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Litigation funding in Australia: a year of review and change?

By Jason Geisker and Jenny Tallis

Increasing access to justice has always been a key objective for parliamentarians and the courts. The cost of pursuing legal remedies can often impose insurmountable hurdles. The increasing availability of third party litigation funding has provided an effective, market-based solution to provide greater access to justice. However litigation funding continues to be hotly debated and is currently the subject of Victorian and Commonwealth government reviews. Licensing and additional prudential requirements are being considered along with the removal of the current ban on damages based contingency fees for lawyers. Increasingly commentators are suggesting that removing contingency fee restrictions on lawyers will increase competition and drive down dispute resolution costs for consumers. For those seeking more competition on funding rates, enhanced consumer safeguards and new options for access to justice, these should be welcome developments.

The evolution of litigation funding

Third party litigation funding is any arrangement whereby a non-party (the funder) contributes to some or all of a party’s costs, or provides security or indemnities for adverse costs. If successful the funder receives a portion of the settlement or judgment. Not so long ago encouraging litigation or, worse still, funding another’s claims for profit, were prohibited by the common law doctrines of maintenance and champerty. ‘Maintenance’ is where a stranger to the litigation assists a party to maintain the litigation, e.g. with financial assistance. ‘Champerty’, a form of maintenance, is where some or all of the costs are paid in return for a share of the proceeds. Between 1998 and 2006 these doctrines were used to challenge more than 20 litigation funding agreements, culminating in the 2006 landmark High Court decision Campbells Cash and Carry Pty Ltd v Fostif Pty Limited [2006] 229 CLR 386 (‘Fostif ).

In Fostif the High Court determined that third party litigation funding for a class action was not an abuse of process or contrary to public policy. Perhaps less publicised is the High Court’s conclusion that it had the ability to address any conduct of a litigation funder ‘inimical to the due administration of justice’ (Fostif 435 at [93]).

Since Fostif, litigation funding has become an established part of the Australian legal system. There are presently around 25 active litigation funders in the Australian market, including domestic and overseas funders (Victorian Law Reform Commission, Access to Justice – Litigation Funding and Group Proceedings, Consultation Paper, July 2017, 2.71-2.72). These comprise publicly listed and privately held companies. IMF Bentham Ltd, an Australian listed litigation funder estimates that in Australia there is now about $3 billion of funded claims from a total litigation market of about $21.1 billion (IMF Bentham, ‘Litigation Funding Masterclass’, October 2015).

Professor Vince Morabito’s empirical report ‘The First Twenty-Five Years of Class Actions in Australia’ 20 July 2017, identifies that of a total of 513 class actions filed from the commencement date of the Federal class actions regime on 4 March 1992 until 31 May 2017, 116 (or 22 per cent) were supported by litigation funders. Of those 513 class actions, 35 per cent were investor shareholder claims, 14 per cent product liability claims and about 10.5 per cent mass tort claims. Interestingly, Professor Morabito notes that the majority of the 116 class actions supported by litigation funders were brought in the past five years (about 63 per cent).

Third party litigation funding ‘post Fostif ’ still attracts controversy. Advocates extol the virtues of funding and its crucial role in providing greater access to the Courts, bringing an equality of arms against well-resourced respondents, and filtering out unmeritorious (uncommercial) cases. Detractors express concern about the moral hazards of litigation funding such as an increase in entrepreneurial litigation and the close involvement or ‘control’ of litigation funders in the legal process.

Australian regulatory framework

Litigation funders are presently subjected to an amalgam of statutory regulations and judicial supervision. Funding arrangements governed by contract are subject to all of the usual legal requirements preventing misleading, deceptive or unconscionable conduct. As providers of financial services and financial products they  are also subject to the consumer provisions of the Australian Securities and Investments Commission Act 2001 (Cth), which contains protections against unfair contract terms, unconscionable conduct, and misleading and deceptive conduct (ss 12BF-12BM, 12CA-12C and 12D). As incorporated entities, they are also regulated by the Corporations Act 2001 (Cth) (‘CA’). Those listed on the Australian Securities Exchange are required to comply with the Listing Rules and the CA.

In 2009, a successful challenge to litigation funding arrangements was made in Brookfield Multiplex Funds Management Pty Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11 (‘Multiplex). The Federal Court determined that where multiple parties had entered into litigation funding contracts with the funder, these litigation funding agreements (and the solicitor’s retainer), constituted managed investment schemes within the meaning of s 9 of the CA. Such managed investment schemes were required to be registered and managed by an entity holding an Australian Financial Services Licence (‘AFSL’). Subsequently in International Litigation Partners Pte Ltd v Chameleon Mining NL [2012] HCA 45 the High Court determined that a litigation funding agreement is a credit facility, rather than a financial product as defined in the CA, raising questions as to whether litigation funders were also then subject to the provisions of the National Credit Code and the National Consumer Credit Protection Act 2009 (Cth).

In 2010, the Labour Government intervened confirming a commitment to ensuring access to justice and intention to protect funded class actions from too heavy a regulatory burden. The resulting Corporations Amendment Regulation 2012 (No 6) (Cth) (‘2012 Conflict Regs’), exempted funders from AFSL and National Credit Code requirements subject to compliance with new conflict management requirements. These require litigation funders to conduct reviews and maintain written procedures identifying and managing conflicts of interest.

In April 2013, ASIC released a regulatory guide (‘RG 248’) detailing how litigation funders may satisfy the obligations to manage conflicts of interest. RG 248 requires funders to have robust arrangements in place to identify and assess divergent interests and conflicts, and to respond as needed. It is an offence to contravene these requirements.

On 15 December 2017, Senator George Brandis, as he then was, announced an Australian Law Reform Commission (‘ALRC’) inquiry into certain aspects of class actions and litigation funding, including the prudential and character requirements for funders, capital adequacy and conflicts of interest. Similar issues are also being addressed by the Victorian Law Reform Commission (‘VLRC’).

Possible reforms

Two possible options for the further regulation of litigation funders are a voluntary industry code of conduct and a new licensing regime.

Voluntary industry code

England and Wales have already taken the voluntary industry code path for the regulation of litigation funders. In November 2011 an Association of Litigation Funders (‘ALF’) was created as a self-regulatory body responsible for third party litigation funding in the UK. The ALF Code of Conduct (‘UK Code’) was published by the Civil Justice Council at that time. The UK Code provides protections and benefits to litigants who contract with ALF members by regulating the content of litigation funding agreements including: measures on case control, the settlement approval process, termination rights and complaints procedures.

One important feature of the UK Code is the requirement that ALF members comply with capital adequacy requirements for access to a minimum of £5 million (increased from £2 million in 2011) for a minimum period of 36 months, including continuous disclosure obligations if the funder’s financial circumstances change. This is an important protection in the UK following the House of Lords decision in Aiden Co v Interbulk [1986] AC 965, which restricts the amount of costs of opposing parties that litigation funders are liable to pay to that provided by the funder - otherwise known as the ‘Arkin cap’ on costs.

The UK Code is voluntary. The current members of the ALF comprise most of the prominent and better known UK funders. Critics of the UK Code, such as the US Chamber of Commerce, complain that the UK Code has not provided meaningful oversight of the litigation funding industry because it provides guidance only, is not complete and because not all litigation funders are ALF members or subscribers to the UK Code. They also argue there is no meaningful enforcement power and complain about the transparency of complaints procedures: (US Chamber Institute for Legal Reform Report, Before the Flood: An Outline of Oversight Options for Third Party Litigation Funding in England & Wales, April 2016).

Proponents of a voluntary code in Australia argue this approach has potential to provide a flexible and cost effective form of industry quality control and is a proportionate form of further regulation in a marketplace that has not seen any significant funding failure adversely impacting consumers to date. Adherence to a voluntary code has the potential to become a condition of funding contracts, which might allow for private rights of action if breached. Co-regulation could also improve the effectiveness of any proposed code, whereby a statutory body such as ASIC or ACCC might endorse such a code and provide a framework to monitor ongoing compliance.

Licensing Regime

In 2013, the Australian Government Productivity Commission undertook an inquiry into litigation funding and the ensuing report recommended a licensing regime for third party litigation funding companies so as to screen ‘fly by night’, disreputable operators and ensure that reputable and capable funders enter the market with adequate capital and liquidity to meet all of their concurrent financial obligations. (Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014) (‘ATJ Report’)) The ATJ Report cites one example of an international funder, Argentum Capital, which failed although no funded consumers were left out of pocket as a result (at page 631).

Presently, there are no capital adequacy requirements for funders operating in Australia. A licensing regime for litigation funders might require litigation funders operating in Australia to maintain an AFSL, to comply with prudential requirements and even require product disclosure statements for each funded class action.

One possible adverse impact of a licensing regime is that it might deter funders, particularly those with a small portfolio of claims in Australia, from continuing operations in Australia, and thereby lessen competition; whereas the Productivity Commission’s recommendations were intended to increase competition and decrease litigation costs by a suggested suite of reforms. These reforms included a licensing regime for funders coupled with the removal of the ban on damages based contingency fees for lawyers. Evidently, any proposed licensing regime should be subject to an Australian Government Regulation Impact Statement and only introduced if an evidenced based analysis establishes the present regulatory and judicial oversight is deficient.

Judicial oversight

Litigation funding agreements must be disclosed when a class action is commenced in the Federal Court, or the Supreme Courts of NSW, Victoria and Queensland. They can be scrutinised at any stage of the proceeding and are commonly disclosed in the context of approval applications made to the Court pursuant to s 477(2B) of the CA.

Consistent with the High Court in Fostif, the ATJ Report acknowledged that the courts are well equipped to monitor litigation funding risks on a case-by-case basis (including unfair commission, excessive control of litigation and conflict of interest) but considered it was a difficult task for Courts to supervise the capital adequacy of litigation funders (ATJ Report, 630-631).

Since the ATJ Report, the Courts have adopted an increasingly broad and active supervisory role and have shown a willingness to scrutinise the capital adequacy of litigation funders, the commercial terms of litigation funding agreements and to intervene if a funding commission is considered to be excessive (see, e.g. Money Max International Pty Ltd v QBE Insurance Group Ltd [2016] FCAFC 148; Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433). In Blairgowrie Trading Ltd v Allco Finance Group [2017] FCA 330, Justice Beach referred to the ability of courts to bring flexibility and nuance to their supervisory role on a case-by-case basis. In 2017 the capital adequacy of litigation funders and funding terms were closely scrutinised by Justice Beach (McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd VID163/2017 and Basil v Bellamy’s Australia Limited VID213/2017).

Adverse costs protection

Security for costs rules go some way to ensuring that litigation funders have sufficient financial capacity or insurance arrangements to pay adverse costs. Litigation funders routinely agree to indemnify funded clients against adverse costs exposure and provide security for costs. This is often a condition of participation by funded representative applicants in class actions. A factor in favour of a security order being made is that there is a third party litigation funder standing behind the plaintiff (KP Cable Investment Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189).

Abuse of process/conflict of interest

The courts have been effective in protecting the legal system from potential abuse of process using their inherent power to stay several proceedings where there were unconventional funding arrangements (Melbourne City Investments Pty Ltd v Myer Holdings Ltd [2017] VSCA 187; Walsh v WorleyParsons Ltd (No 4) [2017] VSC 292; Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd [2016] FCA 787). The courts have even restrained a lawyer from representing the lead plaintiff for public policy reasons where the lawyer and senior counsel’s wife were major shareholders in the litigation funder (Bolitho v Banksia Securities Limited (No4) [2014] VSC 582).

Conclusion

The Productivity Commission’s rationale for recommending the introduction of a licensing regime for litigation funders was due to perceived limits in the Court’s ability to supervise litigation funders’ capital adequacy and to protect consumers from unscrupulous funders. However, in the 12 years since Fostif it is difficult to point to any example where the existing mix of regulation, conflict management and judicial oversight has proven inadequate. Therefore, a more onerous licensing regime would seem to be a disproportionate and potentially anti-competitive response to Australia’s developing litigation funding market. Greater regulation would also not necessarily prevent wrongdoing, as the recent royal commission into the banks has shown. 

The adoption of a voluntary code could potentially enhance the current Australian regime. This coupled with the removal of the prohibition on contingency fees for lawyers, could provide a flexible, cost effective and proportionate level of reform with the effect of increasing competition and access to justice and reducing overall litigation costs.

 

This article originally appeared in the Law Society Journal, Issue 46, July 2018.