Recovery of Third Party Funding Costs in Litigation and Arbitration

An externally funded plaintiff will, if successful, inevitably be required to make some payment to the funder whether by way of funder’s commission, premium under an insurance policy, or other payment. This will necessarily reduce the plaintiff’s net recovery. Recent decisions from the New South Wales Court of Appeal show that while litigation funding expenses are not recoverable as damages, they may in some circumstances be recoverable as costs. By contrast, tribunals in the UK have continued to find that third party funding expenses are recoverable as costs in commercial arbitration.

The New South Wales Court of Appeal recently confirmed that litigation funding expenses are not recoverable by a plaintiff as damages.[1] The Court also recently considered the recoverability of after the event (ATE) insurance expenses as costs, with the majority expressing the view that they are not.[2] The majority view is consistent with the South Australian position.[3]

Meanwhile, class action funding arrangements have continued to come under scrutiny in the Federal Court. While the Court has not been required to decide the issue to date, an emerging wave of obiter has suggested a Court cannot adjust the commission to which a funder is entitled. Further abroad, English Courts have continued to permit arbitral tribunals to award funders’ commissions as ‘the legal or other costs of the parties’ under the Arbitration Act 1996 (UK).

Litigation Funding Expenses as Damages

In Hunt Leather Pty Ltd v Transport for NSW (No 4) [2024] NSWSC 140, in which a class action for private nuisance was funded by a litigation funder, Cavanagh J held that the plaintiffs were not entitled to recover the funder’s 40% commission as damages. The Court of Appeal upheld this decision.[4]

It was no part of the plaintiffs’ case at trial or on appeal that the funder’s commission was recoverable as costs; the only basis on which recovery was sought was as damages.[5] In any event, Cavanagh J opined that the funder’s commission could not be described as costs within the meaning of the Civil Procedure Act 2005 (NSW).[6]

At first instance and on appeal, the Court held that the litigation funder’s commission was not recoverable as damages:

• the claimed loss, while foreseeable, was too remote. It was not a loss caused by Transport for NSW’s (TfNSW) wrongdoing, but by a voluntary decision made by the plaintiffs about how they were to conduct their litigation against TfNSW;[7]
• similarly, the plaintiffs broke the chain of causation between TfNSW’s wrongdoing and the ‘loss’ to the plaintiffs of the 40% commission payable to the funder by freely and willingly choosing to enter the funding agreement;[8]
• under s 5D of the Civil Liability Act 2002 (NSW), it was not appropriate to extend TfNSW’s liability to the litigation funding expenses incurred by the plaintiffs.[9] This point is in essence a policy decision by the Court. The Full Court noted that if the commission was recoverable as damages, there would be no disincentive for a plaintiff to enter such an agreement, nor any incentive to bargain for a smaller fee;[10]
• if the 40% commission was recoverable at all, it would be recoverable as a cost of the litigation, and ‘expenditure on litigation is not recoverable loss’;[11]
• there was a conceptual difficulty in awarding the 40% commission as damages to be paid by TfNSW to the plaintiffs when the plaintiffs’ obligation was to pay to the insurer 40% of the damages that it was awarded by the Court. Necessarily, prior to damages being awarded, the plaintiffs’ obligation to make payment had not crystallised;[12] and
• no authority existed to support the submission that the funder’s commission was recoverable as damages.[13]

As put to the Court by the parties, the question of the plaintiffs’ entitlement to recover litigation funding expenses by way of damages referred to the plaintiff being impecunious. Cavanagh J expressed the view that it did not matter whether a plaintiff obtained litigation funding because of impecuniosity.[14] Had the funder’s commission been recoverable as damages, it would not have been necessary for the plaintiffs to demonstrate impecuniosity, much less impecuniosity caused by TfNSW’s wrongdoing.

The clear outcome of the TfNSW decision is that litigation funding expenses are not recoverable by a plaintiff as damages in tort claims. While different principles apply to calculation of damages in respect of other claims (eg claims under contract or the ACL), it is to be expected that similar considerations of remoteness and causation will arise, and that the outcome would be the same.

Litigation Funding Expenses as Costs

This then raises the question whether litigation funding expenses are recoverable as costs.

The position in South Australia, as set out in the Full Court decision in Burford v Allan [1998] SASC 6693 is that while ‘costs’ is not legislatively defined, the word is limited to the ‘reimbursement for work done or expenses incurred by a practitioner’. There is therefore no power under s 40 of the Supreme Court Act 1935 (SA) for the Court to award litigation funding expenses as part of a costs order.

The New South Wales Court of Appeal recently considered this issue, albeit on an obiter dicta basis, in Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161.[15] The issue was whether the costs of an ATE insurance policy taken out by the appellant in order to provide security for costs were recoverable as costs.

The Court unanimously held that the ATE costs were not recoverable as professional disbursements.[16] The ATE costs were not a payment that the appellant’s solicitors were duty bound to make, nor was there any established custom or practice of solicitors being liable to pay ATE costs.[17]

However, the Court divided on the question whether the ATE costs were recoverable as ‘expenses’ within the definition of ‘costs’ in the Civil Procedure Act 2002 (NSW).

• Gleeson and Leeming JJA took the view that the ATE costs were not ‘expenses’ and were therefore not recoverable,[18] on the basis that they did not represent remuneration to or an expense incurred by a practitioner in the course of representing a client.[19] Their Honours also thought it significant that the ATE payment was not merely a payment for a service to be provided in the course of the litigation, but instead was part of a contract whereby the third party insurer obtained a commercial stake in the litigation;[20]
• White JA was of the opinion that the ATE expenses might be recovered.[21] In White JA’s view, it was significant that the ATE premium was an expense incurred to enable the appellant to provide security for costs, and was therefore a ‘litigation expense’ that could be the subject of an order for costs.[22] From the appellant’s perspective, the premium was a necessary expense to meet an order for security of costs, regardless of the fact that the insurer obtained an interest in the outcome of the litigation.[23]

Recoverability of Funding Costs in Arbitration

By contrast, in Commercial Arbitrations in Australia and the UK, funder’s fees (including any commission payable to the funder) do appear to be recoverable as costs. The ACICA Rules 2021 (ACICA Rules) recognise that ‘third-party funding costs’ constitute ‘costs of the arbitration’ (Rule 48(d)).

A tribunal is empowered to limit recovery of third-party funding costs ‘to the extent that the Arbitral Tribunal determines that such costs are reasonable’.

LK Law has previously published an Insight in relation to ACICA’s introduction of these provisions in 2021, and the decision of the English High Court in Essar Oilfield Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm). In that Insight, it was observed that it may be open to tribunals to award the full funder’s fee and premium as “costs” under the 2021 ACICA Rules, and potentially under the predecessor 2016 ACICA Rules.

Following our earlier publication, this issue arose again, this time before the English Commercial Court in Tenke Fungurume Mining SA v Katanga Contracting Services SAS [2021] EWHC 3301 (Comm). Tenke concerned a situation where a party had received funding via a ‘litigation funding agreement’ from a related company as a shareholder loan, including a fixed success fee and a 9.5% compound interest rate. In an arbitration conducted under the ICC Rules, the arbitrator awarded over $1 million in costs comprising the amount due under this litigation funding agreement. The unsuccessful party challenged the award, alleging a serious irregularity under s 68 of the Arbitration Act 1996 (UK). While our earlier publication observed that Essar appeared to be on the favourable end of the costs spectrum, Tenke perhaps goes even further, involving a loan from a related entity (rather than a ‘true’ third party) and without any finding that the funding was needed to pursue the arbitration. However, as with Essar, the Court was not confirming the correctness of the award of costs, per se, but simply confirming that the award of costs did not exceed the Tribunal’s power.

This line of authority raises a significant question of law and public policy that is yet to be answered in Australia, namely: if an Australian court could award funder’s fees as costs in litigation, to what extent could a court vary the amount owed to the funder if the Court viewed the amount due as unreasonable? In Liverpool City Council v McGraw-Hill Financial Inc [2018] FCA 1289, Lee J described the amount payable to a funder as ‘unprecedently large’ but expressed doubt as to the Court’s power ‘to interfere and vary funding agreements in the context of a settlement by altering the contractual promises of group members to pay commission’ outside of established legal or equitable bases.[24] A contrary view has been expressed by Murphy J in Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433, Beach J in Blairgowrie Trading Ltd v Allco Finance Group Ltd (in liq) (No 3) (2017) 343 ALR 476 and Middleton J in Mitic v OZ Minerals Ltd (No 2) [2017] FCA 409.

[1] Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227.

[2] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161.

[3] Burford v Allan [1998] SASC 6693.

[4] Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227.

[5] Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140 at [58]‑[60]; Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227 at [4].

[6] Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140 at [59]‑[61].

[7] Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140 at [100]‑[102].

[8] Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140 at [108]‑[111]; Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227 at [194]‑[198], [209].

[9] Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140 at [112]‑[122].

[10] Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227 at [199].

[11] Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227 at [202]‑[204].

[12] Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140 at [67]‑[68]; Transport for NSW v Hunt Leather Pty Ltd [2024] NSWSCA 227 at [205]‑[206].

[13] Transport for NSW v Hunt Leather Pty Ltd [2024] NSWCA 227 at [208].

[14] Hunt Leather Pty Ltd v Transport for NSW [2024] NSWSC 140 at [73]‑[89].

[15] The Court did not need to decide the question, because the ATE expenses had been paid by one of several defendants pursuant to a settlement agreement. The Court found that the appellant had to offset payment of the ATE expenses against her claim to equitable compensation from the remaining defendants regardless of whether the ATE expenses could be characterised as costs of the proceedings (at [22]‑[27]).

[16] The meaning to be given to ‘disbursements’ and ‘professional disbursements’ respectively was considered in  Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [109]‑[127].

[17] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [148].

[18] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [149]‑[151].

[19] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [149].

[20] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [151].

[21] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [152]‑[158].

[22] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [156].

[23] Anderson v Canaccord Genuity Financial Ltd (No 2) [2024] NSWCA 161 at [157].

[24]  See also Lay v PTTEP Australasia (Ashmore Cartier) Pty Ltd (Settlement Distribution) [2023] FCA 242 at [24].

James Hayton