Despite the growing number of funded proceedings in Australian commercial litigation there remains no formal regulatory framework applies to litigation funders.  The old law of champerty and maintenance was swept aside and nothing was put in place to fill the gap.

Until recently, litigation funding has largely been controlled through the supervision of the Court, including common law protections against abuse of process, and Federal, State and Territory consumer protection legislation.  Recently, however, a number of funding arrangements have been challenged in satellite litigation.

On 15 March 2011 in its Chameleon Mining decision, the NSW Court of Appeal held that litigation funding agreements are “financial products” within the meaning of Chapter 7 of the Corporations Act 2001 (Cth) and are thus subject to licensing requirements. 

It remains to be seen how the Federal Government’s proposed regulations on litigation funding, initially intended to respond to the earlier Multiplex decision, will shape this aspect of class action litigation.

Chameleon Mining:  litigation funding agreement held to be a financial product

International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50 concerned the effect and classification of a litigation funding agreement entered into between Chameleon Mining NL (Chameleon) and International Litigation Partners Pte Ltd (ILP), under which ILP undertook to fund litigation commenced by Chameleon in the Federal Court against Murchison Metals Ltd, in return for a funding fee which consisted of a percentage of any sum awarded upon resolution of the proceedings.  The agreement also included an early termination clause which allowed the agreement to be terminated when there was a change in control of Chameleon subject to a fee being paid. 

In August 2010, a change in control occurred and Chameleon purported to rescind the funding agreement.  Chameleon relied on section 925A of the Corporations Act, alleging that the funding agreement was a financial product, and that ILP was not licensed to issue or deal in such a product.  (ILP was incorporated in Singapore and did not possess at any stage an Australian Financial Services Licence (AFSL).)  ILP contested this rescission and claimed not only the early termination fee but also the funding fee, pending the successful resolution of the Federal Court proceedings. 

At first instance, Justice Hammerschlag rejected the proposition that the funding agreement was a financial product and determined that it could not therefore be rescinded.  His Honour found that, on the proper construction of the funding agreement, ILP was entitled to an early termination fee, but not the funding fee as claimed.  This decision was appealed by both parties.

It was accepted before the Court of Appeal that rescission rights would follow if the funding agreement was determined to be a financial product under the Corporations Act.  The fundamental question for determination was therefore whether the funding agreement was a financial product under the Corporations Act, and thus capable of being rescinded.

The Court of Appeal concluded that the funding agreement in question did meet the definition of a financial product under section 763A of the Corporations Act on the basis that:

  • the nature of the funding agreement was such as to manage the risk of Chameleon with respect to its litigation, and in regards to any potential adverse costs order that might be made against it.  As such, the funding agreement was directed towards managing “the financial consequences to them of particular circumstances happening” and constituted a financial product
  • none of the exceptions under the Corporations Act applied:
    • it did not fall within an exception based on the management of risk being an “incidental component” of the facility;
    • it did not fall within the exemption for derivatives; and
    • it was not a credit facility.

A table setting out a summary of the Court of Appeal’s findings, and how they compare to the position at first instance, is at the end of this article. 


Since the Court of Appeal found by a majority that the funding agreement was a financial product, and it was not contested that ILP did not possess an AFSL allowing it to issue such a product, the Court held that Chameleon was entitled to rescind the agreement pursuant to section 925A of the Corporations Act.  In these circumstances, ILP was not entitled to any funding or early termination fee.

Regulation of funded class actions - Multiplex and beyond

In 2009 the Full Federal Court held in Multiplex ((2009) 260 ALR 643; [2009] FCFCA 147) that the litigation funding arrangements for two class actions constituted ‘managed investment schemes’ (as defined by section 9 of the Corporations Act) and thus should have been registered with ASIC, as well as satisfying the various requirements of the Corporations Act (see here for detailed analysis of the Multiplex decision). 

In response to this decision, on 4 May 2010 the Federal Government announced that it would implement a regulatory carve-out for funded class actions, with the intention that ASIC provide regulatory guidance about managing conflicts of interest (especially in relation to assessments of awards and settlements).  The approach appears to be underpinned by a belief that differential treatment of litigation funders is justified because of their contribution to access to justice.

Pending enactment of the proposed regulations, the situation remains governed by class order relief granted by ASIC:

  • Under Class Order 10/333, funded proceedings commenced after 4 November 2009 are exempt from the definition of managed investment schemes and concomitant disclosure requirements. Funders, lawyers and their representatives are also exempt from the requirement of holding an AFSL.  This has been extended on a number of occasions, most recently on 29 June 2011 (CO 11/555) to 30 September 2011.
  • Class Order 11/555 also extended the effect of CO 10/333 to provide additional, similar relief  from the requirements of the Corporations Act for litigation funding arrangements that are otherwise characterised as a financial product or an interest in a financial product.

However, while the amendments to Class Order 10/333 negate the practical effect of Chameleon on litigation funders for the time being, it is by no means clear that the Government’s proposed regulations will go so far as to exempt litigation funders from the requirement of holding an AFSL. If they do not, then Chameleon may have a significant impact on the class action landscape with IMF (Australia) Ltd being the only litigation funder with an AFSL (which it has held since 2005).

The conflicting opinions in Chameleon, both between first instance and appeal and between the individual appeal judges, also reflect the complexity inherent in applying the definitional regime of the Corporations Act in relation to “financial products,” and the risk remains that an alternative interpretation of the legislation may be adopted in subsequent cases.  Where doubt remains about whether an AFSL is required, disclosure about the absence of an AFSL can alleviate the risks of rescission (Corporations Act, 925A(4)), although other risks will remain.

Summary of Court of Appeal’s findings

Click here to see table