The proliferation of class action law suits in Australia has created a lucrative environment for litigation funders. Well-established firms are actively competing against new entrants in the market for opportunities to fund litigation. This growth echoes the expansion evident in other common law jurisdictions. The scale of these funding arrangement prompts a prudent examination of the ethical issues and regulations surrounding litigation funders.
Proponents of litigation funding argue that it increases access to justice for litigants who lack liquid financial resources but have meritorious claims. Some commentators, however, have viewed the recent growth in litigation funding in Australia with disquiet, questioning the extent to which the real beneficiaries of such cases are the plaintiffs or the funders, and suggesting that there is evidence that in certain cases, the funders walk away with an excessive share of the settlement proceeds due to the power imbalance between the funders and litigants. Commissions range between 25 and 45 percent of any successful outcome.
Litigation funders may also exercise tight control over litigation which can disenfranchise litigants and cause potential conflicts of interest between litigation funders, lawyers and plaintiffs. Furthermore, a lack of prudential supervision may result in vexatious litigation claims or litigation funders discontinuing mid-proceedings because either they do not have the capital to meet their financial obligations or the likelihood of successful litigation falls below the threshold specified in the litigation agreement between the litigation funders and the litigants.
Classifying litigation funding agreements
Tension between the legislature and the judiciary has resulted in reclassification of litigation funding agreements over time. In 2006 the High Court upheld the first funding agreement on the basis that it provided social utility.1 In 2009 the Full Court of the Federal Court found that funding agreements constituted 'managed investment schemes' under section 9 of the Corporation Act 2001(Cth) (CA) and required registration.2 In 2011 the NSW Supreme Court of Appeal held that the funding agreement was a 'financial product' within the meaning of the CA and therefore required litigation funders to hold an Australia Financial Services License (AFSL).3 The Australian Securities and Investments Commission (ASIC) provided temporary relief from the CA requirements through a class order which exempted litigation funding schemes from being 'managed investment schemes' and from otherwise being a 'financial product'.4
In 2013 the Corporations Amendment Regulation 2012 (No 6) replaced this ASIC order. It continued to exclude funded class actions from the definition of a managed investment scheme and also imposed conflict management procedures on litigation funders. In the explanatory statement to the regulations, the government stated that:
'[t]he Federal Court's decision would have imposed a wide range of requirements that apply to [managed investment schemes], such as registration, licensing, conduct and disclosure requirements on litigation funders and their arrangements with their clients. The Government considers that these requirements are not appropriate for litigation funding schemes. The Government supports class actions and litigation funders as they can provide access to justice for a large number of consumers who may otherwise have difficulties in resolving disputes. The Government's main objective is therefore to ensure that consumers do not lose this important means of obtaining access to the justice system.'5
This mentality has resulted in a permissive regulatory approach which allows litigation funders to employ a number of litigation models.
Litigation funders usually fund litigation in exchange for a share of the amount recovered and often manage the disputes on behalf of clients. Clients may pay an up-front fee to litigation funders, cover their liability for costs and receive a capped amount of money that they are required to repay to the litigation funder. It is not mandatory, however, it is common practice for litigation funders to also indemnify claimants for any adverse costs order in the proceedings.
Alternatively, a common fund approach may be employed whereby funders seek a court-order to recover their funding premium from all group members, and not just those that signed a funding agreement prior to the class action being filed. This model encourages litigation funders to bring 'open class' actions, potentially larger in scale and value than 'closed' classes. Recently, the Federal Court of Australia in Blairgowrie Trading Ltd v Alco Finance Group Ltd6 declined to make orders at the commencement of proceedings which would have endorsed a funder's fee arrangement as reasonable and required all group members to pay that fee. The Court found that making those orders would be advantageous to the litigation funder, but they were not 'appropriate and necessary' to ensure that justice was done in the proceeding and that the Court was not in a position at such an early stage in the proceedings to determine whether such an agreement was 'reasonable'.
Litigation funders acting in Australia are subject to Australian law and court case management protocols, which may require the disclosure of funding arrangements and the posting of security for adverse costs orders.
Despite these safeguards the industry remains largely unregulated.
ASIC has illustrated a willingness to intervene in appropriate cases to ensure litigation funding arrangements are fair,7 however the scope of ASIC's authority is limited because litigation funders are not subjected to a licensing scheme, like the Australian Financial Service Licensing regime. Submissions to the Productivity Commission's enquiry into 'Access to Justice Arrangements' revealed a number of potential regulatory reforms, including the introduction of a mandatory licensing scheme and registration; an oversight agency; the compulsory disclosure of funding arrangements; the introduction of capital adequacy requirements; civil and monetary penalties for violations; suspension or banning orders; breach reporting; and the recognition of a fiduciary duty between the funders and litigants.
Unlike our counterparts in Britain and Ontario where contingency fees are allowed, with caps on the percentage recovered,8 Australian lawyers are prohibited from charging percentage based fees (contingency fees) under the Legal Profession Act in each jurisdiction. There is currently a debate occurring in Australia on the merits of introducing contingency fee agreements. There is increasing appreciation of the benefits of contingency fee arrangements, especially to increase access to justice and create more options for claimants other than through litigation funding. It would promote competition and level playing field for litigation services. The advantage of contingency fee arrangements, unlike litigation funders, is that lawyers are regulated by legal profession's legislation and rules of professional conduct and are more closely regulated by the courts for unethical conduct and court supervision. It remains to be seen whether the Australian lawyers will adopt contingency fee agreements and the impact it will have on litigation funding arrangements in future litigation.
- Campbells Cash and Carry v Fostif  HCA 41.
- Brookfield Multiplex Ltd v International Funding Partners Pte Ltd  FCAFC 147.
- International Litigation Partners Pte Ltd v Chameleon Mining  NSWCA 50.
- ASIC Class Order 10/333.
- (Explanatory Statement, Select Legislative Instrument 2012 No. 172).
- Blairgowrie Trading Ltd v Alco Finance Group Ltd (Receivers & Managers Appointed) (In Liq)  FCA 811.
- See ASIC v Richards  FCAFC 89.
- Annabel Hepworth, ‘Contingency fees ‘would lower costs’, says Maurice Blackburn’s Andrew Watson’, The Australian (online) 15 November 2013 available at <http://www.theaustralian.com.au/business/legal-affairs/contingency-fees-would-lower-costs-says-maurice-blackburns-andrew-watson/story-e6frg97x-1226760109421>.