Key Points

  • Litigation funding is a growth industry, but its capacity to grow is limited by the rule forbidding a third party from maintaining litigation unless it has a real or bona fide interest in the litigation.
  • A recent decision suggests courts will adopt a liberal approach to determining what constitutes a real or bona fide interest.

The cost of litigation is a well recognised problem. The rule of law depends on a functioning and accessible judicial system, however, unless parties can afford the cost of using the courts, the system, no matter how good, will be in vain. As is often the case, while the experts consider ways in which justice can be delivered cost-effectively, the market has produced its own answer, called litigation funding.

Litigation funding is a commercial arrangement whereby one party, the litigation funder, agrees to meet some or all of its client's cost of litigation in exchange for some benefit, often contingent upon the outcome of the litigation. For example, in its simplest form, a litigation funder might agree to pay a plaintiff's costs of a commercial dispute in exchange for a promise that the plaintiff will give the litigation funder a share of any judgment in its favour, together with the benefit of any costs order.

Some forms of litigation funding are well accepted. Liquidators have long had the right, now found in section 477(2)(c) of the Corporations Act, to sell or otherwise dispose of, in any manner, the property of a company in liquidation. Insurers have always been required by their policies to meet the costs of litigation against their clients. Trade unions have often assisted their members to bring cases against employers. More recently, in 1993 the Legal Profession Act 1987 (NSW) was amended to permit lawyers to act on a "no win, no fee" basis, provided that the premium charged for such an arrangement is not more than a 25 percent uplift on the lawyer's usual fees.

However, litigation funding outside of these limited fields has been traditionally forbidden or at least strongly discouraged. The legal term for litigation funding is "maintenance", which is "improperly stirring up litigation and strife by giving aid to one party to bring or defend a claim without just cause or excuse" (Re Trepca Mines Limited (No 2) [1963] 1 Ch 199 at 219). Furthermore, the simple form of litigation funding described above, where the premium charged for the funding is a share of any judgment, is described as "champerty". Champerty is regarded by the courts as particularly undesirable because it gives the funder a very direct interest in both the outcome of the litigation and the size of the judgment.

Maintenance and champerty are seen as undesirable because of the threats they pose to the integrity of the judicial process. The rules against maintenance and champerty originally arose because of the fear that someone whose only interest in litigation was the opportunity for commercial gain would be tempted to subvert court processes by suppressing evidence or suborning witnesses. It is generally accepted that our courts are much more robust and therefore less susceptible to such attacks than the English courts which developed these rules 200 or so years ago. However, concerns remain that litigation funders might stir up strife by encouraging litigation for their own profit or influence the conduct of litigation to the detriment of the parties and the process.

Despite these concerns, the incidence of commercial litigation funding has grown in recent times, particularly in centres for commercial litigation like the United Kingdom. One House of Lords case, Giles v Thompson [1994] 1 AC 142, concerned car hire companies which loaned cars to victims of car accidents. In return the victims agreed to sue at fault drivers for the cost of the care hire and assigned the damages to the hire company.

Australia has lagged a little behind the UK in this area, but has nevertheless made its own contribution to the field: it is home to a company which boasts that it is the only publicly listed litigation funder in the world.

Litigation funding presents a difficulty for the courts. On the one hand, litigation is a costly business, and there are some worthy plaintiffs who wish to bring litigation but cannot afford to do unless they receive a helping hand. On the other hands, allowing a purely commercial operator a stake in the outcome of litigation gives rise to a recognised risk that the integrity of the litigation process will be lost and, ultimately, that rights in litigation might be bought and sold much like any other property. Since the courts depend on the integrity of their process to guarantee justice, such an outcome would defeat the purpose of the exercise.

In Barr v Narui Gold Coast Pty Ltd [2004] NSWSC 986 Justice Palmer of the NSW Supreme Court confronted just this problem. Although the facts are quite complicated, the essential elements can be summarised simply. The plaintiff leased a plot of land on the North Coast of New South Wales, ripe for development, from the defendant. The lease included an option to purchase the land. The defendant alleged that the plaintiff had breached the lease and terminated it. The plaintiff then sought to exercise the option to purchase the land. The plaintiff also granted an option to purchase the land to a developer who was keen to acquire the land for the purposes of developing it. The consideration for this option included a promise by the developer to pay all of the plaintiff's costs of the proceedings to enforce its option against the defendant.

Once the proceedings to enforce the option were commenced, the defendant sought to have the proceedings stayed or dismissed on the basis that they were unlawfully maintained by reason of the developer's promise to meet the plaintiff's costs.

Justice Palmer held that where litigation funding occurs outside of the recognised categories of allowed funding, the critical question is whether the person funding the litigation has a "real or bona fide interest" or a "justifiable motive for involvement" in the proceeding. He held that the commercial interest of the developer in obtaining the property for development was a legitimate interest which justified its funding of the litigation. In particular, it did not matter that before the developer entered into the agreement in which it promised to fund the litigation it had no legal interest in the land. The mere recognition of a commercial opportunity to develop the land was enough to justify the developer's interference in the dispute between plaintiff and defendant.

If this decision is correct it means that any person who takes a commercial interest in a dispute which is above and beyond a mere commercial wager on the outcome may be entitled to "maintain" that litigation. It does not matter whether the interest which the person has is nothing more than the recognition of a commercial opportunity, although presumably the commercial opportunity must be something above and beyond the mere success or failure of the litigation.

This test will leave a great deal of scope for litigation funders in Australia and is likely to see this new industry continue to grow. It remains to be seen at what point the courts will decide that risks of litigation funding require the boundaries of the "real or bona fide interest" principle to drawn.

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.