Access to Justice—Litigation Funding and Group Proceedings: Consultation Paper

5. Disclosure to the court

Introduction

5.1 The Commission has been asked to report on whether the obligation to disclose funding agreements in proceedings supported by litigation funders should be extended beyond class actions and, if so, what other types of proceedings should be covered by the obligation.

5.2 As discussed in Chapter 2, litigation funders are involved a variety of commercial claims,^[1] and the number operating in Australia is increasing. This includes both nationally based entities and international litigation funders.^[2]

5.3 If a litigation funder is involved in funding insolvency proceedings, the liquidator is generally required by the Corporations Act 2001 (Cth) to obtain court approval for entry into the funding agreement.^[3] Disclosure of the funding agreement to the Court, and other parties, is also required in funded class actions commencing in the Federal Court. In contrast, there is no standing obligation on the lawyer or litigation funder to disclose funding agreements in class actions under part 4A of the Supreme Court Act 1986 (Vic), or in other funded proceedings (other than insolvency proceedings) conducted under Victorian law. However, the court retains the power to order disclosure on an ad hoc basis.

5.4 This chapter considers the question of whether litigation funding agreements, or related information, should be required to be routinely disclosed to the court and, if so, the circumstances when this would be necessary. A number of reform options are put forward, and the Commission would welcome comments about these or other proposals.

5.5 Before turning to the reform options, the chapter sets out the principal reasons why the disclosure of information about litigation funding agreements to the court can be desirable, and gives an overview of current law and practice.

Purposes served by disclosure

5.6 Litigation funders are not parties to the proceedings that they fund. They have a financial interest in the outcome but do not conduct the litigation. It is reasonable to ask why the court would need to see the funding agreement. The point has been made in discussions with lawyers and litigation funders that the court does not see the insurance policy that the defendant may have taken out to indemnify it for the costs of responding to the claim. On this view, the funding agreement is simply creating a level playing field for the plaintiff against an insured defendant.^[4]

5.7 There are cogent reasons, however, why the litigation funding agreement, or information about the arrangement, should be available to the court and to the parties. As discussed in Chapter 3, there are potential conflicts of interest in the tripartite relationship between the litigation funder, lawyer and plaintiff. As discussed in Chapters 4 and 7, disclosure of this information can be important to protect the legitimate interests of the defendant and, in class actions, the unrepresented class members.

5.8 Paragraphs [5.9] to [5.22] discuss the purposes served by disclosure, for the court and the defendant, in more detail.

Supervision and management of proceedings

5.9 Disclosure of any funding agreement that is supporting a party to proceedings assists the court in supervising and managing the litigation. The degree to which it does so will vary from one case to the next. The ways in which it can assist can be divided into three primary categories.

• Integrity of process. Disclosure puts the court on notice that a litigation funder is involved in the proceedings. The ability of the court to control proceedings and any abuse of process that arises from the involvement of a litigation funder (as recognised in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd^[5]) depends on this knowledge. For example, in Bolitho v Banksia Securities Ltd (No 4),^[6] disclosure of the funding agreement assisted the Supreme Court in determining that, due to their interests in the litigation funder and the terms of the funding agreement, counsel and lawyers for the representative plaintiff should be prevented from continuing to act.

• Protection of the interests of all parties. Disclosure enables the court to assess the reasonableness of the terms of the agreement and whether they adequately provide for the interests of all parties. For example, in class actions and insolvency proceedings, persons (class members and creditors respectively) who do not appear before the court are directly affected by the terms of any funding agreement. Disclosure enables the court to ensure that the interests of these unrepresented parties are adequately considered under the terms of the funding agreement.

• Case management. Disclosure also plays an important role in case management.

It allows any particular issues arising from the funding agreement to be identified, and addressed, at an early stage of proceedings. For example, if the funding agreement enables the litigation funder to terminate funding at any stage of proceedings, the defendant may wish to obtain a security for costs order. Disclosure of the funding agreement allows this issue to be dealt with early in proceedings.

Capital adequacy

5.10 In the absence of regulatory oversight of litigation funders, other than those listed on the Australian Securities Exchange (ASX),^[7] there can be doubt about whether a litigation funder holds, or has access to, adequate capital to meet its financial obligations contained in a funding agreement—particularly if the litigation is unsuccessful.

5.11 A substantial proportion of the terms contained in a funding agreement will apply to one of two scenarios: where the litigation is successful, or where it is unsuccessful. Disclosure of the funding agreement enables the court to consider how the interests of all parties are affected by the funding agreement in both scenarios.

5.12 If the litigation is unsuccessful, the terms of the funding agreement relating to adverse costs—and whether an indemnity for adverse costs has been provided by the litigation funder—are of particular interest not only to the court, but also to the defendant.

5.13 John Emmerig and Michael Legg have argued that the adverse costs arrangements in funded class actions need to be transparent:

Greater attention needs to be paid to the unsuccessful class actions where the funder is required to honour its obligations in relation to indemnities to representative parties and group members to pay adverse costs orders owed to respondents.^[8]

5.14 Although litigation funding agreements typically indemnify the plaintiff for the costs of bringing proceedings (including an adverse costs or security for costs order), this cannot be assumed in practice. As outlined by Justice Murphy in Earglow Pty Ltd v Newcrest Mining Ltd,^[9] a wide variety of costs arrangements are adopted in funded proceedings. These include structures where the litigation funder pays adverse costs but not legal costs and disbursements, where legal costs and disbursements are covered up to a particular amount, or where adverse costs are covered by after the event insurance.^[10]

5.15 These costs arrangements influence not only the funding fee charged by the litigation funder but also the ability of the defendant to recover its costs in the event that the litigation is unsuccessful. Early disclosure of these arrangements assists in providing certainty to the defendant.^[11]

5.16 Even though disclosure is important for this purpose, the Commission notes that it is not a substitute for industry-wide regulation. In its 2014 report on access to justice, the Productivity Commission noted the limitations faced by the courts in verifying the financial status of litigation funders, and particularly, whether a litigation funder is in a sound position to meet all its concurrent financial obligations.^[12] Furthermore, disclosure of this type does not provide assurance to the plaintiff, when entering the agreement, that the litigation funder is able to meet its financial obligations.^[13]

Security for costs

5.17 One means of protecting a defendant against an impecunious litigation funder is through a security for costs order.^[14] The court may order security for costs either on application by the defendant or at its own discretion.

5.18 In class actions, a security for costs order will be made against the representative plaintiff.^[15] The Federal Court has indicated some reluctance to do this. Commentary suggests that this is out of concern that class members may be forced to share the financial burden of the order, thereby removing their immunity from costs orders under part IVA of the Federal Court of Australia Act 1976 (Cth).^[16] Where a litigation funder is financing a class action, however, the Federal Court has recognised that the litigation funder, rather than the class members, will bear the financial burden of the order.^[17] Accordingly, it may be more willing to award security for costs against the representative plaintiff in funded class actions.

5.19 Similarly, in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd,^[18] the New South Wales Court of Appeal indicated that the involvement of a litigation funder in proceedings increased the likelihood of an order of this type being made:

a court should be readier to order security for costs where the non-party who stands to benefit from the proceedings is not a person interested in having rights vindicated, as would be a shareholder or creditor of a plaintiff corporation, but rather is a person whose interest is solely to make a commercial profit from funding the litigation. Although litigation funding is not against public policy, the court system is primarily there to enable rights to be vindicated rather than commercial profits to be made; and in my opinion, courts should be particularly concerned that persons whose involvement in litigation is purely for commercial profit should not avoid responsibility for costs if the litigation fails.^[19]

5.20 The defendant may wish to obtain a security for cost award if there is doubt about

the funder’s financial capacity to pay costs orders in a number of circumstances, such

as where:

• information about the litigation funder’s financial capacity may not be publicly available

• the litigation funder may be based offshore

• the funding arrangement may not provide an indemnity for costs

• the litigation funder may have retained the right under the funding agreement to terminate the funding at any stage of proceedings.^[20]

Terms of settlement

5.21 In the event that the funded proceedings are successful, disclosure of the funding agreement will ensure that the court is aware of the terms relating to settlement or judgment, such as the fee to be paid to the litigation funder.

5.22 As discussed in Chapter 5, disclosure of these terms to the Court in class actions is important in protecting the interests of all class members. This includes unrepresented class members, who do not appear before the Court.

Current disclosure of funding agreements to the court

Class actions

5.23 In 2010, the Supreme Court Practice Note for class actions was amended to require the disclosure of litigation funding agreements at, or prior to, the initial case management conference.^[21] However, this obligation does not appear in the most recent version of the practice note, issued on 30 January 2017.^[22]

5.24 The Commission has been told that the Court prefers to deal with the disclosure of funding agreements on a case-by-case basis rather than having a standard requirement in the Supreme Court Practice Note. This provides the Court with flexibility where different degrees of disclosure are sought.^[23]

5.25 In contrast, in all funded class actions commencing in the Federal Court, the relevant practice note (Federal Court Practice Note) requires funding agreements to be disclosed to the Court.^[24] Disclosure may be limited to a standard form agreement, and need not include individual variations to the standard form that might be negotiated with different class members.^[25]

5.26 In addition, the applicant’s lawyers are required to update the Federal Court about any revised costs or funding agreements when:

(a) there is a change to the standard form of litigation funding agreement or costs agreement which significantly alters the agreement;

(b) a proceeding not previously subject to a litigation funding agreement becomes subject to such an agreement;

(c) there is a change of the litigation funder funding the proceeding; or

(d) the litigation funder becomes insolvent or otherwise unable or unwilling to continue to provide funding for the proceeding.^[26]

5.27 The Federal Court Practice Note also requires disclosure of the funding agreement to other parties no later than seven days before the first case management conference. Again, disclosure may be limited to a standard form agreement.^[27]

5.28 Provision is also made for the redaction of any information which might be expected to confer a tactical advantage on another party, including information relating to the budget or estimate of costs for the litigation or the funds available, which might reasonably be expected to indicate an assessment of the risks or merits of the proceeding.^[28]

Insolvency proceedings

5.29 Where a litigation funder is involved in insolvency proceedings, a liquidator will generally be required to obtain court approval prior to entering into an agreement with the litigation funder.

5.30 This obligation arises under section 477(2B) of the Corporations Act 2001 (Cth), which states that a liquidator should seek court approval before entering into a long-term agreement. As litigation funding agreements typically last for longer than three months, they are classified as long-term agreements and require court approval.^[29]

5.31 Assessment of the funding agreement in insolvency litigations is left to the discretion of the court. A non-exhaustive list of factors to be considered by the court under section 477(2B) was set out by the New South Wales Supreme Court in Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq)^[30] as follows:

• the nature and complexity of the cause of action

• the amount of costs likely to be incurred and the extent to which the funder is to contribute to these costs

• the extent to which the funder is to contribute to adverse costs or any security

for costs

• the extent to which the liquidator has canvassed other funding options

• the funding fee

• the risks involved in the claim

• the liquidator’s consultations with the creditors.^[31]

5.32 The Federal Court has noted that approval under section 477(2B) of the Corporations Act 2001 (Cth) is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter.^[32] While the Court will not simply ‘rubber stamp’ whatever is put forward by a liquidator, nor will it approve an agreement if its terms are unclear, it is not the duty of the Court to determine the merits or commerciality of the proposed funding agreement.^[33]

5.33 However, the Federal Court has noted that it is important to ensure, among other things, that the entity or person providing the funding is not given a benefit ‘disproportionate to the risk’ undertaken or a ‘grossly excessive profit’.^[34]

Reform options

5.34 In identifying reform options about the disclosure of funding agreements in proceedings supported by litigation funders, four options are apparent to the Commission and are discussed in turn below:

1) Retain the status quo.

2) Require disclosure of funding agreements in all funded class actions.

3) Require disclosure of funding agreements in all funded proceedings.

4) Require disclosure of funding agreements in all funded proceedings except in certain circumstances.

5.35 Retain the status quo. The Supreme Court could continue to deal with the disclosure of funding agreements on a case-by-case basis. The Court has the power to obtain a copy of the funding agreement, or any other information it needs about the litigation funder in order to perform its functions. Lawyers have observed in discussions with the Commission that, when there was a standard disclosure requirement, the common practice was to redact most information, or provide only a standard form of the agreement, which is of limited use.

5.36 The alternative view, which has been put to the Commission during informal discussions, is that specifying a standard disclosure requirement would give a clear indication to the parties of what the Court will want to know about the litigation funder’s involvement in the proceedings. The point has been made that, in the absence of a mandatory disclosure requirement, the onus is on the defendant to apply for the funding agreement to be provided. This creates delays and increases costs.

5.37 Require disclosure of funding agreements in all funded class actions. The Supreme Court could require funding agreements to be disclosed at, or before, the first case management hearing or directions hearing in all funded class actions. The defendant would not have the onus of applying for the disclosure, which in turn should reduce pre-trial procedural steps.

5.38 Require disclosure of funding agreements in all funded proceedings. In view of the evolving scope and size of the litigation funding industry in Australia, it is likely that litigation funding agreements will be used in an increasing number and type of proceedings, such as commercial arbitration or small claim commercial disputes.

5.39 Whether the disclosure of funding agreements in these proceedings is desirable has not, to date, been addressed in legislation or court guidelines.

5.40 Unlike litigation funders involved in class actions—which are typically large litigation funders listed on the ASX—litigation funders involved in other claims, particularly small commercial claims, are likely to be smaller operators with lower capital reserves. If they are not listed on the ASX, or are internationally based, financial disclosure statements are not likely to be publicly available.

5.41 Conversely, if a litigation funder is involved in a small commercial dispute, in which no third party is affected by the terms of the funding agreement other than the plaintiff who appears before the court, it is arguable that there may be a reduced need for court supervision of the funding agreement.

5.42 Require disclosure of funding agreements in all funded proceedings except in certain circumstances. The litigation funding agreement could be disclosed as a matter of course in all funded proceedings, except in certain circumstances. Exceptions could include:

• where the litigation funder is funding a sophisticated client, and so court protection of their interests is less necessary

• where the litigation funder is funding a single plaintiff, who is represented before the court and whose interests are promoted by lawyers.

5.43 The onus could fall on either the plaintiff or the defendants to prove that disclosure is not necessary in the circumstances.

Questions

10 In funded class actions, should the plaintiff be required to disclose the funding agreement to the Court and/or other parties? If so, how should this requirement be conveyed and enforced?

11 In funded proceedings other than class actions, should the plaintiff disclose the funding agreement to the Court and/or other parties? If so, should this be at the Court’s discretion or required in all proceedings?

12 In the absence of Commonwealth regulation relating to capital adequacy, how could the Court ensure a litigation funder can meet its financial obligations under the funding agreement?

1. See, eg, Chris Merritt, ‘Funds Venture Targets Small Claims’, The Australian (Sydney), 21 April 2017, 27.

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2. From March 1992 to September 2016, funded class actions commenced in the Federal Court involved at least 24 litigation funders, 59% of which were incorporated overseas: Vince Morabito, ‘Empirical Perspectives on 25 Years of Class Actions’ in Damian Grave and Helen Mould (eds), 25 Years of Class Actions in Australia (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2017) 43, 48.

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3. Corporations Act 2001 (Cth) s 477(2B).

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4. In 2008 the Commission recommended that parties should be required to disclose the identity of an insurer or litigation funder who exercises control over the conduct of the insured or funded party, and that the court should have discretion to order disclosure of the insurance policy or funding agreement if disclosure is appropriate: Victorian Law Reform Commission, Civil Justice Review, Report No 14 (2008) 476.

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5. (2006) 229 CLR 386.

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6. Bolitho v Banksia Securities Ltd (No 4) [2014] VSC 582 (26 November 2014).

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7. As noted in Chapter 3, some of the large litigation funders operating in Australia are listed on the ASX. They are subject to continuous disclosure requirements under the market listing rules and the relevant provisions of the Corporations Act 2001 (Cth). These provisions require an entity to make significant financial disclosures, and notify the ASX of specified events or matters as they arise, for the purpose of making that information available to participants in the market.

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8. John Emmerig and Michael Legg, ‘Twenty Five Years of Australian Class Actions—Time for Reform’ (2017) 36 Civil Justice Quarterly 133, 171.

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9. [2016] FCA 1433 (28 November 2016).

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10. Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433 (28 November 2016) [179].

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11. Michael Legg et al, ‘The Rise and Regulation of Litigation Funding in Australia’ (2011) 38 Northern Kentucky Law Review 625, 655.

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12. Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014) vol 2, 631.

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13. Emmerig and Legg have queried the efficacy of current disclosure requirements to the courts in light of the lack of capital adequacy requirements for litigation funders in Australia. While the existence of an indemnity for costs in a litigation funding agreement may satisfy the courts, it provides no guarantee that the litigation funder has sufficient resources to meet these obligations. The plaintiff (or the defendant in the event of an impecunious plaintiff) may be at risk of bearing the costs of defending an action if the litigation funder is unable to meet its obligations: John Emmerig and Michael Legg, ‘Twenty Five Years of Australian Class Actions—Time for Reform’ (2017)
    
    36 Civil Justice Quarterly 133, 171.

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14. The ability of a security for costs order to provide comfort from an impecunious litigation funder is affected by the size of the order. Commentary has noted that even if security for costs is ordered, the amount of security a court requires to be posted is often substantially lower than the costs the defendant actually incurs: John Emmerig and Michael Legg, ‘Twenty Five Years of Australian Class Actions—Time for Reform’ (2017) 36 Civil Justice Quarterly 133, 171. The matters which the Court may take into account in determining the size of a security for costs order in a class action, and what costs may be covered in such an order, are outlined in Pathway Investments Pty Ltd v National Australia Bank Ltd [2012] VSC 97 (21 March 2012).

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15. The general rule is that only parties to proceedings may be subject to costs orders, but courts have the discretion to order security for costs where the interests of justice allow a departure from this: G E Dal Pont, Law of Costs (LexisNexis Butterworths, 3rd ed, 2013) 753–4.

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16. Justice Bernard Murphy and Vince Morabito, ‘The First 25 Years: Has the Class Action Regime Hit the Mark on Access to Justice?’ in Damian Grave and Helen Mould (eds), 25 Years of Class Actions in Australia: 1992–2017 (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2017) 13, 30–1.

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17. Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317.

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18. (2008) 67 ACSR 105.

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19. Ibid, 120-1 [51].

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20. Vince Morabito and Vicki Waye, ‘Reining in Litigation Entrepreneurs: A New Zealand Proposal’ [2011] New Zealand Law Review 323, 353; New South Wales Law Reform Commission, Security for Costs and Associated Orders, Report No 137, December 2012, 50–1.

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21. Supreme Court of Victoria, Practice Note No 9 of 2010—Conduct of Group Proceedings, 29 November 2010 [3.6].

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22. Supreme Court of Victoria, Practice Note SC Gen 10—Conduct of Group Proceedings (Class Actions), 30 January 2017.

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23. Email from Supreme Court to the Commission, 5 June 2017.

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24. Federal Court of Australia, Class Actions Practice Note (GPN-CA)—General Practice Note, 25 October 2016, 5 [6].

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25. Ibid [6.1], [6.2].

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26. Ibid [6.3].

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27. Ibid [6.4].

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28. Ibid.

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29. Corporations Act 2001 (Cth) s 477(2B).

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30. (2002) 42 ACSR 296.

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31. Ibid, 302-5 [28]–[40].

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32. Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 (28 August 2007) [26(4)].

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33. Ibid [26(1)]–[26(2)].

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34. Ibid [26(5)].

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