Damages stop short of litigation funding costs, Australian High Court confirms

What you need to know

• The High Court has confirmed that litigation funding costs are not available as a separate head of damages – in essence meaning that the litigation funder's commission is to come out of (rather than be added to) the damages otherwise payable.
• While this case involved a private nuisance claim, the decision will have a broader application, and litigation funding costs are unlikely to be recoverable for claims based on other torts, such as negligence.
• This decision is in line with the orthodox view on damages and follows similar rulings in the Supreme Court and NSW Court of Appeal, so we do not expect it to produce a change in the broader class actions environment. However, if the decision had gone the other way it would have increased class actions exposure.

The High Court’s decision and litigation funding

Relevant background

In Hunt Leather, the litigation funder entered into a fairly standard agreement to pay all reasonable costs and disbursements associated with the litigation, as well as any adverse costs orders and security for costs. Group members had agreed to reimburse the funder for its legal costs and pay a funding commission between 25 – 40% of any settlement or judgment sum. A commission of 40% was sought by way of damages claimed by Hunt Leather and Ancio Investments.

The plaintiffs argued that the 40% commission was a loss that, but for the private nuisance of the defendant, would not have been incurred (and therefore, was reasonably foreseeable).

Key principles

In affirming the Court of Appeal's finding that litigation funding commissions cannot be recovered as an award of damages, the High Court made various statements of principle:

• Entry into a funding agreement a group member's voluntary act: Those group members who choose to enter a funding agreement bargain away the risk of both being exposed to an adverse costs order and liability to pay security for costs. The cost of a funder's commission is a liability incurred by a voluntary decision of group members, rather than a consequence of any actionable nuisance.
• Funder's commission not a foreseeable loss from nuisance: As the loss arises from the plaintiffs’ own conduct or decision to pursue the litigation on a risk-free basis, a litigation funder's fee is not to be regarded as a foreseeable loss caused by the defendant's nuisance, but instead as the voluntary act of the particular plaintiff who chose to enter into the funding agreement on particular terms.
• Funder's commission a promise to pay: The High Court disagreed that the cost of the funding commission ought to be characterised as a loss on the amount they could actually recover from the defendant (versus a loss arising from the defendant's conduct). Instead, the High Court considered that a more accurate description would be to say that the plaintiffs have not increased their loss, but rather have promised to pay a proportion of the damages to which they would otherwise have been entitled in return for an indemnity as to the costs of the litigation.

Policy considerations

• In this case, there was evidence that, without the litigation funding agreement, the plaintiffs would not have the resources to run the litigation.
• With a view to the policy underlying the law of compensation, the High Court observed that litigation funders are not altruistic organisations dedicated to enhancing access to justice. Rather, litigation funders are self-interested investors seeking to profit from litigation. The fact that litigation may be funded of itself provides no good reason to alter the rules of compensable loss for tort.
• Similarly, the High Court also dismissed any argument that the policy of the law of nuisance should provide an exception and render litigation funder fees as recoverable.
• The High Court made observations that the "loss" (i.e. a litigation funder's commission) does not crystalise until the defendant has been ordered to, or has agreed to, compensate the plaintiffs. This underscores that the commission does not flow from the alleged tortious act.

The future of litigation funding

• For reasons similar to those given in the Hunt Leather case, litigation funding costs are unlikely to be recoverable for claims based on other torts, such as the tort of negligence.
• Likewise, litigation funding costs seem unlikely to be recoverable as costs or disbursements that may otherwise be awarded to a successful claimant in class action proceedings.
• By contrast, litigation funding costs may be recoverable in arbitrations. The Arbitration Rules of the Australian Centre for International Commercial Arbitration (2021 Edition) (ACICA Rules) define "costs of arbitration" which may be fixed by an Arbitral Tribunal to include "third-party funding costs, directly incurred by any party in conducting the arbitration" (see rule 48(d)).
• In the United Kingdom, last year's Final Report of the UK Civil Justice Council's Review of Litigation Funding recommended that, among other points, litigation funding costs should be recoverable as damages in exceptional circumstances. This recommendation has emerged in light of the UK Supreme Court's 2023 judgment in PACCAR¹, which is considered to have created uncertainty about the legitimacy and enforceability of litigation funding agreements.
• With the statutory regime for group costs orders (GCOs) in Victoria allowing plaintiff law firms to run class actions on a contingency basis under the Court's supervision, it is possible that we will see the relative costs certainty of GCOs under s 33ZDA of the Supreme Court Act 1986 (Vic) influencing choice of forum across Australia, as well as the litigation funding landscape. For more detail on GCOs, see our publication from August 2024, First settlement approval by Victorian Supreme Court involving contingency fees.
• If the High Court had ruled that litigation funding fees were recoverable as damages, this may have increased overall class action risk for defendants by both (a) increasing the exposure of defendants in particular cases, and (b) consequently shifting the economics of some class actions so that they might be brought whereas they would otherwise be uneconomic. However, the High Court's decision maintains the orthodox position on damages and so, in our view, should not impact overall class actions exposure.

Authors: Jessica White, Lawyer; Patrick Stratmann, Lawyer; Romy Keppel, Graduate and Sophia Balcombe Ehrlich, Graduate.