The recent decision of the New Zealand Supreme Court in Waterhouse v Contractors Bonding Ltd is likely to see an increase in commercial funding of litigation of individual claims (as distinct from class actions).

In an October 2012 FYI we outlined the concept of litigation funding, and how the Court of Appeal’s decision in Contractors Bonding Ltd v Waterhouse at that time had provided some clarity to issues surrounding the courts’ role in supervising third-party litigation funding and disclosure of funding arrangements. The Court of Appeal’s decision was appealed to the Supreme Court. This FYI updates you as to what the Supreme Court has now held to be the definitive approach to litigation funding of individual claims in New Zealand.

Litigation funding

As discussed in our earlier FYI, litigation funding involves a third-party commercial funder paying the cost of litigation for a plaintiff in exchange for an agreed portion of any judgment or settlement received if the plaintiff’s claim is successful. If the plaintiff is unsuccessful, the funder receives nothing. Understandably, the GFC accelerated the litigation funding movement due largely to the many investors left with little or no financial means to fund litigation arising from company collapses. Arguably, litigation funding can provide access to justice which might not otherwise have been available.

Individual claims considered by Supreme Court

While the recent decision has been welcomed, the Supreme Court deliberately limited its findings to the courts’ role, and the extent of disclosure required, in commercially funded claims by individuals only ie individual claims funded by independent third parties who have a success fee arrangement and/or some control over the proceedings. This leaves some important aspects of litigation funding unresolved, for example where the claim is a class action.

Abuse of process arguments

Historically, funding of litigation for profit was viewed as an abuse of process. The torts of maintenance and champerty prevented parties becoming involved in litigation that was of no direct concern to them. The restriction was intended to protect the integrity of the court process. While these torts have been abolished by legislation in England & Wales and Australia, and the applicants in Waterhouse petitioned the Supreme Court in New Zealand to reach a similar end, the Supreme Court declined to do so and expressly assumed the continued existence of these torts in New Zealand. Although the torts have been retained here, the court held that litigation funding is not considered an abuse of process in itself, and therefore the onus is on the non-funded party to raise some concern (if any) with the court, before the court will intervene and scrutinise the arrangement.

Disclosure required

In order for the non-funded party to raise concern (if any), certain aspects of a funding arrangement will need to be disclosed from the outset, with other aspects potentially needing to be disclosed following an application by the non-funded party for closer scrutiny. The Supreme Court held that, while the actual agreement itself is not required to be disclosed at the outset, the courts and the other parties are entitled to know the identity of the real parties to the litigation. To that end, the Supreme Court affirmed the Court of Appeal’s ruling that the existence of a funder, together with the funder’s identity and location, should be disclosed to the other party at the commencement of a proceeding. The Supreme Court also considered that the non-funded party is entitled to sufficient information to enable it to decide whether to apply for costs, security for costs, or a stay on abuse of process grounds. To that extent, the Supreme Court held that the litigation funder’s amenability to the laws of New Zealand (and any order for costs made in the litigation) is also relevant and ought to be disclosed at the outset.

However, the Supreme Court overturned the Court of Appeal’s decision in respect of the requirement to disclose the litigation funder’s financial standing/viability, the terms on which funding can be withdrawn, and the consequences of that withdrawal. The court considered that disclosing the terms on which funding can be withdrawn would provide a tactical advantage to the non-funded party in terms of being able to precipitate the withdrawal of funding, and the risk associated with responding to a claim by a financially limited plaintiff is one that all defendants face, whether the plaintiff is funded by a third party or not.

The court acknowledged that from a practical perspective, the above guidelines may require the funded party to disclose a copy of the actual funding agreement to the non-funded party, although certain information which might give rise to a tactical advantage to the non-funded party (such as information about any "war chest" or other commercially sensitive details) and other confidential or privileged information could be protected by limiting disclosure.

Conclusion

The Supreme Court was careful to record that its findings in Waterhouse were limited to litigation funding of individual claims. While the Supreme Court’s decision has helpfully clarified the approach in that limited area, the approach to third party litigation funding arrangements in general is still in its infancy. Further development will likely come from judicial interpretation and application of the decision. Watch this space.

As mentioned in our earlier FYI, there are also proposals for regulatory reform in New Zealand awaiting review by the Ministry of Justice (for example the Class Actions Bill and proposed amendments to the High Court Rules), but these recommendations have been in the pipeline since 2009 and relate to representative actions only.