With
increased use of litigation funding agreements the Supreme Court has set out
rules governing third party provision of financial and legal support for other
people’s damages claims.
As the adage has it:
the courts like the doors of the Ritz Hotel are open to all comers. But not all can afford to enter. Impecunious
litigants with valuable claims can be blocked by a deep-pocketed defendant who
uses pre-trial manoeuvres to exhaust a claimant both financially and
emotionally.
Litigation funding
agreements are common in the United States.
Investors put up cash to fund litigation and share in any award of
damages. These arrangements have been
frowned on in countries like New Zealand who follow the English tradition: it
is against public policy to allow outsiders to meddle in litigation in which
they have no personal interest. At its
worst, individuals with an ulterior motive would be taking control of someone
else’s legal rights for the sole purpose of embarrassing or bankrupting the
unfortunate defendant. The United States
courts have taken a more pragmatic view: the right to sue is a valuable
economic commodity by itself and if others are willing to pay a price to share
in this potential economic benefit then well and good. The economic argument is buttressed by policy
arguments that litigation funding agreements allow financially disadvantaged
litigants to pursue their legal rights.
Use of litigation
funding agreements in New Zealand reached the Supreme Court when the former
owners of Phoenix Brokers Inc., registered in the US state of Georgia, sued New
Zealand company Contractors Bonding Ltd.
In 2000, Contractors Bonding had agreed to underwrite Phoenix
policies. When the broking business
collapsed, the former owners sued for negligence, deceit and breach of
fiduciary duty, alleging they had suffered personal loss because of Contractors
Bonding’s actions. On learning that the
litigation was being funded by a third party financier, Contractors Bonding
demanded the right to see terms of the funding agreement.
The Supreme Court
ruled that disclosure of the full agreement was not required: all that was
required was disclosure of the identity and location of the funder and its
agreement to abide by the decisions of a New Zealand court.
The court said it was
not its job to vet any funding agreement; its job is to rule on the dispute put
before the court.
Further inquiry is
appropriate should the litigation funder be taking an assignment of the legal
action; effectively “taking ownership”.
Outright purchase of another’s legal rights is not permitted. In deciding whether ownership is being
assumed, the court takes into account the level of legal control assumed by the
funder and the share of damages to be received.
Waterhouse
v. Contractors Bonding Ltd – Supreme Court (20.09.13)
13.029