Australia: Do litigation funders need an AFS licence? New challenge for the litigation funding industry
Insurance Update March 2012

International Litigation Partners Pte Ltd v Chameleon Mining NL and Anor [2011] 276 ALR 138

The NSW Court of Appeal has delivered the most recent challenge to the Australian litigation funding industry, finding that a funding agreement was unenforceable on the basis that the litigation funder was dealing in a 'financial product' without an Australian Financial Services licence.

Background

On 28 October 2008, Chameleon Mining NL (Chameleon) entered into a litigation funding agreement with a Singaporean litigation funder, International Litigation Partners Pte Limited (ILP), in respect of proceedings commenced in the Federal Court of Australia by Chameleon against Murchison Metals Ltd and others.

ILP was entitled under the funding agreement to the repayment of its legal costs and the payment of a percentage of the proceeds from the litigation. The funding agreement also gave ILP the right to a multi-million dollar Early Termination Fee in the event of termination.

Following a change in control in Chameleon resulting from a merger, Chameleon purported to rescind the funding agreement on the basis that, contrary to the Corporations Act 2001 (Cth) (the Corporations Act), ILP was providing a financial service without an Australian Financial Services (AFS) licence. The impact of this challenge was that if this rescission was effective, the contract with ILP would be unenforceable and ILP would not be able to recover the Early Termination Fee or any other benefit under the funding agreement.

Decision at first instance

Hammerschlag J rejected the proposition that the funding agreement was a "financial product" issued by a non-licensee and concluded that ILP was entitled to the Early Termination Fee.

Court of Appeal

The Court of Appeal, in determining whether the funding agreement was a "financial product", was required to resolve whether the funding agreement was a facility through which Chameleon "managed financial risk" as required by section 763A(1) of the Corporations Act. At trial, Hammerschlag J had found that while the funding agreement minimised Chameleon's defence costs enabling it to pursue Murchison, on no realistic view could it be said that the funding agreement was a facility through which Chameleon managed its financial risk.

On appeal, Chameleon submitted that his Honour wrongly confined attention to the payment of Chameleon's defence costs without reference to the risk of an adverse costs order or the risk that the proceedings could not go ahead without the provision by Chameleon of security for costs, both of which also featured in the funding agreement.

The Court of Appeal unanimously held that the Funding Agreement was a "financial product".

This Court however was divided as to whether the exception contained in s 763E of the Corporations Act applied. This exception permits dealing without an AFS licence where managing financial risk was not the main purpose of the "financial product". The majority concluded that managing risk was the main purpose of the facility while Hodgson JA found that this aspect was incidental to the main purpose which was the provision of funding.

The result was that ILP was found to have provided "financial services" without an AFS licence contrary to the Corporations Act which meant that the funding agreement could be rescinded by Chameleon.

High Court - Special Leave

The High Court has granted special leave to ILP to appeal this decision. During the Special Leave Application, Gummow J observed that the question of licensing litigation funders was an important one that needed to be addressed.

Implications

The litigation funding industry will be watching closely this High Court appeal which is expected to take place this year.

ASIC has, since the Court of Appeal judgment, issued class order 11/555 which extends class order 10/333 to exempt all litigation funding arrangements, including single member arrangements, from the requirement to hold an AFS licence.

The Federal Government has also released details of a proposed Corporations Amendment Regulation which, amongst other things, seeks to carve out funded class actions from the definition of a "financial product" in the Corporations Act.

Thus it appears that whatever the outcome of the High Court appeal, litigation funders will not in future require AFS licences as the issue is being dealt with by ASIC and the Federal Government.

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.