Campbells Cash And Carry Pty Limited V Fostif Pty Limited [2006] HCA 41
For many centuries the common law frowned on parties becoming involved in litigation that was of no direct concern to them. To prevent this type of conduct the common law developed the laws of maintenance (the unlawful encouragement of others to bring legal actions or to raise defences which they had no right to make) and champerty (a form of maintenance which results in the maintainer sharing a portion of the spoils of litigation).
The laws of maintenance and champerty do not sit comfortably with the increasing use of class actions (representative proceedings) and the emergence of the Litigation Funder (there are 5 currently operating in Australia) as a financial backer for reward of large scale litigation.
Lawmakers and the courts have recognized the tension. The A.C.T., New South Wales, South Australia and Victoria have abolished the laws which made maintenance and champerty a crime and a tort. The Courts now allow insolvency practitioners to use litigation funding to recover “company property” and have approved the use of litigation funding in non-insolvency claims.
Yet the use of litigation funding remains contentious.
A group of licensed tobacco retailers from New South Wales commenced representative proceedings against their respective wholesalers to recover licence fees they had paid under a tobacco licensing scheme that the High Court had declared unconstitutional (a similar scheme concerning petroleum was also the subject of a representative action that was dealt with by the High Court in Mobil Oil Australia Pty Limited v Trendlen Pty Limited [2006] HCA 42, together with the Fostif decision, with the same result).
The tobacco retailers were funded by a Litigation Funder. The Litigation Funder undertook to pay all costs in exchange for 33 1/3 % of any judgment or settlement plus costs (a not uncommon arrangement) and would play a major role in the conduct of the proceeding.
The Trial Judge in the New South Wales Supreme Court held that the litigation funding arrangements were against public policy and an abuse of process and did not comply with Court Rules regarding representative proceedings because the represented persons did not have the “same interest” in the proceedings.
The NSW Court of Appeal overturned the Trial Judge’s decision. The Court of Appeal was satisfied that the Court Rules for representative proceedings were complied with and that the proceedings were not an abuse of process because they were under judicial supervision, the litigations funder’s control of the litigation and fees was not excessive, there was a solicitor on the record and the individual claims were small making separate recovery processes unlikely.
The High Court by a 5 to 2 majority made the following important findings.
At the time Fostif issued its proceedings there were no persons other than Fostif that had an interest in the proceedings. The proceeding sought to represent only those within the class of represented retailers who “opted in”. It could not therefore be said that there was any person that Fostif would represent and therefore the “same interest” test was not satisfied.
The majority was also satisfied that the terms of the litigation funding before it, either alone or in combination, were insufficient to warrant condemnation as being contrary to public policy or as leading to an abuse of process.
Any fear that the processes of litigation would be adversely affected by litigation funding or about the fairness of the bargain struck between a litigant and a funder, did not justify the formulation of an overarching rule of public policy against litigation funding. Funded litigation should be treated like any other litigation; any problems that arise should be dealt with via the processes governing such litigation not a general rule of public policy.
Given the High Court’s pronouncement, there is no longer any justification for any Australian jurisdiction to “outlaw” champerty and maintenance. Court Rules should be harmonized to enable large and medium scale class actions (representative proceedings if you will) and drafted in such a way as to minimize interlocutory skirmishes over whether court procedures have been complied with.
Litigation funding should cease to be the preserve of Plaintiffs. There is no reason why it cannot be utilized by Defendants.
Governments, of course, have to have their say. The Standing Committee of Attorneys–General published a Discussion Paper in June 2006 entitled “Litigation Funding in Australia”. Submissions or comments were due by 14 September 2006. It seems clear enough that some form of regulation of litigation funders will emerge from this review. Any such regulation will have as its prime objectives the protection of consumers, national consistency and the need to promote broader access to justice.
While we are unlikely to see a sudden upsurge in class actions following the High Court’s decision, in the longer term the decision may tend to promote the incidence of large scale litigation. In turn, corporations and businesses (especially those that deal with the public or whose shares are publicly listed) will need to develop tighter risk management procedures and a more sophisticated approach to litigation.
Impediments to representative proceedings still exist. For one thing, lawyers in Australia cannot charge contingency fees (although in some jurisdictions and under strict conditions they can charge “uplift fees”) and the massive cases and damages awards common in the United States are not likely to be replicated here, at least not in the short to medium term. For another, the High Court’s decision is only applicable in those jurisdictions where maintenance and champerty have been abolished as a crime and a tort.
It remains to be seen whether the decision will lead to more entrants into the litigation funding market, more funded proceedings and change in approach by corporations faced with representative proceedings as to how they defend them.
For further information, please contact Wayne Kelcey on + 61 3 9608 2132 or at w.kelcey@cornwalls.com.au
or John Hutchings on + 61 3 9608 2245 or at j.hutchings@cornwalls.com.au
or Stephen Newman on +61 3 9608 2219 or at s.newman@cornwalls.com.au
