Australia: Has the long-anticipated regulation of litigation funding finally arrived?

Swaab Connect - June Edition
Last Updated: 21 June 2011


The recent decision of the NSW Court of Appeal in International Litigation Partners Pte Ltd v Chameleon Mining NL 1 has confirmed that litigation funders are required to hold an Australian financial services licence (AFSL) pursuant to the requirements of Ch 7 of the Corporations Act 2001 (Cth) (the Act). The failure on the part of a litigation funder to hold such a licence, or be exempted from doing so by the Australian Securities and Investments Commission (ASIC), may subject any litigation funding agreement to rescission pursuant to s 925A of the Act, and thereby render such agreement void ab initio.


The first respondent to the appeal, Chameleon Mining NL (Chameleon), had entered into a litigation funding agreement (funding agreement) with the appellant, International Litigation Partners Pte Ltd (ILP), for the purposes of funding Chameleon's litigation proceedings in the Federal Court against Murchison Metals Ltd (Murchison).2

On 10 August 2010, a change in control of Chameleon occurred when Chameleon signed a term sheet with a third party, the second respondent to the proceedings. The trial at first instance dealt principally with the impact of that change in control on the funding agreement and the amount of money, if any, payable to ILP as a result.

It was alleged by ILP, both in the proceedings at trial before Hammerschlag J and before the Court of Appeal, that a term of the funding agreement stipulated that upon a change in control of Chameleon occurring, ILP would, in addition to the recovery of the legal costs it had funded, be entitled both to its "funding fee" and to an additional "early termination fee" as a result of the early termination of the funding agreement.

It was contended by Chameleon, however, that as ILP was an unlicensed provider of financial services, within the meaning of Ch 7 of the Act, Chameleon was entitled to, and did, rescind the agreement by a notice of rescission issued to ILP. Chameleon submitted that as ILP did not hold an AFSL, by effect of ss 925A and 925E of the Act, the notice of rescission resulted in the funding agreement being void ab initio and unenforceable against Chameleon, and therefore neither the funding fee nor the early termination fee were payable by Chameleon.

At trial, Hammerschlag J found that the funding agreement was not a financial product within the meaning of the Act and that it could not be rescinded. On appeal, however, the NSW Court of Appeal, per Giles JA and Young JA (Hodgson JA dissenting in part), found that ILP was required to hold an AFSL and Chameleon had validly rescinded the funding agreement.

Litigation funding as a financial product

The starting point of the court's analysis was s 924A of the Act and whether the funding agreement "constitutes, or relates to, the provision of a financial service". Section 766A(1)(b) then directs that a financial service is provided if a person "deals in a financial product". This occurs by "issuing a financial product" (s 766C(1)(b)).

This then leads to the question of what constitutes a financial product. Section 763A(1) defines a financial product as:

... a facility through which, or through the acquisition of which, a person does one or more of the following:

(a) ...

(b) manages financial risk ...

In turn, s 763C directs that a person manages financial risk (among other things) "if they manage the financial consequences to them of particular circumstances happening".

His Honour Giles JA summarised the effect of the convoluted trail of provisions as follows (at [34]):

Drawing the provisions together, did the agreement constitute or relate to ILP issuing a facility through which, or through the acquisition of which, [Chameleon] managed the financial consequences to it of particular circumstances happening?

Decision at first instance

Hammerschlag J concluded that the funding agreement did not manage financial risk, as the principal object of the agreement was to enable Chameleon to prosecute the proceedings against Murchison (by having ILP pay its legal costs), rather than to manage the risk of Chameleon's possible failure in those proceedings:

Whilst in one sense the Deed has the effect of minimising one category of financial risk for [Chameleon] (namely, the risk that it will incur expense in pursuit of Murchison which will be wasted if no or an insufficient Resolution Sum is received), on no realistic view can it be said that the Deed is a financial product whereby [Chameleon] manages that risk.

Rather the object of the Deed is to enable [Chameleon] to prosecute the Proceedings by having the Funder pay Legal Costs and perhaps (as the Recitals describe) provide investigative and management expertise to assist in the Proceedings. The object of the Deed is to facilitate [Chameleon] vindicating its claim against Murchison, not to manage the risk of possible failure in that endeavour.3

Accordingly, his Honour concluded that as the funding agreement was not a financial product, it could not be rescinded.

Decision on appeal

On appeal, the court unanimously concluded that the funding agreement was a financial product as it was a facility through which Chameleon managed financial risk. The court considered that Chameleon managed the financial consequences to itself of certain things happening, including adverse costs orders and the loss of the litigation.

However, the court split on the question of whether the funding agreement was excluded from constituting a financial product by virtue of s 763E of the Act in that the management of the financial risk was only an "incidental component of the facility". Giles JA and Young JA concluded that the financial product aspect of the funding agreement was not an incidental component of the facility and therefore it was a financial product within the meaning of the Act. In assessing whether management of financial risk was only an incidental component, Giles JA determined that the relevant test is an objective one. Giles JA concluded (at [44]):

It is not correct to categorise the agreement as an enterprise with a purpose exclusory of managing financial risk. The enquiry under the Act is relevantly whether the agreement was a facility through which, or through the acquisition of which, [Chameleon] managed financial risk. It is not an inquiry into [Chameleon's] purpose in managing financial risk, translated to a purpose of the agreement, and the word "through" calls attention to the operation or effect of the facility and not to the purpose of the person.

In assessing the purpose of the funding agreement, he later concluded (at [91]):

... the agreement is not a financial product as an incidental component of a facility which also has other components or a facility incidental to other facilities; nor are the relevant terms incidental components or incidental to other terms or another facility. There is no "main purpose" of obtaining funding distinct from the financial product purpose of managing financial risk. The purpose of the agreement is to obtain litigation funding on the terms contained in it, and those terms make it a financial product.

In dissent, Hodgson JA, although acknowledging that one aspect of the funding agreement was the management of financial risk, held that this aspect was not the primary aspect and was incidental to the main purpose of the funding agreement, which was the provision of financing for the pursuit of the proceedings.


It was also submitted by Chameleon that the funding agreement was a "derivative" within the meaning of s 761D of the Act and, as a result, fell within the specific things that are deemed financial products described within s 764A(1).

The majority of the Court of Appeal concluded (per Young JA and Hodgson JA, Giles JA dissenting) that the funding agreement was not a derivative within the meaning of the Act. However, all three members of the court provided differing reasoning.

Hodgson JA summarised the definitional test of a derivative as follows (at [129]):

Whether the amount of the consideration that must or may be required to be provided under the funding agreement at some future time (or the value of the arrangement) "is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else" within s 761D(1)(c).

Hodgson JA concluded that the amount of consideration to be provided under the funding agreement was ultimately determined, derived from or varied by "something else".

Hodgson JA thereafter reasoned, however, that the funding agreement was excluded from the definition of derivative by virtue of the exclusion contained within s 761D(3)(b), "as a contract for the future provision of services". He concluded that the funding agreement was a contract where the amount to be paid was unknown and to be determined by the future provision of services (at [132]):

Having taken a broader view of the basic definition [of derivative], I would also take a broader view of the relevant exception. The intention disclosed, in my opinion, is that where what determines the amount to be paid at some future time is the future provision of services, the extent or value of which is presently uncertain, or the outcome of which provision is presently uncertain, the arrangement should not be caught by the definition.

Young JA, however, concluded that the funding agreement was not a derivative as the amount of consideration related, in every aspect, to an interest in the Federal Court proceedings, as opposed to being derivatively reliant upon the value of "something else". As Young JA concluded that the funding agreement was not a derivative, he did not address in detail the exclusion in s 761D(3)(b), nor whether the funding agreement was a contract for the future provision of services, other than to conclude that it was not and that the exclusion would not apply in any event.

Giles JA, in dissent, concluded that the funding agreement was a derivative in that the value of the consideration to be paid was affected by the outcome of the Federal Court litigation and the associated legal costs.

Giles JA did not consider that the funding agreement was a contract for the future provision of services. His Honour found that it was overwhelmingly a contract for the provision of money by ILP, not services.

Credit facility

It was submitted by ILP that the funding agreement was a "credit facility" within the meaning of s 765A(1)(h)(i) of the Act and, as such, was exempted from the definition of a financial product. ILP asserted that the funding agreement provided for an advance of money by ILP to the benefit of Chameleon and pursuant to which Chameleon deferred the repayment of the debt.

The submission was rejected by the majority on appeal (per Giles JA, Young JA, Hodgson JA dissenting) as there was no advance of money by ILP to Chameleon and there was no debt owed, the payment of which was deferred. There might never be anything payable by Chameleon to ILP and in the event the proceedings were unsuccessful, ILP would be liable to pay more money in respect of an adverse costs award in the proceedings.


The Court of Appeal held that ILP was required to hold an AFSL as the funding agreement was a financial product for the management of financial risk. Accordingly, Chameleon was entitled to (and did) rescind the funding agreement pursuant to s 925A of the Act.

The decision is of fundamental importance to any party to a current or contemplated litigation funding agreement where the litigation funder does not hold an AFSL, or is exempted from doing so by ASIC. In the absence of an AFSL, a funded party may be in a position to rescind any funding agreement rendering it void ab initio and unenforceable. This can result in the funder being required to repay all amounts paid to it by way of brokerage fee, commissions or other fees. It will likely be the case, however, that the funder is entitled to repayment for any amounts advanced by it to a funded party in respect of legal costs and disbursements.

To validly exercise a right of rescission, a funded party is required to act within a reasonable period of time of becoming aware of the AFSL requirement by serving a rescission notice, failing which the funded party may be deemed to have affirmed the funding agreement.

The judgment handed down by the NSW Court of Appeal on 3 June 2011 confirmed that Chameleon Mining was entitled to rescind the funding agreement. It is anticipated that ILP will seek special leave to appeal to the High Court.

Swaab Attorneys acted for Chameleon Mining NL in the proceedings at trial and on appeal.


1. International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 276 ALR 138; [2011] NSWCA 50; BC201101379, on appeal from the decision of Hammerschlag J in Chameleon Mining NL v International Litigation Partners Pte Ltd (2010) 79 ACSR 462; [2010] NSWSC 972; BC201006296.

2. Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129; BC201008807.

3. Chameleon Mining NL v International Litigation Partners Pte Ltd (2010) 79 ACSR 462; [2010] NSWSC 972; BC201006296 (at [83]–[84]).

For further information please contact:
Tean Kerr, Partner
Phone: + 61 2 9233 5544

Swaab Attorneys was the highest ranking law firm and the 13th best place to work in Australia in the 2010 Business Review Weekly Best Places to Work Awards. The firm was a finalist in the 2010 BRW Client Choice Awards for client service and was named the winner in the 2009 Australasian Legal Business Employer of Choice Awards.

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.

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