation

Overview

Is third-party litigation funding permitted? Is it commonly used?

Third-party litigation funding is permitted. Although the common law torts of maintenance (assisting a party in litigation without justification) and champerty (assisting in consideration of a share of proceeds of the litigation) have not technically been abolished in New Zealand, the recent attitude of the New Zealand courts to third party-funding can be described as ‘cautiously permissive’ and, perhaps, increasingly receptive. To describe this approach, a distinction needs to be drawn between representative proceedings under Rule 4.24 of the High Court Rules (which allows one or more persons to sue on behalf of, or for the benefit of, all persons with the same interest in the subject matter) and ordinary non-representative proceedings.

Representative proceedings

A representative proceeding requires that the representatives sue with the consent of the other persons who have the same interest (Rule 4.24(a)), or the court directs this on an application (Rule 4.24(b)). The Court of Appeal has confirmed that the existing procedure does not require the court to give prior approval for a funding arrangement (Southern Response Earthquake Services Ltd v Southern Response Unresolved Claims Group [2017] NZCA 489 (Southern) at [79]). Instead, the court will ensure that in making a direction it is not facilitating an abuse of process. If a representative proceeding is based on clearly misleading funding arrangements or amounts to a bare assignment of claims, then the court will not grant leave knowing that its processes are being used to facilitate unlawful conduct. In this regard, the courts will exercise a greater supervisory role over the setting up of representative proceedings (ie, the funding arrangements and communications with prospective class members) than where a party bring an ordinary proceeding that is funded.

Non-representative proceedings

The Supreme Court of New Zealand has made it clear that it is not the role of the courts to act as general regulators of litigation funding arrangements or to give prior approval to such arrangements, outside its supervisory role in ‘representative’ proceedings (see above). Instead, the role of the courts is to adjudicate on any applications brought before them to which the existence and terms of a litigation funding arrangement may be relevant (Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 (Waterhouse) at paragraphs 28 to 29). The Supreme Court has accepted that some measure of control by a third-party funder is ‘inevitable’ to enable a litigation funder to protect its investment (Waterhouse at paragraph 46).

Scope for intervention

Under the High Court Rules or its inherent powers, the High Court may intervene (for example, by imposing a stay of proceedings) in both representative or non-representative funded proceedings under the following circumstances.

Abuse of process

The High Court may intervene if there is a manifestation of an abuse of process on traditional grounds, such as where proceedings:

  • deceive the court, are fictitious, or mere sham;
  • use the process of the court in an unfair or dishonest way, for some ulterior or improper purpose, or in an improper way;
  • are manifestly groundless, without foundation or serve no useful purpose; and
  • are vexatious or oppressive.

See Price­Waterhouse­Coopers v Walker [2016] NZCA 338 (Price­Waterhouse­Coopers) at paragraph 14(e).

Non-permitted bare course of action

A funding arrangement (including an assignment of a security agreement) amounts to an assignment of a bare cause of action to a third-party funder in circumstances where this is not permissible (ie, the exceptions to maintenance and champerty do not apply).

In assessing whether litigation funding arrangements amount to an assignment that is not permitted, the court will have regard to the level of legal (rather than de facto) control able to be exercised by the funder, the profit share of the funder and the role of the lawyers acting (Waterhouse and Price­Waterhouse­Coopers). Even where such concerns arise, the provision of appropriate undertakings by a funder may be effective to allay them. In Price­Waterhouse­Coopers, a funding agreement was in place between the plaintiff company (in liquidation) and the litigation funder (SPF No. 10 Ltd), in conjunction with an assignment under a security agreement to the funder of the plaintiff’s right of action against the defendant (being its only valuable asset). The defendant argued that this arrangement was an impermissible assignment of a bare cause of action to the funder, which amounted to an abuse of process. The majority of the Supreme Court held (paragraphs 77 to 91) that the belated provisions of the following undertakings given by the funder to the court satisfied concerns as to the permissibility of the assignment:

  • to not rely on clauses in the security agreement giving it greater control than it had under the funding agreement; and
  • to pay a proportion of proceeds of a successful claim for the benefit of unsecured creditors (where the funder was otherwise entitled to all of these under the security agreement).
Misleading statements given to the court

Where a representative action has been promoted to prospective litigants using misleading statements, the court may also intervene, either by refusing a direction under Rule 4.24(b), or to correct the harm done by the distribution of the material (Southern at paragraphs 78 and 82).

Funding of arbitration

Given the private nature of arbitration, the treatment of third-party litigation funding in domestic arbitration in New Zealand is largely unknown. The relevant legislation (the Arbitration Act 1996) does not contain any provisions relating either directly or indirectly to litigation funding (or even class arbitrations). Instead, an arbitrator has the power to conduct the arbitration, or to control the conduct of the arbitration, subject to the agreement between the parties and the rules of natural justice (article 19, Schedule 1). An arbitrator may also order ‘any party to do all such other things during the arbitral proceedings as may reasonably be needed to enable an award to be made properly and efficiently’ (Clause 3(1)(j) of Schedule 2). These broad powers would encompass the ability to regulate funded domestic arbitrations with respect to those referred to in the following questions.

In addition, the arbitral tribunal, or a party with the approval of the arbitral tribunal, may request assistance from the High Court or a district court in the exercise of the powers conferred on the arbitral tribunal relating to the conduct of arbitral proceedings (Clause 3(2) of Schedule 2). This ability would allow either the arbitral tribunal of its own motion, or one of the parties with its approval, to request assistance from the High Court or a district court in the event of an issue arising in the context of a funded domestic arbitration.

Litigation funding is becoming more commonly used in New Zealand, although is not as commonly used as in other common law jurisdictions (such as the United Kingdom and Australia). In recent years, a variety of proceedings funded by third parties have been brought, with allegations in relation to:

  • losses on share investments resulting from misleading statements in a share prospectus (Saunders v Houghton [2014] NZHC 2229);
  • building products (White v James Hardie New Zealand [2017] NZHC 2112]);
  • losses resulting from kiwi fruit being affected by the entry of disease into the country (Strathboss Kiwifruit Ltd v Attorney-General [2018] NZHC 1559 (Strathboss Kiwifruit);
  • illegitimate fees charged to consumers by banks (Cooper v ANZ [2013] NZHC 2827);
  • insurance claims arising out of earthquakes (Southern Response Unresolved Claims Group v Southern Response Earthquake Services Ltd [2017] NZCA 489, [2018] 2 NZLR 312); and
  • breaches of directors’ duties owed to companies (Walker v Forbes [2017] NZHC 1212 and Mainzeal Property and Construction Ltd (in liq) v Tan [2019] NZHC 255).
Restrictions on funding fees

Are there limits on the fees and interest funders can charge?

There are no limits prescribed by either legislation or the common law. In the context of a non-representative funded action, the Supreme Court of New Zealand has said that it is not the role of the courts to assess the fairness of any bargain between a funder and a plaintiff, presumably including funder remuneration (Waterhouse, paragraph 48). In the context of a representative funded action, the High Court was not persuaded that the terms of the funding agreement (including an entitlement to terminate the funding agreement without cause on five days’ notice and a power to veto in relation to settlement) were inappropriate for a representative action (Strathboss Kiwifruit Ltd v Attorney-General [2015] NZHC 1596, (2015) 23 PRNZ 69 at paragraph 70).

That said, in assessing whether litigation funding arrangements amount to an assignment that is not permitted, the courts will have regard to the profit share of the funder (see question 1).

Specific rules for litigation funding

Are there any specific legislative or regulatory provisions applicable to third-party litigation funding?

There are no provisions specifically applicable to third-party litigation funding, but there are general provisions which have application.

As providers of financial services and products in trade, litigation funders are subject to the provisions of the Fair Trading Act 1986. This contains consumer protections against misleading and deceptive conduct, unsubstantiated representations, and false or misleading representations. It provides redress against such conduct by funders in, for example, marketing funding, negotiating with prospective plaintiffs, or in relation to acts or omissions while a funding arrangement is in place. The Consumer Guarantees Act 1993, which imposes statutory guarantees in relation to services, may also have application.

Funders with a place of business in New Zealand, and who provide a ‘financial service’ (typically, this is because they act as a creditor under a credit contract, as defined in section 5 of the Financial Service Providers (Registration and Dispute Resolution) Act), must register as a financial service provider (FSP). Those providing services to ‘retail clients’ (as defined in section 49 of the Financial Service Providers (Registration and Dispute Resolution) Act) must also belong to a dispute resolution scheme. All financial service providers are subject to the ‘fair dealing’ provisions in the Financial Markets Conduct Act 2013, which prohibit misleading conduct, false or misleading representations and unsubstantiated representations in relation to financial products and services. The regulatory authority, the Financial Markets Authority, can take civil action against financial service providers whose conduct breaches these provisions. Possible civil orders include declarations of contravention, pecuniary penalties and compensatory orders.

Legal advice

Do specific professional or ethical rules apply to lawyers advising clients in relation to third-party litigation funding?

No specific rules apply. The general professional and ethical rules in the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 apply.

In Houghton v Saunders (2011) 20 PRNZ 509, the High Court, at paragraph 75, found the following guidelines ‘helpful’:

  • There should be a direct client-solicitor relationship between the members of the represented group and the lawyer acting for the represented group in the litigation.
  • The lawyer acting for the represented group must be responsible for advising the named claimants and members of the represented group about the merits of the case and all material developments in the case. That advice must be prepared and provided without interference by the litigation funder.
  • The litigation funder must not provide expert evidence in the litigation. Expert witnesses must be instructed directly by the lawyers acting in the litigation and the litigation funder should have no direct involvement in that process.
Regulators

Do any public bodies have any particular interest in or oversight over third-party litigation funding?

No public bodies have specific interest in or oversight over third-party litigation funding, apart from the courts and the Financial Markets Authority to the extent that litigation funders are subject to the relevant legislation (see question 3).