19 May 2016 - By Bill Wilson QC
The adversarial system is an effective means of achieving the correct legal outcome in civil litigation, provided there is equality of arms. By that, I mean that the resources of the adversaries must be approximately equal.
If there is not equality, the party with the greater resources may well be able to persuade the court to find in its favour when, had there been equality, it could not have done so. A miscarriage of justice may accordingly result. Ensuring equality of arms is therefore an issue of access to justice.
As a litigation partner in Bell Gully for 25 years and then as a barrister for 10, I came across many examples of individuals and small- or medium-size companies with well-founded claims against public sector defendants or large corporates (often financial institutions) who were unable to bring proceedings or to pursue their proceedings to best advantage because of their limited resources. Legal aid would not be available or, if available, would be on terms which prevented the claims from being pursued as well as they could have been.
As a Judge of the Court of Appeal and the Supreme Court, I continued to see examples of inequality in terms of the differing expertise and experience of opposing counsel, the degree of support (if any) from instructing solicitors and the availability and quality of expert witnesses.
Judges may attempt to redress any perceived imbalances by asking a question which counsel should have asked but did not, or raising an argument which should have been advanced by counsel but was not, but there is a limit to the extent that judges can enter the fray in this way while continuing to appear to be impartial.
I now know that litigation funding can, in many cases, address the problem of inequality by ensuring that there is indeed equality of arms and consequently assured access to justice for those with well-founded claims but limited means.
LPF Group Ltd
LPF is New Zealand’s largest litigation funder. It is currently funding claims which total more than one billion dollars, and has ample financial capacity to do so.
The funded plaintiff and LPF enter into a “funding agreement”. LPF agrees to pay all the solicitor and client costs of the plaintiff as they are incurred and to provide any security for costs which is required.
If the proceedings are ultimately unsuccessful, LPF does not recover any of these costs and additionally is responsible for payment of the party and party costs of the successful defendant. If the proceedings are successful, LPF is reimbursed for the payments it has made and also receives part of the remaining proceeds (as agreed in the funding agreement). LPF has the right to approve the appointment of counsel and solicitors.
Under this model, which is I think similar to that of other litigation funders, the funder can earn substantial profits if it is correct in its assessment that the claim is a good one. (The profits are, however, not as great as they might seem at first sight because, given the length of time it takes to complete litigation in this country, the funder when being reimbursed for payments which it has been making over many years without any payment of interest will, in real terms, be incurring a loss). If the proceedings are unsuccessful, the funder will be substantially out of pocket.
Conversely, the only downside for a funded plaintiff is that, in the event of a successful claim, it will not receive that part of the net proceeds which goes to the funder.
As against this, the plaintiff obtains a number of benefits. It is able to pursue its claim to best advantage where it may not otherwise have the means to do so. Even if it has those means, the plaintiff may prefer not to put them at risk in pursuit of an uncertain outcome but rather deploy them elsewhere in its business. And there are also non-financial benefits. The plaintiff receives, at no cost, the independent confirmation of the funder that the claim is a well-founded one and that suitable counsel and solicitors have been appointed. The plaintiff also has the benefit of advice from the funder on litigation strategy and tactics and the acceptability or otherwise of any settlement offers.
When I was first invited to join the Board of LPF, I declined because I knew nothing about the company or indeed litigation funding. I also had a concern that the involvement of a funder might result in an unmeritorious claim being pursued against a defendant which would then be required to carry its solicitor and client costs to the extent that they exceeded the party and party costs recoverable.
To enable me to learn about LPF and litigation funding, I did agree to become a consultant to the company. In that capacity, I quickly became aware of the important role of litigation funding in ensuring access to justice.
My concern about unmeritorious claims was also allayed. I found that LPF was much more cautious and objective in considering whether to fund proceedings than, in my experience, parties themselves and their legal advisors usually are when considering whether or not to issue. Moreover, because proceedings are funded only when the defendant has the resources to satisfy any judgment against it, the defendant will have the resources required to advance a comprehensive defence. I therefore agreed to become a director of LPF and now chair its Board.
Judicial consideration of litigation funding
Funding agreements of LPF have passed examination by the New Zealand courts on three occasions in the last three years.
In Waterhouse v Contractors Bonding Ltd [2014] 1 NZLR 91, in a single judgment delivered by Justice Glazebrook, the Supreme Court found no reason not to give effect to the funding agreement but held at [76] that the identity and location of the funder and confirmation of its amenability to the jurisdiction of the New Zealand Courts were required to be disclosed. (I will return to the question of disclosure).
There followed the judgments of Justice Dobson in Strathboss Kiwifruit Ltd v Attorney-General [2015] NZHC 1596 approving at [87] a funding agreement for a representative action and Justice Brown in Re Property Ventures Ltd [2015] NZHC 1730 recording at [92] that there was no objection to the terms of the funding agreement.
Another recent judgment, not involving LPF, is of interest as illustrating the consequences for a funder if the proceedings are unsuccessful. In Houghton v Saunders [2015] NZHC 548, his costs judgment in the Feltex litigation, Justice Dobson ordered the plaintiffs to pay costs totalling in excess of $3 million to the defendants. To that figure must be added the substantial disbursements which were also ordered to be paid, the costs of the costs applications themselves and the plaintiffs’ own costs. Unless the substantive judgment is reversed on appeal, the exercise will prove to be a very expensive one for the London-based funders of the plaintiffs.
Disclosure of insurance arrangements
I have no difficulty with the disclosure of funding arrangements as required by the courts. I believe however that, when the effect of funding is to insure plaintiffs against their liability for their own and the defendant’s costs if the proceedings are unsuccessful, similar disclosure should be required of all forms of insurance.
It is therefore time to reconsider the long-standing rule that documents relating to insurance are discoverable only if the issue of insurance arises on the pleadings; see, for example, the judgment of Justice Asher in Body Corporate No. 187242 v Auckland City Council: Auckland CIV 2005404001597: 20 July 2006. The problem with that test is that the existence of insurance may well be relevant to a just determination of the dispute but that relevance is very unlikely to be apparent from the pleadings.
A number of examples come to mind immediately to illustrate why it would be desirable to require disclosure of insurance arrangements. First, when considering a settlement offer it may be relevant for a plaintiff to know whether the defendant is insured. Secondly, in making a costs award against an unsuccessful plaintiff it could properly be taken into account that the actual plaintiff is not an individual of modest means but an insurer seeking to enforce its right by subrogation to recover its own costs from the defendant. Thirdly, the court should know, when considering the submissions of the parties as to where liability should fall, that two parties have the same insurer behind them even if they are separately represented.
My overriding plea is for consistency. The presence or absence of litigation funding is not an issue which is required to be addressed on the pleadings. So either all forms of insurance, including litigation funding, should be required to be disclosed, even though there is no reference to them in the pleadings, or there should no longer be a requirement to disclose litigation funding.
Conclusion
In my view legal advisers should raise with their clients the possibility of litigation funding when discussing the issue of civil proceedings. As I have said, even if clients have the financial capacity to pay all the costs of the litigation without outside assistance, they may prefer not to put their assets at risk in pursuit of an outcome which can never been certain.
More specifically, it seems to me that insolvency is an area where much greater use could be made of litigation funding. I can understand the reluctance of receivers and liquidators, often with limited funds available, to embark without support upon litigation with its attendant risks and costs. What I cannot understand is why so many seem prepared to abandon a valuable asset, in the form of what appears to be a good claim, when with litigation funding the true value of that asset can be recovered with no downside risk to creditors.
In summary, and acknowledging my self-interest, I am an enthusiastic proponent of litigation funding. It enables those with good claims but limited means to pursue those claims to best advantage. While that may be an unattractive prospect for powerful defendants who have in the past been able to burn off such claimants with unnecessary interlocutory steps and successive appeals, assisted to a considerable degree by undisclosed insurance funders, the emergence of litigation funding is in my view very much in the interests of justice.
Bill Wilson QC is a former Supreme Court Judge who practises as an arbitrator, mediator and legal adviser from Stout Street Chambers in Wellington. He chairs the Board of LPF Group Ltd.