International Litigation Partners Pte Ltd v Chameleon Mining NL

Judgment 1GILES JA: The appeal and cross-appeals are concerned with - whether a litigation funding agreement ("the agreement") was validly rescinded pursuant to provisions of the Corporations Act 2001 (C'th) ("the Act") because it "constituted or related to the provision of a financial service" by a funder which was not licensed to provide financial services or exempt from being licensed; and if it was not, whether on the proper construction of the agreement the funder was entitled, in addition to recovery of the legal costs it had funded, only to a fee payable on early termination of the agreement and not to a funding fee. 2The trial judge held that the agreement had not been rescinded, and that the funder was entitled only to the fee payable on early termination: Chameleon Mining NL v International Litigation Partners Pte Lt d [2010] NSWSC 972; (2010) 79 ACSR 462. For the reasons which follow, in my opinion the agreement was validly rescinded, but his Honour correctly determined the issue of construction. The cross-appeals on the issue of rescission should be upheld, and the appeal on the issue of construction should be dismissed.

Background 3By the agreement International Litigation Partners Pte Ltd ("ILP") agreed with Chameleon Mining NL ("CHM") to fund CHM's litigation in the Federal Court against Murchison Metals Ltd ("Murchison") and others. ILP is a Singapore corporation, and was not licensed to provide financial services or exempt from being licensed. 4CHM's proceedings in the Federal Court were commenced in November 2007. The agreement was entered into in October 2008. The litigation came to a hearing in September-October 2009, and judgment was reserved. 5Thereafter disputes arose between ILP and CHM, including over possible settlement of the Federal Court proceedings and over legal representation in the proceedings and in any negotiations towards settlement. 6In August 2010 CHM and Cape Lambert Resources Ltd ("CLR") signed a Terms Sheet whereby, upon acceptance of the terms, CLR would provide a standby facility of $6.5 million to CHM and would be entitled to appoint 50 per cent of CHM's board of directors. This was a Change in Control within the definition in the agreement, and triggered cl 4.1 of the agreement providing for immediate payment to ILP of an early termination fee. 7Perhaps not unconnected with signature of the Terms Sheet, also in August 2010 CHM wrote to ILP pointing out that ILP was not licensed to provide financial services or exempt from being licensed, and giving notice of rescission of the agreement pursuant to s 925A(1) of the Act. CHM invited ILP to explain why it was entitled to any fee for which CHM would otherwise have been liable. 8In the proceedings to which this led, CHM contended that it had rescinded the agreement; and while it accepted that ILP was entitled to be repaid the legal costs it had funded, it said that ILP was not entitled to the early termination fee or any funding fee. CHM contended in the alternative that, if the agreement had not been rescinded, on the proper construction of the agreement ILP was entitled only to the early termination fee and not to the funding fee for which it also provided. CLR supported CHM in these contentions. ILP resisted them. There were other issues at first instance concerning charges and receivers, but they did not arise on appeal.

The agreement 9The agreement was made purportedly as a deed. It had nineteen operative clauses and, as will become apparent and was common ground, was poorly drafted. The complete agreement may be seen as a schedule to the trial judge's judgment. 10The recitals were - "A. CHM had requested that the Funder provide litigation funding to CHM for its Legal Costs in relation to the Proceedings. B. CHM has requested that the Funder provide investigative and management expertise to assist it in the Proceedings. C. The Funder has agreed, on the terms and conditions set out in this DEED, to provide funding, and management and investigation expertise and other related and agreed matters to CHM to assist in investigating the Claims and to prosecute the Proceedings. D. CHM acknowledges that the Funder has, by virtue of its obligations and entitlements (including to receive a percentage of The Resolution Sum) set out in this DEED, an interest in the Claims and the Proceedings." 11The defined terms used in the recitals, and then (together with other defined terms) in the operative clauses, were - "' Legal Costs ' means all costs associated with procuring the legal files from the previous solicitor on the record for CHM in the Proceedings and all future agreed legal costs and disbursements incurred by CHM and Funder in relation to or incidental to the Proceedings, or any appeal, including without limitation solicitors fees and disbursements, counsel's fees and disbursements and expert witness fees, the provision of $250,000 by way of security for costs for security paid prior to this deed, and the provision of any Security for Costs or monies payable for Adverse Costs Orders arising in the Proceedings or Appeal, unless otherwise agreed between CHM and the Funder." "' Proceedings ' means Federal Court of Australia proceedings no. NSD 2355 of 2007 and/or any other proceedings which arise from the Claims." "' Claims ' means the claim or claims CHM has against the Respondent(s)." "' Resolution Sum' " means the gross amount received by CHM or the Lawyers, whether by way of settlement, judgment or otherwise of the Proceedings, including any interest and Legal Costs recovered pursuant to a Costs Order." 12The operative clause providing for funding was cl 2.1 (there was no other sub-clause), by which ILP agreed "to pay the Legal Costs", with provisions for notice by CHM requiring payment, supporting documentation and time of payment. 13Clause 8 provided for the appointment of Lawyers to conduct the proceedings, including negotiating any settlement, and the instruction of the Lawyers. The definition of "Lawyers" was "any firm of solicitors appointed by CHM (and agreed by the Funder) to conduct the Proceedings on behalf of CHM". Clause 8 further provided for keeping ILP advised and consulting with it concerning the conduct and progress of the Proceedings. The obscurities of the clause need not be considered, but on one view it gave ultimate control of the conduct of the Federal Court proceedings and any settlement to ILP. 14Clause 4 provided - " 4. Early Termination 4.1 Should there be a Change in Control of CHM, the Funder's obligations pursuant to this Deed terminate effective immediately. 4.2 Should clause 4.1 come into effect the Funder is entitled to immediate payment by CHM of the Early Termination Fee." 15The definition of Change in Control was wide, but need not be set out. By its definition, the Early Termination Fee was - " ... a payment by CHM to the Funder or its nominee of an amount equal to the Legal Costs (including Security for Costs) expended by the funder [sic] up to the date of termination pursuant to clause 4.1 and a further amount equal to the higher of the value of 20% of the share capital of CHM at the strike price of its shares by the acquirer of the Change in Control or the Change in Control [sic] or $9 million." 16ILP's entitlement apart from early termination was found in cl 3.1, providing - "Upon Resolution of the Proceedings the Funder will be entitled to: (a) Repayment of the Legal Costs paid by it in accordance with clause 2.1; (b) Payment of the Funding Fee." 17"Funding Fee" was defined to mean - " ... the higher of: (a) Three (3) times the sum of the Costs [sic: not defined, presumably Legal Costs] incurred by the Funder under cl 2.1; or (b) The Percentage Payment." 18The Percentage Payment was a varying percentage of the Resolution Sum, depending upon when "Resolution agreement" occurred. The percentages ranged from 25 per cent at the earliest of four times to 40 per cent at the latest. 19By its definition "Resolution" meant receipt of all or part of the Resolution Sum, and if it was received in parts there was Resolution on each occasion. By cl 3.7 CHM authorised the lawyers to pay ILP the Legal Costs out of the Resolution Sum, and by cl 3.8 it authorised them to pay the Funding Fee. The further sub-clauses of cl 3 made essentially mechanical provisions for payment of the Resolution Sum to the Lawyers and payment by them to ILP. The sub-clauses included provisions for CHM to account for receipt of the Resolution Sum or part of it if received by CHM rather than by the Lawyers (cl 3.4) and for any non-monetary part of the Resolution Sum (cl 3.5), and by cl 3.6 the obligations in cll 3.4 and 3.5 "are continuing obligations and survive any Termination of this DEED save for a Termination pursuant to clause 8.1". 20Clause 3.9 provided that CHM was not required to pay to ILP, either as repayment of the Legal Costs or as payment of the Funding Fee, more than the Resolution Sum. 21By cl 5 CHM gave ILP a fixed and floating charge. Again the wording was obscure, but presumably the intention was to secure amounts payable to ILP. 22Clauses 9 and 10 provided - " 9. Term 9.1 Subject to the following Termination provisions, this DEED will continue until all obligations by CHM and the Funder pursuant to this DEED have been satisfied, and the Resolution Sum (if any) has been disbursed in accordance with this DEED. 10. Termination Termination by the Funder 10.1 The Funder is entitled, at its sole discretion, to terminate its obligations under this DEED, other than accrued obligations, by giving 7 days written notice to CHM that the DEED and the Funder's obligations are terminated; 10.2 If the Funder terminates its obligations pursuant to clause 10.1 then it will not be entitled to any payment pursuant to the Funding Fee but it will continue to be entitled to receive payment pursuant to clause 3.7 from any Resolution Sum. CHM will notify the Funder upon receipt of money referred to in this clause. The obligations in this clause survive any Termination of this DEED. 10.3 All obligations of the Funder under this DEED cease on the date the Funder's termination becomes effective, save for obligations accrued to that date; 10.4 The accrued obligations of the Funder referred to above comprise payment of any outstanding Legal Costs incurred up to the date the notice of termination becomes effective. Termination by CHM 10.5 If the Funder commits a serious breach of this DEED and does not remedy the breach within 30 days after receiving written notice from CHM requiring it to do so, CHM may terminate this DEED forthwith by written notice to the Funder. If this DEED is terminated by CHM pursuant to the above clause 10.5, then: (a) the Funder remains liable for the obligations referred to in clause 10.4, and (b) the funder remains entitled to repayment of Legal Costs incurred up to and including the date of termination pursuant to clause 3.6; and (c) CHM will not be required to pay the Funding Fee under clause 3.7." 23By cl 11, CHM and ILP agreed to keep confidential the existence and terms of the agreement and "all discussions, disclosures and information they have obtained by reason of" the agreement. 24Clause 13 was a wide dispute resolution clause, including as to dispute over settlement of the Proceedings. By cl 13.1(e) it "shall not merge upon completion": conveyancing language, but the intent was clear enough. 25Other provisions of the agreement not particularly material to the issues on appeal need not be mentioned. It should be noted, however, that the operative clauses said nothing about provision of investigative and management expertise or any related and agreed matters: cf recitals B and C.

Rescission 26I do not unnecessarily repeat all the relevant provisions of the Act set out in the reasons of Young JA. Knowledge of those not reproduced below is assumed for what follows. 27The starting point is s 924A(1) of the Act. Did the agreement constitute or relate to "the provision of a financial service"? If it did, at least on appeal it was not disputed that the agreement was entered into in the course of a financial services business carried on by ILP. 28Confining attention to the limbs on which CHM and CLR relied, a financial service is provided if a person "deal[s] in a financial product" (s 766A(1)(b)), and the person deals in a financial product by "issuing a financial product" (s 766C(1)(b)). 29The trail then leads to the general definition of a financial product in s 763A(1), relevantly - " ... a facility through which, or through the acquisition of which, a person does one or more of the following - (a) ... (b) manages financial risk ... " 30The definition of "facility" in s 762C includes an arrangement, and is wide. It encompasses the agreement. 31The trail then leads also to the specific things that are financial products, relevantly "a derivative" (s 764A(1)(c)). 32For the present I pass over the exemptions to being a financial product on which ILP relied (a credit facility (s 765A(1)(h)) and reg 7.1.06(1) and (3) of the Corporations Regulations 2001 (C'th); a contract for the future provision of services (s 761D(3)(b)); and also the questions of an incidental product (s 763E) and a financial product as one component of a facility (s 762B)).

A facility for managing financial risk 33This branch of the trail then leads to when a person manages financial risk, relevantly (s 763C) - " ... if they: (a) manage the financial consequences to them of particular circumstances happening ... ". 34Drawing the provisions together, did the agreement constitute or relate to ILP issuing a facility through which, or through the acquisition of which, CHM managed the financial consequences to it of particular circumstances happening? 35The trial judge declined to hold that the agreement fell within s 763C(a) of the Act because - "83 Whilst in one sense the Deed has the effect of minimising one category of financial risk for CHM (namely, the risk that it will incur expense in pursuit of Murchison which will be wasted if no or an insufficient Resolution Sum is received), on no realistic view can it be said that the Deed is a financial product whereby CHM manages that risk. 84 Rather, the object of the Deed is to enable CHM to prosecute the Proceedings by having the Funder pay Legal Costs and perhaps (as the Recitals describe) provide investigative and management expertise to assist in the Proceedings. The object of the Deed is to facilitate CHM vindicating its claim against Murchison, not to manage the risk of possible failure in that endeavour. 85 What is more, under cl 4 of the Deed, as part of the quid pro quo for the funding, CHM undertakes a risk of a significant payment which is unrelated to the ultimate fate of the Proceedings. As well, under cl 10.1 the Funder may in its sole discretion (and without reference to the outcome of the Proceedings) terminate the Deed. These are not the characteristics of a financial risk management instrument." 36CHM submitted that his Honour wrongly confined attention to the financial risk of incurring expense in pursuit of Murchison for which no or an insufficient return in the Resolution Sum might be received. It said that there was also the financial risk of adverse costs orders. "Adverse Costs Orders" were within Legal Costs, the phrase itself being defined and meaning "any costs order made against CHM in the Proceedings ... arising on or after the date of this deed". Adverse Costs Orders were within ILP's funding obligation under cl 2.1, and the risk to CHM was minimised by CHM entering into the agreement. Further, CHM said, the notion of financial consequences extended to the consequences of maintaining expensive litigation, lying in either or both of cost of funds for payment of legal costs and reduction of cash flow, and that those financial consequences were managed by passing the immediate exposure to the payment of Legal Costs to ILP. 37Thus CHM submitted that all of insufficiency of return, imposition of Adverse Costs Orders and obtaining money for payment of Legal Costs by borrowing or from cash flow were "particular circumstances" within s 763C(a), and that their financial consequences were managed by CHM by obtaining litigation funding under the agreement. The financial consequences to CHM were managed by transferring the risk and the money burden, initially and perhaps forever, to ILP; that was why ILP was able to command the significant return for which the agreement provided. 38CHM submitted that the trial judge departed from applying the legislation when he said that the agreement was not a financial product because its object was to enable prosecution of the Proceedings and facilitate vindication of the claim against Murchison, not "to manage the risk of possible failure in that endeavour" (at [84]). It submitted that management of financial consequences to CHM was not denied by the matters in cll 4 and 10.1 to which the trial judge referred at [85]. The Early Termination Fee, it said, was no more than an obligation CHM was prepared to undertake in return for ILP's obligations whereby the financial consequences were managed. The ability of ILP to terminate the agreement limited the extent of ILP's obligations, but unless and until the agreement was terminated the financial consequences to CHM were managed. CHM drew an analogy with a contract of insurance, which limited the risk to the insured of the financial consequences of the insured events even though there were exclusions or an ability to avoid the policy. 39The submissions of CRL were to the same effect, with reference also to the risk that CHM would not be able to proceed with its litigation against Murchison at all and the risk of having to provide security for costs. 40The written submissions of ILP were brief, relevantly - "33. It is contrivance to suggest that the Funding Deed manages the financial risk of Chameleon by managing the financial consequences to it of particular circumstances happening. One clear indication of this is that the Funding Deed does not, in all possible contractual outcomes, avoid the payment by Chameleon of the Legal Costs, being ( ex hypothesi ) a significant risk-transferring aspect of the transaction from its perspective." 41In oral submissions ILP suggested that an analogy with insurance was imperfect because, if CHM failed in the Proceedings, ILP would recover nothing (cl 3.9) so that there was no "premium". It submitted that the better analogy was with a joint venture, and that the agreement should be seen as an enterprise designed to produce success in the litigation with the financial risk falling where it may; and that in so far as might fall on ILP, no risk was managed by CHM because CHM had no risk if, without the litigation funding, it was unable to conduct the litigation at all. 42Analogy can distract from correct analysis. Whether or not CHM could conduct the litigation in the absence of ILP's funding (and there was no evidence that it could not), the financial consequences to it of the circumstances identified in its submissions happening were in my view managed by passing them, initially and perhaps forever, to ILP. This was done through or through the acquisition of the agreement, which was a facility within the definition in the Act. 43This is so not withstanding that a possible outcome is that CHM is left with payment of the Legal Costs. It will pay the Legal Costs if the Resolution Sum is such that the Legal Costs are repaid pursuant to cl 3.1(a). Nonetheless, in the meantime the financial consequences of (to take one circumstance) an Adverse Costs Order have been managed by ILP providing funds. If the litigation is unsuccessful or insufficiently successful, plainly the financial consequences of the lack of success are managed by passing them on to ILP. 44It is not correct to categorise the agreement as an enterprise with a purpose exclusory of managing financial risk. The enquiry under the Act is relevantly whether the agreement was a facility through which , or through the acquisition of which, CHM managed financial risk. It is not an inquiry into CHM's purpose in managing financial risk, translated to a purpose of the agreement, and the word "through" calls attention to the operation or effect of the facility and not to the purpose of the person. (See also the question of the purpose of a facility under s 763E, below.) 45Subject to the exemptions, in my opinion, the agreement was a financial product as a facility for managing financial risk.

A derivative 46This branch of the trail then leads to what is a derivative, the relevant definition of which is (s 761D(1)) - "Meaning of derivative (1) For the purposes of this Chapter, subject to subsections (2), (3) and (4), a derivative is an arrangement in relation to which the following conditions are satisfied: (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and (b) that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following: (i) an asset; (ii) a rate (including an interest rate or exchange rate); (iii) an index; (iv) a commodity." 47As a matter of words, the agreement was an arrangement under which each of ILP and CHM must or may be required to provide consideration to the other at a future time. The monetary consideration could be - ILP paying Legal Costs for CHM; possibly, ILP providing investigative and management expertise to CHM; and CHM paying the Early Termination Fee, repaying the Legal Costs, or paying the Funding Fee to ILP. 48The Court was informed that the prescribed number of days was relevantly one day, and there was no issue that any provision of consideration would be at a future time. The issue concerned determination, derivation or variation of the amount of the consideration or the value of the arrangement. (The value of an arrangement to a party to it is not necessarily the same as the consideration it will receive; for example, the costs of performance by that party must be taken into account.) 49The trial judge dealt with this as follows - "78 In my opinion, the Deed is not a derivative. Section 761D(1)(c) requires the amount of the consideration or the value of the arrangement ultimately to be determined, derived from or vary by reference to (wholly or in part) the value of something else. The word "ultimately" in the subsection plainly qualifies the words "determined, derived from or varies by reference to" (there being no comma before the words which follow the words in parentheses). 79 This is no doubt because it is in the nature of a derivative that the value of the arrangement will (as the word "ultimately" connotes) in every case be affected by (and hence derived from) the value of something else. The Deed does not have this invariable operation, as the facts in the present case demonstrate. The amount of the Early Termination Fee on the particular Change in Control here is not determined or derived from, nor does it vary by reference to the value of, something else. 80 There is, to my mind, a further and fundamental problem with CHM's submission. CHM is the client referred to in s 924A(1), and in that capacity purported to rescind an arrangement whereby it was issued with a financial product. By s 763A, the financial product concerned is a facility through which CHM says it made a financial investment. Section 763B provides for when a person makes a financial investment which in all cases involves an investor giving money or money's worth to another person and envisages that contribution being used or intended to be used in a particular way. That is not this case. Here, it seems to me, if anyone is making a financial investment, it is the Funder, not CHM. The Funder pays Legal Costs and may receive a possible enhanced return. of cl 7.1 of the Charge, and accordingly an Event of Default." 50The reasoning in [78]-[79] is that "ultimately" in s 761D(1)(c) required that all possible outcomes in determining or varying the amount of the consideration or the value of the arrangement be by reference to the value or amount of something else; but that was not so for the agreement, because the Early Termination Fee was a fixed $9 million if (as was the case with CLR's involvement) there was no acquisition of CHM's shares at a strike price. 51With respect, the part played by [80] in the reasoning is not clear. CHM suggested that it was that the agreement was not a derivative because it was not CHM, but ILP, which was making a financial investment. ILP submitted that it went to who was the "client" in s 925A of the Act with the entitlement to rescind, and that it "further illustrates the artificial operation of [CHM's] contentions". I do not understand this last submission. If [80] should be understood as CHM suggested, the reasoning was erroneous. A derivative is a financial product in its own right, whether or not it is within the general definition (s 762A(2)) and so whether or not anyone makes a financial investment under s 763B. 52The parties' submissions went in some detail into matters of grammar and punctuation. The structure of s 761D(1)(c) is difficult, but in my opinion its application in the present case does not turn on "ultimately" or a comma. 53A particular difficulty is that para (a) of s 761D(1) refers to provision of consideration, but when one comes to para (c) it refers also to the value of the arrangement as a factor additional to the amount of the consideration, the affectation of which by itself can satisfy the paragraph. Value to whom, and how is it ascertained? One way this can operate is if the value of the arrangement is seen as an extended correlative of the amount of the consideration, although it is not the same as the amount of the consideration; from the point of view of its recipient under the arrangement, the consideration is one of all the elements in the arrangement from which the value of the arrangement to that party is ascertained. Adopting the trial judge's use of "affected by" as shorthand for the determination, derivation or variation to which para (c) refers, in such a case it is not easy to see that the additional factor adds anything to the working of the definition, since if the amount of the consideration is relevantly affected, so is the value of the arrangement likely to be affected. 54Putting that aside, in my respectful view the word "ultimately" does not "connote" that the value of the arrangement will in every case be affected by the value (or amount) of something else. It allows the effect of the value (or amount) of the something else to be remote, but says nothing of whether the effect must be such that the value of the arrangement is always affected by the value (or amount) of something else. Similarly, although the trial judge did not refer to this limb of para (c), the word "ultimately" does not "connote" that the amount of the consideration will in every case be affected by the amount (or value) of something else. 55Apart from the word "ultimately", the trial judge considered that universal affectation was "in the nature of a derivative". CHM submitted that whether the agreement is a derivative depends on the definition in the Act, not some accepted concept of a derivative, if there be one. I accept that submission. 56The better indicator of whether there must be universal affectation lies in para (a) of s 761D(1), whereby a party must or may be required to provide the consideration. An arrangement may call for a party to provide consideration of more than one kind, depending on future events, one of which is affected by the value or amount of something else and another of which is not. The party "may be required" to provide the consideration of the former kind, if the appropriate future events occur, but this will not necessarily be so. It will be sufficient if the amount of that consideration is affected by the value or amount of something else; and if it is, the value of the arrangement will be affected by the value or amount of the something else. It does not matter that in other future events the consideration which is not affected by the value or amount of something else is the consideration which must be provided. 57On this analysis, universal affectation is not necessary. It may be added that any other reading of the definition would permit it be avoided by the simple expedient of providing for payment of a fixed $1, no matter what happened in relation to the something else and its effect on the amount of the substantive consideration. 58In my view, therefore, the basis on which the trial judge decided that the agreement was not a derivative should not be accepted. 59CHM submitted that the trial judge considered only one way in which the agreement could be a derivative, namely, by regard to the amount of the Early Termination Fee. As to that, it submitted, his Honour was in error because although the Early Termination Fee of $9 million was not affected by something else, in other circumstances the Early Termination Fee could turn on the strike price of CHM's shares. 60Going beyond the Early Termination Fee, CHM did not rely on provision of investigative and management expertise, no doubt recognising that the operative clauses in the agreement did not extend to it; the substance of its submissions was that - from the point of view of ILP paying Legal Costs for CHM, the amount of the consideration was affected by the value or amount of the costs incurred, the costs ordered to be provided as security or the costs ordered to be paid, each of which was something else; from the point of view of CHM receiving the benefit of payment of the Legal Costs, the value of the arrangement to it was ultimately affected by the same something elses; from the point of view of ILP receiving payment of the Early Termination Fee, or repayment of the Legal Costs and payment of the Funding Fee, the value of the arrangement to it may be affected by the value or amount of the Legal Costs and the strike price of CHM's shares (in the case of the Early Termination Fee) or by the value or amount of the Resolution Sum (in the case of the Funding Fee), each of which was something else; and from the point of view of CHM repaying the costs and paying the fees, the amount of the consideration may be affected by the same something elses. 61In so stating the substance of the submissions, I continue the shorthand of "affected" for ultimate determination, derivation or variation. The amount of the consideration or the value of the arrangement will not always be affected by the something else(s). But it will be affected by the costs amounts and may be affected by the strike price and the Resolution Sum. 62CLR made effectively the same submissions as CHM. It submitted also that the value of the arrangement could not be broken down into the elements of consideration which might be paid or received according to another outcome. It was the overall value, in ascertaining which there entered the prospect of one outcome rather than another. Correctly, in my view, it submitted that the trial judge conflated the two statutory criteria of the amount of the consideration and the value of the arrangement, and did not allow for the different operation of the latter concept. 63ILP's submissions rather abandoned reliance on "ultimately". It submitted that the affectation might wholly characterise the arrangement or do so only in part, but that it had to be "an essential aspect of the nature of any such arrangement". This, it said, came from seeing the definition "though the functional prism intended by the legislature", and in the case of the agreement all permutations of the amount of the consideration or the value of the arrangement to either party "relates directly to [the Federal Court proceedings], as opposed to derivatively to some secondary something else". 64I will return to the legislative intention, and for the present note ILP's explanation of why the value of the agreement was not ultimately determined by reference to the value of something else. The explanation did not similarly address the amount of consideration, but can be extended to it. The explanation was by examples; one where CHM failed in the proceedings so that ILP paid the Legal Costs and CHM did not have to repay them, another where ILP determined the agreement under cl 10.1 and all ILP could get was repayment of the Legal Costs, and the third where there was a Resolution Sum and ILP received repayment of the Legal Costs and payment of the Funding Fee. As to the first two, it was said that the amount of the Legal Costs was "simply a function of itself" and "not a derivative of some other value", and was "self-determining". As to the third, it was said that the value of the Funding Fee was "a function of the outcome of the litigation which is the very subject-matter of the [agreement]", and that ILP realised an interest in the proceedings which was contingent on the damages awarded but there was no something else. 65The submissions as to the first two examples were off the point. The point is not whether the Legal Costs were affected by something else, but whether an amount of consideration or a value of the arrangement was affected by something else, viz, the Legal Costs. As to the third example, the outcome of the litigation could be a something else even as, indeed because, something at the heart of the agreement. 66The definition of "derivative" is extraordinarily wide, one which could catch many arrangements not ordinarily thought of as derivatives. Returning to ILP's submissions as to the legislative intention, there is no satisfactory basis for reading the words down. 67Section 761D was part of the amendments to the Act made by the Financial Services Reform Act 2001. The amendments included introduction of Ch 7, ss 760A and following, amongst which are the provisions concerned with provision of a financial service. By 760A - " 760A. Object of Chapter The main object of this Chapter is to promote: (a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and (b) fairness, honesty and professionalism by those who provide financial services; and (c) fair, orderly and transparent markets for financial products; and (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities. 68More specifically as to derivatives, there was dissatisfaction with the regulation of financial market instruments so far as through the definition of a futures contract in the Corporations Law , particularly following the decision of the Full Federal Court in Sydney Futures Exchange Ltd v Australian Stock Exchange Ltd (1995) 128 ALR 417. The Company and Securities Advisory Committee ("CASAC") recommended "core provisions" for regulation of financial markets and financial market instruments, including a definition of derivatives, and that the definition should employ commercial criteria and be by the "deductive" method of "devising a broad general definition to cover all possible derivatives, with a power (by regulation or administrative discretion) to exempt certain agreements, to avoid over-regulation" (CASAC Final Report, "Regulation of On-Exchange and OTC Derivatives Markets", June 1997, paras 3.31, 3.33-3.35). 69This was taken up by the legislature. The Explanatory Memorandum to the Financial Services Reform Bill stated in para 6.72 - "The definition of 'derivative' in proposed section 761D has been formulated to replace the existing definition of 'futures contract' in section 72 of the proposed Corporations Act. As recommended by CASAC in its report entitled "Regulation of On-exchange and OTC Derivatives Markets' the definition focuses on the functions or commercial nature of derivatives rather than trying to identify each product that will be regarded as a derivative. The definition proposed by CASAC in its report has been used in developing the definition in proposed section 761D." 70The structure of the definition in s 761D is first to describe an arrangement which satisfies certain conditions (s 761D(1)), and to provide as well for declaration by regulation of things to be derivatives (s 761D(2)); but then to provide that an arrangement in relation to which other conditions are satisfied (s 761D(3)(a)), other specific things (s 761D(3)(b), (c)) and anything declared by regulation not to be a derivative (s 761D(3)(d)) are not derivatives "even if they are covered by the definition in subsection (1)". 71This is in accord with the CASAC method of a wide general definition with exceptions. There are quite broad exceptions where what is involved is tangible property (intended to exclude "a range of transactions involving the future delivery of something, including such things as contracts for the sale of land with a three month settlement period": Explanatory Memorandum, para 6.73 seventh dot point), and where the arrangement is "a contract for the future provision of services". There is the control of a power to exclude by regulation. Furthermore, s 761D(4) excludes an arrangement which would otherwise be caught because the consideration for the sale of property varies according to the CPI or a similar general inflation index. 72Given this deliberate drafting, there is little warrant for reading down the definition in the inclusory s 761D(1). It was intended to be wide; over-width was to be controlled by the subsequent exclusions, including by regulation. Moreover, a derivative is a particular financial product (s 764A(1)(c)), and so something which is a derivative within the wide definition and not within one of the exceptions may still be taken out of the class of financial products by the numerous exceptions in s 765A - which themselves include anything declared by regulation, or by ASIC, not to be a financial product (s 765A(1)(y), s 765(2)). 73The drafting structure has been recognised in Keynes v Rural Directions Pty Ltd [2010] FAFC 100, concerned with contracts for the forward purchase of grain. The Court (Dowsett, Stone and Bennett JJ) said - "28 The term 'financial product' is critical to the operation of the chapter. The express exclusions contained in s 765A are designed to ameliorate the effect of the very broad language used in the other definition sections which seek to capture many kinds of financial transactions. Section 765A narrows the operation of Ch 7 so as to keep it within the intended bounds. Section 761D(3) is important because it leads to the exclusion of a very large number of everyday transactions, namely sales of tangible property for future delivery. Such transactions are not generally thought to be financial transactions. However it is well-known that there are markets in which contracts for the sale and purchase of "tangible property" are traded. Such markets are more readily seen as being "financial" and therefore appropriately regulated. Where the price of tangible property fluctuates significantly over time, there is always the likelihood that people will seek to profit from such fluctuations. For that reason s 761D(1) catches "arrangements" for the supply of tangible property where the prices are not fixed or the 'values' of the arrangements may fluctuate. However s 761D(3) narrows that effect. Broadly speaking, it does so by excluding from the definition of 'derivative' arrangements for the supply of tangible property where one of the parties is actually expected to deliver the relevant property, and where rights and obligations under such arrangements are not usually traded, or not traded in a recognizable market." 74This may not be a desirable way to legislate, quite apart from the difficulty of tracking through the provisions and seeking to apply sometimes imprecise and convoluted language. However, in my opinion CHM's submissions should be accepted. The agreement was within the inclusory definition in s 761D(1). 75Subject to the exemptions, in my opinion the agreement was a financial product as a derivative.

The credit facility exemption 76Section 765A of the Act provides for things which are not financial products, relevantly "a credit facility within the meaning of the regulations (other than a margin lending facility)" (s 765A(1)(h)(i)). The question of a margin lending facility does not arise. Regulation 7.1.06(1) describes a number of things each being is a credit facility, of which that in para (a) involving "the provision of credit" is presently relevant, and reg 7.1.06(3)(a) and (b) define "credit". The regulations are set out in the reasons of Young JA. 77The exception was made because, in the example given in the Explanatory Memorandum, "fixed rate loans could have been regarded as a facility for managing financial risk and credit cards would have been facilities for the making of non-cash payments". At the heart of the provision of credit, on the application of the definition of "credit", is whether under the agreement the payment of a debt owed by one person to another was deferred, or the one person incurred a deferred debt to the other. 78The trial judge said - "86 I do not accept the Funder's submission that the Deed is a credit facility within s 765A(1)(h)(i) and Regulation 7.1.06 (which is set out above) and therefore not a financial product because: a. the Deed does not operate so as to defer payment of any debt owed by CHM to the Funder or result in CHM incurring a deferred debt to the Funder; b. CHM does not incur a debt to the Funder as a result of the Funder paying the Legal Costs and it does not incur any personal obligation to repay the amount funded; and c. the payment by the Funder of the Legal Costs is not an advance and the Deed does not contain provisions under which CHM incurs a personal obligation to repay." 79ILP submitted that the agreement was "essentially" an advance of money by ILP to assist CHM in obtaining a financial benefit arising from the loan, under which CHM deferred the debt of repayment of the Legal Costs to ILP. 80I do not accept the submission. ILP promised to pay money for the benefit of CHM, but it did not advance money to it and there is no debt owed by CHM payment of which is deferred. There might never be anything payable by CHM to ILP; indeed, if CHM failed in the proceedings, ILP would probably have to pay more money for the benefit of CHM, being the costs payable to Murchison and others, without any recovery from CHM. If anything became payable (upon early termination or Resolution of the Proceedings), there was an immediate debt, not a deferred debt. The trial judge was correct. The provision of services exemption 81ILP relied on the exclusion under s 761D(3)(b), whereby a "contract for the future provision of services" is not a derivative. 82There are no relevant definitions assisting in the meaning or application of this collection of words. The CASAC Final Report did not mention such an exclusion, nor did the Explanatory Memorandum explain it. 83The trial judge said of this - "81. I do not consider that the Deed can properly be described as a contract for the future provision of services as contemplated by s 761D(3)(b) of the Act. The Recitals record that the Funder has agreed to provide investigative and management expertise but the Deed does not seem to contain any covenant obliging the Funder to do so. This aspect of the Deed is at best an adjunct to the main object of the arrangement, which is the payment of money." 84Given the width of an "arrangement" in s 761D (see its definition in s 761A, and s 761B) and the reference to "consideration of a particular kind or kinds" in the inclusory definition of a derivative, what is excluded is a particular arrangement (a contract) involving particular consideration (provision of services). The agreement was a contract. On no view was CHM providing services, so the question is whether ILP's performance of the agreement would satisfy "for the future provision of services". 85ILP submitted that it promised to provide future services, referring to recitals B and C and cll 2.1, 6.2, 8.1(b), 8.1(c), 8.3 and 13.2. 86The recitals can be put aside unless matched by relevant promises (including promises found by construction of the operative clauses in light of the recitals). There are funding promises, but no promise of management and investigation expertise. 87Some operative clauses to which ILP referred were funding promises, being the general promise in cl 2.1 and a promise to fund an appeal if it so elected (cl 6.2). The other operative clauses to which it referred were - not a promise by ILP at all, but a promise by CHM to consult with and consider ILP's views "in relation to any material issues arising from the conduct and/or progress of the Proceedings at any Appeal" (cl 8.1(b)); not a promise by ILP at all, but a promise by CHM to provide to ILP "such information as may reasonably be required in relation to the Proceedings and any Appeal" (cl 8.1(c)); not a promise by ILP at all, but a promise by CHM to "make all reasonable efforts, if appropriate to authorise ILP to appoint, instruct and direct the Lawyers (including counsel and experts); to pursue the claim and the Proceedings or any Appeal; and to negotiate an outcome of the Proceedings of any Appeal; on its behalf" (cl 8.3); and not a promise by ILP to provide services, but promises by CHM and ILP to obtain and act upon the advice of Senior Counsel in the event of disagreement over settlement of the Federal Court proceedings (cl 13.2). 88Assuming implied or inferred promises by ILP to the effect that it would maintain oversight so as to seek information from and convey its views to CHM, and that it would appoint Lawyers and pursue the claim if authorised, I do not think the agreement could be described as a contract for the future provision of services by ILP. It was overwhelmingly a contract under which ILP was to pay money, under the funding promises to provide money to pay the Legal Costs. That may in one sense have been provision of a service, the payment of money, but it was not provision of services. Nor in my view was the agreement a contract for the provision of services because the money (or at least a lot of it) would be used to obtain the services of lawyers and experts, and ILP did not submit that it was. An incidental product or component 89Section 763E is set out in the reasons of Young JA, and involves components of a facility (as does s 762B), the purpose of a facility and the concept of a financial product purpose. By its definition (s 762C), facility includes "an arrangement or a term of an arrangement", so separate terms of an arrangement can be separate facilities. If something is a financial product within the general definition (s 763A(1)), which requires that it be a facility, it could be an incidental component of a facility which has other components or incidental to one or more other facilities; likewise a financial product as one of the specific things (s 764A(1)). 90ILP did not invoke either s 763E or s 762B in its written submissions. The provisions received some attention in the course of argument, and I understand ILP to have relied on s 763E by the submissions that the "main purpose [of the agreement] is to obtain funding with a view to winning", and that "anything else is ... incidental". 91On the analyses in the proceeding paragraphs, the agreement is not a financial product as an incidental component of a facility which also has other components or a facility incidental to other facilities; nor are the relevant terms incidental components or incidental to other terms or another facility. There is no "main purpose" of obtaining funding distinct from the financial product purpose of managing financial risk. The purpose of the agreement is to obtain litigation funding on the terms contained in it, and those terms make it a financial product. In my opinion, the agreement is not an incidental product which is not a financial product, within s 763E. 92I do not understand ILP to have relied on s 762B, which is also set out in the reasons of Young JA. As a facility for managing financial risk, or a derivative, so far as the agreement might be a component of a facility that also has other components Ch 7 still applies in relation to it. Section 762B has no relevant exclusory effect. Conclusion 93For the foregoing reasons, in my opinion the agreement constituted or related to the provision of a financial service. 94Subject to one matter, in the manner the appeal and cross-appeal were argued it follows that the agreement was validly rescinded by CHM. That matter is a rather obscure reference in ILP's written submissions to whether CHM was a "client" within s 925A(1) of the Act. By s 924A(1)(a) the client is simply the person with whom the unlicensed provider of financial services entered an agreement constituting or relating to the provision of a financial service by that non-licensee. In my opinion, CHM was a client and so entitled to rescind the agreement pursuant to s 925A(1).

Construction 95I have earlier outlined or set out relevant provisions of the agreement. If the agreement was validly rescinded, the issue of construction does not arise. I should nonetheless deal with it. 96The trial judge did not accept CHM's submission that the effect of cl 4.1 was to terminate the agreement, and therefore to terminate ILP's entitlement under cl 3.1. His Honour held that cl 4.2 meant that ILP was entitled to immediate payment of the Early Termination Fee and only of that fee, and that its entire entitlement was to payment of the Early Termination Fee (at [97]). 97The essential reasoning was that ILP's obligations terminated pursuant to cl 4.1, and that it did not retain rights corresponding to obligations which it no longer had. For example, his Honour did not accept that ILP could require that an appeal be brought pursuant to cl 6.2 but would not be obliged to fund the appeal, or more widely would be entitled under cl 3.1 to a significant share of the Resolution Sum although it had not provided the funding for the proceedings bringing that reward, possibly from a very short time after the agreement was entered into. He detailed other anomalies which he considered flowed from ILP's construction of the agreement, including that ILP could recover the Legal Costs twice, once as part of the Early Termination Fee and again under cl 3.1(a). His Honour considered that there were four effective ways in which the funding arrangement came to an end, namely on early termination; on termination by ILP under cl 10.1; on termination by CHM under cl 10.5; and on receipt of the Resolution Sum and distribution in accordance with cl 3.1; each of which had its own consequence for payment to ILP. He considered that the agreement operated sensibly and rationally with cll 3 and 4 as mutually exclusive provisions for payment. 98The submissions of ILP on appeal may be summarised as follows - cl 4.1 specifically provides that its obligations terminate upon a Change in Control; thus its entitlements survive; the entitlements include both the newly engaged entitlement to the Early Termination Fee under cl 4.2 and the existing entitlement to the Funding Fee under cl 3.1; nothing in the agreement required mutually exclusive operation of cll 3 and 4, and concurrent operation was indicated by cll 3.6 (obligations in cll 3.4 and 3.5 survive any termination of the agreement) , 9.1 (subject to cl 10 termination provisions, the agreement continues until all obligations satisfied) and 10 (specific provisions for entitlements on termination); there was no commercial absurdity in this operation of the agreement; any other operation would subvert the purpose of cl 4.1, being to dissuade a third party from acquiring control of CHM, and would allow that ILP be deprived of a Funding Fee by a Change in Control on the eve of expected success in the Federal Court proceedings when it had fully provided the litigation funding; and possibly the Change in Control could be engineered by CHM, or could involve breach of the agreement by CHM (such as breach of the confidentiality obligation in cl 11); in the latter event, CHM could be advantaged by its own wrong; 99ILP submitted that CHM acknowledged its interest in the Claims and the Proceedings (recital D), and that the agreement carefully protected its entitlements, including by the charge, and should not be construed so as to defeat its fully sharing in the proceeds of the litigation it agreed to fund unless it was clearly so provided. ILP drew particular attention to the specific disentitlements to a Funding Fee in cl 10.2 and c. 10.5(c). It said that on a sensible reading of the agreement it would not be entitled to double recovery of the Legal Costs (although it did not further explain how that would come about). 100There was much detail in the submissions, and in the submissions of CHM and CLR, which I have not overlooked but do not reproduce. The submission of ILP is not persuasive. 101No evidence supported that purpose of cl 4 was to discourage a third party from acquiring control of CHM, but even if it was the discouragement could lie simply in the termination of ILP's obligation to provide funding and payment of a minimum of $9m; it is not self-evident that continuing entitlement to the Funding Fee was also necessary to discourage a third party acquirer. 102Change in Control is not itself a breach of the agreement, and it should not be assumed that a Change in Control will involve breach by CHM. Further, rather than a Change in Control late in the proceedings there could be a Change in Control very soon after the agreement was entered into; it would be odd if ILP were entitled to the Funding Fee, as well as the Early Termination Fee, if it had not provided much funding at all. Of the opposing considerations, this has at least as much force, viewed as at the time the parties entered into the agreement. 103In the circumstances for which the agreement provides, ILP is entitled to be paid the Legal Costs upon Change in Control (cl 4.1); upon termination by ILP (cl 10.1); upon termination by CHM (cl 10.5); and upon Resolution (cl 9.1). In two of these circumstances it is entitled to further payment, of the Early Termination Fee upon Change in Control and of the Funding Fee upon Resolution. A rational and sensible structure is evident, namely, that the Early Termination Fee (which is a not inconsiderable minimum sum and could be much more than $9m, and is not capped by the Resolution Sum) compensates ILP for the risk it assumed in fulfilling its funding obligation to that time and for the loss of possible greater return; and that the Funding Fee (which could be considerable, but could be nothing: cl 3.9) compensates ILP for the risk it assumed in fulfilling its funding obligation until Resolution. 104In my opinion, the preferable construction of the agreement is that at which the trial judge arrived.

The result 105CHM and CLR cross-appealed on the issue of rescission. The cross-appeals should be upheld with costs. The orders claimed in the cross-appeals differed, and I agree with Young JA that short minutes should be brought in. 106ILP appealed on the issue of construction. The appeal should be dismissed with costs. That can be part of the short minutes. 107The short minutes, or in the event of disagreement the competing versions, should be provided by 5 pm on 30 March 2011. The proceedings should be stood over to 9.30 am on 6 April 2011 before Young JA for the making of orders. 108HODGSON JA: The circumstances giving rise to this appeal and cross-appeal, the issues they raise, relevant provisions of the Funding Agreement between the appellant ILP and the first respondent CHM, and the relevant statutory provisions, are set out in the judgment of Young JA. 109Although the question of the construction of the Funding Agreement does not arise if the cross-appeal succeeds, I find it convenient to consider the construction and effect of the Funding Agreement before considering whether it is affected by the relevant legislation.

Construction of Funding Agreement 110The Funding Agreement was entered into after CHM had commenced substantial proceedings in the Federal Court, in respect of which it had already incurred costs and been ordered to provide security for costs. Those proceedings are identified in the Funding Agreement in its definition of "the Proceedings" (although that definition also extends to other proceedings arising from CHM's claims against the defendants in the Federal Court proceedings). 111The recitals refer to ILP's agreement, on the terms and conditions of the Funding Agreement, to provide funding and expertise to assist in pursuing the Proceedings, and to ILP's interest in the Proceedings by virtue of its obligations and entitlements under the Funding Agreement. 112Clause 2 of the Funding Agreement contained ILP's agreement to pay legal costs in relation to the Proceedings, including CHM's own legal costs and monies payable under adverse costs orders. 113Clause 3 provided (clause 3.1) that upon resolution of the Proceedings, ILP was entitled to repayment of costs paid by it and a "Funding Fee" (being the higher of three times the costs or a percentage of the "Resolution Sum", being the gross proceeds of the Proceedings") though not to any amount in excess of the Resolution Sum (clause 3.9). 114Clause 4 provided as follows: 4. Early Termination 4.1 Should there by a Change in Control of CHM, the Funder's obligations pursuant to this Deed terminate effective immediately. 4.2 Should clause 4.1 come into effect the Funder is entitled to immediate payment by CHM of the Early Termination Fee. The Early Termination Fee was payment by CHM to ILP (or its nominee) of an amount equal to the legal costs expended by ILP up to the date of termination and a further amount equivalent to the higher of 20 per cent of CHM's share capital and $9 million. 115Clauses 9 and 10 provided: 9. Term 9.1 Subject to the following Termination provisions, this DEED will continue until all obligations by CHM and the Funder pursuant to this DEED have been satisfied, and the Resolution Sum (if any) has been disbursed in accordance with this DEED. 10. Termination Termination by the Funder 10.1 The Funder is entitled, at its sole discretion, to terminate its obligations under this DEED, other than accrued obligations, by giving 7 days written notice to CHM that the DEED and the Funder's obligations are terminated; 10.2 If the Funder terminates its obligations pursuant to clause 10.1 then it will not be entitled to any payment pursuant to the Funding Fee but it will continue to be entitled to receive payment pursuant to clause 3.7 from any Resolution Sum. CHM will notify the Funder upon receipt of money referred to in this clause. The obligations in this clause survive any Termination of this DEED; 10.3 All obligations of the Funder under this DEED cease on the date the Funder's termination becomes effective, save for obligations accrued to that date; 10.4 The accrued obligations of the Funder referred to above comprise payment of any outstanding Legal Costs incurred up to the date the notice of termination becomes effective. Termination by CHM 10.5 If the Funder commits a serious breach of this DEED and does not remedy the breach within 30 days after receiving written notice from CHM requiring it to do so, CHM may terminate this DEED forthwith by written notice to the Funder; If this DEED is terminated by CHM pursuant to the above clause 10.5, then: (a) the Funder remains liable for the obligations referred to in clause 10.4, and (b) the Funder remains entitled to repayment of Legal Costs incurred up to and including the date of termination pursuant to clause 3.6; and (c) CHM will not be required to pay the Funding Fee under clause 3.7. 116It was submitted for ILP that: (1) clause 4.1 ends only ILP's obligations, not its entitlements; and clause 4.2 does not include the word "only"; (2) ILP's entitlement under clause 2 was conditional only on resolution of the Proceedings, not on ILP having continued to fund the Proceedings to completion; and (3) CHM could engineer the circumstance giving rise to automatic termination under clause 4.1 right up to a time immediately before resolution of the Proceedings, and it could not have been the intention of the parties that ILP could thereby be deprived of its Funding Fee, which could be far in excess of $9 million. 117There is some force in these submissions. But in my opinion, point (3) has much less force than the opposing consideration, that the circumstance giving rise to automatic termination under clause 4.1 could occur, without any contribution to it by CHM, very soon after entry into the agreement. In that event, on ILP's construction, CHM would be liable to ILP not only for at least $9 million but also (if it subsequently managed to complete the Proceedings through its own funding or with the assistance of another funder) for the full Funding Fee. Further, if CHM did engineer the circumstance giving rise to the automatic termination, this could involve a breach of the Funding Agreement, either as a breach of an express term or as a breach of an implied obligation of good faith, in which case ILP would have a claim for damages. 118I note also that ILP's entitlement to repayment of legal costs is, like its entitlement to the Funding Fee, expressly conditional only on the resolution of the Proceedings; and if ILP's contentions were correct, this entitlement would apparently exist even if it had already been paid "an amount equal to" legal costs expended by it, as part of the Early Termination Fee. 119In my opinion, the more reasonable construction of the agreement is that ILP's entitlement to the Funding Fee is in return for its funding of the Proceedings, as contemplated in the recitals; and that the Early Termination Fee is intended to be an entitlement that substitutes for the entitlement under clause 3.1, covering both ILP's entitlement to repayment of the costs it had expended and its entitlement to a fee for undertaking the obligations under the agreement and expending costs to the date of termination. 120Accordingly, I agree with the view expressed by Young JA on this aspect, and I would dismiss ILP's appeal.

Cross-appeal 121Turning to the cross-appeal, it raises the following issues: (1) Is the Funding Agreement within the general definition of "financial product" as being a facility through which CHM managed financial risk? ( Corporations Act 2001 (Cth) (the Act), ss 763A, 763B, 763C, 763E and 762B) (2) Is the Funding Agreement caught as a specific inclusion, as being a "derivative"? (s 764A(1)(c), s 761D) (3) Is the Funding Agreement excluded from being a financial product, as being a "credit facility"? (Section 765A, Corporation Regulations 2001 (Cth), Reg 7.106(1)) I will consider these issues in turn.

Management of financial risk 122In my opinion, plainly the Funding Agreement was a facility through which CHM managed financial risk (within s 763A(1)(b) of the Act), in that it managed the financial consequences to itself of certain things happening (namely, adverse costs orders and loss of litigation, and possibly also the incurring of its own costs through pursuit of the litigation) (s 763C). The difficult question is whether it is nevertheless excluded from the general definition of financial product by operation of s 763E. 123Certainly, in my opinion, the management of financial risk can be considered a component of a facility (the Funding Agreement) that has other components within the meaning of s 763E(1)(a)(i), in particular the financing of litigation by advancing money to pay CHM's own costs and to meet adverse costs orders as and when they need to be paid, in return for the chance of a very large fee if the proceedings are successful. This in turn gives rise to two questions: (1) Is the risk management component "an incidental component of the facility"? (s 763E(1)(a)(i)) (2) Is it reasonable to assume that the main purpose of the facility, considered as a whole, was not managing financial risk? (s 763E(1)(b), (2)(b)) 124The Federal Court proceedings had already been commenced, and security for costs had been ordered, by the time the Funding Agreement was entered into, so that there was then already a potential risk of adverse costs orders. In my opinion, one purpose of the Funding Agreement was to manage that risk. However, plainly at least one main purpose of the Funding Agreement was to provide finance for and thereby to facilitate the pursuit of the proceedings. Further risks would arise by reason of the pursuit of the proceedings, and another purpose of the Funding Agreement was to manage these further risks. 125In my opinion, the management of future risks was plainly incidental to the financing of the litigation: those risks were dependent on the litigation proceeding, and did not exist independently of that. In my opinion also, the management of existing risks was incidental to the financing of the litigation: although those risks did exist independently of the litigation proceeding further, the management of these risks was provided not as something independent to facilitation of the pursuit of the litigation, but rather as something incidental to it. 126In relation to the "main purpose" question, it is important to note that the question posed by the statute is not whether the main purpose considered as a whole was in fact not managing financial risk, but whether "it is reasonable to assume" this to be the case. In my opinion, this is a less stringent requirement: the assumption in question need not be objectively true, so long as it is "reasonable". In my opinion, the view of Young JA that the management of risk was a principal or main purpose, presumably along with the financing of the litigation, is a reasonable view; but in my opinion also, another reasonable view is that the funding of the litigation, and the provision to the funder of the chance of a very large fee constituted the main purpose of the Funding Agreement, to which risk management was subsidiary. In terms of the statute, in my opinion it is "reasonable to assume" that the main purpose of the Funding Agreement was not managing financial risk. 127Accordingly, s 763E has the effect that such components of the Funding Agreement as managed risk are not to be considered a financial product; and in my opinion, this also excludes the operation of s 762B, as well as the general definition provisions. 128Accordingly, in my opinion the Funding Agreement does not fall within the general definition of financial product.

Derivative 129Derivative is defined in s 761D of the Act. The questions crucial to this case are: (1) whether the amount of the consideration that must or may be required to be provided under the Funding Agreement at some future time (or the value of the arrangement) "is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else" within s 761D(1)(c); and (2) whether the Funding Agreement is "a contract for the future provision of services" within s 761D(3)(b). 130Young JA took a somewhat narrow view of both provisions, and answered both questions no. I would take a broader view of both provisions, and answer both questions yes. The result is the same: the Funding Agreement is not a derivative. 131I agree with Young JA that "ultimately" does not mean in every case. This is made clear by the words "must, or may be required" in s 761D(1)(a). What the word means, in my opinion, is that where a provision of the relevant kind is required, the "something else" must (perhaps in combination with other factors) have a determinative effect on its amount (or the value of the arrangement) which is not displaced by any other factor. In my opinion, this is clearly the case with the Funding Fee, which in some cases is determined by the Resolution Sum, and in others by the amount of legal costs paid. As regards the obligation to repay legal costs, this is less clear, because what is required to be repaid is just the amount of the costs itself, which may not count as "something else". In my opinion, the better view is that the amount of legal costs is not determined by "something else". 132Having taken a broader view of the basic definition, I would also take a broader view of the relevant exception. The intention disclosed, in my opinion, is that where what determines the amount to be paid at some future time is the future provision of services, the extent or value of which is presently uncertain, or the outcome of which provision is presently uncertain, the arrangement should not be caught by the definition. That consideration applies equally where what is provided in the future is not of the nature of tasks undertaken, but rather of the nature of the procuring by payment for the undertaking of such tasks; and also in my opinion where what is provided is finance for the party which has the obligation to make the later payment to undertake a venture which may produce a benefit for both parties. 133There is no definition of "provision of services" or of "services". In my opinion, it extends to a case where the arrangement requires the party which is to receive the later payment, to make payments which procure services from third parties, and also to cases where the services to be provided are services by way of providing finance for an undertaking by the party which is to make the later payment. Accordingly, in my opinion the Funding Agreement was a contract for the future provision of services, and for that reason is not a derivative.

Credit facility 134Since I have held that the Funding Agreement neither falls within the general definition as a facility for risk management, nor is caught by a specific inclusion as being a derivative, it is not necessary for the result of this appeal for me to consider whether it is in any event excluded as a credit facility. However, it is in my opinion appropriate for me to consider this. 135As the matter was argued, there are two crucial questions: (1) Was the Funding Agreement a contract arrangement or understanding under which "one person (a debtor ) incurs a deferred debt to another person (a credit provider )"? (Reg 7.1.06(3)(a)(ii)) (2) Did the Funding Agreement include a financial benefit (or assistance in obtaining a financial benefit) "arising from or as a result of a loan") (Reg 7.1.06(3)(b)(ix) and (x)) 136As regards (1), the language is awkward, but in my opinion the sense is clear enough. It applies where there is a contract arrangement or understanding under which, at some time in the future, a debt from one person to another arises. In my opinion, it is not necessary that this be inevitable: the fact that on some contingencies the debt may not arise at all does not necessarily exclude the application of the provision. So long as the contingency on which the debt arises is not too remote, in my opinion a contract arrangement or understanding which provides for a debt in the future on such a contingency is one under which one person incurs a deferred debt to another. 137As regards (2), "loan" is not defined; and it was argued for CHM that there is no loan in the case of the Funding Agreement, because the costs are not lent to CHM but paid to the lawyers, and the costs only have to be repaid if there is a Resolution Sum that covers repayment. However, in my opinion there is in the Funding Agreement what is in substance a loan of the costs, which must be repaid in the not unlikely event that the proceedings are sufficiently successful. I note also that, although the argument before us focussed on pars (ix) and (x) which refer to "loan", par (i) includes "any form of financial accommodation"; and even if I were wrong in deciding that the advancing of the costs was a loan, the Funding Agreement is in my opinion clearly a form of financial accommodation. 138For those reasons, I would dismiss the cross-appeal. 139YOUNG JA: This is an appeal from Hammerschlag J sitting in the commercial section of the Equity Division of this Court. 140The basal background is that the first respondent, Chameleon Mining NL (hereafter "CHM") entered into a litigation funding agreement (the "Funding Agreement") with the appellant, International Litigation Partners Pte Ltd (hereafter "ILP") to fund CHM's litigation in the Federal Court against Murchison Metals Ltd (hereafter "Murchison") and others. The dispute raises the questions as to how much CHM must pay to ILP under the Funding Agreement in the events which have happened. 141As will appear in more detail later in these reasons, the Funding Agreement specified that certain consequences should follow should CHM suffer a change of control. It is common ground that CHM did suffer a change of control on 10 August 2010 when a third company, Cape Lambert Resources Ltd (hereafter "Cape Lambert") signed a "Terms Sheet" with CHM giving Cape Lambert significant say in the affairs of CHM. 142ILP reckoned that a very large sum of money was payable to it as a result of the change of control and it appointed two persons as receivers to CHM to protect its alleged rights. 143CHM alleged that the Corporations Act 2001 (Cth) (the "Corporations Act") gave it the right to rescind the Funding Agreement and it purported to do so. Alternatively, it submitted that it was not liable to pay ILP more than $9,000,000 less what it had already paid. 144The case was dealt with by the commercial section seven days after the dispute arose and, after a three day hearing, a reserved judgment was handed down on 31 August 2010 [2010] NSWSC 972 (now reported 79 ACSR 462) a fine example as to how quickly commercial cases can be heard by this Court. 145Two basic questions arose for determination by the primary judge and on this appeal and the cross appeals, which I will call Questions A and B. These are: A. Was CHM entitled to rescind the Funding Agreement? B. If A is answered, "No", how much must CHM pay ILP? At first instance, there were collateral matters such as the status of the receivers, but those matters do not trouble us on this appeal. 146The primary judge virtually answered Question A "No" and Question B "$9,000,000". 147ILP appeals on Question B. CHM and Cape Lambert each have cross appealed with respect to Question A and, in response, ILP has filed a notice of contention re Question A. 148The appeal was heard on 12 October 2010. Mr B W Walker SC and Ms RC Higgins appeared for ILP, Mr T F Bathurst QC and Mr M A Jones appeared for CHM and Mr C R C Newlinds SC and Mr J C Giles appeared for Cape Lambert. 149At the time of the hearing, no judgment had been handed down in the Federal Court even though the hearing had been substantially completed many months earlier. However, on 20 October 2010, judgment was given, Chameleon Mining NL v Murchison Metals Ltd [2010] FCA 1129. CHM was substantially successful, though accounts have to be taken to assess the dollar amount it is to receive. 150It is convenient to deal with Question A first. To do so it is necessary to set out in some detail the relevant provisions of the Corporations Act . 151The focus is upon Chapter 7 which made its first appearance in the legislation as a result of Act 122 of 2001. 152It might be remarked at this initial stage that Chapter 7 of the Corporations Act 2001 (Cth) is drafted in the most obscure and convoluted manner. Indeed, it almost became humorous that Mr Bathurst so often interspersed his submissions when construing various sections by saying, "I did not draft this". 153I know it is our job to make plain what is obscure, and I know that commercial lawyers are thought by the legislature to be so able to find loopholes that every possible eventuality must be thought of and covered. However, the main aim is to protect the investing public and the investing public gain little comfort from obscure legislation. 154The argument of the cross appellants is that the Funding Agreement was properly rescinded pursuant to s 925A of the Corporations Act either because an unlicensed person issued a financial product (which I will call "Argument 1") or because an unlicensed person issued a derivative ("Argument 2"). 155It will also be necessary to consider ILP's notice of contention that: (1) the Funding Agreement is a "credit facility" within s 765A(1)(h)(i) and thus excluded from being a financial product; or (2) it is a contract for future provision of services within s 761D(3)(b). I will consider these at the end of Arguments 1 and 2 respectively. 156Chapter 7 commences with s 760A which is as follows: "760A The main object of this Chapter is to promote: (a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and (b) fairness, honesty and professionalism by those who provide financial services; and (c) fair, orderly and transparent markets for financial products; and (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities." 157The basic approach to regulation in the Chapter is to endeavour to ensure that only licensed persons provide financial products to Australians and that such licensed persons operate within prescribed bounds. ILP, a corporation incorporated in Singapore, has never been a licensed person. 158I should also note that there is no doubt that ILP is in the business of providing litigation funding. 159The Chapter then proceeds to definitions. Division 3 of the Chapter is entitled "What is a financial product?" Subdivision B of that Division (ss 763A-763D) gives a general definition; Subdivision C (s 764A) provides for specific inclusions; and Subdivision D (s 765A) provides for specific exclusions. 160As to Argument 1, dealing with what is a "financial product", the following sections must be considered. 161Section 763A(1) provides: " General definition of financial product (1) For the purposes of this Chapter, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following: (a) makes a financial investment (see section 763B); (b) manages financial risk (see section 763C); (c) makes non-cash payments (see section 763D). This has effect subject to section 763E." 162Section 763B provides: " When a person makes a financial investment For the purposes of this Chapter, a person (the investor ) makes a financial investment if: (a) the investor gives money or money's worth (the contribution ) to another person and any of the following apply: (i) the other person uses the contribution to generate a financial return, or other benefit, for the investor; (ii) the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated); (iii) the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated); and (b) the investor has no day-to-day control over the use of the contribution to generate the return or benefit." 163Section 763C provides: " When a person manages financial risk For the purposes of this Chapter, a person manages financial risk if they: (a) manage the financial consequences to them of particular circumstances happening; or (b) avoid or limit the financial consequences of fluctuations in, or in the value of, receipts or costs (including prices and interest rates)." 164Section 763E provides: "(1) If: (a) something (the incidental product ) that, but for this section would be a financial product because of this Subdivision [ie Subdivision B] is: (i) an incidental component of a facility that also has other components; (ii) a facility that is incidental to one or more other facilities; and (b) it is reasonable to assume that the main purpose of: (i) if paragraph (a)(i) applies---the facility referred to in that subparagraph when considered as a whole; or (ii) if subparagraph (a)(ii) applies---the incidental product and the other facilities referred to in that subparagraph, when considered as a whole; is not a financial product purpose; the incidental product is not a financial product because of this Subdivision (however, it may still be a financial product because of Subdivision C). (2) In this section: financial product purpose means a purpose of: (a) making a financial investment; or (b) managing financial risk; or (c) making non-cash payments." 165However, s 763E must be read in conjunction with s 762B which provides: "If a financial product is a component of a facility that has also other components, this Chapter, in applying to the financial product, only applies in relation to the facility to the extent it consists of the component that is the financial product." 166I need to digress at this point and deal with where one draws the line between the operation of s 762B and s763E. 167This distinction does not appear to have been of concern at first instance. 168During Mr Bathurst's submissions, Hodgson JA asked, "Does s 763E mean that if the main purpose is to finance litigation and the risk management aspect is incidental to that then it is not a financial product?" 169Mr Bathurst's response was, "Yes, subject to this qualification. Section 763E has to be read in conjunction with 762B." 170Later Mr Bathurst said, "There's two hurdles that have to be overcome in relation to 763E. Firstly you have to be able to get within subpara (a) showing the product is an incidental component of a facility that has other components. Second, once you get past that you have got to look at what is the main purpose of, not the persons who entered into it, but the main purpose of the facility." 171Thus "purpose" is not subjective purpose. 172On the broad brush approach, s 762B has the effect that if one has the right to receive income from a scheme with the obligation to pay an annual "service charge" and there is an added sickness insurance policy to make the payments if sickness intervenes, then the Chapter only applies to the scheme minus the insurance aspect. In this particular example, one might also say that the insurance was incidental to the main purpose of the whole scheme. 173During argument, Hodgson JA put to counsel that s 762B applies where there are severable parts of a facility, but s 763E applies where there are incidental, but non severable, parts. 174This view was accepted by counsel for the cross appellants. 175Mr Walker put that the statute calls for courts to look at something called "components". That term is not something that lends itself to be dealt with by conceptions of severability. In the instant case, there is no "component" which on its own can been seen to be managing financial risk, and indeed, the agreement is more properly seen as a joint venture for financial gain. However, one can call in aid s 762B to assist understanding of what it means in s 763A for a facility to be one through which a person does what is called "managing financial risk". 176"Component" is a word whose derivation appears to be from "ponere" = "to place" and "com" = "with". It was analysed by the European Court of Justice in Fischer v Finanzamt Burgdorf [2002] QB 704, 716 et seq . That court made the following relevant observations:

1. Where two goods are brought together without definitely losing their physical and economic distinctiveness, they should not be regarded as component parts. Examples are car radios and a car telephone [72] and [73].
2. In tax cases, a component part needs to add value to the other goods [74].
3. Thus goods are only component parts of other goods if when combined with those other goods the former lose their physical and economic distinctiveness [77]. 177Further guidelines can be gleaned from other cases:
4. To be a component, the article must itself be a significant item in the larger product. Thus where a clause in a construction contract allowed for an increase in the contract price should there be a price increase of component materials for a building, the clause covered steel but not the ingredients for the making of steel: Bethlehem Steel Co v Turner Construction Co 141 NE (2d) 590, 593 (CA of NY) (1957).
5. An accessory to a product is not a component of the product. A bottle cap on a soft drink bottle is not a component of the soft drink: Poer v Curry 8 So (2d) (Ala) (1942) 418 . 178The statute is dealing with intangibles, not physical goods, but there seems little difficulty in applying the guidelines. In the case of a subscription to a telephone service which entitled the subscriber to a "free" telephone book, the latter would not be a component of the service. However, if one booked into a five star hotel, the right to receive room service, concierge service, a clean bedroom and bathroom would probably all be components of the overall service. 179Of course, the guidelines noted in the previous paragraphs are only that. What in this statute was meant by the term "component" must be ascertained by the terms of the statute itself. 180It seems to me that the flavour of the word "component" is a distinctive matter which when combined with other matters constitutes a whole. However, the aspect of losing its distinctiveness in the whole may not be appropriate under this statute as it seems for some purposes to continue to refer to the constituents of the whole. 181It should be noted that whilst in some cases, when components are mated to make a product it is possible to sever them, such as removing parts from a motor car. However, in other cases, once the whole product is produced, the components cannot be easily recovered. Thus once mixed, gunpowder is different from its component elements. A super glue obtained from mixing tube A with tube B is an even better example. 182It seems to me that the problems caused by this discussion does not lead to any assistance in this case. If s 763E applies, it is very difficult to say what was the main purpose of the arrangement as is clear from the fact that each side puts a different main purpose with logical force. Probably there is more than one principal purpose and it cannot be said that there are main and incidental purposes. 183If s 762B applies, then, assuming the contractual rights to fund the litigation and share the spoils and the minimisation of the downside of paying costs if unsuccessful are components then one must ask what would happen if one of those aspects was a financial product? Clearly s 911A and the like would still apply to allow the consumer to rescind unless there could be severance. 184Section 765A provides that certain specific things are not financial products. This section is material for showing that the legislature considered that without it, courts might conclude that various arrangements which the legislature did not intend to attack would fall within the literal words of the legislation. Thus a funeral benefit and most insurances are specifically exempted. 185Apart from that general consideration, it should be pointed out that s 765A makes various specific provisions. None of these are particularly relevant to the present case, though what is a credit facility is relevant to the notice of contention and will be considered when dealing with that notice. 186Section 766A(1)(b) provides, relevantly that "a person provides a financial service if they ...(b) deal in a financial product (see section 766C)". 187Section 766C(1)(b) provides, relevantly: " Meaning of dealing (1) For the purposes of this Chapter, the following conduct (whether engaged in as principal or agent) constitutes dealing in a financial product: (b) issuing a financial product." 188What, then is my decision on Argument 1: Did an unlicensed person issue a financial product? 189Stripped of surplus verbiage, the Act by the sections I have set out defines a financial product so far as the present facts are concerned as an arrangement through which a person manages financial risk in the sense that that person manages the financial consequences to the parties of particular circumstances happening. 190Mr Bathurst put that by the Funding Agreement, CHM "manages financial risk" as contemplated by s 763C(a), by shielding itself against the possibility of incurring legal costs but failing to recover sufficiently or at all against Murchison. 191Mr Bathurst put to us that one commences with s 760A which recognises that the aim of the legislation is the protection of the investing public. One consequence of that recognition is that courts should not read down its provisions; cf Australian Softwood Forests Pty Ltd v Attorney-General (NSW) [1981] HCA 49; 148 CLR 121, 129-130; Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147; 180 FCR 11. 192This view is reinforced by the fact that the legislature recognised in s 765A that it was necessary to exclude discrete matters which would otherwise have fallen within the wide net cast by the general sections of the Act. 193Mr Bathurst puts that, with the above purpose in mind, one goes to s 762C which provides that a "facility" includes an arrangement. He puts that there is no doubt that the Funding Agreement is an arrangement. 194Then one goes to s 763A(1)(b) (set out above) and sees that a financial product includes a facility (arrangement) whereby a person manages a financial risk. In the instant case, CHM manages financial risk because it manages the financial consequences to it of the occurrence of particular circumstances. 195The primary judge was not attracted to this submission. He said, in summary in [82]-[84] of his reasons that whilst, in one sense, the Funding Agreement has the effect of minimising one category of financial risk for CHM, on no realistic view can it be said that the Deed is a financial product whereby CHM manages that risk. The core object of the Funding Agreement is rather to enable CHM to prosecute the Proceedings by having the Funder pay Legal Costs and perhaps provide investigative and management expertise to assist in the Proceedings. The object of the Funding Agreement is to facilitate CHM vindicating its claim against Murchison, not to manage the risk of possible failure in that endeavour. 196The primary judge added in [85] that his view was reinforced by cl 4 of the Funding Agreement under which, as part of the quid pro quo for the funding, CHM undertakes a risk of a significant payment which is unrelated to the ultimate fate of the Proceedings. As well, under cl 10.1 ILP may in its sole discretion (and without reference to the outcome of the Proceedings) terminate the Deed. These are not the characteristics of a financial risk management instrument. 197Mr Bathurst puts that the primary judge did not analyse the Funding Agreement in sufficient depth. One's core object in a transaction may not necessarily be a guide as to its juristic classification. He gave the example that a person takes out third party insurance so that he or she can drive on the public street, however, that purpose does not affect the fact that, the legal classification of the transaction is a contract of insurance. 198The question must be faced, however, that an arrangement may have more than one aspect to it. This matter is dealt with in ss 763E and 762B (both set out above). 199Mr Bathurst puts that in relation to s 763E one has to surmount two hurdles: (a) it must be shown that the product is an incidental component of a facility that has other components; and (b) one has to examine what is the main purpose of the facility (not of the persons who entered into the facility). 200Mr Bathurst puts that a main purpose of the facility in the instant case was to manage the financial consequences associated with the litigation. 201Thus, he submits, the Funding Agreement is caught by the legislation. 202Mr Newlinds' submissions proceeded along similar, but not identical lines. 203Mr Walker affirms the approach of the primary judge in [82]-[85] to which I have already referred. 204Mr Walker further says that the Funding Agreement is akin to a joint venture agreement. It is an agreement that does not manage financial risk, but rather is a combination of two people designed to share in the spoils of the litigation. It is an arrangement designed to produce the possibility of winning the litigation. The financial consequences are simply left to fall on ILP, but these are financial consequences which, had the Funding Agreement not been made, would not come into being as CHM would not have litigated. 205In their written submissions, counsel for ILP say that it is a contrivance to suggest that the Funding Agreement manages the financial risk of CHM. One clear indication is that the Funding Agreement does not, in all possible contractual outcomes, avoid the payment by CHM of the Legal Costs, (a defined term see [259] post) being ( ex hypothesi) a significant risk-transferring aspect of the transaction from its perspective. 206If one approaches the matter from a common sense practical broad brush commercial viewpoint, I think one balks at the idea that an arrangement which is aimed at funding particular litigation is caught as an illegal financial product. However the approach of the majority in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147; 180 FCR 11 shows that this initial feeling might well be overcome by looking at the object of the statute, the approach taken by the High Court in Australian Softwood Forests Pty Ltd v Attorney-General (NSW) [1981] HCA 49; 148 CLR 121 and the actual words used in the statute. 207The majority in Brookfield Multiplex held that a funding agreement in the circumstances of that case was a managed investment scheme. 208The approach of the High Court in Australian Softwood Forests at 129-130 was that if you find wide words in a statute to protect the investing public, and the circumstances of the case come within the literal words, there is no reason to read down those general words, unless, at least, one can "glean from the legislative provisions an overall purpose which, being limited in scope, justified a reading down of the definition". That exception does not apply here. 209Using that approach in the instant case, the facts, as Mr Bathurst has submitted do fit the words of the statute, the statute is one to protect consumers of financial products, here we have a financial product within the definition and one which has a principal purpose to minimise financial risk and there is no reason to read the statute down to remove this type of financial product. 210As I noted earlier, this view is reinforced by the presence of s 765A which goes out of its way to recognise that some situations would come within the definitions and to exempt specifically those for which that consequence is not to follow. 211Mention of s 765A brings me to consider the notice of contention that the Funding Agreement is a "credit facility" within s 765A(1)(h)(i) and Regulation 7.1.06. 212Section 765A provides that: "(1) Despite anything in Subdivision B or Subdivision C, the following are not financial products for the purposes of this Chapter: (h) any of the following: (i) a credit facility within the meaning of the regulations (other than a margin lending facility); (y) a facility, interest or other thing declared by regulations made for the purposes of this subsection not to be a financial product." 213Regulation 7.1.06(1) of the Corporations Regulations 2001 (Cth) provides: " Specific things that are not financial products: credit facility (1) For subparagraph 765A(1)(h)(i) of the Act, each of the following is a credit facility : (a) the provision of credit: (i) for any period; and (ii) with or without prior agreement between the credit provider and the debtor; and (iii) whether or not both credit and debit facilities are available; and (iv) that is not a financial product mentioned in paragraph 763A(1)(a) of the Act; and (v) that is not a financial product mentioned in paragraph 764A(1)(a), (b), (ba), (f), (g), (h) or (j) of the Act; and (vi) that is not a financial product mentioned in paragraph 764A(1)(i) of the Act, other than a product the whole or predominant purpose of which is, or is intended to be, the provision of credit;" 214Regulations 7.1.06(3)(a) and (b)(ix) and (x) provide: "(3) In this regulation: credit means a contract, arrangement or understanding: (a) under which: (i) payment of a debt owed by one person (a debtor ) to another person (a credit provider ) is deferred; or (ii) one person (a debtor ) incurs a deferred debt to another person (a credit provider ); and (b) including any of the following: (ix) a financial benefit arising from or as a result of a loan; (x) assistance in obtaining a financial benefit arising from or as a result of a loan; ...." 215The primary judge rejected the submission by ILP that the Funding Agreement was a credit facility in [86] of the judgment by saying that the deed did not operate to defer payment of any debt nor does CHM incur any debt to ILP which involves it in an obligation to repay. 216ILP says that both these reasons are in error. CHM embraces them. 217ILP puts that the Funding Agreement is essentially an advance of monies by ILP to assist CHM in obtaining a financial benefit arising from the loan and under which CHM defers a debt of repayment of the Legal Costs to ILP. 218Mr Bathurst puts that this is an erroneous characterisation. He notes that, importantly, clause 2.1 is not couched in terms of a loan or advance, but rather an agreement to pay Legal Costs (as defined see [259] post). Again, such a characterisation is inconsistent with Recital D. 219I agree with Mr Bathurst's submissions. Further, I do not consider that merely because it is possible to fit within the literal wording of "credit facility" one must so classify a transaction even though there are many and perhaps more significant aspects to it. 220Thus, the Funding Agreement should not be classed as a "Credit Facility". 221Thus I would deal with Argument 1 by answering "Yes" to the question I posed earlier, namely, did an unlicensed person issue a financial product? 222I turn now to Argument 2. The focus here is on definition of "derivative" in s 761D, particularly s 761D(1)(c). The section, as far as is relevant, is as follows: " Meaning of derivative (1) For the purposes of this Chapter, subject to subsections (2), (3) and (4), a derivative is an arrangement in relation to which the following conditions are satisfied: (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and (b) that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following: (i) an asset; (ii) a rate (including an interest rate or exchange rate); (iii) an index; (iv) a commodity. (3) Subject to subsection (2), the following are not derivatives for the purposes of this Chapter even if they are covered by the definition in subsection (1): (a) .... (b) a contract for the future provision of services. (4) Subject to subsection (2), an arrangement under which one party has an obligation to buy, and the other has an obligation to sell, property is not a derivative for the purposes of this Chapter merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index." (Subsection (2) allows for variation by Regulation). 223Section 764A(1)(c) provides: " Specific things that are financial products (subject to Subdivision D) (1) Subject to Subdivision D, the following are financial products for the purposes of this Chapter: (c) a derivative..." 224Section 761E provides that where the financial product is a derivative, it is issued when the person enters into the legal relationship that constitutes the financial product (sub-section 3 item 3) and each person who is a party to the financial product is a deemed issuer (sub-section 5). 225Mr Bathurst submits that when one goes to the definition in s 761D(1) criteria (a) and (b) are clearly satisfied. The issue is about sub-paragraph (c) that is whether the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from or varies by reference to (wholly or in part) the value or amount of something else. 226The primary judge in [78] of his reasons said that the word "ultimately" qualifies the whole of the phrase which I have italicised in the preceding paragraph. His Honour said at [79] that the word "ultimately" meant "in every case" and the Funding Agreement did not have such an invariable operation. For instance, the Early Termination Fee is not determined by reference to the value of something else. 227The primary judge based his view to a considerable extent from the absence of a comma after the words in parentheses in sub-paragraph (c). 228Mr Bathurst points out that the vital word is not just "ultimately"' but "is ultimately" and while one can easily say "is ultimately determined" or "is ultimately derived from" one cannot say "is ultimately varies". 229Furthermore he puts that, although there is no comma after the words in parenthesis, there is a comma after "determined". This is what grammarians call a "listing comma" which is a substitute for "and" or "or". Thus the words should be read as "is ultimately determined or derived from" and "derived from" does not mean that the ultimate result is derived from but rather the agreement provides for the value to be so determined. 230Again, Mr Bathurst submits, the construction that "ultimately" means "in every case" goes against ss 761B and 762B. Again, the primary judge's construction really construes the Act as saying the same thing three times over. 231However, he puts, that, even if the primary judge's construction of the phrase is correct, (c) would still be satisfied, because Parliament could never have intended that if an arrangement provided for three potential outcomes, two of which were derivative and one was not, that it would follow that none of the potential outcomes was a derivative. 232Again, Mr Bathurst puts that the primary judge focused on the "value of the arrangement" part of (c) and neglected the alternative of the "amount of the consideration". In terms of CHM, the consideration payable is at least referable to "Legal Costs" (as defined) which, in turn is dependent on the "Resolution Sum" (again as defined) both of which may vary. 233He puts that the "value of the arrangement" to either party will turn on a large number of factors to be determined in the future, including orders made for costs in the Murchison proceedings, any strike price and the size of the "Resolution Sum". 234Thus, the value of the arrangement was derived from something else within paragraph (c). 235Mr Newlinds adopted similar arguments, but also emphasised that the primary judge's construction went against the objects of the statute in s 760A. 236Mr Walker defended the primary judge's construction. He also put in written submissions that when looked at "through the functional prism of the legislature, it is clear that the Funding Deed is not a derivative. This is fundamentally because the Funding Deed relates to, and creates interests in, the Federal Court Proceeding. Every possible permutation of the amount of the consideration or value of the arrangement to either party relates directly to this proceeding, as opposed to derivatively to some secondary something else." Thus, the value of the Funding Agreement is not ultimately determined by reference to the value of something else. 237Mr Walker puts that the opposing construction is so broad that the category of "derivative" would virtually be rendered meaningless. 238My mind has fluctuated as I have been considering this question. Both side's propositions have some merit. However, even giving full weight to the reluctance to read down words in a statute for the protection of investors, it seems to me that Mr Walker is correct when he says that the appellant's construction would make the operation of the definition of "derivative" so broad that it would be virtually meaningless. This is reinforced by the fact that, absent the definition, the present interest comes nowhere near the category of derivative as commercially understood. 239It is thus unnecessary to deal in detail with the submission put in the notice of contention that s 761D(3)(b) that the Funding Agreement is properly classed as a contract for the future provisions of services so that, it is excluded from being a derivative even if otherwise would be so classed. 240The submission points to recitals B and C and clauses 2.1, 6.2, 8.1(b), 8.1(c), 8.3 and 13.2 (see [258] et seq post). 241In my view, it is not every contract that involves some future services being provided that comes within s 761D(3)(b). What is being considered is the type of contract noted by Mr Bathurst in his submissions where the amount payable for such services may well vary by "something else" being the time taken to perform the services. Such a contract would be far removed from what this statute is seeking to regulate. 242The matters referred to in [240] are merely matters relating to the carrying out of the parties' promises as the affairs contemplated by the deed span out and do not fall within the term "future provision of services". 243Accordingly in my view the Funding Agreement is not a derivative. 244I now turn to the consequences of my determinations in the previous paragraphs. 245Section 911A(1) has an overarching effect. It states: "Subject to this section, a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services." 246As to the consequences of involvement in a transaction which runs foul of the requirements of the Chapter, one must turn to ss 924A and following. 247Section 924A(1)(a) of the Corporations Act provides: " Agreements with certain unlicensed persons (1) Subdivision B applies to an agreement entered into by a person (in this section and Subdivision B called the non-licensee ) and another person (in this section and Subdivision B called the client ) (not being a financial services licensee) that constitutes, or relates to, the provision of a financial service by the non-licensee if: (a) the agreement is entered into in the course of a financial services business carried on by the non-licensee; and (b) the non-licensee does not hold an Australian financial services licence covering the provision of the financial service, and is not exempt from the requirement to hold such a licence." 248Section 925A(1) (which is in subdivision B) provides: " Client may give notice of rescission (1) Subject to this section, the client may, whether before or after completion of the agreement, give to the non-licensee a written notice stating that the client wishes to rescind the agreement." 249Section 925E provides: " Agreement unenforceable against client (1) This section: (a) applies while both of the following are the case: (i) the client is entitled to give a notice under section 925A; (ii) a notice so given will result under section 925B in rescission of the agreement; and (b) applies after the agreement is rescinded under section 925B; but does not otherwise apply. (2) The non-licensee is not entitled, as against the client: (a) to enforce the agreement, whether directly or indirectly; or (b) to rely on the agreement, whether directly or indirectly and whether by way of defence or otherwise." 250The only matter of fact that need be stated is that on 10 August 2010, CHM also wrote to ILP, amongst others, as follows: "CHM now raises the following matters: 1 The Board of CHM consider that a serious issue arises as to whether ILP is entitled to any payment under the Funding Agreement. This includes ILP's entitlement to the Early Termination Fee (as defined in the Funding Agreement). 2 ILP is in the business of litigation funding. This is plainly suggested in ILP's name and by its conduct. 3 Pursuant to section 911A of the Corporations Act (CA), a person who carries on a financial services business in Australia must hold an Australian Financial Services Licence ( AFSL ) covering the provision of the financial services. We advise that a search of the ASIC register has been carried out in the course of Cape Lambert resources Ltd undertaking its due diligence from which it appears that ILP has neither an AFSL nor an exemption from ASIC exempting ILP from this requirement. 4 In the circumstances, CHM gives notice of its rescission of the Funding Agreement pursuant to section 925A of the CA. 5 As you may be aware, pursuant to sections 925E and 925F of the CA, ILP, as a non-licensee is not entitled to rely on the Funding Agreement, nor is it entitled to recover by any means (including, for example, set-off or a claim on a quantum meruit ) any brokerage, commission or other fee for which CHM would, but for section 925F, have been liable to ILP under or in connection with the Funding Agreement. 6 Without a right to receive any payment, CHM sees no basis upon which ILP can either assert that CHM is in default of the Funding Agreement or that IPL has any entitlement whatsoever, to appoint a Receiver. 7 Please explain the basis upon which IPL considers it is entitled to any fee in circumstances where it is un-licensed." 251CHM has acted to rescind the Funding Agreement. Because the transaction is the provision of a financial product by an unlicensed person, it was entitled to do so. 252It is clear that CHM acknowledges that in consequence of its rescission, it is appropriate for it to consent to an order under s 925D of the Corporations Act that it repay ILP the amounts it has expended on CHM's behalf in the litigation with Murchison. 253Thus on the cross appeal, I would propose that the appeal be allowed and that it be declared that the Funding Agreement has been rescinded ab initio with the appropriate order under s 925D. There may also be some need to make an order with respect to the receivership. 254Although not strictly necessary, in accordance with recent custom, I now turn now to the construction question, which I have called Question B. 255I need to set out the material terms of the Funding Agreement and a few basic and non controversial background facts. 256All counsel acknowledge that the Funding Agreement is a very poorly drawn document which contains many patent errors and errors in cross references. All counsel also acknowledge that whichever interpretation is put on some of its terms, there are often clear indications the other way. 257It is common ground that the Funding Agreement is a deed governed by the law of New South Wales, even though it could be argued that the drafter did not do enough to have the document designated as a deed. I will quote extensively from the Funding Agreement, where it uses the term "Funder" ILP is meant. 258There were four recitals, viz: " A CHM has requested that the Funder provide litigation funding to CHM for its Legal Costs in relation to the Proceedings. B CHM has requested that the Funder provide investigative and management expertise to assist in the Proceedings. C The Funder has agreed, on the terms and conditions set out in this DEED, to provide funding, and management and investigation expertise and other related and agreed matters to CHM to assist in investigating the Claims and to prosecute the Proceedings. D CHM acknowledges that the Funder has, by virtue of its obligations and entitlements (including to receive a percentage of The Resolution Sum) set out in this DEED, an interest in the Claims and the Proceedings." 259The deed then, in clause 1, sets out a series of definitions, the relevant ones being the following: " " Early Termination Fee " means a payment by CHM to the Funder or its nominee of an amount equal to the Legal Costs (including Security for Costs) expended by the funder up to the date of termination pursuant to clause 4.1 and a further amount equivalent to the higher of the value of 20% of the share capital of CHM at the strike price of its shares by the acquirer of the Charge in Control or the Change in Control or $9 million; " Lawyers " means any firm of solicitors appointed by CHM (and agreed by the Funder) to conduct the Proceedings on behalf of CHM; " Legal Costs " means all costs associated with procuring the legal files from the previous Solicitor on the record for CHM in the Proceedings and all future agreed legal costs and disbursements incurred by CHM and Funder in relation to or incidental to the Proceedings, or any Appeal, including without limitation solicitors fees and disbursements, counsel's fees and disbursements and expert witness fees, the provision of $250,000 by way of security for costs for security paid prior to this deed, and the provision of any Security for Costs or monies payable for Adverse Cost Orders arising in the Proceedings, or any Appeal, unless otherwise agreed between CHM and the Funder; " Percentage Payment " means: (a) 25% of the Resolution Sum should a Resolution agreement occur at any time prior to the earlier of 1 February 2009 or the third security for costs payment in the Proceedings; (b) 30% of the Resolution Sum should a Resolution agreement occur at any time thereafter (a) but prior to the earlier of 31 May 2009 or 45 days prior to the hearing date of the Proceedings; (c) 35% of the Resolution Sum should a Resolution agreement occur at any time thereafter (b) but prior to the earlier of 30 November 2009 or 45 days prior to the hearing date of the Proceedings; and (d) 40% of the Resolution Sum should a Resolution agreement occur at any time after 31 March 2010; " Resolution " means when all or any part of the Resolution Sum is received and where the Resolution Sum is received in parts, a "Resolution" occurs each time a part is received; " Resolution Sum " means the gross amount received by CHM or the Lawyers, whether by way of settlement, judgment or otherwise of the Proceedings, including any interest and Legal Costs recovered pursuant to a Costs Order;" 260Clause 2 then set out the obligation of ILP "to pay the Legal Costs, such payment to be made within 28 days of receipt of written notification requiring payment and supported, as and when reasonably required by" ILP. 261I need to set out clauses 3 to 11 in full: " 3. Funding Fee and Legal Costs Entitlement 3.1 Upon Resolution of the Proceedings, the Funder will be entitled to: (a) Repayment of the Legal Costs paid by it in accordance with clause 2.1; (b) Payment of the Funding Fee. 3.2 CHM irrevocably directs that: (a) payment of any Resolution Sum be made to the Lawyers; and (b) the Lawyers are to immediately pay any Resolution Sum into a separate trust account kept for that purpose. 3.3 CHM irrevocably authorises the Lawyers to hold that part of the Resolution Sum due to the Funder under this DEED on trust for the Funder and the balance on trust for CHM; 3.4 If, notwithstanding clause 3.2, CHM directly or indirectly receives all or any part of the Resolution Sum, CHM will pay it over, together with the reasonable market value of any non monetary component of the Resolution Sum received, to the Lawyers to be paid into the trust account referred to in clause 3.2 and dealt with on the terms of this DEED; 3.5 If any part or all of the Resolution Sum is not money, CHM will, as soon as the part or all of the Resolution Sum is received, pay to the Lawyers an amount equal to the reasonable market value of the non monetary component of the Resolution Sum so received; 3.6 The obligations in clause 3.4 and 3.5 are continuing obligations and survive any Termination of this DEED save for a Termination pursuant to clause 8.1; 3.7 On the Repayment Date, CHM irrevocably authorises the Lawyers to forthwith pay out of the Trust Account referred to in clause 3.2 all amounts, to repay Legal Costs paid by the Funder under clause 2.1 to an account directed by the Funder; 3.8 In addition to any Legal Costs to be repaid to the Funder in accordance with clause 3.6, CHM irrevocably authorises the Lawyers to pay to the Funder the Funding Fee on the Repayment Date, to an account directed by the Funder; 3.9 Notwithstanding clauses 3.7 and 3.8, CHM will not be required to pay any amount to the Funder under either clause in excess of the Resolution Sum;

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 March 2011