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The Third Party Litigation Funding Law Review 2nd edition

Australia

By Jason Geisker and Jenny Tallis[1]

1. Market overview

Australia is home to a sophisticated third party litigation funding market. In 2015, the Australian litigation funding market was estimated to be worth around A$3 billion as compared with a total Australian litigation market of around A$21.1 billion. Industry estimates suggest a compounded annual growth rate of between 3 per cent and 11 per cent.[2], [3] Traditionally third party litigation funding in Australia was used to support insolvency litigation but has been increasingly utilised in a broad range of civil and commercial litigation including: tort claims, shareholder and investor claims, product liability claims, employment, consumer and environmental claims. A 2018 litigation finance survey of Australian lawyers and in-house counsel indicates that more than 70 per cent of survey respondents cited legal finance as a growing, essential new business tool for law firms and were users of single-case funding. [4]

The increasing use of litigation funding for a broad range of class actions [5] is another well-established trend of the Australian funding market. By 2017, almost half of all class actions filed in the Federal Court of Australia were class actions supported by third party litigation funders.[6] Although this trend is to be contrasted with a more subdued use of third party funding in class action filings in the state courts where, for example, only 10 out of the 85 class actions filed in the Supreme Court of Victoria were funded.[7]

Initially, the Australian litigation funding market was dominated by ASX- listed IMF Bentham Ltd, with an estimated market share of 69 per cent in 2015. [8] IMF Bentham Ltd's first mover advantage has since been significantly eroded in Australia as other domestic and international funders compete for business. The Australian Law Reform Commission (ALRC) now estimates there are approximately 25 litigation funders active in the Australian market.[9]

2. Legal and regulatory framework

2.1 The legal basis of third party funding and limits on funding others

Prior to 2006, encouraging litigation and funding another's claim for profit were prohibited in Australia by the common law doctrines of maintenance and champerty.[10] These doctrines prevented the courts from being used for speculative business ventures. Maintenance and champerty were the foundation for numerous challenges to the legitimacy of litigation funding before being progressively abolished as crimes and torts. [11] Even after the statutory abolition of maintenance and champerty, courts could still intervene in funded litigation where funding contracts were considered to be arrangements contrary to the public policy considerations upon which the previous prohibitions were based at common law. [12] More than 20 challenges to funding agreements were mounted in the eight years prior to the 2006 landmark decision of the High Court in Campbells Cash and Carry Pty Ltd v. Fostif Pty Limited [3] (Fostif).[14]

In a pivotal moment in the development of the Australian jurisprudence the High Court in Fostif held that third party litigation funding of a class action was not an abuse of process or contrary to public policy. [15] The Court stated that notions of maintenance and champerty could not be used to challenge proceedings simply because they were funded by a litigation funder.[16] Since Fostif litigation funding has become an entrenched part of the Australian legal system. It now plays a crucial role in providing greater access to the courts and bringing an equality of arms against often well-resourced respondents.

A further development under review by regulators is whether lawyers should be restricted from funding claims in the way that third party funders do. Presently Australian law practices are prohibited from entering into any arrangement for payment of damages based contingency fees, where fees are calculated by reference to a percentage of the amount recovered [17] but are entitled to enter into conditional billing arrangements whereby their ordinary fees are payable upon a successful outcome. These arrangements are known as 'no win no fee' agreements and sometimes permit an uplift of 25 per cent of the lawyer's ordinary fees where a successful outcome is achieved.[18] For obvious reasons, such ‘no win no fee' arrangements are often not commercially viable, particularly for larger or more complex claims such as class actions. Interestingly, in its 2017 report on Litigation Funding and Group Proceedings, the Victorian Law Reform Commission (VLRC) suggests that the damages-based contingency fee prohibition does not prevent lawyers from receiving a contingency fee via a common fund Court order approving a litigation service fee in the context of class actions conducted in the Supreme Court of Victoria.[19] Given that encouragement, it should only be a matter of time before the limits on contingency fee restrictions are tested through the courts.

The extent to which a lawyer may be associated with the litigation funder has been extensively tested in recent years by a Melbourne-based solicitor, who was the sole director and shareholder of Melbourne City Investments Pty Ltd (MCI). In 2014, a number of securities class actions were commenced by MCI, as the representative plaintiff, against ASX listed Treasury Wine Estates (TWE) and Leighton Holdings (LEI). At incorporation, MCI had acquired shares in TWE and LEI and other small parcels of shares costing less than A$700 in various other ASX-listed companies. This same MCI director had also appointed himself as the legal representative for MCI, which was receiving litigation funding to conduct the claims.

In December 2014, the Victorian Court of Appeal held that the TWE class action was an abuse of process because it had been commenced with the predominant purpose of earning legal fees for the solicitor, rather than such fees being an incident or by-product of the vindication of legal rights and permanently stayed the proceeding.[20] In dismissing an appeal, the Court of Appeal stressed the importance of maintaining public confidence in the fairness of court processes.

Earlier in 2013, the same solicitor had trialled a different funding model for a class action brought against Banksia Securities.[21] He again sought to act as the lead plaintiff's solicitor, while also being a director and secretary of the litigation funder and holding an indirect shareholding in the funder. The litigation funding agreement entitled the litigation funder to 30 per cent of the amount received by way of an award or settlement of the proceeding, and to exercise control over the conduct of the proceeding.

In November 2014, the Supreme Court of Victoria restrained the solicitor and senior counsel from acting for the lead plaintiff in the Banksia Securities class action owing to conflicts of interest. Justice Ferguson considered that the main risk arising from the solicitor's pecuniary interest in the outcome of the class action was that he might not fulfil, or might not be perceived to fulfil, his duties to the court or be independent and objective.[22] Her Honour found 'it would be inimical to the appearance of justice for lawyers to skirt around the prohibition on contingency fees by this means; particularly where the legal practitioner's interest in the funder is sizeable.[23]

2.2 Present regulation of litigation funding

As providers of financial services and credit facilities, litigation funders are subject to the consumer provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). The ASIC Act contains protections against unfair contract terms, unconscionable conduct, and misleading and deceptive conduct.[24] These provisions provide avenues for redress against unfair or false and misleading terms or omissions in funding agreements.

Currently there are no licensing requirements imposed on litigation funders by the Corporations Act 2001 (Cth) (the Corporations Act), requiring funders to hold an Australian financial services licence (AFSL) or by the National Credit Code, requiring them to hold an Australian credit licence. Consequently, litigation funders have no regulated capital adequacy requirements, nor are they required to comply with various related corporate and risk management regulatory requirements, which would ordinarily apply if they were licensed. This is not to suggest that the applicable regulation of litigation funding has been without challenge. In 2009, the regulation of litigation funding became the subject of national debate as a result of the Federal Court landmark case Brookfield Multiplex Funds Management Pty Ltd v. International Litigation Funding Partners Pte Ltd (Multiplex), which determined that litigation funding agreements (including the funding agreement and retainer) in a funded class action constituted managed investment schemes within the meaning of Section 9 of the Corporations Act.[25] Managed investment schemes were required to be registered and managed by an entity holding an AFSL. Failure to comply was an offence under the Corporations Act. A second landmark case involved a dispute between a funder and client, which raised similar questions regarding the nature and regulation of funding arrangements. In Chameleon Mining NL (Receivers and Managers Appointed) (Chameleon) the litigant sought to rescind a funding agreement under Section 935A of the Corporations Act and thereby avoid payment of the funder's commission. [26] The funded client argued that the funding agreement was a financial product and that the funder did not hold an AFSL. The High Court concluded that the funding agreement was a 'credit facility' rather than a financial product and, while it did not need an AFSL, the funder did require an Australian credit licence.

In the aftermath of these two landmark cases the federal government intervened, announcing that it would protect funded class actions from too heavy a regulatory burden.[27] In 2010, the Australian Securities and Investment Commission (ASIC) issued class orders granting transitional relief to the lawyers and litigation funders involved in funded class actions, exempting them from the managed investment regulatory obligations. ASIC subsequently granted transitional relief from financial product regulatory requirements of the Corporations Act.

The Multiplex and Chameleon cases also led to the introduction of a new conflict management regime. In 2012, regulations were enacted exempting litigation funders from the managed investment scheme provisions of the Corporations Act subject to compliance with new conflict management requirements.[28] Litigation funders providing both single-party funding[29] (litigation funding arrangements) and multiparty funding[30] (litigation funding schemes) are now required to conduct reviews and maintain written procedures identifying and managing conflicts of interest.[31]

In April 2013, ASIC released a regulatory guide detailing how litigation funders may satisfy the obligations to manage conflicts of interest (the Guide).[32] The Guide describes the actual, potential and present or future conflicts of interest that may arise in a litigation scheme because of a divergence of interests between the funder, lawyers and claimants. The Guide requires funders to have robust arrangements in place to identify and assess divergent interests and conflicts, and to respond as needed.[33] The regulations require funders to design their own conflicts management policy suited to the nature, scale and complexity of the litigation schemes funded in recognition that funding operations differ greatly.[34]

2.3 Government reviews into the regulation of litigation funding

Despite the introduction of the 2012 'conflict management' procedures and the Guide in 2013, the regulation of litigation funding remains a heavily debated reform issue. In 2014, the Productivity Commission delivered a comprehensive report regarding access to justice, which favoured two major reforms that would greatly impact litigation funding.[35] The two proposed reforms are (1) the introduction of a licensing regime for litigation funders[36] and (2) the removal of the ban on lawyers charging damages based contingency fees, thereby introducing another funding option for clients.[37] Both reforms (and an array of other proposals) have recently been under further consideration at state and federal level by the VLRC and the ALRC respectively. [38]

VLRC

On 16 December 2016, the Victorian Attorney-General, the Hon. Martin Pakula MP, commissioned the VLRC to report on litigation funding and the conduct of class actions and to consider how regulators might better protect litigants from unfair risks or disproportionate cost burdens. [39] The VLRC report, 'Access to Justice: Litigation Funding and Group Proceedings', tabled in the Victorian parliament on 19 June 2018 (VLRC Report), recommends that, subject to careful regulation, legal practitioners be permitted to charge contingency fees so as to provide another funding option for clients who are unable to bring proceedings without financial assistance in appropriate cases. The VLRC Report also supports industry-wide, national regulation of litigation funders and recommends that Victoria advocate for stronger national regulation through the Council of Australian Governments.[40]

ALRC

The following year, on 11 December 2017, the then Federal Attorney General, the Hon. Mr George Brandis SC announced that the ALRC would be asked to conduct a similar review at the federal level regarding the prudential and character requirements for funders, capital adequacy and conflicts of interest and to report by 21 December 2018. The ALRC Inquiry, led by the Hon. Justice Sarah Derrington QC, is consulting broadly with judicial and expert panels, regulators, stakeholders and interested parties in the UK and Canada. A discussion paper released on 1 June 2018[41] (ALRC Paper) attracted more than 70 formal submissions from a broad range of industry stakeholders including: funders, law firms, insurers, industry super funds, non-government organisations, business lobby groups and regulatory bodies and professional associations. A post-submission seminar series has been conducted throughout Australia and a Post Submission Seminar Paper and Supplementary Note for Consultation has been released.[42]

The ALRC Discussion Paper includes a proposal that contingency fee arrangements for solicitors should be permitted in Australian class action proceedings with some limitations. This would allow solicitors to receive a proportion of the sum recovered at settlement, subject to Court approval, to ensure arrangements are reasonable and proportionate. One rationale for the proposal is so that medium-sized class action matters could proceed (between A$30 million and A$60 million).[43] The ALRC's proposal is broadly supported by 71 per cent of submitters[44] and seems likely to be included in the final report. There are widely divergent responses under consideration regarding the detail of the proposed limitations, including that: the contingency fee be the one and only form of funding; the solicitors bear the onus of paying for the disbursements and providing an indemnity against adverse costs; and the solicitors are precluded from also recovering any professional fees on a time-cost basis. [45] Overall, it seems likely that some type of regime for contingency fees in class actions will be recommended by the ALRC, consistent with the earlier recommendations of the VLRC and the Productivity Commission.

The ALRC Paper also contains a draft law reform proposal that the Corporations Act be amended to require third-party litigation funders of class actions to obtain a 'litigation funding licence' to operate in Australia (Proposal 3-1), so as to help protect the parties to litigation from the risk of financial loss and to protect the reputation of the civil justice system. [46] The ALRC reasons that there is a broad licensing regime for financial sales advice and dealings in relation to financial products and no sound policy reason to exempt litigation funders.[47] The ALRC Post Submission Seminar Paper indicates that 65 per cent of submitters are broadly supportive of the ALRC's licensing proposals. [48] The type of licensing regime currently favoured by the ALRC is an AFSL licensing regime regulated by ASIC rather than a more costly bespoke regime.[49] The ALRC Paper also suggests that licensees would be required to satisfy minimum character and qualification requirements likely to include both financial and legal skills and knowledge requirements.

Perhaps the most controversial element of any new licensing regime for litigation funders is the extent of any capital adequacy requirements to be imposed. While litigation funders currently provide costs protection by the security for costs regime, the ALRC's view is that this does not negate the need for a capital adequacy requirement.[50] The ALRC is currently considering whether the base-level financial requirements under an AFSL licence should be in accordance with ASIC Regulatory Guide 166. These financial requirements would include a net asset requirement of about 5.5 per cent of adjusted liabilities and a cash requirement of A$50,000. The asset requirement to hold 5.5 per cent of liabilities as a buffer differs from the approach adopted by some overseas regimes which require a flat capital amount. For example, in England and Wales, under the self-regulatory model managed by the Association of Litigation Funders of England and Wales, members of the association are required to have £5 million in capital and the capacity to cover aggregate funding liabilities for a minimum of 36 months.

Some foreign domiciled funders have raised concerns about new licence requirements that would require the transfer of capital to Australia. ALRC is considering the application of exemptions for entities that are subject to comparable prudential regulation overseas (ALRC Paper at 3.62). One challenge is that many overseas funders are either not regulated in a comparable manner or are not regulated at all. While the detailed licensing provisions are still under review, it seems likely that the ALRC will recommend the introduction of a licensing regime for litigation funders of class actions.

3. Structuring the agreement

3.1 Typical structure

Funded litigation can involve a tripartite relationship between the litigation funder, the lawyer and the funded client, whereby the funder agrees to provide for all of the client's legal costs and disbursements in return for receiving a percentage of any damages recovered. This percentage typically ranges between 20 per cent and 45 per cent of the settlement proceeds depending on the risks and time involved and the type of funding required. [51] In class actions, the funder typically also assists with project management, administration and pre-claim investigation and sometimes also charges a project management fee. Litigation funders often agree to provide an indemnity to cover the risk of adverse cost orders in the event that the proceeding is unsuccessful. This may involve providing security for costs as agreed or ordered by the court.

As litigation funders do not act as the legal representatives for the funded litigant, clients generally enter into two agreements: (1) a standard retainer agreement with a lawyer recording the scope and terms under which the legal services are to be provided; and (2) a litigation funding agreement with the funder recording the terms on which litigation funding is to be provided. Commonly, the funder and lawyers have no direct contractual relationship, although clients often authorise their lawyers to report directly to the funder. Funders may agree to pay a proportion, or all, of the lawyer's fees during the course of the claim. Where legal fees are partially deferred they are generally recovered from any resolution sum if a successful outcome is achieved. Commonly both the funder and the lawyer agree to assume some financial risk in the event that the claim is not successful.

Funding agreements often allocate project management responsibilities and day-to-day control over the litigation to the funder, allowing the funder the right to provide instructions and administrative support to the lawyers. In theory, the ultimate level of control given to the funder might be seen to give rise to potential conflicts between the interests of the client, in achieving the best possible outcome, and the interests of the funder, in resolving the claim for an acceptable return on its investment. In Fostif the Court of Appeal recognised that a high level of control by the funder is expected and permissible but cautioned that it would be contrary to public policy for the lawyers to fully abdicate to the funder the obligation to act for the representative party.[52] Therefore, while it is permissible for a funder to maintain day-to-day control of a claim, the legal representatives are expected to consult with the client on key issues. In this regard funding agreements often preserve the right of the client to override the funder's instructions. They also commonly include dispute resolution procedures to manage potential conflicts between the funder and client. Unresolved disputes between funders and clients can require the lawyers to brief a senior counsel to provide a final and binding opinion on areas of dispute, such as, for example, the reasonableness of a proposed settlement offer.

The funded client usually authorises the lawyer to receive any resolution sum on their behalf to be applied in accordance with an agreed priority for reimbursements and payments as set out in the funding agreement. Generally payments are prioritised by first reimbursing the lawyer for any deferred fees and the funder for legal costs and disbursements outlaid, before paying any funding commission and then distributing the balance (or pro-rata share in the case of a class action) to the funded clients.

3.2 Judicial intervention

Australian courts have recently shown some willingness to scrutinise the commercial terms of litigation funding agreements and, in limited instances, intervene if they consider funding commissions to be excessive. In Earglow Pty Ltd v. Newcrest Mining Ltd Justice Murphy considered that the court had power to reduce a litigation funder's commission rate when approving a class action settlement.[53] His Honour held that the court was not limited to the binary choice of either approving or rejecting the settlement – instead, the court had power to approve the settlement, while at the same time varying, of its own motion, the amount payable to the funder (thus, in effect, overriding the contractual arrangements between the funder and group members). Justice Murphy considered that such power derived from a combination of Sections 23, 33V, 33Z and 33ZF of the Federal Court of Australia Act (FCA), and that it was, in many respects, analogous to the court's power to fix the amount of costs payable to the lawyers.

In deciding whether to exercise that power in the context of a class action settlement approval, Australian courts have shown a willingness to review and consider not only funding commissions, but also: legal costs, the amount that funded litigants will receive 'in hand', the risks assumed by the funder, the amount of adverse costs exposure and the sophistication and experience of funded litigants. Applying these principles to the Newcrest settlement approval application, Murphy J concluded that the aggregate funding commission of A$6.78 million, at rates of between 26 per cent and 30 per cent, was fair and reasonable. In reaching this conclusion, his Honour considered the published empirical research into the funding commission rates paid in Australian class actions, as well as a number of recent decisions in which settlements were approved, before concluding that those rates were at the lower end of the range. He also emphasised the need for transparency about matters relating to funding in judgments to allow proper benchmarking.

In the subsequent decision of Mitic v. OZ Minerals Ltd (No. 2) Justice Middleton agreed that the court had power to vary the amount payable to a litigation funder out of a settlement in a class action, [54] but preferred to base that view on Section 33V of the FCA, rather than on the other provisions referred to by Justice Murphy. [55]

This issue appears not to be settled though. In Liverpool City Council v McGraw-Hill Financial Inc[56] (now known as S&P Global Inc), Lee J approved a comparatively large funding commission of A$92 million out of a total settlement of A$215 million (about 43 per cent) through a funding equalisation order but, in doing so, considered that Section 33V(2) of the FCA did not give the court the power to interfere with the amount of a funding commission in order to make a settlement reasonable, or to alter a ‘valid contract' between parties (including a funding agreement). [57] In considering whether the funding agreement constituted a valid contract, Lee J noted that there were no objections or applications to set aside the agreement and that a large portion of the class were sophisticated institutional investors. His Honour, did not ultimately decide on whether the court has an inherent power to alter a funding agreement. [58] Therefore, the question (and extent) of judicial power to vary terms of litigation funding agreements remains somewhat controversial and unresolved in Australia.[59]

Looking ahead, the current ALRC inquiry into litigation funding is considering whether new requirements for leave to proceed and approval of litigation funding agreements (and potentially contingency fee arrangements) should be introduced as a precondition to any class action proceeding in the Federal Court of Australia. Whether the Court should be empowered to reject, vary or set the commission rate or contingency fee and grant leave on such terms as the Court sees fit is also under review.[60] The ALRC contends that this would not be a US-styled certification process addressing claim merits, but if introduced says it would clarify the extent of judicial power to vary terms of litigation funding agreements, but no final recommendation has been made.

4. Disclosure

The Federal Court's Class Action Practice Note requires the disclosure of legal costs and any litigation funding charges to current and potential clients in class actions, in clear terms, as soon as is possible. [61] Broader disclosure to the court and other parties is also required in any class action.[62] Funded applicants are entitled to redact these materials to conceal information that might confer a tactical advantage on another party.[63] Commercial terms such as the litigation budget, the commission and costs structure are generally redacted whereas the court is given a complete version.[64] On occasion the Federal Court has been prepared to order production of unredacted litigation funding agreements where relevant, for example, where funding rates were relevant to the respondent's application to set aside the proceeding as an abuse of process,[65] or where an application to de-class the proceeding on the ground that a closed class was said to be an abuse of process.[66]

Conversely, parties have also successfully resisted production of funding agreements and documents associated with the funding relationship, such as investigative reports and correspondence between the funder and a funded party, on the ground of legal professional privilege under Section 119 of the Evidence Act 1995 (NSW) (the Evidence Act). In Hastie Group Ltd (in liq) v. Moore the respondent successfully obtained orders at first instance for production of an expert report that had been provided to the prospective litigation funder.[67] However, the NSW Court of Appeal overturned that decision and upheld a claim of legal professional privilege. It did so on the ground that the report was prepared for the dominant purpose of the provision of professional legal services in relation to proceedings or anticipated proceedings under Section 119 of the Evidence Act, having regard to the engagement letter attached. Importantly, the Court of Appeal also held that the disclosure of the report to a litigation funder was not sufficient to waive privilege in circumstances where it was clear that the report was being provided on a confidential basis.[68]

5. Adverse costs

Superior Australian courts generally have power to order costs against a non-party, including a third-party funder. In Knight v. FP Special Assets Ltd the High Court held that the relevant provisions of the Supreme Court Act 1867 (Qld) empowered the Court to award costs against a non-party where the party to the litigation is an insolvent person or 'man of straw' and the non-party has played an active part in the conduct of the litigation and has (or some person on whose behalf that non-party has been appointed has) an interest in the subject of the litigation.[69]

Examples exist where a litigation funder did not provide any contractual indemnity against adverse costs and where the court subsequently refused to order that third-party funder to pay adverse costs. In Jeffery & Katauskas Pty Ltd v. SST Consulting Pty Ltd (SST) the High Court held that it was not an abuse of process where a plaintiff was unable to meet an adverse costs order simply because the funder had not assumed any liability for adverse costs.[70] In that case the defendant had not sought adequate security for costs during the proceeding. The High Court clarified that a litigation funder does not always have to put the funded party in a position to meet any adverse costs order.[71]

At the time the High Court's SST decision generated some apprehension from some quarters suggesting that funders might refuse to provide indemnities for adverse costs to the detriment of successful respondents. However, perhaps as a result of commercial realities and market competition, these fears have not materialised.[72] In practice, litigation funders now routinely agree to indemnify funded clients against adverse costs exposure and provide security for costs that may be ordered. Representative applicants in funded class action claims will often not be prepared to assume personal liability for the costs of the class without such costs indemnities.[73]

In Domino's Pizza Enterprises Limited v. Precision Tracking Pty Ltd (No. 2) the funded party opposed a security for costs order being made on the grounds that there was no risk that a costs order would not be satisfied due to the combined effect of the litigation funding indemnity, an adverse costs insurance policy and proposed undertakings by Precision Tracking Pty Ltd to notify the parties of any relevant change of funding circumstances.[74] However, the court ordered security for costs be lodged, concluding that (1) Precision Tracking did not have the capacity to meet an adverse costs order, (2) the funding agreement restricted the indemnity to a counterclaim in the proceeding and (3) the adverse costs insurance was taken out for the primary claim. Additionally, the funder had an absolute discretion to terminate its funding arrangements with Precision Tracking at any time, including the adverse costs indemnity and the adverse costs insurance.

The adequacy of adverse costs insurance, as a form of security, was again tested in Petersen Superannuation Fund Pty Ltd v. Bank of Queensland Ltd (Petersen).[75] In that case Justice Yates accepted that, depending on the circumstances, 'an appropriately worded ATE policy might be capable of providing sufficient security for an opponent's costs'; but on the facts of Petersen concluded that the specific policy offered was not sufficient, noting the beneficiary of the policy was the applicant, not the respondents.[76] His Honour also found that there was no mechanism by which the respondents could compel the applicant to sue on the policy if it were breached. Although this could potentially be overcome by direct proceedings against the insurer under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), there were other potential difficulties including numerous policy exclusions that might be relied on, and a lack of evidence in relation to procurement of the policy that might have an impact on non-disclosure and avoidance rights.

6. The year in review

6.1 Competing funded class actions

Evidence suggests that competing funded class actions against the same respondent arising out of substantially the same subject matter are becoming more prevalent. Professor Vince Morabito's empirical report ‘Competing class actions and comparative perspectives on the volume of class action litigation in Australia' concludes that as at 30 June 2018 there had been 28 instances or sets of competing class actions in Australia.[77]

The Federal Court of Australia is adopting a 'hands on' approach to case management and demonstrating a willingness to exercise the Court's case management powers to prevent duplicative funded class actions. In McKay Super Solutions Pty Ltd (Trustee) v. Bellamy's Australia Ltd (Bellamy's) the court scrutinised the funding packages offered by competing litigation funders in detail at the commencement of the case.[78] Two securities class actions

commenced on an open basis had been filed against Bellamy's Australia Ltd, in McKay Super Solutions Pty Ltd (Trustee) v. Bellamy's Australia Ltd (the McKay class action) and Basil v. Bellamy's Australia Limited (the Basil class action).[79] The respondent applied to the court to stay one of the class actions on the grounds that it would be oppressive and an abuse of process to defend two similar funded class actions. The pleadings and claim period in each class action were similar, each class action was of a similar size and claim value, and each had experienced class action solicitors on the record. The major point of difference was the litigation funding. The McKay class action was funded by IMF Bentham. The Basil class action was funded by ICP Capital. Beach J held that neither class action should be stayed and that the IMF Bentham-funded class action should remain as an ‘open class' and the ICP Capital-funded class action should remain on foot but become a closed class.[80] Ultimately, the comparative financial position of IMF Bentham, the form of security provided and the standard terms of its funding agreement were key determinants in the court resolving which funded class action should proceed as an open class in Bellamy's.

In Perera v GetSwift Ltd[81] (GetSwift class action) there were three competing class actions resulting in a carriage motion to determine which class action would proceed and which (if any) would be stayed. The court adopted a multi-factorial analysis to compare the competing class proceedings.[82] Justice Lee considered that the court had the power to stay two of the proceedings and permit one to proceed on the basis that to allow two duplicative open class proceedings to proceed would perpetuate unnecessary multiplicity, would bring the administration of justice into disrepute and would amount to an abuse of the court's process. Broadly, the main area of difference between the various GetSwift class actions identified by the court was in the approach to funding and costs. The class action selected to proceed (the Webb class action)[83] was said to have an innovative, highly competitive funding model and novel proposed methods to reduce costs by involvement of court-appointed costs referees and joint experts.[84] The funding model was calculated as the lesser of 20 per cent of the net settlement sum and a multiple of legal costs, increasing at various stages of the proceedings.[85] Lee J considered the alignment of the reward of the funder with a multiple of legal costs was a significant attraction of the funding model because it recognises the reality that the risk of a funder (including for adverse costs) increases incrementally as legal costs increase and has the advantage of avoiding 'windfalls' which might be disproportionate to the risk and costs incurred.

Perhaps the most prominent recent example of competing funded class actions in Australia involves one of Australia's oldest funds managers, AMP Ltd. In 2018, the market value of AMP Ltd plummeted by about 11 per cent as a result of previously undisclosed revelations that emerged during the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Five separately funded shareholder class actions have been brought against AMP Ltd offering various types of funding packages. Four of these class actions were commenced in the Federal Court and one in the NSW Supreme Court. A final determination as to claim or claims that will be permitted to proceed is yet to be made.

6.2 Common fund orders

A recent significant development has been the judicial approval of ‘common fund' orders sought in funded class actions. Common fund orders can provide for the legal cost of the proceeding and the commission charge of a litigation funder to be met by all members of a class who succeed in, or achieve a settlement in, a class action, irrespective of whether they have signed any legal retainer or funding agreement. Common fund orders have been made in a growing number of class actions, including: Money Max Int Pty Ltd (Trustee) v. QBE Insurance Group Ltd (the QBE class action),[85],[86]Blairgowrie Trading Ltd v. Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No. 3) (the Allco class action),[87] and Camping Warehouse v. Downer EDI (Approval of Settlement) (21 December 2016) (the Downer EDI class action)[88] and Lenthall v Westpac Life Insurance Services Limited [89] (the Lenthall class action) and Catherine Duck v Airservices Australia[90] (the Airservices class action).

A common fund order was first made in the QBE class action at an early stage of the proceeding to assist group members in making an informed decision as to their participation in the class action prior to 'opt-out'. In making the order the court did not set the funding commission rate, preferring to determine that issue at a later stage once the amount of any settlement was known (the applicant had sought a rate of 30 per cent, being less than the 32.5–35 per cent provided for in the pre-existing funding agreements).[91]

Justice Beach subsequently made a common fund order at the time of settlement approval of the Allco class action, allowing the funder 30 per cent of the net settlement amount (i.e., after deduction of legal costs), which equated to about 22 per cent of the gross settlement amount of A$40 million. His Honour emphasised that the 30 per cent rate was reasonable and proportionate to the investment and risk undertaken by the funder in the context of the settlement and should not be seen as a precedent and that he would have set a lower rate had the settlement amount been substantially higher. He also stated that 'a 30% rate would be difficult to justify on a net settlement sum above A$50 million'; albeit with the caveat that ‘valuable services such as that which a funder provides have a commercial cost and if it can be justified, so be it'.[92]

Similar orders were also made in the Downer EDI class action, setting the commission rate at 10 per cent. Although this rate was comparatively low, the circumstances of that case were quite unique, including that 'the funder only provided adverse costs cover and security for costs', with the lawyers acting on a 'no-win, no-fee' basis, and the total settlement amount being relatively modest (A$8.25 million).

Justice Lee made common fund orders for the payment of funding commission of the lesser of 20 per cent of the net settlement sum and a multiple of legal costs at the commencement of the proceedings in the GetSwift class action. Lee J considered it to be preferable to make the order at an early point, and noted that the order could be varied by the Court at a later time if necessary.[93] This decision was subsequently cited in Impiombato v. BHP Billiton Ltd [94] in support of the making of an early common fund order, while retaining scope to vary or vacate the order. In the Lenthall class action, Justice Lee made similar orders to the GetSwift class action. The funding rate to be paid by the class in the Lenthall class action is the lesser of 25 per cent of the gross recovery and three times the total spend on legal costs and disbursements and adverse costs. [95]

Whether it is appropriate to provide for common fund orders with funding commission rates early in the proceedings will depend on the circumstances of the case. In the Airservices class action, Justice Bromwich held that it might distort decision making and was not appropriate to make common fund orders early in that proceeding that fixed any commission rates because there was a reasonable possibility that a separate question might end the proceeding or provide a platform for early settlement.[96]

The judicial power for common fund orders has been challenged in the Lenthall class action in which an application for leave to appeal has been filed.[97] If leave is granted the appeal will determine whether the Federal Court has the power to make common fund orders pursuant to Section 33ZF of the Federal Court of Australia Act 1976, which is the general power of the court to make orders appropriate or necessary to ensure that justice is done in the proceeding. The Australian judicial trend towards making common fund orders to ensure fairness and equality between group members might suggest the prospects of this appeal are not strong.

7. Conclusions and outlook

Litigation funding in Australia is well established and now progressing into a mature and sophisticated market. Common law and regulatory requirements have steadily developed and clarified the regime's requirements since the High Court's foundational decision in Fostif. Market competition spurred by new local and international funding entrants is driving innovation and placing downward pressure on commission rates and competitive terms.

The general acceptance of the common fund doctrine in class actions has improved fairness and equity between class members and enabled funders to more efficiently consider the commercial viability of multiparty claims, without completing costly book-building. Looking ahead we can expect to see further judicial guidance on funding arrangements and the extent of the court's powers of intervention. We also expect that increased regulatory requirements will be imposed on funders as a result of the VLRC and ALRC reviews and recommendations to parliament.

Clearly, an important next step facing state and federal regulators will be the introduction of damages-based contingency fees for lawyers, as has been recommended by the Productivity Commission and the VLRC. It seems inevitable that Australian lawyers will shortly be competing with litigation funders in the funded class action segment of the market, which should further enhance consumer outcomes and provide greater access to justice in Australia.

 

1 Jason Geisker is a principal and Jenny Tallis is a special counsel at Maurice Blackburn Lawyers.
2 IMF Bentham Litigation Funding Masterclass October 2015 presentation, p. 8.
3 IBIS World Industry Report OD5446, 2017, p. 3.
4 Burford Capital, 2018 Litigation Finance Survey, p. 22.
5 A class action is a procedure whereby a single representative can bring or conduct a claim on behalf of others in the same, similar or related circumstances (Part IVA Federal Court of Australia Act 1976 (Cth) Section 33C(1)).
6 Victorian Law Reform Commission, ‘Access to Justice – Litigation Funding and Group Proceedings' Consultation Paper (July 2017), p. 8, para. 1.47.
7 Victorian Law Reform Commission, ‘Access to Justice – Litigation Funding and Group Proceedings' Report (March 2018), p. xiv, paras. 12, 14.
8 IMF Bentham Litigation Funding Masterclass October 2015 presentation, p. 9.
9 Australian Law Reform Commission, ‘Inquiry Into Class Action Proceedings And Third Party Litigation Funders' Discussion Paper 85 (June 2018), p. 16, para. 1.12.
10 Maintenance is assistance in prosecuting or defending a lawsuit by someone with no bona fide interest in the case. Champerty is an agreement to divide litigation proceeds between the owner and another party unrelated to the lawsuit who helps enforce the claim.
11 Civil Law (Wrongs) Act 2002 (ACT) Section 221; Maintenance, Champerty and Barratry Abolition Act 1993 (NSW) Sections 3-4, 6; Criminal Law Consolidation Act 1935 (SA) Schedule 11 cll 1(3), 3; Wrongs Act 1958 (Vic) Section 32; and Crimes Act 1958 (Vic) Section 322A.
12 For example, see Wrongs Act 1958 (Vic) Section 32(2).
13 [2006] HCA 41.
14 Standing Committee of Attorney Generals, Litigation Funding Discussion Paper (May 2006), p. 4.
15 Campbells Cash and Carry Pty Ltd v. Fostif Pty Limited [2006] HCA 41.
16 ibid. at [84]–[86].
17 ibid. Section 183.
17 See, for example, Section 182(2)(b) of the Legal Profession Uniform Law 2015 (NSW).
18 Victorian Law Reform Commission, ‘Access to Justice: Litigation Funding and Group Proceedings' Report, p. 63, para. 3.96.
19 Treasury Wines Estates Limited v. Melbourne City Investments Pty Ltd (2014) 318 ALR 121; [2014] VSCA 351 at [22].
20 Bolitho v. Banksia Securities Ltd (No. 4) [2014] VSC 582 (26 November 2014) at [53].
22 ibid. [53].
23 ibid. [51].
24 Australian Securities and Investments Commission Act 2001 (Cth), Sections 12BF-12BM, 12CA-12C, 12DA.
25 Brookfield Multiplex Funds Management Pty Ltd v International Litigation Funding Partners Pty Ltd (2009) 180 FCR 11.
26 Chameleon Mining NL (Receivers and Managers Appointed) [2012] HCA 45.
27 Treasury Press Release, Hon Chris Bowen, Minister for Financial Services, Superannuation and Corporate Law ‘Government acts to ensure access to justice for class action members.' No 039, 4 May 2010.
28 Corporations Amendment Regulation 2012 (No. 6) (Cth).
29 Corporations Regulations 2001 (Cth), r 5C.11.01(d).
30 ibid. rr 5C.11.01(b)–5C.11.01(c).
31 ibid. r 7.6.01AB.
32 ASIC Regulatory Guide 248, ‘Litigation schemes and proof of debt schemes: Managing conflicts of interest'.
33 ibid. RG248.31.
34 Corporations Regulations 2001 (Cth) r 7.6.01AB(2)(a).
35 Productivity Commission, ‘Access to Justice Arrangements', Inquiry Report No 72 (2014).
36 ibid. vol 2, p. 633, Recommendation 18.2.
37 ibid. vol 2, p. 619, Recommendation 18.1.
38 Victorian Law Reform Commission, ‘Access to Justice – Litigation Funding and Group Proceedings' Report (March 2010), pp. 17–19, paras. 2.23-2.31 and (Chapter 3); Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings And Third Party Litigation Funders' Discussion Paper 85 (June 2018), pp. 48–52, paras. 3.21–3.33 and pp. 83–91, paras. 5.9– 5.41.
39 Victorian Law Reform Commission, ‘Access to Justice – Litigation Funding and Group Proceedings' Consultation Paper, p. v.
40 ibid. p. xvi, paras. 28–31.
41 Australian Law Reform Commission, ‘Inquiry into class action proceedings and third party litigation funders' Discussion Paper 85, pp. 4–5, and p. 17, para. 1.17.
42 Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings and Third-Party Litigation Funders Reform' Post-Submissions Seminar and Supplementary Note for Consultation: Leave to Proceed.
43 Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings and Third Party Litigation Funders' Discussion Paper 85, p. 83, para. 5.10.
44 Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings and Third-Party Litigation Funders' Post-Submissions Seminar, p. 5.
45 ibid.
46 Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings and Third Party Litigation Funders' Discussion Paper 85, p. 50, para. 3.27.
47 ibid. p. 49–50, para. 3.26.
48 Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings and Third-Party Litigation Funders' Post-Submissions Seminar, p. 10.
49 ibid. p. 16.
50 Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings and Third Party Litigation Funders' Discussion Paper 85, p. 56, para. 3.49.
51 Earglow Pty Ltd v. Newcrest Mining Ltd [2016] FCA 1433 at [7] and [157].
52 Mitic v. OZ Minerals Ltd (No 2) [2017] FCA 409.
53 In the Tamaya Resources class action ([2017] FCA 650 at [105]–[106]), Justice Wigney appeared to accept that the power existed, and so too did the Full Court in Melbourne City Investments Pty Ltd v. Treasury Wine Estates Ltd ([2017] FCAFC 98 at [90]).
54 Victorian Law Reform Commission, ‘Access to Justice – Litigation Funding and Group Proceedings' Consultation Paper, p. 115, para. 8.25.
55 Fostif v. Campbells Cash & Carry Pty Ltd (2005) 63 NSWLR 203, 223-224 (Mason P).
56 [2018] FCA 1289.
57 ibid. at [51].
58 ibid. at [52] – [58].
59 See, for instance, observations of Justice MBJ Lee ‘Varying Funding Agreements and Freedom of Contract: Some Observations' 1 June 2017, IMF Bentham Class Actions Research Initiative with UNSW Law: Resolving Class Actions Effectively and Fairly, p. 7. In other instances the Federal Court has indicated that under Section 33ZF of the Federal Court of Australia Act 1977 it has the power, for example, to effectively modify ‘any contractual bargain dealing with the funding commission payable out of any settlement proceeds' in the course of a settlement approval: Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec
and mgr apptd) (in liq) (No. 3) (2017) 343 ALR 476, 504 (Beach J). See also Earglow Pty Ltd v Newcrest
Mining Ltd [2016] FCA 1433 (28 November 2016) [133]–[134], [157] (Murphy J); Mitic v OZ Minerals
Ltd (No. 2) [2017] FCA 409 (21 April 2017) [26]–[31] (Middleton J).
60 Australian Law Reform Commission, ‘Inquiry into Class Action Proceedings and Third-Party Litigation Funders Reform', Supplementary Note for Consultation: Leave to proceed, 13 September 2018, pp. 4–5.
61 Federal Court of Australia, Class Action Practice Note (GPN-CA) – General Practice Note 25 October 2016, p. 4, para. 5.3.
62 ibid. paras. 6.1, 6.4.
63 ibid. para. 6.4(b).
64 Federal Court of Australia, Class Action Practice Note (GPN-CA) – General Practice Note 25 October 2016, para. 6.1.
65 Spatialinfo Pty Ltd v. Telstra Corporation Ltd [2005] FCA 455.
66 Dorajay Pty Limited v. Aristocrat Leisure Limited [2005] FCA 588.
67 Hastie Group Ltd (in liq) v. Moore [2016] NSWCA 305.
68 ibid. at [59] – [60].
69 Knight v. FP Special Assets Ltd (1992) 174 CLR 178, [192]– [193]; see also Gore v. Justice Corporation
(2002) 119 FCR 428.
70 Jeffery & Katauskas Pty Ltd v. SST Consulting Pty Ltd (2009) 239 CLR 75.
71 See also Grave, Adams and Betts, Class Actions in Australia, para. 17.1000.
72 ibid.
73 ibid.
74 Domino's Pizza Enterprises Limited v. Precision Tracking Pty Ltd (No 2) [2017] FCA 211.
75 [2017] FCA 699.
76 ibid. at [92].
77 See Vince Morabito, ‘Competing class actions and comparative perspectives on the volume of class actions litigation in Australia', An Evidence-Based Approach to Class Actions Reform in Australia (Monash Business School, 6th ed, 11 July 2018), p. 13 – of the 28 competing class action identified, 16 related to shareholder claims, five concerned product liability, four were investor, two were mass tort and one related to consumer protection.
78 McKay Super Solutions Pty Ltd (Trustee) v. Bellamy's Australia Ltd [2017] FCA 947.
79 McKay Super Solutions Pty Ltd v. Bellamy's Australia Limited (VID 163/2017); Basil v. Bellamy's Australia Limited (VID 213/2017).
80 A closed class action is restricted to identified group members who have entered into a funding agreement with the funder. An open class action is a class action on behalf of both the funded group members and unfunded group members who fall within the group member definition.
81 [2018] FCA 732.
82 ibid. [169].
83 ibid. [330].
84 ibid. [328].
85 ibid. [73].
86 (2016) 245 FCR 191.
87 [2017] FCA 330; (2017) 118 ACSR 614.
88 [2016] VSC 784.
89 [2018] FCA 1422 at [25].
90 [2018] FCA 1541.
91 Money Max Int Pty Ltd (Trustee) v. QBE Insurance Group Ltd (2016) 245 FCR 191 at [183].
92 Blairgowrie Trading Ltd v. Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No. 3) [2017] FCA 330 at [160].
93 Perera v. GetSwift Ltd [2018] FCA 732, [244]–[248].
94 [2018] FCA 1272 at [25].
95 Lenthall v. Westpac Life Insurance Services [2018] FCA 1422 at [13], [58] – [62].
96 Catherine Duck v. Airservices Australia [2018] FCA1541 at [16].
97 See Westpac Life Insurance Services Limited ABN 31 003 149 157 & Anor v. Gregory John Lenthall & Ors, NSD1880/2018, filed 2 October 2018.