Supreme Court Introduces Uncertainty to Litigation Funding
/PricewaterhouseCoopers v Walker and Ors [2017] NZSC 151
Background
In the substantive proceedings, the liquidator of Property Ventures Ltd (PVL), which was wound up following the Global Financial Crisis, sued PwC for its role as auditor of that company (the liquidator has also sued PVL’s directors). The liquidator received funding from SPF No. 10 Ltd (SPF), a subsidiary of LPF Group Ltd, in circumstances which PwC argued amounted to an abuse of process.
SPF entered into a funding agreement with the liquidator of PVL (the Funding Agreement). Under the terms of the Funding Agreement, SPF was entitled to 42.5% of any monetary award in PVL’s favour. In addition, the Funding Agreement conferred on SPF a large degree of control over the proceedings. It provided that SPF had the final decision in terms of settlement matters or any proposed discontinuance of the proceedings, as well as input into the conduct of the claim, including strategy advice and the selection of legal advisors.
The Funding Agreement was conditional on SPF obtaining a first ranking security interest over PVL’s property. This was done by SPF entering into an agreement with Allied Farmers Investments Ltd by which it was assigned the first ranking security originally held by Hanover over PVL (the Allied Assignment).
PwC argued that the two documents, when read together, amounted to an assignment of a bare cause of action and were thus impermissible. While it may not have been an assignment of a bare cause of action in form, PwC argued that in substance it was, as the only property the security holder had to assign to SPF was its cause of action against PVL (for the recovery of outstanding debt). PwC argued that this arrangement was objectionable because it involved a third party, who is a stranger to the subject matter of the litigation, receiving virtually all of the proceeds of the litigation, rather than those truly out of pocket as a result of PVL’s collapse.
Comment
Self-evidently, the purpose of litigation is not to allow third parties to gamble on outcomes and make profits. On the other hand, the policy justification for litigation funding is to improve access to justice for plaintiffs otherwise unable to meet the rising costs of litigation.
In these proceedings, neither the High Court nor the Court of Appeal found any issue with the funding arrangement between SPF and PVL. The Court of Appeal in particular suggested that the law was settled in this area, and was unperturbed by the disproportionately low share of any proceeds that would be received by the unsecured creditors.
The substantive proceedings between PVL and PwC were settled before the Supreme Court was able to issue its decision. As a result, the Court decided to formally dismiss the appeal, but still issued judgment because the appeal involved important issues on which the Court had heard full argument.
The majority accepted PwC’s argument that the Funding Agreement and the Allied Assignment should be read together when assessing whether the funding arrangement was permissible. They said that they would have allowed the appeal and made orders requiring SPF to formalise certain undertakings that it made to the Supreme Court as an intervener in the proceedings, to the effect that:
- SPF would pay a larger share of the proceeds to the unsecured creditors; and
- SPF would not exercise any power in the assigned first ranking security that would give it greater control over the proceedings than was provided for in the Funding Agreement.
The Supreme Court’s ruling makes it clear that the funding arrangement in this case would likely have been impermissible absent the undertakings. The Court was critical of SPF making last-minute and improvised changes to the arrangement, but was nonetheless satisfied by them. Unfortunately, the majority did not specify why the undertakings were enough to make the funding arrangement permissible, when without them it would not have been. As a result, it is difficult to distil a clear test from the judgment. While this lack of specificity limits the usefulness of the decision to a degree, the majority’s view signals that courts may subject such arrangements to further scrutiny in future.
In her separate reasons, Elias CJ declined to issue a decision, reasoning that the facts of this case were too specific to be of public interest, and that there was little point in doing so now that the substantive proceedings had settled. Nonetheless, her judgment focused in on the terms of the Funding Agreement. She expressed the view that it was “well arguable” that the litigation funding agreement itself was contrary to law and public policy, given the wide extent of control over the litigation it afforded SPF. Her provisional conclusion was that there is scope to take the view that “the litigation funding arrangement amounts to the transfer of a bare cause of action for profit and is champertous”. Nor was she convinced that SPF’s undertakings would have been sufficient, as they were irrelevant to the central question of whether a bare cause of action had been assigned to the litigation funder. Finally, the Chief Justice questioned whether the law should be further developed by legislation.
Russell Stewart, Senior Associate at Fee Langstone, says that the last time the Supreme Court considered funding agreements, which was in Waterhouse v Contractors Bonding, it rejected the court’s role as a regulator of litigation funding agreements. This left something of a vacuum. The funding agreement in Waterhouse seemed to be similar to that used by the plaintiffs in the PVL case. Elias CJ’s criticisms of the Funding Agreement are significant for this reason, and it will probably mean that there will be more challenges to litigation funding arrangements in future.
Fortunately, the Law Commission will soon invite the public to make submissions as it considers whether the law surrounding litigation funding should be reformed. It is open to anyone to make submissions. Given the far-reaching effects litigation funding has on the insurance industry (particularly as seen in other jurisdictions) we encourage those in the industry to give serious thought to making a contribution. Look for an announcement in In Brief once submissions are open.
Fee Langstone acted for PwC in these proceedings.
