This article was written by Matt Egerton-Warburton and Yannis Goutzamanis.
Australia is in the midst of its third major inquiry into the growing litigation funding industry in four years.
In one of his last acts as Attorney-General, on 11 December 2017, Senator the Hon George Brandis QC provided Terms of Reference to the Australian Law Reform Commission (ALRC) for an inquiry into class actions and third party litigation funders (the Inquiry). The Inquiry is examining whether the costs of class actions are appropriate and proportionate, the interests of plaintiffs and class members are adequately protected and whether and to what extent class action proceedings and third party litigation funders should be subject to Commonwealth regulation.
The ALRC released a discussion paper on 31 May 2018 which we discuss below.
Litigation funding, originally the tort of “maintenance and champerty”, has traditionally been illegal under English/Australian law (in fact it is still illegal in Western Australia, Queensland and Tasmania). Victoria was one of the first common law jurisdictions in the world to allow funding in 1969 and New South Wales, South Australia and the ACT have followed suit.
The abolition of maintenance and champerty in certain jurisdictions was confirmed by the High Court of Australia in the Fostif case in 2006 where the court ruled that third-party funding per se was not contrary to public policy or an abuse of process.
Litigation funders now fund the majority of all class actions in Australia. In FY 2016/2017, 58% of class actions filed in Australia involved litigation funding and it is anticipated that approximately 65% of class actions filed in FY 2017/2018 will involve litigation funding. Litigation funding is growing because it is profitable. Australia’s largest litigation funder, the ASX listed IMF Bentham, has recovered over A$1.3 billion since 2001 and the litigation funders are experiencing success in the US, UK, Singapore and Hong Kong.
Reasons for an inquiry
The rapid emergence and entrenchment of third party litigation funding in Australia has raised questions around costs, conflicts of interest and appropriate levels of regulation.
Public concern has arisen following recent high profile cases such as the Huon litigation, in which the entire $4.5m settlement was split between lawyers and the litigation funder, and the Kilmore East-Kinglake bushfire class action, in which law firm Maurice Blackburn received $100 million in fees after achieving a $494 million settlement.
Terms of Reference
The purpose of the Inquiry is to ensure that the costs of class actions are ‘appropriate and proportionate and that the interests of plaintiffs and class members are protected'.
The ALRC is to consider whether and to what extent class action proceedings and third party litigation funders should be subject to Commonwealth regulation, and in particular whether there is adequate regulation of the following matters:
- conflicts of interest between lawyer and litigation funder;
- conflicts of interest between litigation funder and plaintiffs;
- prudential requirements, including minimum levels of capital;
- distribution of proceeds of litigation including the desirability of statutory caps on the proportion of settlements or damages awards that may be retained by lawyers and litigation funders;
- character requirements and fitness to be a litigation funder;
- the relationship between a litigation funder and a legal practice;
- the costs charged by solicitors in funded litigation, including but not limited to class action proceedings; and
- any other matters related to these Terms of Reference.
The ALRC is to make specific recommendations on any legislative changes necessary to implement its findings.
Recent reports and inquiries
As mentioned, this is the third inquiry in recent years. In 2014, the Productivity Commission published a report Access to Justice Arrangements, which found that litigation funding was not appropriately regulated in Australia. In 2017, the Victorian Law Reform Commission (VLRC) was commissioned to review litigation funding practices in Victoria and whether the prohibition of Australian lawyers charging contingency fees should be removed. It delivered its final report to the Victorian Attorney-General recently.
The ALRC have stated they will draw on these reports and inquiries when completing their work.
The ALRC discussion paper released on 31 May 2018 contains a number of interesting proposals, including that:
- (Further review) A further review of the legal and economic impact of the continuous disclosure obligations of listed entities and those relating to misleading and deceptive conduct with regards to:
- the propensity for corporate entities to be the target of funded shareholder class actions;
- the value of the investments of shareholders at the time that entity is the target of the class action; and
- the availability and cost of directors and officers liability cover.
- (Licence) Litigation funders should be required to obtain and maintain a ‘litigation funding licence’ to operate in Australia. Litigation funders will be required to:
- deliver their services efficiently, honestly and fairly;
- ensure clear, honest and accurate communications with class members;
- have adequate arrangements for managing conflicts of interest;
- have sufficient resources (including financial, technological and human resources) – the ALRC seeks comment on what ongoing financial standards should apply to litigation funders (including capital adequacy and adequate buffers for cash flow);
- have adequate risk management systems;
- have a compliant dispute resolution system - the ALRC seeks comment on whether litigation funders should be required to join the Australian Financial Complaints Authority scheme; and
- be audited annually.
- (Contingency fee arrangements) Class action plaintiff solicitors should be permitted to enter into contingency fee agreements with the following limitations:
- a contingency fee action cannot also be directly funded by a litigation funder which is also charging on a contingent basis;
- a contingency fee cannot be recovered in addition to professional fees for legal services charged on a time-cost basis;
- under a contingency fee arrangement, solicitors must advance the cost of disbursements and indemnify the representative class member against an adverse costs order; and
- contingency fee agreements in class action proceedings are permitted only with leave of the Court.
- (Court power to vary commission) The Court will have power to reject, vary or set the commission rate in litigation funding agreements. The ALRC is considering a recommendation to impose a statutory limitation of fee arrangements – a cap of 49.9% was discussed.
- (Competing class actions):
- all class actions are initiated as open class actions; and
- where there are two or more competing class actions, the Court must determine which one of those proceedings will progress and must stay the competing proceeding(s), unless the Court is satisfied that it would be inefficient or otherwise antithetical to the interest of justice to do so.
- (Litigation funding) Litigation funding agreements need Court approval.
- (Costs referee) The Court may appoint a referee to assess the reasonableness of costs charged in a class action prior to settlement approval. The referee will explicitly examine whether the work completed was done in the most efficient manner.
- (Settlement) Whether:
- settlement administration should be the subject of a tender process; and
- in the interests of transparency and open justice, the terms of class action settlements should be made public.
- (Collective redress scheme) The Government should establish a collective redress scheme (based on the UK scheme) as an alternative path to expensive class actions – discussed below.
The UK Collective Redress Scheme
One of the more radical proposals of the ALRC was the establishment of a collective redress scheme based on a successful scheme process operating in the UK.
The ALRC perceives collective redress schemes as reducing the time and cost involved in pursuing adversarial litigation and reducing the unnecessarily duplicate public enforcement in follow-on compensation claims. The ALRC believes the UK scheme empowers regulators to deliver compensation swiftly and cost-effectively through the ability to resolve the combination of public and private consequences and allows defendants to avoid the reputational loss and costs involved in defending a class action.
Under the UK scheme a company can apply to regulators to approve a redress scheme. Once approved the scheme is binding. Under a UK scheme a regulator can reduce penalties by up to 20% to reflect the infringing party’s voluntary provision of redress. The existence of the scheme is only revealed after a decision by the regulator to approve the scheme and an application for a compensation scheme is not an admission of liability or inconsistent with the applicant continuing to exercise its rights of defence.
The ALRC noted that certain regulators in Australia already operate redress schemes – the ACCC can accept enforceable undertakings from companies which often include the provision of refunds to affected customers.
Process and Next Steps
Please contact us if you would like our assistance in making a submission to the ALRC on this issue.
Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386.