As the global economic crisis deepens, the trend of increasing litigation will gather momentum. Hedge funds, private equity firms and high net worth individuals are some of the players now being attracted by the potentially high returns litigation funding offers. Some think this appetite will only increase while the outlook for traditional investment markets remains dire. Enter the white knights of the “penniless plaintiff” or “debt-laden defendant”.

Litigation Funding – What is it?

Litigation funding is a commercial arrangement whereby one party, the litigation funder, agrees to meet some or all of its client’s litigation costs in exchange for some benefit, often contingent upon the outcome of the litigation. In its simplest form, a litigation funder might agree to pay a plaintiff’s costs and disbursements of pursuing a commercial dispute in exchange for a share of any judgement in the plaintiff’s favour, together with the benefit of any costs awarded.

For many centuries the courts frowned on parties becoming involved in litigation that was of no direct concern to them. To prevent this, the courts developed the laws of maintenance - unlawfully encouraging another party to bring legal actions, or to raise defences, which they had no right to make on their own account; and champerty - a form of maintenance whereby the maintainer takes a share of the spoils of litigation.

Courts prohibit champerty and maintenance because of public policy. The courts fear that the champertous maintainer might be tempted, for his or her own personal gain, to inflame the damages, suppress evidence, or even to suborn witnesses: Giles v Thompson [1993]  All ER 321.

It is generally accepted that our courts are much more robust these days, and therefore less susceptible to such tactics when these rules were developed. However, there are concerns litigation funders might stir up strife by encouraging litigation for their own profit. 

The Courts' approach

The courts, both in Australia and New Zealand, now recognise that champerty and maintenance do not sit comfortably with the increasing use of class actions, group proceedings and litigation funding.   

Both Australian and New Zealand courts already allow insolvency practitioners to use litigation funding to recover “company property” and this will be a growing trend. The recent decision of Associate Judge Sargisson in AMP Capital Investments No 4 Ltd v IBS Group Ltd (In Liquidation), High Court, Auckland, 12 November 2008, is a timely reminder to all liquidators that any litigation finding agreement they have must not have terms that exceed the rule that the funder cannot unduly interfere with the conduct of the litigation.

In Australia, the High Court in Campbells Cash and Carry Pty Ltd v Fostif Pty Limited  & Ors (2006) 229 ALR 58 found that the laws of champerty and maintenance were not relevant or applicable to litigation funding. Similarly, the High Court in New Zealand has recently indicated that it no longer sees maintenance and champerty as reasons to disallow funding. Justice Heath, in the decision of Auckland City Council as Assignee of Body Corporate No. 16613, Paul Borne Browne & Ors. v Auckland City Council & Ors High Court, Auckland 10 December 2007, discussed the challenge of the relevance of these torts to New Zealand courts. The Courts in both Australia and New Zealand seemingly continue to support this trend.

Legislature’s approach

Law makers in both countries have recognised the tension of the old laws versus the realities of today. In Australia, three States and one Territory have abolished the laws of maintenance and champerty as a crime and a tort. The laws of maintenance and champerty have never been a crime in New Zealand but as a tort Parliament seems to be now questioning their relevance. 

Recent legislative developments in New Zealand mean that class actions and litigation funding are set to become part of the fixed legal landscape. The High Court Rules Committee is in the process of finalising consultation on draft legislation and High Court Rules to support the bringing of class actions in New Zealand. The intention is to present these documents to the Minister towards the end of the first quarter of 2009.

The draft legislation sets out a class action regime similar to the Australian model, and allows for both “opt-out” and “opt-in” actions.  If passed, this legislation, together with the growth of litigation funding could well bring about a significant increase in class actions in New Zealand.

Legislation for class actions has been in force in Australia for many years. There is still debate in Australia about legislative controls over litigation funders.

Commercial litigation funding companies in Australia are steadily increasing In number, one has recently publicly listed and one has crossed the ditch to start operations in New Zealand, no doubt, with more to follow.

The time is ripe for litigation funding to gather steam. For the funder, it is purely an investment decision and potentially a sound one given the lack of other investment options at the moment.

For the funded party it presents a chance to level the playing field. While this may be meritorious on the one hand, the impact of increased litigation will have a number of negative spinoffs including strain on the case load of the judiciary, increased insurance premiums particularly in the field of directors and officers’ liability insurance and, aside from the financial consequences, an emotional toll on litigators.

We should all remember the following: “Litigation:  A machine which you go into as a pig and come out of as a sausage” – Ambro Bierce 1842-1914.

Belinda Barclay is an associate at New Zealand firm Wynn Williams & Co and is a former Australian lawyer.