Court of Appeal upholds validity of funding agreement

4th December 2020
lcm-court-of-appeal

Court of Appeal upholds declaration that funding agreement is valid

13 November 2020

Author: Susanna Taylor, Head of Investments APAC, LCM

The class members to the Gladstone Fisheries class action and their funder LCM Operations Pty Ltd (LCM) have successfully upheld in the Court of Appeal a declaration confirming the enforceability of the funding agreements for this class action. This is an important decision which validates the third party funding of class actions and puts to bed any residual arguments regarding the continuing effect of the medieval torts of maintenance and champerty on class action funding arrangements.

The Court of Appeal was asked to consider whether the judgment of Crow J declaring that the funding agreements for this class action were enforceable should be overturned and the funding agreements should be found to be unenforceable as a matter of public policy (such public policy said to derive from the torts of maintenance and champerty).

The proceeding

The class action commenced pursuant to Queensland’s class action regime (Part 13A of the Civil Proceedings Act 2011 (Qld) (CPA)) was brought on behalf of commercial fishers, fish handlers and wholesalers in the Gladstone region of Central Queensland. LCM is the funder of the class action, pursuant to a suite of class action funding agreements (“Funding Agreements).

It is alleged in the class action that the defendant, Gladstone Ports Corporation Limited (GPC), is responsible for the classes’ losses resulting from the contamination to the waters where they carry out their fishing operations, as a result of dredging undertaken by GPC.

The issue of the enforceability of the Funding Agreements arose in the context of a security for costs application brought by GPC. GPC challenged the form of the security, being a Deed of Indemnity from an ATE insurer but was unsuccessful in that application. GPC interpreted a comment from the judge in that security for costs judgment regarding the torts of maintenance and champerty to mean that the Funding Agreements were unenforceable and made this assertion in communications with the plaintiff. As such, the plaintiffs brought an application for a declaration that the Funding Agreements were not unenforceable by reason of maintenance and champerty and they were successful in that application before Crow J.

The appeal

The first question which the Court of Appeal considered was whether there was in fact a justiciable issue between the parties or whether the court was being asked to give an advisory opinion for a purely hypothetical situation. The Court of Appeal was clear that GPC had been mistaken in its interpretation of the security for costs judgment and no court had in fact found that the Funding Agreements were unenforceable (at [24]). Further, both the plaintiffs and LCM who are the parties to the Funding Agreement were ad idem as to the validity of their contractual arrangements.

The question of whether there was an issue to be determined by the court which was not purely hypothetical is interesting in light of the recent decisions in Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCAFC 183 and Brewster v BMW Australia Ltd [2020] NSWCA 272 which both found that the issue of whether the court had power to made a common fund order upon the approval of a class action settlement was hypothetical and as such it was not appropriate for the court to give any declaratory relief.

In the context of this decision however, the court found that “the point having been asserted [by GPC], it would be unfair to the plaintiffs and their Funder to continue to conduct this onerous, complicated, expensive and important litigation with this tactical threat remaining alive” (at [26]).

Having found that there was an issue capable of being determined, the Court of Appeal then turned to what that issue was.

The torts of maintenance and champerty are creatures of the common law. Maintenance is ‘the procurement, by direct or indirect financial assistance, of another person to institute, or carry on or defend civil proceedings without lawful justification’. Champerty is an aggravated form of maintenance, by which the maintainer receives a share of the proceeds of the action. Historically, contracts offending maintenance and champerty were illegal, and therefore unenforceable, as they were found to be contrary to public policy.

GPC, as appellant, had conceded that the existence of the torts of maintenance and champerty in Queensland (one of the remaining states where the torts have not been abolished by statute) alone was not sufficient to render the Funding Agreements unenforceable. Rather, GPC asserted that the Funding Agreements were unenforceable because certain features of these agreements were against public policy. These features were centred around the “control” said to be exerted by the funder over the class action proceeding.

The basis for the “public policy” consideration asserted by GPC was same public policy considerations which led to the development of the torts of maintenance and champerty.

The appeal judgment

The Court of Appeal considered in detail the development of the torts of maintenance and champerty and found that “the evils against which those old laws were directed are now addressed by a variety of other means, including the now accepted power of a court to control its own processes against abuse” (at [76]).

The judgment considered the relevance of the torts of maintenance and champerty to modern class action litigation where a group of plaintiffs, whose claims individually may be too small to prosecute, are permitted by a legislative regime to come together to bring their claims as a class. The court has a supervisory role in respect to such class actions in respect to most importantly, the costs of the action and the approval of any settlement of class actions. The judgment then considered how such class actions were intended to be funded in the absence of any public funding scheme, where solicitors acting on a contingency fee basis have any uplift capped according to statute and the class members themselves are unlikely to have the means to fund such large scale litigation. The Court of Appeal concluded that the scheme as a whole “leaves open only a champertous agreement with a rich litigation funder who is willing to speculate on the litigation” (at [94]).

The Court of Appeal analysed the Funding Agreements and ultimately found that the level of control exerted by the funder was inevitable where the funder was risking such a large amount of money in bringing the class action and such control did not interfere with the orthodox relationship between the solicitor and the client. Further, the court questioned in response to GPC’s submission that there was some vice in the fact that the funder’s interest was in making a return and not in actual compensation, that this is no different from the position of an insurer defending a claim, or suing for recovery under a right of subrogation.

The Court did not accept that the Funding Agreements somehow were structured in a way which would motivate the Funder to exert more than a proper level of control over the action stating that “It is difficult to see why a court should presume that a professional litigation funder, who undoubtedly wishes to remain in business beyond a single case, and who must therefore maintain a reputation for probity, would be more prone than the plaintiffs themselves to misbehave”.

Ultimately, the Court of Appeal upheld the decision of the Supreme Court that the Funding Agreements were not unenforceable as against public policy.

The future of class actions funding

The lawfulness of LCM’s class action funding agreements in Queensland and jurisdictions in which the torts of maintenance and champerty may yet to be abolished is now is clear. Defendants will need to defend the class actions brought against them on their merits rather than seek to starve the plaintiff class of the resources with which to bring them.

The judgment can be located here: Gladstone Ports Corporation Limited v Murphy Operator Pty Ltd & Ors [2020] QCA 250

This article was first published in Lawyerly.

 

 

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