Pip Murphy (PM): In the last few months, I have been asked to speak at corporate counsel events by four top tier law firms, including Baker McKenzie about the what, when, why and how of third party funding. This reflects what my colleagues and I at Vannin Capital see as a developing trend of well capitalised organisations considering - and importantly, using - third party funding to manage legal budgets and transfer the risks of bringing litigation and arbitration claims across the globe. Where do you see opportunities to talk to clients about third party funding as an alternative funding model?

Mark Chapple (MC): There is undoubtedly increased interest in third party funding which goes well beyond its traditional roles in financing insolvency claims and class actions, including from clients who clearly have the financial capacity to finance their own claims if they wished.

Mark ChapplePartner, Baker McKenzie

+61 (0)2 8922 5227mark.chapple@bakermckenzie.com

Pip MurphyDirector of Investments, Vannin Capital

+61 (0)4 3826 0712pjm@vannin.com

2016 and 2017 have seen important developments in third party funding around the globe. In this edition of our In Conversation Series, Melbourne-based Pip Murphy, Director of Investments at Vannin Capital interviews Mark Chapple, Partner at Baker McKenzie in Sydney about some of these changes and key considerations for third party funding in the Asia Pacific region.

The topics covered here include third party funding as an alternative funding model; litigation funder’s commission in relation to ‘open’ v ‘closed’ class actions; and how privilege and confidentiality is maintained when providing documents to a third party such as Vannin Capital.

No. 2: May 2017

In Conversation Series

Baker McKenzie & Vannin Capital

Generally, we see this as being driven by the opportunities third party funding can offer, in appropriate cases, to pursue meritorious claims while preserving ‘day-to-day’ legal budgets and managing the risk of adverse costs orders. Special circumstances may also apply. Recently, for example, we considered third party funding in the context of a joint venture between two very well capitalised organisations, where only one of the joint venture parties was prepared to risk their own funds to pursue a very large and complex claim.

(PM): Late last year I attended the Australian Bar Association and Victorian Bar Conference. One of the panel discussions at this conference saw several corporate counsel discussing the things that keep them up at night and what they are expecting from their lawyers in this changing legal market. In many respects, some of these things weren’t new but it was a great reminder of the corporate counsel perspective. The topics identified were the need to reduce costs, increase efficiency, to identify and access alternative fee models and the desire to have early strategic insight by their lawyers into claims. I’m interested to know how you think accessing third party funding can assist with these points of attention for corporate counsel?

(MC): Few are immune from the ever increasing pressure to ‘do more with less’ and this can be particularly acute in the context of large and complex disputes, where costs can be greatly impacted by factors beyond the size and complexity of the claim itself, such as an opponent’s tactical response (e.g. will it be pragmatic or ‘scorched earth’) and the tribunal’s approach to case management (especially with respect to documentary discovery). Typically in Australia, as in many other jurisdictions, these uncertainties are exacerbated by a claimant’s exposure to an adverse costs order if a claim is ultimately unsuccessful.

These factors undoubtedly result in some meritorious claims not being pursued at all and others unnecessarily compromised for a lower amount.

In the appropriate case, third party funding provides an opportunity for clients to effectively manage these risks, while retaining most of the commercial benefit of the claim. Third party funding can also facilitate alternative fee structures that may be beyond the capacity of an individual legal firm to finance (particularly with respect to the potential for adverse costs), while some Australian clients may also be attracted by the ability to, in effect, ‘contract out’ the day-to-day management of the claim to a third party funder, especially if they are inexperienced in the conduct of major claims.

(PM): In your firm’s recent presentation to corporate counsel you focused your attention on the recent cases in Australia which touched on the topic of ‘open’ v ‘closed’ class actions and the increased intervention by the courts in the amount of the funder’s commission. Can you talk a little bit about these concepts and how they have, or are likely to, change the way that class actions are being run in Australia?

(MC): A class action cannot be compromised or discontinued in Australia without court approval. The most critical consideration is usually whether the settlement has been undertaken in the interests of group members as a whole. One recurring question is the reasonableness of commission payable to third party funders, where the distinction between ‘open’ and ‘closed’ classes can be relevant.

Mark Chapple

Partner, Baker McKenzie +61 (0)2 8922 5227mark.chapple@bakermckenzie.com

Mark Chapple is a senior partner in Baker McKenzie’s Sydney office. A leading dispute resolution and insolvency lawyer in Australia for over three decades, and Partner of the Year at the 2016 Lawyers Weekly Australian Awards, Mark is regularly retained to successfully resolve a wide range of major complex commercial disputes, while also taking lead roles in many of Australia’s most significant corporate insolvencies over that period.

Mark is an accredited mediator, an experienced advocate and a respected author and presenter on a wide range of dispute resolution, commercial and business management topics. He was also head of Baker McKenzie’s Australian and Asia Pacific Dispute Resolution practices until late 2005, and as well as the Firm’s Australian Managing Partner from late 2005 until June 2010.

Mark has also devised and presented Masters programs at the University of Technology, Sydney in Insolvency and Corporate Restructuring and Advanced Insolvency and Corporate Restructuring.

Pip Murphy

Director of Investments, Vannin Capital+61 (0)4 3826 0712pjm@vannin.com

Pip Murphy is a Director of Investments with global third party funder, Vannin Capital. She is a solicitor entitled to practice in all Australian jurisdictions (Commonwealth, State and Territory) and, before joining Vannin, Pip was a partner in the dispute resolution team of Baker McKenzie and head of the firm’s Asia Pacific Risk and Crisis Management Practice Group.

Pip has extensive experience in corporate and commercial disputes in Australia and internationally, both as a solicitor and as a third party funder, and she has managed and advised on all types of dispute resolution including investigations, negotiation, mediation, expert determination, litigation (including class actions) and arbitration.

Pip holds a Masters of Law from the University of Melbourne, is a Graduate of the Australian Institute of Company Directors and a Certified Practicing Risk Associate with the Risk Management Institution of Australasia.

Broadly, an entirely ‘open’ class describes a situation where claims are made on behalf of group members who have first signed a litigation funding agreement, while a fully ‘closed’ class comprises only members who have signed a funding agreement.

The fully ‘closed’ class was designed to address concerns by third party funders that some (and potentially a high percentage of) members of an ‘open’ class would not agree to a funding agreement and commission rates, so as to potentially get a ‘free ride’ on the back of those that did.

However, this (perceived) advantage of a fully ‘closed’ class had to be balanced against the probability that the total group claim would be higher if more group members were included.

The ‘best of both worlds’ for the third party funder is a ‘hybrid’ class, where the group initially starts off as a ‘closed’ class and is then opened up to those who had not signed a funding agreement, in order to increase the total amount of claims.

One obvious issue is whether those who have not signed a funding agreement should also pay or bear a funder’s commission and, if so, at what rate.

In Pathway Investments1 (2012), the ‘original’ group members had each agreed to pay commissions of 30-40%, while the applicant’s solicitors had obtained an order that the other group members also pay the same commission. The Court observed that “it is not for the court to express a view about the commercial desirability of the quantum to be paid to the litigation funder”.

A different result applied in Modtech2 (2013), where approximately 92% of group members (by estimated loss) had agreed to pay 25-30% of net recoveries after litigation costs and an order was sought that the 8% who had not signed a funding agreement also pay the same rate of commission. In declining to make that order, the Court asked (rhetorically) “why should the litigation funder be entitled to receive 25-30% of the amount to be received by those group members who chose, for whatever reason, not to sign a funding agreement?”.

The Court was, however, alert to the ‘windfall’ point and ordered an amount equal to the commission which would have been payable by the 8% to be returned to the pool to be shared amongst all group members.

This approach became known as a ‘funding equalisation’ scheme.

In Money Max3 (2016), 1,290 class members, amongst an ‘open’ class, had agreed to pay 32.5%-35% and the applicants sought (so-called) ‘common fund’ orders to the effect that the terms of the funding agreement would apply to all group members equally but at a lower rate of 30%. The respondent proposed a single ‘funding equalisation’ order.

The Court preferred a ‘common fund’ order over a ‘funding equalisation’ order because the common fund order would ensure that all group members were treated equally, it reduced what the Court saw as the potential for conflicts between the applicant’s solicitors and those who had signed funding agreements on the one hand and those who had not and it was considered to reduce the risk of competing class actions by encouraging ‘open’ rather than ‘closed’ classes.

However, the Court declined to set the funder’s commission rate at that stage, instead foreshadowing that it was “likely” that members would suffer a lower commission rate than 30% and lower than they would have borne under a ‘funding equalization’ order.

As recently as 31 March 2017, the Court in Blairgowrie Trading Ltd4 (the Allco Finance class action) also expressed a clear preference for common fund orders over fund equalisation orders5, including because of “enhanced access to justice”, the avoidance of third party funder “book builds” and the possible consequential acceleration of the commencement of proceedings.

I would expect this preference for ‘common fund’ orders to result in volatility in commission rates as they are set retrospectively by individual judges based on individual circumstances and, overall, add to downwards pressure on funding commissions in class actions.

(PM): I am regularly asked how privilege and confidentiality is maintained when providing documents to a third party such as Vannin Capital. This is a topic which strikes fear in corporate counsel across the globe. Most countries recognise that communications between a lawyer and a client should be protected from disclosure but there is a lack of consistency on this topic. There have been some very interesting cases in Australia recently which have dealt with this question. What have the courts said about the way that privilege and confidentiality can be protected when engaging with a third party funder?

1 Pathway Investments Pty Ltd v National Australia Bank (No 3) [2012] VSC 625

2 Modtech Engineering Pty Ltd v GPT Management Holdings Limited [2013] FCA 626

3 Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148

4 Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (in Liq) (No 3) [2017] FCA 330

5 Describing the fund equalization mechanism as “an ad hoc innovation posited by practitioners seeking to expeditiously resolve a practical problem”, rather than arising “through extensive judicial evolution and exposition”

(MC): Three decisions from 2016 on privilege in the context of communications with potential litigation funders remind us that each case will be determined on its facts and continuing caution is warranted.

In Perazzoli6, where lawyers communicated with a potential litigation funder prior to a litigation funding agreement being signed, the Court held that communications prior to that time were generally not subject to privilege (in this instance, litigation privilege) because the communications were not made pursuant to a specific client retainer, the lawyer’s efforts only represented exploration of possible funding arrangements of their own accord and that, prior to obtaining litigation funding, litigation was no more than a “mere possibility”.

Subsequently, in IOOF7, lawyers undertook work for an IOOF shareholder investigating a potential class action against IOOF, including communications and discussions with a litigation funder. Those communications were held to be protected by the litigation funder’s ‘legal advice privilege’, on the basis that the lawyers were ‘effectively’ providing the litigation funder itself with legal advice as to the prospects of the action, even though not formally retained.

Finally, in Hastie Group8, the respondents challenged a privilege claim over an expert’s report, including on the basis of implied waiver by reason of the “knowing and voluntary disclosure”9 of that report to a prospective litigation funder. Section 122(5)(a)(i) of the Evidence Act 1995 (Cth) provides an exception where disclosure is made “in the course of making a confidential communication or preparing a confidential document”. In finding that privilege had not been waived, the Court (by majority) concluded that the proposed litigation funder “would ... have clearly been under an obligation of confidentiality” by reason of “the parties’ knowledge of the proposed litigation and the report’s function of providing expert assistance in relation to it”.

This exception to waiver privilege for confidential communications undertaken for a limited purpose is critical because of the strict limitations on joint and common interest privileges. While the Court in Hastie Group found a clear implied obligation of confidentiality in that case, great care should be taken, in practice, to expressly provide for the confidentiality of communication, that the communication is for a stated, limited and relevant purpose and (preferably) that the confidential documents will be returned on demand.

(PM): Thank you Mark for these wonderful insights into how, when and why corporate counsel and private practice lawyers might recommend and access third party funding for a matter.

I am certain our readers will be particularly interested in the reminder to be careful to protect privilege and confidentiality in your discussions and interactions with a third party funder, and your insights into the recent developments around an ‘open’ vs ‘closed’ class and the rise of common fund orders. These are very interesting developments and make for an interesting future landscape.

6 Perazzoli v BankSA (No 2) [2016] FCA 2607 IOOF v Maurice Blackburn [2016] VSC 3118 Hastie Group Ltd (in liq) v Moore [2016] NSWCA 3059 See s 122(3)(a) of the Evidence Act 1995 (Cth)

About Vannin Capital

Vannin Capital is one of the world’s largest and most experienced professional dispute resolution funders with quantum under management consistently in the billions.

We provide bespoke funding solutions in high value commercial litigation and international arbitration disputes which can eliminate the inherent cost risks of legal proceedings.

We are flexible, innovative, responsive and able to make quick funding decisions not constrained by a rigid investment mandate, and have an excellent success rate.

Our experienced, multi-disciplinary team comprises successful UK, Australian and US-admitted lawyers, judges, QCs, barristers, solicitors, advocates, arbitrators, financial experts, entrepreneurs and technology professionals who work seamlessly together to originate, evaluate, fund and monitor a diverse portfolio of complex international claims.

Vannin Capital is a funder member of The Association of Litigation Funders of England & Wales (“ALF”), the UK regulatory body responsible for litigation funding and strictly adheres to the ALF Code of Conduct.

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© 2017 Vannin Capital PCC

The information contained in this publication is intended solely for general information purposes and does not constitute legal, financial or other professional advice. Neither Vannin Capital PCC nor its subsidiary companies accept liability to any party for any loss, damage, or disruption which may arise from information contained in this publication.

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Correct at time of publication: May 2017.

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