Watershed IMF Federal Court win

Australia's first litigation funder, Perth-founded IMF Australia, recently won a case in the Federal Court that confirms the much-questioned legitimacy of litigation funding.

A Perth court recently refused an application by international telecommunications company Ericsson to stay proceedings brought against it by Western Australian-based technology company QPSX on the basis that IMF was funding the action.

Despite operating for the best part of a decade and listing on the stock market in 2001, IMF’s role in providing funding for legal cases for a potential share of the success has been consistently challenged by defendants.

IMF has almost $1 billion worth of claimed damages being sought in a variety of cases, including $190 million from pokies giant Aristocrat, $120m in the finance brokers case and, most recently, $50m from two of the children of Lang Hancock’s mining partner, Peter Wright.

IMF was originally a private operation run by lawyer Hugh McLernon and backed by his business partner, low-profile Perth magnate Danny Hill. In 2001, the company publicly floated using the shell of failed Max Multimedia Ltd.

Australian Securities and Investments Commission records show interests associated with Mr Hill retain a significant stake in the company.

Among IMF’s directors are lawyer Michael Bowen and insolvency practitioner Alden Halse.

In taking on actions, IMF covers legal fees, and in the case of a recovery by settlement or judgement, retains the entitlement to recover that cost and an additional amount of the balance, estimated at up to 40 per cent in some cases.

Historically, it was deemed criminal to fund a third party’s litigation under the legal principle of maintenance and champerty – a belief that the commercial gain of a third party can lead to the compromise of the administration of justice.

But this has been whittled away and recently both the Federal Court and the Full Court of the WA Supreme Court have backed challenges against IMF, saying there is a public interest in ensuring access to justice.

In the QPSX-Ericsson case, Justice Robert French of the Federal Court said litigation funding legitimately extended to companies not wanting to risk the costs and uncertainty of litigation.

“The development of arrangements under which the cost risk of complex commercial litigation can be spread is at least arguably an economic benefit if it supports the enforcement of legitimate claims,” Justice French said.

IMF managing director John Walker said the judgement made it clear that his company may properly service the entire litigation market in Australia, and in appropriate circumstances may enter into litigation finding agreements with individual litigants, groups of litigants, and now, with multinational corporations.

“This judgement is of particular importance to IMF because it recognises that litigation funding may properly be made available to all litigants, large or small, who wish to spread the risk of their litigation,” Mr Walker said in a statement.

Pitcher Partners managing partner Bryan Hughes said he believed litigation-funding firms such as IMF provided a needed service on the litigation landscape.

“They provide the resources to pursue recovery actions that would otherwise go begging,” he said.

“A lack of resources should not stop the achievement of an equitable outcome, which it has in the past. We certainly don’t want a litigation model like the US, but our legal system doesn’t lend itself to that anyway.

Mr Hughes said that, while it was a specialised area, there could be a number of businesses interested in funding litigation.

Phillips Fox senior associate Darren Pratt said the QPSX case was an important one for ensuring access to justice.

“As a practitioner in commercial litigation, it is a common occurrence to have a client with a legitimate claim that they cannot effectively pursue because it would be an unacceptably high drain on their cash reserves,” he said. “The QPSX decision and the earlier decisions in the Clairs Keeley (finance brokers) cases serve as a blueprint for the types of funding arrangement that will meet with the court’s approval.”

Now, Mr Pratt said, when clients came to him with “excellent prospects but limited means”, he could advise them of the increased availability of litigation funding. And in the not-too-distant future, Australian law firms would be offering commercial litigation clients a greater range of fee arrangements, he said.

Other litigation funding companies in Australia include Litigation Lending Services, the Cartel Compensation Group, Hillcrest Litigation Services, Firmstone and Feil, and Australian Litigation Fund.