On 20 June 2012, the High Court of Australia heard argument in the appeal from the decision of the New South Wales Court of Appeal in International Litigation Partners Pte Ltd v Chameleon Mining NL  NSWCA 50.
The case concerns a litigation funding agreement between Chameleon Mining NL (Chameleon) and International Litigation Partners Pte Ltd (ILP) (the Agreement), under which ILP undertook to fund litigation commenced by Chameleon in the Federal Court of Australia against Murchison Metals Ltd, in return for a percentage of any sum awarded upon resolution of the proceedings. The Agreement also allowed for early termination if a change of control of Chameleon occurred, subject to payment of an early termination fee. When a change of control occurred, Chameleon purported to rescind the funding agreement under section 925A of the Corporations Act 2001 (Cth) (Corporations Act) on the basis that the Agreement was a financial product, and that ILP was not licensed to issue or deal in such a product.
At first instance, Justice Hammerschlag did not accept that the Agreement was a financial product. Thus, Chameleon could not rescind the Agreement and was liable to pay the early termination fee.
In March 2011, the New South Wales Court of Appeal overturned this judgment, holding that the Agreement was a financial product and that, because ILP did not hold an Australian financial services license (AFSL), Chameleon could rescind the Agreement. For a more detailed summary of the reasoning behind the Court of Appeal’s decision, please see our earlier article.
Key issues raised before the High Court
The key issues raised in argument before the High Court were:
- whether the Agreement was a facility through which a person manages financial risk and thus, answers one of the general descriptions of a financial product under the Corporations Act. ILP submitted that the word “manage” suggests there must already be an existing state of affairs which presents a financial risk. It argued that the Agreement created an allocation of risk between the parties and that it was not an instrument for managing financial risk;
- if the Agreement answered this general description of a financial product, whether it was reasonable to assume that any financial product purpose of the Agreement was merely incidental and thus otherwise excluded from the definition of financial product contained in Chapter 7 of the Corporations Act. ILP submitted that the real purpose of the Agreement was to fund litigation with a view to sharing the spoils of a hoped-for victory and the stoploss effect of the Agreement was incidental to this purpose;
- if the Agreement answered this general description of a financial product, whether it was a credit facility and thus expressly excluded from the definition of financial product in Chapter 7 of the Corporations Act;
- if the Agreement did not answer the one of the general descriptions of a financial product, whether, it was nonetheless a derivative and thus specifically deemed to be a financial product; and
- if the Agreement fell within the statutory description of a derivative, whether it was nevertheless a “contract for the provision of services” and thus expressly excluded from the description of a derivative for the purposes of Chapter 7 of the Corporations Act.
Corporations Amendment Regulation 2012 (No. 6)
The High Court has reserved its decision. Whichever way it rules, from 13 January 2013 the position in respect of litigation funding agreements for class actions will be affected by the Corporations Amendment Regulation 2012 (No. 6).
This legislative action is a direct response to the decision in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd  FCAFC 147, which held that litigation funding arrangements were managed investment schemes and therefore needed to satisfy the regulatory requirements for such schemes, including the promoter holding an AFSL.
The Regulation provides that:
- litigation funding schemes are declared not to be managed investment schemes (MIS) under the Corporations Act;
- litigation funding schemes are exempt from the requirement to hold an Australian financial services license;
litigation funders must maintain adequate arrangements for managing conflicts of interest that may arise in relation to activities undertaken pursuant to the scheme. This includes having written procedures on:
- how to identify conflicts of interest;
- how to disclose any conflicts to members of the scheme; and
- how to deal with situations where the lawyer acts for both the funder and the members;
- litigation funders do not need to provide certain types of disclosure documents or statements when offering their services to a client; and
- litigation funders are exempt from the anti-hawking provisions in section 992A of the Corporations Act.
The Regulation will commence on 13 January 2013.
In the meantime, ASIC has granted transitional relief to litigation funders from compliance with the MIS and AFSL regimes under the Corporations Act until 13 January 2013.
While the practical effect of a High Court decision in relation to litigation funding agreements for class actions may now be somewhat limited, the decision will provide important guidance on whether other commercial arrangements constitute financial products and are subject to regulation under the Corporations Act. Such guidance may be particularly useful given the use of, as Bret Walker SC called them in his submissions, "functional descriptions" in the legislation, which might in the future be argued to apply to instruments created by the "ingenuity or so called innovation of persons serving or acting in [the] markets”.