NSW COURT OF APPEAL DECISION SUPPORTS LITIGATION FUNDING MARKET

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1 NSW COURT OF APPEAL DECISION SUPPORTS LITIGATION FUNDING MARKET Introduction 1. The New South Wales Court of Appeal, in a unanimous Judgment on Thursday 31 March 2005, sent some clear messages to legal practitioners about the conduct of litigation which may have a material impact upon IMF s business in the following areas: (d) enabling funded representative proceedings to be utilised for the benefit of funded clients exclusively; utilisation of the Court s discovery process to identify and communicate with potential clients; greater control of the litigation by the funder permitted by the Court; and the Court s focus on just, quick and cheap resolution of the real issues. 2. In the NSW Court of Appeal proceedings (Fostif Pty Ltd v Campbell Cash and Carry Pty Ltd) ( Fostif ), the appellants (licensed tobacco retailers) brought claims in representative proceedings against their respective licensed tobacco company, the respondents, to recover licence fees paid by the retailers. These claims were brought in the wake of High Court decisions: declaring invalid the licensing schemes; and allowing retailers to recover the licence fees paid to the tobacco companies before the schemes were found to be invalid. 3. The litigation funder s control of the proceedings in Fostif was extensive, being responsible for overall project management, technical issues, appointment of legal representatives, funding the legal proceedings and all dealings with tobacco suppliers and government organisations. The control over the litigation given to the funder under the funding agreement extended to the right to give instructions as to how the claims were to be moulded, what evidence to rely upon and similar matters. In broad terms, the funder was in effect granted authority by the retailers under the funding agreement to provide direction to the lawyers conducting the proceedings on the retailers behalf. Efficiency of Representations Proceedings 4. The principal efficiency offered by representative proceedings in comparison to proceedings commenced individually by all members of a class is that until the representative s claim is heard and determined, the Court does not require each and every member s evidence to be identified and disclosed. 5. The representative process offers earlier and cheaper determination of the common issues and an opportunity for the parties to the litigation to understand quickly and cheaply their principal risks and opportunities. This in turn enables resolution of the disputes efficiently (if that is what is seen by both parties as in their commercial interests). Document #44092

2 Page 2 of 5 6. It is not, however, commercially viable for litigation funders to fund representative proceedings in circumstances where not all members of the class agree to pay the funder for the risks it undertakes and the services it provides. 7. The tobacco companies in Fostif submitted that defining the class by reference to parties prepared to accede to the funder s conditions was circular and inadequate to underpin representative proceedings. In other words, participation in the benefits of the proceedings was dependant upon submission to the funder s conditions. 8. The Court of Appeal held there could be no objection to this in itself, particularly where the conditions themselves and the management of the process to determine the represented parties was subject to judicial supervision. 9. This decision promotes the overriding purpose of the NSW Supreme Court Rules, being to facilitate the just, quick and cheap resolution of the real issues in civil proceedings. 10. In particular, if its effect is to enable access to justice through the leverage of representative proceedings and resourcing through litigation funding, then we will see valuable legal rights being enforced that would otherwise have wasted. 11. Clearly this would be in the interests, amongst others, of IMF. 12. The Aristocrat proceedings are currently before the Federal Court of Australia, NSW Registry in respect of a similar issue; namely whether proceedings funded by IMF can proceed as representative proceedings in circumstances where all members in the class, as currently defined, are funded by IMF. Efficient Communication with Clients 13. A principal question answered by the Court of Appeal in Fostif was whether it should require the tobacco companies to disclose the identities of additional retailers within the class? 14. In answering this question in the affirmative, the Court of Appeal stated: The interests of justice favour early limited discovery of these matters, because it assists the court in closing the class as a step in case management and it is the fairest and most effective way of giving notice to all represented persons The respondents are best equipped to aid the court in this process. 15. The tobacco companies argued the court process was driven by the funder s desire to ensure that only those retailers who accepted the funder s terms should have the right to participate in the anticipated fruits of victory. 16. The President of the Court of Appeal responded to this argument as follows: Interestingly enough, the respondents do not propose opting-out as an antidote. My general remarks about the utility of these funded proceedings in assisting access to justice explain why I reject this submission about improper goal of the proceedings or the discovery motions. 17. Clearly early identification of, and communications with, class members would be in the interests, amongst others, of IMF.

3 Page 3 of IMF is currently seeking the West Australian Court of Appeal s determination in respect of whether IMF may utilise the share register of Sons of Gwalia Limited (Administrators Appointed) to efficiently communicate with claimants. What is an acceptable level of funder control? 19. This question was asked of the Western Australian Court of Appeal in Clairs Keeley which was prepared to entitle IMF to have the following involvement: (d) overseeing the activities of the solicitors and ensuring the timelines, budgets and court orders were met; being involved in the major strategic moves during the course of the litigation; investigating; and involvement in settlement negotiations. 20. The NSW Court of Appeal in Fostif extended the area of legitimate involvement of the funder, in the interests of access to justice, to the extensive roles referred to in paragraph 3 above. 21. The President of the Court of Appeal said: In my opinion, the Court s basal inquiry should be whether the role of the particular funder has corrupted or is likely to corrupt the processes of the court to a degree that attracts the extraordinary jurisdiction to dismiss or stay permanently for abuse of process. The standard of proof is high where (as here) the plaintiff has a genuine and variable cause of action. The court will lean in favour of moulding its remedy so as to eliminate the abuse, resorting to dismissal as a last resort where it is impossible A measure of control is essential if the funder is to manage group litigation and also protect its own legitimate interests. The funder s control in the present case is not excessive, especially since there is a solicitor on the record and since these are representative proceedings under judicial supervision. 22. This decision effectively enables funders to be involved in the day to day management of the litigation as an ancillary service to their assumption of the financial risks. Being involved in this management will enable funders to better understand and manage the risks associated with their investments, which in turn will enhance their capacity to bring capital to the litigation funding market. Quick and Cheap Resolution of the Real Issues 23. Shortly after JJ Spigelman AC was appointed Chief Justice of the Supreme Court of NSW, the Supreme Court Rules were amended to stipulate: (1) The overriding purpose of these rules, in their application to civil proceedings, is to facilitate the just, quick and cheap resolution of the real issues in such proceedings. (2) The Court must seek to give effect to the overriding purpose when it exercises any power given to it by the rules or when interpreting the rules.

4 Page 4 of 5 (3) A party to civil proceedings is under a duty to assist the Court to further the overriding purpose and, to that effect, to participate in the processes of the Court and to comply with directions and orders of the Court. (4) A solicitor or barrister shall not, by his or her conduct, cause his or her client to be put in breach of the duty identified in (3). (5) The Court may take into account any failure to comply with (3) or (4) in exercising a discretion with respect to costs. 24. In the report, Access to Justice, Lord Woolf wrote: It is now generally recognised, by judges, practitioners and consumer representatives, that there is a need for a new approach both in relation to court procedures and legal aid. The new procedures should achieve the following objectives: provide access to justice where large numbers of people have been affected by another s conduct, but individual loss is so small that it makes an individual action economically unviable; provide expeditious, effective and proportionate methods of resolving cases, where individual damages are large enough to justify individual action but where the number of claimants and the nature of the issues involved mean that the cases cannot be managed satisfactorily in accordance with normal procedure; and achieve a balance between the normal rights of claimants and defendants, to pursue and defend cases individually, and the interests of the group of parties to litigate the action as a whole in an effective manner. 25. The Court of Appeal in Fostif endorsed these principles as reflective of goals consonant with the rule seeking just, quick and cheap resolution of the real issues and contemporary attitudes to civil litigation. 26. The real issues in Fostif involved the retention by the tobacco companies of millions of dollars in circumstances where the High Court had decided that money held by the tobacco companies in similar circumstances ought to be returned to the tobacco retailers. 27. Unfortunately for the retailers and the Court, the tobacco companies diversion of the Court s attention from the real issues lasted about 2 years, which prompted the Court of Appeal to state: In general, it is simply no business of a defendant to be taking up the cudgels on behalf of the funded litigants who are either parties or represented persons, invoking interlocutory processes ostensibly on behalf of the funded litigants but in reality in its own interest. As this appeal demonstrates, such satellite proceedings have the capacity of diverting resources and attention from the true issues as between the plaintiffs (and those they represent) and the defendant. 28. Too often deep pocketed and determined defendants, together with their lawyers, will see it in their interests to cause as much delay and cost in the litigation process as is necessary to ensure the real issues are not addressed by the Courts.

5 Page 5 of One of the Court of Appeal s principal messages in Fostif is that it will be vigilant in seeking just, quick and cheap resolution of the real issues in civil proceedings. This will directly enhance access to justice by diminishing the cost of litigation over time as legal fees and time are only spent on resolving the plaintiff s claim and not satellite litigation. 30. Any decrease in the cost of litigation and related delays will benefit all parties, seeking quick and cheap resolution of the real issues, including IMF. John Walker Managing Director