Houghton v Saunders HC Christchurch CIV-2008-409-000348 [2011] NZHC 1726 (30 November 2011)

Last Updated: 8 December 2011

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

_{CIV-2008-409-000348}

BETWEEN ERIC MESERVE HOUGHTON Plaintiff

AND TIMOTHY ERNEST CORBETT SAUNDERS

SAMUEL JOHN MAGILL JOHN MICHAEL FEENEY

CRAIG EDGEWORTH HORROCKS PETER DAVID HUNTER

PETER THOMAS JOAN WITHERS First Defendants

AND CREDIT SUISSE PRIVATE EQUITY INC (FORMERLY CREDIT SUISSE FIRST BOSTON PRIVATE EQUITY INC)

Second Defendant

AND CREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP Third Defendant

AND FIRST NEW ZEALAND CAPITAL Fourth Defendant

AND FORSYTH BARR LIMITED Fifth Defendant

Hearing: 3 October 2011

Appearances: A J Forbes QC and P Mills for Plaintiffs

D Cooper for First Defendant

C Curran for Second and Third Defendants

D McLellan for Fourth Defendant

A Challis for Fifth Defendant

Judgment: 30 November 2011

RESERVED JUDGMENT OF HON JUSTICE FRENCH

_{on Application for Non-Disclosure of Funding Arrangements}

HOUGHTON V SAUNDERS HC CHCH CIV-2008-409-000348 30 November 2011

Introduction

[1] The plaintiff, Mr Houghton, seeks orders directing that certain categories of documents relating to the funding of this litigation not be disclosed to the defendants.

[2] The orders are sought on the grounds of confidentiality and privilege.

Factual background

[3] Mr Houghton is bringing this claim in a representative capacity on behalf of approximately 1700 former Feltex shareholders.

[4] Last year, each claimant signed an opt-in notice and also agreed to be bound by the terms of a Court-approved funding agreement with a company called Joint Action Funding Limited (JAFL).

[5] Subsequently, it was confirmed that JAFL would not itself be providing the money to fund the litigation, and that while no actual funder had yet been found, negotiations were in train with prospective funders.

[6] Those negotiations were still ongoing as at the date of a hearing to determine whether the proceeding should be allowed to continue. The lack of an actual funder became a key point of contention.

[7] In my subsequent decision,[1] I lifted the stay, notwithstanding the lack of an actual funder. However, I ordered that when an actual funder was found, that entity would be required to satisfy me it was a funder of repute, that it had the means to pay the full costs of the litigation, and that the existing rights of qualifying shareholders under the funding agreement with JAFL would not in any way be prejudiced as a

_{result of any arrangements the actual funder might enter into with JAFL.}

[8] Further, one of the conditions of lifting the stay was that Mr Gavigan was to file and serve an affidavit within 14 days, advising what progress had been made in the negotiations.

[9] Mr Gavigan duly filed an affidavit, in which he deposed that JAFL had received a confidential conditional offer from a reputable international litigation funder to jointly fund the representative action, and that a funding agreement was expected to be concluded in the next few days and become unconditional before the end of May 2011.

[10] The affidavit also stated that Mr Gavigan was required by the terms of the offer to keep confidential all aspects of the negotiation, including:

(a) the funding agreement actually concluded;

(b) the steps in negotiations leading up to the making of the final agreements; and

(c) the identity of the funder.

[11] Since that affidavit was filed, JAFL has secured what is described as an investment agreement between it and an undisclosed London-based entity. The investment agreement has been concluded through Harbour Litigation Funding Limited. Harbour Litigation Funding Limited is also based in London, but is not itself the contracting party, only an associate.

[12] As well as entering into an investment agreement with JAFL, the undisclosed London-based entity is said to have taken out an adverse costs insurance policy in relation to this proceeding. Under the policy, the undisclosed London-based entity is shown as the insurer, but the policy is also said to be endorsed in the interests of JAFL and the claimants.

[13] By virtue of r 8.23 of the High Court Rules, a document mentioned in an affidavit must be produced for inspection unless the Court upholds a claim for

confidentiality or privilege. Mr Gavigan’s affidavit has triggered r 8.23, and

accordingly the plaintiff has brought the present application.

[14] The application seeks an order directing that the following categories of documents not be disclosed to the defendants:

(i) The investment agreement, including the identity of the actual funder.

(ii) The after-the-event adverse costs insurance policy.

(iii) Documents which disclose the steps in negotiations leading to the creation of the investment agreement and the insurance policy.

[15] The grounds of the application are that the documents are confidential in nature, subject to express confidentiality obligations and contain privileged information.

[16] For their part, the defendants do not oppose the application in so far as it concerns documents disclosing the steps in negotiations leading to the investment agreement and the insurance policy.

[17] The defendants do, however, seek full disclosure of the investment agreement and the policy itself.

The competing arguments

[18] As noted in previous decisions, this Court has a supervisory jurisdiction over funding arrangements in representative actions.

[19] The plaintiff acknowledges this, and is accordingly prepared to make full disclosure to the Court, together with any additional information the Court might require. Mr Houghton is also prepared to provide a generic description of the principal clauses, which was given orally at the hearing. In addition, had the

defendants agreed, the plaintiff would also have been prepared to make disclosure of the adverse costs insurance policy to an independent Court-appointed Queen’s counsel, with a view to that person assessing its adequacy and reporting back to both the Court and the defendants.

[20] What the plaintiff resists, and resists strongly, is disclosure of the actual documents themselves to the defendants.

[21] The plaintiff argues that full disclosure to the defendants would potentially cause significant harm to him and the claimants he represents, because disclosure would give the defendants an unfair and improper tactical advantage. In particular, it would mean the defendants would know how much money was available to fund the claim, and so enable them to work out how to exhaust the plaintiff’s resources.

[22] There is also concern that disclosure of the identity of the funder would carry with it the potential for distortion in the form of the defendants making direct or indirect approaches to the funder with a view to influencing the funder in the performance of the agreement.

[23] In opposing the application, the various defendants raised a number of arguments. The key points can be conveniently summarised as follows:

(a) The reason why the Court of Appeal considered there should be close judicial supervision of the funding arrangements was to protect the interests of the defendants. The funding arrangements are central to the ongoing review of the appropriateness of the representation order, as well as security for costs – both matters in which the defendants are vitally interested. The defendants have a legitimate interest in seeing the documents.

(b) Natural justice and the New Zealand Bill of Rights Act 1990 require that the defendants should be entitled to access those documents when the documents affect their interests and when there is to be a judicial determination regarding them.

(c) The risks of harm alleged by the plaintiff are either illusory or overstated and, in any event, capable of being mitigated.

(d) The plaintiff has already disclosed information about its funding arrangements, including disclosure of JAFL’s funding agreement, the fact that JAFL’s litigation budget was $2.5m, and that it has since increased to $5m. The information is thus no longer confidential, and any tactical advantage to be gained by disclosure already exists.

(e) The Court is likely to benefit from the defendants’ analysis of the documents. The defendants are best placed to assess their own interests.

(f) Mr Gavigan has provided inconsistent and inaccurate descriptions of the funding arrangements, which strengthens the case for disclosure. The Court (and the defendants) cannot have confidence in him, given past unreliability. Even now, the information being provided by counsel is vague and ill-defined.

(g) The fact the funder is an overseas person creates a further risk of prejudice to the defendants in that it may impact on their ability to recover costs.

(h) For the purposes of s 69 of the Evidence Act 2006, the public interest in protecting defendants to a commercially funded representative action outweighs the plaintiff’s interest in preserving confidentiality.

[24] Both plaintiff and defendants contended that the balancing exercise under s 69 of the Evidence Act favoured them.

Discussion

[25] Unfortunately, there is limited authority on this issue, and none directly on point.

[26] The current High Court Rules do not contain any specific class action rules such as exist in other jurisdictions. There is, however, a new draft Class Actions Bill and new draft Rules.

[27] The draft Rules provide that a person wishing to commence a class action in the capacity of a lead plaintiff must apply for a class action order.[2] The application must be supported by affidavit evidence containing certain specified information. Significantly for present purposes, the required information includes what the draft Rules describe as “general information as to any arrangements, in place or prospective, for funding the proposed class action (including the terms of any agreement or proposed agreement with a litigation funder)”. The application must be served on prospective defendants who are to be given an opportunity to be heard

before a class action order is made. The draft Rules do not require the plaintiff to serve a complete copy of the funding agreement, but they obviously contemplate disclosure of “general information” as to the terms.

[28] Although the defendants say the plaintiff ’s concerns about full disclosure are illusory or overstated, similar concerns have in fact been upheld in a series of Australian decisions involving funding agreements entered into by liquidators.[3]

[29] In these Australian cases, the Courts have refused to order full disclosure of the agreements, but have ordered disclosure of redacted or masked copies. The information withheld has included the identity of the funder, as well as detail of some terms and levels of funding.

[30] The justification given in the Australian cases for denying access to the redacted information is that non-disclosure is necessary to secure the due administration of justice, having regard to the improper tactical advantages which defendants would gain by disclosure.

[31] These Australian authorities have been followed in a New Zealand decision. In Waterhouse v Contractors Bonding Ltd,[4] Allan J ordered that, at least in the first

instance, production of a litigation funding agreement should be made only to the Court, and not to the defendant. The reasons given were that it was for the Court, and not the defendant, to supervise the operation of any litigation funding agreement affecting the plaintiff, and that issues arose concerning confidentiality and privilege. Significantly, Allan J considered such an outcome was consistent with the Court of

Appeal decision in this proceeding:[5] ie he did not consider the Court of Appeal

contemplated or required disclosure being made to the defendants.

[32] Allan J does not refer to s 69 of the Evidence Act, but in my view, whether the analysis is undertaken in terms of the inherent jurisdiction or under s 69, or by analogy with s 69,[6] the outcome will be the same. It is ultimately a question of balancing the competing interests. Unlike the Australian authorities and Waterhouse, this case involves a representative action and I accept that is an additional important consideration.

[33] Each side sought to persuade me that the reason the Court of Appeal in this case required judicial supervision of the funding arrangements was to protect their interests, rather than the interests of the other side. However, in my assessment, the Court saw judicial regulation of the funder as being necessary to protect the interests of both defendants and claimants. While the focus was on the defendants, there was also a concern that the terms upon which litigation is funded and conducted should be reasonable and fair to the funded party. Their rights and interests must be properly protected. As regards the defendants, the Court identified a need to protect the defendants from the potentially oppressive effects of the representative procedure, substantially altering as it does the balance between plaintiff and defendant. In particular, the Court of Appeal was concerned that defendants could be subjected to baseless class actions designed to extort unjustified settlement. Security for costs orders and a provisional examination of the merits were seen as particularly important safeguards. Other safeguards discussed by the Court, such as ensuring

_{that control of the litigation is not ceded to the funder and that communications to}

claimants are balanced and accurate are obviously measures designed to protect claimants as well as defendants, if not more so.

[34] In my view, the current application must be considered against a background where three crucial steps have already been taken. The first is that there has already been a hearing into the provisional assessment of the merits and a determination made that there is an arguable case for rights that warrants vindication. Secondly, security for costs up to a specified stage has also already been ordered. Thirdly, the defendants have been given complete access to the JAFL agreement. That agreement has been closely scrutinised and amended so as to ensure greater control over the funder and over the conduct of the litigation. Mr Forbes has assured the Court and the defendants that the investment agreement is expressly subject to the JAFL agreement.

[35] Against that background, I accept Mr Forbes’ submission that the interest in maintaining the confidentiality of the investment agreement and the policy outweigh the interest in disclosure. In all the circumstances, the defendants’ legitimate interests are, in my view, adequately protected by disclosure of the two documents to the Court.

[36] I am fortified in this conclusion by reference to the fact that neither the draft class action rules, nor suggested guidelines governing Court supervision of litigation funding arrangements that were submitted to the Court of Appeal require full disclosure.[7]

[37] There is support, too, from English authority regarding disclosure of insurance resources.[8]

[38] For completeness, I should add that in my judgment the fact Mr Gavigan has disclosed global budget figures before the investment agreement was negotiated does

not of itself deprive the documents in issue of their confidential character. No details of the budget have ever been disclosed.

[39] Because of the view I have taken on confidentiality, it is unnecessary for me to express any concluded views on privilege. Suffice it to say, I consider the claims to privilege turn on whether the documents contain or reveal legal advice, rather than constituting preparatory material under s 56 of the Evidence Act.

Outcome

[40] The plaintiff’s application is granted and orders made directing that the following categories of documents not be disclosed to the defendants:

(a) The investment agreement concluded with JAFL through Harbour

Litigation Funding Limited.

(b) The after-the-event adverse cost insurance arranged through Harbour

Litigation Funding Limited.

(c) Documents which disclose the steps and negotiations leading to the making of the agreements referred to in (a) and (b).

[41] Within 15 working days, the plaintiff is to produce to the Court the investment agreement and the insurance policy for inspection, together with the following further information:

(i) Evidence as to the standing of the London entity, to support the claim it is a reputable entity.

(ii) A certificate from the London entity that it has funding available to meet the costs of the litigation, and to pay any order for security for costs, the certificate to be supported by relevant financial records, including its most recent audited financial statements.

(iii) The insurer’s most recent audited financial statements.

(iv) The insurer, or its group’s, insurance rating and the source of that rating.

Costs

[42] The defendants are to pay the plaintiff costs on this application on a 2B basis.

Solicitors:

A J Forbes QC, Christchurch Wakefield & Associates, Christchurch A R Galbraith QC, Auckland

Bell Gully, Auckland

Clendons, Auckland

Russell McVeagh, Wellington

D McLellan, Auckland Jones Fee, Auckland McElroys, Auckland

---

[1] Houghton v Saunders HC Christchurch CIV-2008-409-000348, 8 June 2011.
[2] _{Draft High Court Amendment (Class Actions) Rules 2008, r 34.7.}
[3] Weston v Publishing and Broadcasting Ltd [2010] NSWSC 1288; Re Kingsheath Club of the Clubs Ltd (in liq) [2003] FCA 1034; Elfic Ltd v Macks [2000] QSC 18.

[4] _{Waterhouse v Contractors Bonding Ltd HC Auckland CIV-2010-404-3074, 13 December 2010.}
[5] _{Saunders v Houghton [2010] 3 NZLR 331.}
[6] M v L [1999] 1 NZLR 747. The predecessor to s 69 was recognised as not applying to discovery and inspection of documents, but having a rationale that applied by analogy.
[7] _{Saunders v Houghton [2010] 3 NZLR 331 at [32].}
[8] In so far as there is a conflict between Arroyo v BP Exploration Company (Colombia) Ltd QBD 6 May 2010 and Barr v Biffa Waste Services Ltd [2010] Lloyds Report IR428, I prefer the reasoning in the former. Under the English Civil Procedure Rules, a party is required to provide the Court and other parties with certain information about any ATE policy at the outset of litigation, but only if they are seeking to recover the insurance premium.