NSW Supreme Court confirms that litigation funding commissions are not recoverable as damages by successful plaintiffs

Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140

On 22 February 2024 the Supreme Court of NSW determined that a litigation funding commission charged by a litigation funder to lead plaintiffs and group members in a class action was not recoverable as damages against an unsuccessful defendant.

Background

On 19 July 2023, in Hunt Leather Pty Ltd v Transport for NSW,¹ the Supreme Court found Transport for NSW (TfNSW) liable in private nuisance to the lead plaintiffs of a class action proceeding commenced against TfNSW by businesses and members of the public said to have been affected by construction of the Sydney Light Rail.^{2 3}

On 13 and 14 December 2023 there was a further hearing in the proceeding to determine, amongst other things, two remaining common questions:

Common question 10

Are such Group Members as have suffered loss or damage as a result of private or public nuisance for which the defendant is responsible and who have entered into a litigation funding agreement in connection with these proceedings entitled to claim as a head of damages their reasonable litigation funding costs incurred under any such agreement without needing to show: (a) that it was the nuisance of the defendant which rendered them impecunious so as to be unable to pursue their claims without the benefit of litigation funding; (b) that they would have pursued their claims against the defendant without litigation funding had they the means to do so; or (c) that they negotiated over the terms of the litigation funding agreement?

Common question 11

If yes to 10, what is a reasonable rate of litigation funding costs recoverable by such Group Members?

The questions addressed the plaintiffs’ contention that the litigation funder’s commission of 40%, payable by the plaintiffs to International Litigation Partners No. 16 Pte Ltd (ILP) pursuant to the terms of a litigation funding agreement, ought to be recoverable as damages from TfNSW.

Plaintiffs' position

The plaintiffs submitted they suffered loss as a result of the tortious conduct of TfNSW ─ loss that included the litigation funder’s commission, on the basis that the commission was a reasonably foreseeable consequence of TfNSW's conduct. The plaintiffs submitted the litigation funding costs incurred were reasonably foreseeable ─ specifically, that it was reasonably foreseeable that:

1. any nuisance for which TfNSW was responsible would impact a range of persons and entities along the light rail route;
2. it would be uneconomic for such affected individuals and businesses to commence nuisance claims against TfNSW individually;
3. such affected individuals and businesses would be unwilling to take on the substantial risks involved in bringing proceedings against TfNSW;
4. accordingly, it was reasonably foreseeable that any proceedings would be class action proceedings,⁴ and that such proceedings would be funded; and
5. without access to litigation funding, the proceedings would not have been brought.⁵

TfNSW's position

TfNSW argued that the plaintiffs were not entitled to recover the litigation funding commission as a head of damage because:

1. the plaintiffs had not established a causal link between the alleged funding commission loss and TfNSW's tortious conduct; and
2. a litigation funding commission should be viewed as costs rather than damages when regarding statutory regulations governing the awarding of costs.

The litigation funding agreement

Clause 7.2 of the litigation funding agreement at the centre of the dispute provided as follows:

Upon Resolution, the Claimant will pay to the Funder or its nominee, from the Resolution Sum:⁶

(a) Claimant’s Common Costs Share – being the Claimant’s Pro Rata share of the Legal Costs incurred in respect of Common Benefit Work;

(b) Claimant’s Individual Costs – being the Legal Costs incurred in respect of Individual Benefit Work in respect of the Claimant’s Claims;

(c) Claimant’s Appeal Costs Share – being the Claimant’s Pro Rata share of Appeal Costs;

(d) Funder’s Commission – being the Claimant’s Pro Rata share of the Funder’s Commission;

(such amounts being the Deductions), plus any GST in accordance with Section 17 below.

Only (d) was the subject of the plaintiffs' claim.

Schedule 4 of the litigation funding agreement set out the funder’s commission scale, and provided that in the event of a resolution of the proceeding after 31 December 2019, the funder’s commission would be 40%.

Category of loss

Cavanagh J determined it was necessary to categorise the loss sought to be recovered by the plaintiffs by reference to the terms of the funding agreement entered into by the group members. Having regard to the terms of the litigation funding agreement, Cavanagh J determined the litigation funding commission did not constitute "costs" for ten separate reasons including the following:

1. there is a clear distinction between legal costs and the funder’s commission in the funding agreement;
2. the amount of the funder’s commission has been determined by way of a commercial agreement entered into between the plaintiffs and the litigation funder;
3. the commission is the funder’s consideration for providing the benefits (including payment of their ongoing costs and disbursements, indemnity in respect of costs orders made against them and litigation management services);
4. the court has no supervisory jurisdiction over the funder’s commission in that it did not have the power to set aside or vary the commission or assess its reasonableness;⁷ and
5. the funder’s commission did not fall within the definition of costs in the Civil Procedure Act 2005 (NSW).

Further, in circumstances where, for example, the plaintiffs did not include the litigation funding claim in their calculation of loss of profits or claim the litigation funding commission as loss mitigation, the plaintiffs were:

"...seeking to recover "a loss" which does not crystalise until after the defendant has been ordered, or has agreed, to compensate the plaintiffs in respect of their economic loss. It is a loss which the plaintiffs are not even obliged to tell the defendant about until a time of their choosing."⁸

Accordingly, Cavanagh J described the funding commission as:

"...an amount payable which arises because of, and is determined by reference to, a contractual arrangement between the plaintiffs and a third party, that is, an entity which is not a party to the litigation, which played no role in the circumstances leading to the other losses sustained by the plaintiffs and had nothing to do with any attempt by the plaintiffs to mitigate their other losses."⁹

Determination of common question 10

Having categorised the loss, Cavanagh J then considered whether the funder’s commission could be recoverable as damages in these proceedings. In particular, Cavanagh J indicated the question as to whether the plaintiffs could recover the funder’s commission must be "assessed having regard to conventional principles and having regard to whether the amount claimed is objectively reasonable", rather than undertaking a subjective assessment of the position of each plaintiff. Accordingly, Cavanagh J assessed the elements of foreseeability, remoteness and causation.

Foreseeability and remoteness

Cavanagh J did not accept the plaintiffs' position that the imposition of a litigation funding commission was a reasonably foreseeable consequence of TfNSW's tortious conduct. Rather, his Honour determined the litigation funding commission claim was too remote from TfNSW's tortious act to be recoverable as damages, stating:

"...The funder's commission arises because, once they found themselves in the position of having suffered a loss of profit, they entered into an agreement with a third party to enable them to recover their loss of profit. In that sense, the loss is removed or remote from the tortious conduct. It arises from measures which the plaintiffs chose to take after they had suffered a loss of profit, not in mitigation of their losses… but to reduce their risks associated with recovery of their loss of profits. It may be more properly viewed as expenditure on litigation, a step removed from the actual losses sustained by the plaintiffs caused by the defendant’s tortious conduct."¹⁰

(Our emphasis).

Causation

Cavanagh J then considered the relationship between TfNSW's "tortious interference with the plaintiffs’ businesses"¹¹ and the plaintiffs' agreement to pay a funding commission to ILP. In so doing, Cavanagh J noted that the loss was one which was "electively incurred by the Plaintiffs" and thus has the effect of breaking the chain of causation between TfNSW's conduct and the monies owed to ILP. His Honour did not accept that it is appropriate for TfNSW to bear responsibility for the funding commission claim. Notably, Cavanagh J stated at [109]:

"What the plaintiffs have really done is enter into a bargain with a third party, by which they agreed to give the third party an amount of money in return for the third party taking the risk on the litigation. The loss arises from the plaintiffs’ own conduct or decision to pursue the litigation on a risk free basis. Without reference to the defendant, the plaintiffs have increased “their loss” by 40% so as to ensure that they did not bear any costs associated with the litigation. They have not otherwise reduced their loss of profits flowing from the defendant’s conduct. They have agreed to “take a loss” on the amount they actually recover from the defendant by way of actual losses caused by the defendant, so as to enable them to not only pursue the litigation but to do so on a risk free basis."

Accordingly, Cavanagh J did not accept that TfNSW caused the plaintiffs' claimed loss.

Answers to common questions

Cavanagh J concluded the plaintiffs were not entitled to recover the funder’s commission as damages (common question 10) and accordingly, it was not appropriate to offer a hypothetical opinion on whether a 40% commission is reasonable (common question 11).

Going forward

The judgment maintains the status quo - it remains that litigation funding commissions must be paid by successful plaintiffs, and payment of such commissions cannot be passed on to defendants.

Had this not been the case, plaintiffs would be entitled to increase their "loss", while at the same time receiving benefits from a litigation funder ─ meaning defendants would be at the mercy of plaintiffs' commercial negotiations.

Lander & Rogers acted for Transport for NSW in this matter.

¹ [2023] NSWSC 840.

² The public nuisance claims of the second and fourth plaintiffs, being individuals as opposed to businesses, was rejected.

³ Determination of group member claims has been deferred pending TfNSW's appeal of the primary proceedings.

⁴ The plaintiffs say such risk was specifically set out in TfNSW's risk register prepared regarding the construction project.

⁵ See [19]

⁶ Defined in the litigation funding agreement as "the amount or amounts, or the value of any goods or services, to which the Claimant, or any part of the Group including the Claimant, becomes entitled in connection with or satisfaction or part satisfaction of the Claims, including (without limitation) as a result of a settlement, judgment or arbitration and whether the said amount or value is provided by the Respondent (or if more than one, any of them) or any other person, and for the avoidance of doubt includes any amount or value to be provided by or in respect of a person against whom any Respondent claims any indemnity, apportionment or contribution."

⁷ subject to the plaintiffs seeking to claim it as damages.

⁸ [68]

⁹ See [69]

¹⁰ [102]

¹¹ [105]