NSW Court of Appeal confirms litigation funding commission not recoverable as damages

What you need to know

• Litigation funding commission can comprise a sizeable portion of any class action settlement or judgment.  In some recent class actions, plaintiffs have advanced a novel claim seeking to recover the funder's commission as damages, in addition to the other damages said to be payable as a result of the defendant's alleged conduct.
• The New South Wales Court of Appeal has rejected a claim of this nature and confirmed the orthodox view that any funding commission is taken from the ordinary damages payable to group members, rather than being available as a separate head of damages.
• This is important because, if permitted, such a claim could increase the quantum of class action claims.  It also has the potential to fundamentally change the litigation funding market, including by reducing the downward pressure we have seen on the commission percentages obtained, resulting from competition and "Group Costs Orders" in the Supreme Court of Victoria.  

Litigation funding commission 

Typically, litigation funding agreements for class actions provide that the funder will be entitled to a funding commission calculated as a percentage of any settlement or judgment.  The percentage has historically been in the range of 20-40%, although more recently some judges have referred to a benchmark of around 25%, and recent figures have tended to be in the low 20s.  Under some funding agreements, a funder may be entitled to recover a multiple of its funding which could be a significantly higher amount. 

If a funding order is made, funding commission can eat into the amounts available to group members upon settlement or judgment.  In some cases, this can impact whether the Court considers that a settlement is in the interests of group members, and should be approved.  Funders often accept reductions in their funding commission at the point of settlement approval in light of those considerations.

Can litigation funding commission be claimed as damages in Australia?

In some recent class actions, plaintiffs have sought the funding commission as a separate head of damages resulting from the defendant's alleged wrong, and therefore as an additional amount recoverable from defendants (rather than something to be taken out of any settlement or damages awarded).  This is a novel claim.

In the recent decision in Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227, the New South Wales Court of Appeal (Bell CJ, Leeming and Mitchelmore JJA) unanimously rejected a claim for litigation funding commission as damages.  

The issue arose in the context of a nuisance claim against a public authority.  The Court of Appeal held there was no nuisance, and went on to hold that litigation funding commission was not recoverable as damages.  

The key reasons were as follows.

• The Court considered that the entry into the litigation funding agreement was a voluntary act by some group members.  
• The Court did not accept that the "real benefit" of the relevant agreement was the prosecution of the proceeding, but rather, the agreement provided the plaintiffs with an indemnity as to the costs of the proceeding, including adverse costs orders and security for costs.  In those circumstances, the funder's commission was not a foreseeable loss flowing from the defendant's (alleged) breach.  
• In any event, it is not sufficient that a loss is reasonably foreseeable – reasonable foreseeability is a "necessary but not a sufficient touchstone for damages in this area".  The loss was a voluntary act and/or outside the scope of matters for which the defendant was responsible, in damages.
• The commission was also more like expenses of litigation which, if at all recoverable, would be recoverable under the costs regime and not as a component of damages.

The Court further noted that to permit recovery would not "serve any of the ends to which the legal system is directed".  Every plaintiff would have an incentive to take out litigation funding to avoid risk in the litigation, since that choice would be cost-free for them.  Further, they would have no real incentive to bargain down the amount of the funder's commission.  

The Court rejected the suggestion that any measure which increased access to justice was, if only for that reason, necessarily within the policy of the law.  The Court said:

It is to be borne steadily in mind that litigation funders are not altruistic organisations dedicated to enhancing access to justice; they are self-interested investors, seeking to profit by involving themselves in litigation.  The fact that litigation may be funded of itself provides no good reason to alter the rules of compensable loss for tort.

The Court also referred to a case raising the possibility that in some circumstances finance costs necessary to pursue litigation by an impecunious defendant could be recovered as damages.  The Court disagreed with that proposition, noting that the case was only a strike-out decision, but in any event, the plaintiffs in the current case had not relied on group member impecuniosity.

We understand that the plaintiffs have sought special leave to appeal to the High Court. 

Comments

Class action funding commission has the potential to significantly impact the practical recovery of group members in class actions.  This has caused concern both here and in the UK, where there has been public concern in some quarters about the large portion of recoveries taken by litigation funders.

In Australia, at least, the Court supervises (and needs to approve) the payment of funding commission in class actions, including as part of common fund orders and group costs orders.  There is also competitive pressure arising from the range of third party funders and law firms in the market for litigation funding.  That regime seeks to strike a reasonable balance between the interests of plaintiff, defendant and funder, and avoid the adverse consequences identified by the Court of Appeal.

Accordingly, while the issue is a significant one for funders, and we may see further litigation on the point, it is helpful that the Court of Appeal has reinforced orthodox principles in this area.

Finally, the Court's observations about the role of litigation funders and the limits of arguments about enhancing access to justice may have broader relevance, as the High Court comes to consider arguments around common fund orders, including solicitors' common fund orders – see our update here.

Authors: Ian Bolster, Partner; John Pavlakis, Partner; Mark Bradley, Partner; Angela Pearsall, Partner; Ellena Cavell, Senior Associate and Jordon He, Graduate.