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Litigation funding

14 Nov 2012

Litigation funding is a fact of life in large, complex litigation. Not too long ago, litigation funding was seen as against public policy. The law is still developing in this area and disputes still abound with the litigation funding, how to characterise it and issues associated with it.

The agreements contain various provisions covering the rights of the parties, how to conduct the litigation, what licensing requirements operate and what happens if there is a change in control of corporations involved in proceedings. Each issue has, somewhat ironically, lead to complex litigation itself.

In October 2012 the High Court unanimously determined that a litigation funder was entitled to an “early termination fee” pursuant to a funding deed despite the funder not having an Australian Financial Services Licence pursuant to Part 7.6 of the Corporations Act 2001 (Cth) (the Act).

International Litigation Partners Pte Ltd (ILP), a Singapore based corporation, entered into a deed (the Funding Deed) with Chameleon Mining (Chameleon) to fund Chameleon's legal proceedings against Murchison Metals and others in the Federal Court of Australia (the Federal Court Proceedings).

In 2010 an agreement was reached regarding the Federal Court Proceedings, which resulted in, amongst other things, a change in control of Chameleon. The Funding Deed contained a clause that if there was a change of control of Chameleon, it would trigger the obligation of Chameleon to pay the early termination fee to ILP. That the Funding Deed contained a clause to this effect was not disputed.

Chameleon, in response, issued ILP with a notice of recession of the Funding Deed pursuant to section 925A of the Corporations Act 2001 (Cth) (the Act), on the basis that the Funding Deed satisfied the criteria of section 924A of the Act, being that the:

  1. agreement was entered into in the course of a financial services business carried on by way of non-licence; and
  2. non-licensee did not hold an Australian financial service licence, and is not exempt from the requirement to hold such licence.

The High Court, overturning the Court of Appeal decision, held that the Funding Deed was a "credit facility" as it was an agreement, which provided for a period of time, a form of financial accommodation by ILP to Chameleon.

It was determined that a financial services licence was not necessary in this instance, and as such the rescission notice issued by Chameleon was invalid. This meant that Chameleon was required to pay the ‘early termination fee’.

What does this mean for you?

Litigation funding can enable deserving plaintiffs to conduct litigation that would otherwise be beyond them. However, the issues surrounding the agreements and their operation are complex and evolving.

If you are involved in matters either as a recipient of litigation funding or as a litigation funder you should be aware of the issues surrounding them (including whether the agreement requires compliance with section 924A of the Act).

If, like in this matter, the agreement does not require the funder to hold a financial services licence, such an agreement will be valid and the right to terminate may not be available. Careful consideration should be given to compliance aspects before entering into such agreements.