Access to Justice—Litigation Funding and Group Proceedings: Report (html)

2. Litigation funding and access to justice

Introduction

2.1 The entry of litigation funding into Australia’s legal system, and the growth over the past 20 years in the number of providers and diversity of services they offer, have improved access to justice. Litigation funders have enabled plaintiffs to bring legal action that they would not have otherwise contemplated because of the financial risks of losing.

2.2 Under the costs-shifting rule, the losing party is usually ordered to pay the other side’s reasonable legal costs (an adverse costs order). The prospect of being burdened with an adverse costs order if the litigation is unsuccessful, in addition to their own legal costs, is particularly daunting in class actions, where the representative plaintiff alone is liable and the costs are significant.

2.3 In large class actions, the representative plaintiff will commonly be charged around $10 million in legal costs, plus disbursements, even though their individual claim may be for a few thousand dollars. They could also have to pay as much again, or more, in adverse costs if the litigation is unsuccessful. Few legal firms have the financial capacity to provide their services on a ‘no win, no fee’ basis in a class action. Where they do, the representative plaintiff will be relieved of paying their own legal costs if they lose but will remain liable for adverse costs and possibly disbursements.^[1]

2.4 The costs-shifting rule creates a financial risk that litigation funders are able to underwrite, and fosters demand for the financial assistance they provide. The funder reduces the risk for the plaintiff by covering their legal costs and indemnifying them against an adverse costs order, in return for a share of the recovered amount if the claim succeeds. The market for litigation funders in Australia has grown in the absence of local competition from forms of financial assistance that are employed overseas to mitigate the risk of losing: ‘after the event’ insurance, and lawyers charging contingency fees.^[2]

2.5 Litigation funders are providing services which were illegal until 1967 and have expanded incrementally since then. They have been permitted to fund insolvency proceedings since 1996 and were first seen in class actions in 2001. They were not recognised by the High Court as a legitimate means of funding multi-party proceedings until 2006.^[3] Over the five-year period from 1 June 2012 to 31 May 2017, they funded 46.2 per cent of all class actions nationally.^[4]

2.6 Procedural developments in response to the involvement of litigation funders in class actions have also encouraged the litigation funding market to grow. For example, judicial acceptance of closed class actions,^[5] which allow class membership to be limited to class members who have signed funding agreements, contributed to a surge in the number of funded class actions filed in the Federal Court from 2008.^[6] It has also been suggested that the approval of common fund orders for litigation funding costs, which allow a litigation funder to obtain a funding fee from every registered class member even if they have not signed a funding agreement, will encourage continued growth in the market.^[7]

2.7 Although much of the discussion about litigation funding in this report focuses on class actions, this is only one aspect of the industry. Litigation funders continue to invest in insolvency proceedings, as well as in other areas of law such as commercial and contractual disputes, intellectual property and estates.

2.8 In addition, sophisticated and diverse products for a broader range of markets have been emerging. For example, funding is now offered to law firms against a portfolio of different cases, where the funder’s return depends on the overall net financial performance of the portfolio as opposed to the outcome of any particular claim.^[8] Litigation funders also offer finance for specific risks and costs, such as compliance with an order to provide security for costs, or the payment of disbursements. Some funders provide ‘after the event’ insurance, which may be taken out at the beginning of, or during, proceedings to protect against the risk of having to pay adverse costs.

2.9 Another trend has been for litigation funders to provide funds direct to companies, rather than through an arrangement with a law firm. The company uses its litigation as collateral to secure the finance in order to pursue or defend a claim (by, for example, its in-house legal team) or for other corporate purposes.

2.10 As companies increasingly operate globally, there has been an upsurge in international disputes that the parties seek to resolve through international commercial arbitration. The value of the claims can be very high. Large established international litigation funders are actively pursuing the opportunity to fund these disputes and provide additional services, such as enforcing arbitral awards. In Hong Kong and Singapore, where traditional restrictions on litigation funding remain in place, exceptions have been made to permit litigation funding in international commercial arbitration.^[9]

2.11 Perhaps not surprisingly, hedge funds and private equity houses are seeing investment in litigation as an attractive ‘alternative asset class’ with returns that are uncorrelated to movements in the stock market or bond returns.^[10]

2.12 In Australia, even though there has been an increase in the predominance and impact of litigation funders in civil proceedings, the industry is only lightly regulated.^[11] The Productivity Commission has recommended strengthening the existing Commonwealth regulation. Concern about the continued lack of national oversight of the industry was expressed in several submissions and during consultations. While this is not a topic within the terms of reference, the absence of robust Commonwealth regulation means that parties to funded litigation need to rely more on the courts, and court processes, to

safeguard their interests. For this reason, the chapter begins with a discussion of the need for national regulation.

2.13 In Victoria, there is scant reference to litigation funders in legislation and court procedures. The terms of reference ask the Commission to report on whether there is scope for the supervisory powers of Victorian courts or Victorian regulatory bodies to be increased in respect of proceedings funded by litigation funders, in particular by increasing disclosure obligations or controlling fees.

2.14 The initiatives suggested in the terms of reference, and raised during the Commission’s review, need to be considered in the context of the problems they are intended to address. This chapter provides an overview of litigation funding practices and the issues they raise. It then discusses proposals concerning disclosure and the control of funding fees in funded litigation generally. Cost controls in funded class actions is discussed in Chapter 5.

2.15 The question of whether the issues presented by litigation funding would be mitigated by removing the existing prohibition on law firms charging contingency fees is examined in Chapter 3.

National regulation of litigation funders

Maintenance and champerty

2.16 For centuries, financial services of the type offered by litigation funders were illegal. They were proscribed by the torts and offences of maintenance (providing financial assistance to a litigant without lawful justification) and champerty (a form of maintenance involving the sharing of the proceeds of litigation). The policy underlying the offences was to prevent the legal system from being subverted by persons who were not parties to proceedings but had a financial interest in the outcome.

2.17 Criminal and civil liability for maintenance and champerty was abolished in Victoria by the Abolition of Obsolete Offences Act 1969 (Vic) and similarly in other Australian jurisdictions.^[12] However, the underlying policy of the law was retained: a contract can still be treated as contrary to public policy or illegal if it is found to be in aid of maintenance or champerty.^[13]

2.18 Uncertainty about the legality of any financial agreement between a third-party funder and a litigant to assist the litigation in return for reward was overcome by two judicial decisions:

• The 1996 Federal Court decision in Movitor Pty Ltd (rec and mgr apptd) (in liq)
v Sims^[14] allowed for commercial litigation funders to raise capital to provide funding

to insolvency practitioners.^[15]

• The 2006 High Court decision in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd^[16] (Fostif) provided certainty that litigation funders have a legitimate role in financing multi-party proceedings, including class actions, and can exercise broad influence over how they are conducted.

2.19 While endorsing the funder’s role in Fostif, the High Court acknowledged that the involvement of a third-party litigation funder can corrupt court processes. However, it concluded that the court could rely on its inherent powers if necessary to address any difficulties that arise, on a case-by-case basis. Any particular problems found in proceedings financed by a litigation funder, including class actions, could be solved through court procedures for that type of proceeding. Any associated conflict of interest issues for lawyers could be addressed by their duties to the court and professional rules.^[17]

2.20 One of the strongest messages emerging from the Commission’s consultations is how well the judicial system has responded to issues that have arisen in individual cases as

the litigation funding industry has grown and the number and types of class actions have changed. As noted in Chapter 1, there is broad support for the courts continuing to be able to exercise broad discretion in managing class action proceedings. This support is distinct from, and accompanied by, calls for stronger systemic regulation of the

industry itself.

Calls for stronger regulation

2.21 The courts can supervise the involvement of litigation funders in legal proceedings only on a case-by-case basis. Systemic protection from the risk of the legal system being subverted by the activities of third-party litigation funders calls for industry-wide regulation. Moreover, legislation—rather than court procedure—is the appropriate vehicle for reform where policy issues are involved.

2.22 In a series of decisions between 2009 and 2012, the courts found that litigation funding should be regulated under existing legislation variously as a financial product,^[18] a managed investment scheme,^[19] and a credit facility.^[20] The Commonwealth Government’s response to the decisions was to legislate to minimise consequential regulatory burdens. It declined to regulate litigation funders to the same degree or in the same way as providers of other financial, investment or credit services. There was concern that if they were subject to stronger regulation, they would pass on the costs to consumers and thereby reduce access to justice.^[21]

2.23 Litigation funders operating in Australia are free from mandatory licensing, financial disclosure requirements, reporting obligations and prudential supervision, unless they are listed on the Australian Securities Exchange.^[22] Unlike other providers of financial products and services, litigation funders are not required to hold an Australian Financial Services Licence (AFSL). They are exempt from the requirement as long as they have adequate practices in place to manage conflicts of interest.^[23] Failure to have such practices in place and follow certain procedures for managing conflicts is an offence.^[24]

2.24 The exemption is provided by the Corporations Regulations.^[25] The Australian Securities and Investments Commission (ASIC) has issued a regulatory guide which sets out ASIC’s expectations for compliance with the obligation to maintain adequate practices to manage conflicts of interest.^[26] ASIC has not undertaken a specific program to obtain information from litigation funding scheme operators to monitor compliance with the guide. However ASIC continues to monitor compliance through its other detection means such as reports from members of the public and others. As at August 2017, there had not been significant or widespread issues with industry compliance with the regulatory guide that had been brought to ASIC’s attention.

2.25 The Commonwealth Government is under pressure to strengthen the regulation of the litigation funding industry. In particular, there have been calls for litigation funders to be licensed to ensure that they hold adequate capital to manage their financial obligations.^[27] This is seen as a way to protect plaintiffs and defendants from an impecunious litigation funder by ensuring that the funder has adequate capital and liquidity to meet its obligations under the litigation funding agreement.

2.26 In its 2014 report Access to Justice Arrangements, the Productivity Commission concluded that the potential barriers to entry created through licensing requirements were justified in order to ensure that only ‘reputable and capable funders enter the market’.^[28] It recommended that:

The Australian Government should establish a license for third party litigation funding companies designed to ensure they hold adequate capital relative to their financial obligations and properly inform clients of relevant obligations and systems for managing risks and conflicts of interest.

• Regulation of the ethical conduct of litigation funders should remain a function of the courts.

• The licence should require litigation funders to be members of the Financial Ombudsman Scheme.

• Where there are any remaining concerns relating to categories of funded actions, such as securities class actions, these should be addressed directly, through amendments to underlying laws, rather than through any further restrictions on litigation funding.^[29]

2.27 Many submissions conveyed unease about the limited regulation of the industry and expressed support for the Productivity Commission’s recommendations. Chartered Accountants Australia and New Zealand, for example, called for greater regulatory controls:

While we support the role that third party litigation funders can play we are concerned that in the current unregulated environment, the rise of funders utilising litigation as an investment vehicle has been largely unchecked. This has introduced potential for misuse and unintended impacts on the productivity and cost of doing business. The continuing evolution of funding participants and models has the potential to extend the impact of such funding. We believe that regulation is required to protect the validity of the legal process and the legitimate interests of plaintiffs and defendants. The recommendations of the Victorian Law Reform Commission from 2008 and the Productivity Commission from 2014 remain valid, particularly in relation to licencing and capital adequacy.^[30]

2.28 The Australian Institute of Company Directors observed that courts do not have the time or expertise to properly assess the prudential position of litigation funders. It identified uncertainty, in the absence of any form of licensing, about whether:

• only fit and proper persons may provide funding services

• adequate conflict management processes are in place

• the terms of litigation funding agreements can be enforced against foreign litigation funders.^[31]

2.29 Allens also endorsed the Productivity Commission’s recommendations. It proposed that minimum content standards for all litigation funding agreements be mandated by legislation, adding that regulation at the state level might be necessary if Commonwealth legislation is not introduced.^[32] Additional comments in support of a licensing scheme for litigation funders, or other prudential regulation by the Commonwealth, were made in submissions from Ashleigh Leake and colleagues;^[33] Michael Duffy;^[34] the US Chamber Institute for Legal Reform;^[35] the Law Council of Australia;^[36] and IMF Bentham.^[37]

2.30 The views expressed were not unanimous. Other submissions argued that the existing powers of the Court are adequate to manage the risks. Julie-Anne Tarr cautioned against unnecessary regulation.^[38] Slater and Gordon maintained that introducing substantial capital adequacy requirements could create regulatory burdens that would close off the market and reduce competition among funders.^[39] Litigation Funding Solutions also

argued that a capital adequacy requirement would not be conducive to a competitive market place:

The Funders who are based offshore have most of their assets overseas even though they are heavily involved in Australian matters. They hold little or no capital here in Australia. Imposing a minimum capital requirement for litigation funders to operate in Australia could remove a large quantity of funding from Australia. If this occurred, the access to justice would be adversely impacted for many people.^[40]

2.31 The courts have responded to the challenges arising from the involvement of litigation funders in individual proceedings, and need to continue to do so, but court procedures cannot, and should not, be seen as a substitute for industry-wide regulation. The Commission considers that industry-wide issues require national responses, and the responsibility for regulating the litigation funding industry rests squarely with the Commonwealth Government.

Review by Australian Law Reform Commission

2.32 On 15 December 2017, the Commonwealth Attorney-General referred to the Australian Law Reform Commission (ALRC), for report by 21 December 2018, consideration of:

whether, and to what extent, class action proceedings and third-party litigation funders should be subject to Commonwealth regulation, and in particular, whether there is adequate regulation of the following matters:

• conflicts of interest between lawyer and litigation funder;

• conflicts of interest between litigation funder and plaintiffs;

• prudential requirements, including minimum levels of capital;

• distribution of proceeds of litigation, including the desirability of statutory caps on the proportion of settlements or damages awards that may be retained by lawyers and litigation funders;

• character requirements and fitness to be a litigation funder;

• the relationship between a litigation funder and a legal practice;

• the costs charged by solicitors in funded litigation, including but not limited to class action proceedings; and

• any other matters related to these Terms of Reference.^[41]

2.33 The Attorney-General further asked the ALRC to consider what changes, if any, should be made to Commonwealth legislation to implement its recommendations. The results of the inquiry will be awaited with interest. In the meantime, this issue should not be confined to jurisdictions with class action regimes: it should be raised at the national forum of the Council of Australian Governments.

Recommendation

2 The Victorian Government should advocate through the Council of Australian Governments for stronger national regulation and supervision of the litigation funding industry.

Litigation funding in Victoria

Funded class actions

2.34 The growth of the litigation funding industry has had national consequences for the management of class actions, but the impact varies from one jurisdiction to the next. Vince Morabito has concluded from his extensive research that the Victorian class action regime ‘has not been particularly attractive to litigation funders’.^[42]

2.35 There have been 85 class actions filed in the Supreme Court of Victoria since part 4A of the Supreme Court Act 1986 (Vic) commenced.^[43] Litigation funders have funded only

10 of them; four of these were transferred to the Federal Court.^[44]

2.36 Litigation funders are more active in the three other class action jurisdictions in Australia, particularly the Federal Court. As at 31 May 2017, 96 (82.7 per cent) of the 116 funded class actions ever filed in Australia were brought in the Federal Court.^[45] The last Victorian class action supported by a litigation funder was filed on 16 May 2016. Since then, more than 34 funded class actions have been filed in the Federal Court and in the Supreme Courts of New South Wales and Queensland.^[46]

2.37 Of the 10 funded class actions that have been filed in Victoria, six were shareholder class actions^[47] and two were investor class actions.^[48] The predominance of funded class actions of this type in Victoria is consistent with experience in other jurisdictions.

2.38 Only two other types of funded class action have been filed in Victoria. The litigation funder in each case is based offshore:

• A class action, funded by Omni Bridgeway, where the holders of abalone fishery licences alleged that the State of Victoria and Southern Ocean Mariculture negligently allowed the release of a herpes-like virus from an abalone aquaculture farm operated by Southern Ocean Mariculture to the wild abalone population, causing loss and damage to the class members.^[49]

• A claim by companies which manufacture, install and distribute home insulation for loss and damages suffered because of the early termination of the Commonwealth Government’s national home insulation scheme. It is funded by Harbour Litigation Funding.^[50]

Other funded proceedings

2.39 It is not known how many other types of civil proceedings in Victoria have involved litigation funders. The plaintiff’s financial arrangements and costs in these cases are not subject to the same degree of court supervision and public scrutiny as class actions. Generally, apart from class actions, commercial litigation funders support insolvency proceedings and commercial litigation with large claims. It is reasonable to conclude that they are involved in cases with these characteristics in Victoria.

2.40 One funded case is reportedly a catalyst for this reference: a claim made by trustees for former employees of Huon Corporation Limited against CBL Insurance Ltd^[51] (Huon Corporation). The trustees would have been unable to proceed with the claim without the financial support of a litigation funder. After a protracted dispute between the parties, the Supreme Court found in the trustees’ favour. The outcome attracted public attention because the former employees on whose behalf the litigation was conducted ultimately received nothing from the amount awarded. The Commission has received submissions from the National Union of Workers and Litigation Capital Management, who were directly involved in the case.

2.41 Clearly, although the outcome of Huon Corporation was a result of particular circumstances, it illustrates the importance to funded plaintiffs (and to anyone on whose behalf litigation is conducted) of clear communication from their legal representatives about the progress and costs of the proceedings. Because of the public interest in the case, as well as the insight it provides into some of the issues arising from the terms of reference, it is further discussed at [2.75]–[2.87].

Issues presented by litigation funding

2.42 The Commission has identified three core issues that have affected, or could affect, the extent to which litigation funders make access to justice possible:

• case selection—the types of case selected for funding

• costs—the size of the funding fee and any other funding costs

• client interests—the juxtaposition of the commercial interests of the funder and the interests of the plaintiff.

2.43 These issues are inherent in the commercial nature of litigation funding: litigation funders invest in litigation to make a profit. They invest in claims that are low risk and aim to maximise their returns. The cases they select are confined to distinct areas of commercial activity and their funding fee is the largest single expense that a plaintiff pays. Although they have supported claims for altruistic reasons,^[52] it would be unsustainable for them to give priority to public benefit over commercial considerations.

2.44 In addition, the entry of a participant who is not a party to litigation, but has a financial stake in how it is conducted and the result achieved, changes the dynamics of the proceeding. It introduces the risk of a conflict of interest that could produce an unfair process or outcome.

2.45 Disclosure obligations and cost controls for litigation funding are discussed below against the background of these issues.

Case selection

2.46 Litigation funders invest in claims that have strong prospects of recovering a significant financial return, and the selection process has become more sophisticated as the industry has matured. Broadly, litigation funders consider the following criteria when deciding whether or not to fund a claim:

• the prospects of success

• the amount likely to be recovered if the claim is successful

• the costs and risks in prosecuting the claim

• the complexity of the claim

• the estimated time until the claim will be resolved

• whether there are risks in enforcing a favourable judgment, such as the solvency of a defendant.^[53]

2.47 The cases that tend to meet these criteria are high value, low-risk commercial claims for damages or compensation, often involving liquidators, bankruptcy trustees, shareholders and investors. More recently, funders have been investing in international arbitration as well. Claims aimed at obtaining non-monetary results (such as an injunction or declaration) are not funded, and nor are claims that rely on evidence which may give rise to a number of litigation risks, including claims for personal injury or workers’ compensation, family law cases and defamation cases.

2.48 Although there will be exceptions, a claim for less than $1 million is unlikely to be funded by a commercial litigation funder. The reasoning is apparent from the following explanation by Litigation Funding Solutions:

It is important that the damages which are capable of being recovered justify the cost of litigation. Legal claims often involve layers of potential damages. For a legal claim to be successful it must have a strong inner core of liability.

Many claims can potentially be stretched to increase quantum. However, generally speaking, the further you move from the centre of a claim the more risky and expensive the claim becomes to litigate. There are often much greater costs involved to establish ‘outer boundary’ recovery levels. A funder looks for an action that has a solid core. Once a funding decision is taken the potential of greater recovery becomes icing on the cake and can be used to pressure the defendant to settle.

As a rule of thumb, [the] ‘inner core’ quantum of a claim needs to be $1,000,000 or more to warrant a funder’s interest and make the cost of funding justifiable for the claimant and its stakeholders. One reason for this is that the cost and expenses to run a $1,000,000 damages case often involves comparable costs to cases for much bigger amounts.^[54]

2.49 The minimum claim value for funding multi-party claims is generally higher than for single-party claims. IMF Bentham, for example, usually funds single-party claims above $5 million in value, and multi-party claims above $20 million in value.^[55] Maurice Blackburn commented that it is almost impossible to secure litigation funding for a class action involving claims of less than $30 million.^[56]

2.50 The practice of filtering out applications for funding that do not meet stringent legal, process and commercial criteria removes claims that do not have merit (as well as those that do have merit but do not meet other criteria). For example, IMF Bentham informed the Productivity Commission that fewer than five per cent of the applications it receives are funded.^[57] The diversion of unmeritorious claims allows the resources of the legal system to be allocated more efficiently.

2.51 Careful selection processes are also likely to have contributed to the success rate of funded proceedings, although data compiled by Vince Morabito about the settlement rates of all class actions has revealed that there is no direct correlation between funding arrangements and results.

2.52 In the Federal Court, where most funded cases are filed, 79 per cent of funded class actions have settled, compared to 43 per cent of unfunded class actions. In state jurisdictions, the settlement rate for funded class actions is much lower than for unfunded class actions. Only 30 per cent of funded class actions in state jurisdictions have settled, compared to 70 per cent of unfunded class actions.^[58]

2.53 The results indicate that the involvement of a litigation funder does not necessarily increase the prospects of a successful outcome; nor does it reduce them. The involvement of litigation funders in the legal system does not cause an upsurge in speculative and insubstantial claims.

2.54 Clearly, litigation funding creates opportunities for claimants to seek compensation or damages for meritorious claims and supports them usually to a successful conclusion. The extent to which funders enable access to justice in this way is determined by the criteria they use for selecting the cases they fund. The next two sections discuss, in turn, the significance for class action litigation and other litigation.

Funded class actions

2.55 Most revenue generated by the litigation funding industry is derived from class actions, particularly shareholder class actions.^[59] The first class action in Australia—and the world—to involve a litigation funder was in 2001.^[60] By 31 May 2017, 116 funded class actions had been filed across all jurisdictions. Of these, 74 (63 per cent) were filed after 1 June 2012.^[61]

2.56 A relatively narrow variety of class actions attract the most attention of litigation funders, reflecting the focus on low-risk claims that are likely to generate a return on the funder’s investment. The range is shown in Table 1.

Table 1: Class actions funded by litigation funders: types filed to 31 May 2017^[62][63]

2.57 Australia has robust mandatory continuous disclosure rules for ASX‑listed companies, comprehensive prohibitions on misleading and deceptive conduct, and a high rate of share ownership.^[64] A failure to comply with these laws affects a large number of people in similar situations, and class actions are an inherently suitable means of seeking damages or compensation for broad-based harm. Litigation in these areas of the law presents a sound investment opportunity for litigation funders, as explained by John Walker, Suzanna Khouri and Wayne Attrill when working for IMF (Australia) Ltd in 2009:

The statutory causes of action provided in the continuous disclosure, product liability and anti-cartel legislative regimes are generally more straight-forward to establish than the equivalent actions at common law and, in the context of shareholder non-disclosure claims in particular, are determined in large part on publicly-available evidence, including documents filed with the Australian Securities Exchange.^[65]

2.58 Seventy-one per cent of all shareholder class actions filed in Australia on or before

31 May 2017 were supported by litigation funders.^[66] However, as IMF Bentham submitted, litigation funders have funded many types of class action besides shareholder and investor cases.^[67]

2.59 Nevertheless, none of the 87 non-investor class actions that had been filed nationally for the benefit of vulnerable people as at March 2014 were financed by litigation funders.^[68] Legal services in these cases were usually provided on a ‘no win, no fee’ basis, although some proceeded only with the support of government agencies or the community or because the lawyers were prepared to work without charge.^[69]

2.60 The largest class actions conducted under the Victorian class action regime have been underwritten by law firms acting on a ‘no win, no fee’ basis.^[70]

Other funded proceedings

2.61 Commercial litigation funding began as a source of finance for insolvency proceedings. Claims arising out of insolvent companies about preferences, insolvent trading, and other claims brought by liquidators continue to be an important area of activity for funders.

2.62 Litigation funding has expanded into proceedings in other areas of law, notably commercial claims about breach of contract, misrepresentation and negligence. Funding

is also commercially available for intellectual property and estates matters. Proceedings that involve a major litigation funder are likely to be large claims as they are more economic to run.

2.63 Although the commercial funding of claims valued at less than $1 million is generally not viable for litigation funders, the number of litigation funders is growing. A funder observed during informal consultations that newer entrants are focusing on claims valued at less than $5 million. In addition, litigation funders are offering an increasing variety of products, such as limited funding only for adverse costs or disbursements, which may be more viable than providing full funding services for smaller claims. IMF Bentham gave, as an example, a funding solution called ‘Cost-certain access to business litigation’, offered by a firm that provides services to small-to-medium-sized businesses. Under this arrangement, for claims over $500,000, a ‘no win, no fee’ fee agreement can be combined with litigation funding.^[71]

2.64 The access to justice that litigation funding provides is necessarily determined by the commercial nature of the activity. It is reasonable to expect that litigation funders will continue to expand the market for their services. It is also inevitable that some meritorious claims will not be funded if—because of the value of the claim, the complexity of the matter, the likelihood of success or other factors caught by the selection criteria—they will not generate an adequate return on the funder’s investment.

2.65 Measures to generate financial support for meritorious class actions that are not perceived as commercially viable by litigation funders, or law firms operating on a ‘no win, no fee’ basis, are discussed in Chapters 3 and 5.

Costs

Components of funding costs

2.66 Litigation funders reduce the cost barrier of litigation for plaintiffs by underwriting the cost of bringing proceedings and indemnifying them against adverse costs. They monitor and influence the legal costs to different degrees, and some may charge a project management fee for doing so, but they do not determine the lawyer’s share of any recovered amount. The terms on which the funding is provided are set out in a funding agreement with the plaintiff.

2.67 Normally, the litigation funder agrees to pay the plaintiff’s legal costs and disbursements and, if the litigation is resolved in the defendant’s favour, any adverse costs order. It will also pay any security for costs if ordered by the court. The plaintiff is obligated to pay the funder only if the proceedings resolve in the plaintiff’s favour.

2.68 If the plaintiff wins, the litigation funder’s costs are deducted from the amount awarded by the court or negotiated between the parties. These typically include:

• a funding fee, expressed as a percentage of the settlement or judgment amount

• reimbursement of the legal costs and disbursements that the litigation funder paid during the proceeding (less any contribution from the defendant in the form of adverse costs)

• court fees

• a project management fee, calculated as a percentage of the legal costs, for monitoring the progress of the litigation and managing the associated legal costs and disbursements.^[72]

2.69 The amount of the funding fee is determined by the structure of the funding agreement, which varies in nearly every case. This was pointed out by Justice Murphy in Earglow Pty Ltd v Newcrest Mining Ltd:^[73]

It should be kept in mind that it is not enough to consider the funding commission rate on a stand-alone basis. The funding arrangements reached may be structured in a variety of ways which can affect the costs and risk taken on by the funder and therefore affect the reasonableness of the funding commission rate. For example, a funder might agree:

(a) to provide funding to cover adverse costs but not to meet the applicant’s legal costs and disbursements, with the case being conducted by the applicant’s solicitors on a conditional fee basis to be paid by class members from any settlement conditional on success;

(b) to pay disbursements only, with the case being conducted by the applicant’s solicitors on a conditional fee basis;

(c) to only pay costs and disbursements up to a fixed cap or to pay a fixed percentage of the costs and disbursements, with the remainder left to the applicant’s solicitors to be paid by class members conditional on success; or

(d) to cover the risk of adverse costs liability through After the Event Insurance with the premium to be paid by class members from the settlement sum upon success.^[74]

2.70 The percentage of the recovered amount that litigation funders charge in return for their services varies. The typical range appears to be between 20 and 45 per cent.^[75] In federal class actions, the average proportion left for distribution to class members has been found to be approximately 58 per cent.^[76] The funding fee is usually the largest single deduction.^[77]

Funding fees in Victoria

2.71 Unlike legal fees, which are based on the amount of work done and are subject to regulation and review, the funding fee reflects the litigation funder’s assessment of the risk, its own costs and its profit margins. The examples discussed below show that the funder’s share of the recovered amount can be much less than, similar to or greater than the share allocated to legal costs and disbursements. They also show that, while engaging a funder enables the proceedings to be conducted, it does not guarantee that those for whom they are conducted will receive a share of the proceeds.

Funded class actions

2.72 The Supreme Court of Victoria has reviewed the settlement agreements of four class actions involving a litigation funder.

• Pathway Investments Pty Ltd v National Australia Bank Limited, a shareholder class action funded by International Litigation Funding Partners Pte Ltd. The settlement amount was $115 million, including interest and costs. Class members received just over 57 per cent ($65.55 million) plus interest; legal costs and disbursements were 10.4 per cent ($11.9 million). The litigation funder received 40 per cent of the proceeds of class members who held fewer than one million shares; 35 per cent if they held between one million and ten million shares; and 30 per cent if they held more than 10 million shares.^[78]

• Bolitho v Banksia Securities Limited, an investor class action. In a partial settlement, approved in August 2016, the settling defendants paid $5.2 million. Class members were entitled to approximately 34.5 per cent of this amount, minus half of the fees payable for a contradictor who was appointed by the Court to review the settlement agreement. Legal costs and disbursements accounted for 49 per cent ($2.55 million) and the litigation funder, BSL Litigation Partners Limited, received about 16.5 per cent ($858,000).^[79]

• In a further partial settlement, approved in January 2018, the settling defendants paid $64 million. Of this amount, approximately 69.7 per cent ($44.62 million) was distributed to class members, and 8.2 per cent ($5.225 million) was directed to legal costs and disbursements. The litigation funders received 22 per cent ($14.08 million).^[80]

• Regent Holdings v State of Victoria and Southern Ocean Mariculture, a class action brought on behalf of 88 holders of abalone fishery access licences. The action was not successful against the first defendant, the State of Victoria.^[81] The second defendant, Southern Ocean Mariculture, had previously settled and $2.57 million of the proceeds were paid towards the State of Victoria’s costs. The class members received no monetary compensation from the settlement. The lawyers wrote off substantial professional fees. The litigation funder, Omni Bridgeway, received undisclosed payments from the settlement but did not recover the costs it had incurred or compensation for its involvement.^[82]

• Camping Warehouse v Downer EDI, a shareholder class action that settled for $8.25 million plus legal costs of $2.85 million, a total of $11.1 million. The class members received 88 per cent of the settlement fund ($7.25 million), or about 63 per cent of the total. The litigation funder, BSL Litigation Partners Limited, received 10 per cent of the settlement fund ($825,000), less than 8 per cent of the total paid by the defendants.^[83]

Other funded proceedings

2.73 Publicly available information about the amounts received by litigation funders in other proceedings is harder to find. Funding for these proceedings can be obtained from a wider range of sources and the question of whether a litigation funder is involved may not be raised during court proceedings at all. Even where the court is aware that a commercial funding arrangement is in place, the terms may be kept confidential. Funding agreements with litigation funders who invest directly into litigation portfolios, rather than individual cases, would be even more opaque.

2.74 Nevertheless, the existence of a funding arrangement is most likely to be revealed where litigation funders have been most active: insolvency proceedings. Under section 477(2B) of the Corporations Act 2001 (Cth), before entering a long-term agreement on the company’s behalf, a liquidator must seek court approval, or the approval of the committee of inspection or the majority of creditors. Although litigation funding agreements were unlikely to have been contemplated when the section was drafted, liquidators seeking to enter them to conduct insolvency proceedings and meet any obligations to provide security for costs commonly apply to the court for approval under this provision. The funding fee in insolvency cases can exceed 50 per cent, and has been as high as 75 per cent.^[84]

The Huon Corporation case

2.75 As noted above, the outcome of the Huon Corporation case^[85] attracted public attention when the company’s former employees, on whose behalf the litigation was conducted, received none of the payments ordered by the court. Safeguards that exist in insolvency proceedings and class actions did not apply in this case.

2.76 The claim was for payment under a financial insurance policy for a shortfall in employee entitlements when Huon Corporation become insolvent in 2006. The policy, procured from New Zealand insurer CBL Insurance Ltd, named two trustees for the employees as ‘the insured’.

2.77 The trustees commenced legal action against CBL Insurance, ultimately on behalf of 336 former employees, in October 2011. The trial concluded in October 2013, and judgment was handed down in October 2014. Final orders were made in May 2015. The defendant filed an appeal but, before it was heard, the claims were resolved and finally discontinued in February 2016.

2.78 The amount received from CBL Insurance was $5,107,259, comprising:

• $4,132,232 as the principal sum, based on employee entitlements

• $500,027 in interest

• $475,000 as a contribution to the plaintiff’s costs.^[86]

2.79 The distribution of the amount is shown in Table 2.

Table 2: Distribution of amount recovered in Huon Corporation^[87]

2.80 Discussion about Huon Corporation in submissions and consultations raised two areas of concern: the cost of the proceedings and the distribution of the recovered amount.

2.81 The cost of the proceedings was clearly disproportionate to the size of the claim. Excluding the litigation funding fee, it was $3,259,000. According to the trustees, the initial legal costs estimates were ‘hopelessly inadequate’ because of the long trial time and legal process and disputes.^[88] The litigation was conducted over almost five years and, ‘from the beginning, CBL maintained an obtuse approach in dealing with the trustees’ demands and subsequent litigation’.^[89]

2.82 The delays and disruptions to the proceedings were caused by both parties, causing the Court to note that: ‘With the benefit of hindsight, it is clear that both parties could have conducted this litigation in a more efficient way.’^[90] The Court concluded that, in order to do justice between the parties, it was not appropriate to apply the usual rule as to costs. Instead, CBL Insurance was ordered to pay only 70 per cent of the plaintiff’s costs of the proceeding.^[91]

2.83 In its submission, LCM stressed that it did not control the costs of the proceeding:

it is not LCM’s role, nor is it properly LCM’s prerogative, to assume a plaintiff’s right and responsibility to conduct the plaintiff’s proceedings, instruct its legal representatives and, by extension, drive and regulate the quantum of incurred legal costs or adverse costs.

It is, however, LCM’s role to continue to make payment of the legal costs that eventuate and to bear the full risk of the action. It is important to note that had the Huon Corporation action (and the same can be said for most funded actions) resolved for less than its ultimate outcome, or had the defendant been successful at first instance or on appeal, it is LCM who would have been liable to make payment of the full sum of the plaintiff’s legal costs and, in addition, to meet the very considerable burden of adverse costs orders.^[92]

2.84 The involvement of the litigation funder is at the heart of the second issue: how the recovered amount was distributed. As required by the funding agreement, LCM met the costs of the proceedings and was reimbursed from the proceeds. It was then entitled to its funding fee, for which it received about 36 per cent of the recovered amount. This is within the range that litigation funders are commonly paid and reportedly less than the full amount to which LCM was entitled under the agreement.^[93]

2.85 The decision by the trustees to use the services of a litigation funder was not an easy one. They felt they had no option but to approach third parties for funding after extensive discussions with the liquidator failed to reach agreement. After the outcome of the litigation was known, the trustees initiated a dispute with the litigation funder to force a dividend for the employees. They later abandoned it on legal advice.^[94]

2.86 The National Union of Workers described the experience of the former Huon Corporation employees as ‘one of complete despair’:^[95]

We believe that this is not a good public policy outcome. Those who were clearly wronged decided to prosecute their claim in spite of all of the various tactical legal barriers put before them and won an outcome that should have meant a disbursement to them after 11 years. Our Victorian system of justice however did not produce this outcome. It is clear to us that some form of market regulation needs to occur to prevent this result from occurring again.^[96]

2.87 Because of the lack of data about how many funded proceedings, other than class actions and insolvency cases, are likely to be conducted for disputants who are unaware of the involvement and cost of the litigation funder, it is difficult to gauge the scale of the problem encountered by the former Huon employees. Nevertheless, there is scope for reform to ensure that the court knows that a litigation funder is involved and the terms of its involvement. Recommendations for reform are discussed later in this chapter.

Client interests

2.88 In the consultation paper, the Commission discussed the tripartite relationship between the litigation funder, lawyer and plaintiff and the conflicts of interest within this relationship.^[97] The tripartite model is a useful means of identifying, conceptually, how conflicts of interest may affect decision making at various stages of proceedings, though in practice the way in which the parties interact and their relative influence vary.

2.89 Factors such as the size and type of proceeding, how the funder and lawyers approach their roles, and whether there is a pre-existing relationship between any of the parties will affect the way in which they interact. In class actions, there are additional distinctions between the representative plaintiff and other class members; between class members who are clients of the lawyers and those who are not; between class members who have entered a funding agreement with the litigation funder and those who have not.

2.90 The discussion below only concerns conflicts of interest for litigation funders. Conflicts of interest for lawyers in both funded and unfunded class actions are discussed in Chapter 4.

Conflict of interest for litigation funders

2.91 Because litigation funders seek to profit from the litigation in which they invest, there is recurring debate about the priority given to the funder’s commercial interests over the plaintiff’s interests. The debate has three broad themes:

• the risk that the litigation funder will fail to meet its obligations under the funding agreement

• the risk of abuse of process, where the process of the court is used for an improper purpose

• the risk that the litigation funder will exercise influence over the conduct of proceedings to the plaintiff’s detriment.

2.92 These themes are expressed as ‘risks’ because they arise from the inherent conflicts of interest between the funder and the plaintiff. The Commission has been told about a small number of cases that have been clouded by conflicts of interest, but acknowledges that there is little empirical evidence that conflicts of interest are producing unfair outcomes. This does not mean that the risks are hypothetical or exaggerated. They have long been recognised, as evident in the old torts and offences of maintenance and champerty.

2.93 The low incidence of reported problems may indicate that the risks are being well managed under existing laws, as submitted by Slater and Gordon:

the vast majority of lawyers and funders involved in litigation of this nature take their obligations under the relevant legislative frameworks extremely seriously. This includes compliance with professional obligations, disclosure requirements, and statutory overarching obligations, combined with the recognition that courts rightly take a great interest in ensuring compliance with same.^[98]

2.94 The Commission also notes that the litigation funder’s commercial interests do not inevitably conflict with the plaintiff’s interests. IMF Bentham, which actively supervises the litigation in which it invests, pointed out that they may align:

In funded proceedings some of the potential conflicts are mitigated by the involvement of the funder. For example, IMF’s objectives are closely aligned with those of the class members that it funds: namely to achieve the just, quick, inexpensive and efficient resolution of claims through appropriate use of the civil justice system and for the largest settlement or damages award possible having regard to the risks of the litigation. The funder’s involvement provides an important check and ensures there is oversight of the costs of the litigation which is for the benefit of all class members. The funder brings a commercial approach to the conduct and resolution of class actions that aligns closely with the interests of class members.^[99]

Funding agreement obligations

2.95 In the absence of stronger national regulation of the industry, there is a risk that a funder will avoid meeting its obligations to indemnify the plaintiff for the cost of the proceeding and any adverse costs.

2.96 Concern about this risk is evident in calls for the introduction of capital adequacy requirements in conjunction with more robust industry regulation, and the Commission recommends above that the Victorian Government advocate for stronger supervision and regulation of the industry nationally.

Abuse of process

2.97 While upholding an arrangement that gave the funder significant control over the conduct of the proceedings in Fostif, the High Court recognised that this level of influence could corrupt court processes. It considered that the court could rely on its inherent powers to address any problems.

2.98 All courts have inherent powers to take any steps that are necessary to prevent abuse of process and ensure a fair trial. If a proceeding is brought for an improper purpose, a stay may be the appropriate remedy. However, the power to stay a proceeding is used only in exceptional circumstances.^[100] Where there is an unacceptable legal or commercial relationship between the lawyers and the litigation funder, the court is likely to use its inherent jurisdiction to restrain the lawyers from acting to ensure due administration of justice and to protect the integrity of the judicial process.^[101]

2.99 The Commission notes that the Court would be supported in its role if it were always made aware when a litigation funder is involved in a proceeding. Recommendations concerning disclosure are discussed later in this chapter.^[102]

Excessive influence

2.100 Although the litigation funder and plaintiff are parties to a funding agreement they have little, if any, direct contact. Whether supervising and making day-to-day decisions about the proceedings, or taking a less active role, litigation funders work with the lawyers, not the plaintiffs.

2.101 There is a risk that the litigation funder’s influence over the conduct of the litigation will subordinate the plaintiff’s interests to the funder’s interests. However, it is common for funding agreements to specify that, if there is a disagreement, the lawyer’s and plaintiff’s view will prevail over that of the litigation funder.^[103]

2.102 The High Court’s decision in Fostif established the right of a funder to exercise influence and some degree of control over the day-to-day conduct of a funded action. The point at which the control is excessive is not clear, including to litigation funders who have expressed difficulty in seeing where their interests could conflict with those of the plaintiff. IMF Bentham said in its submission:

it is difficult to see how claimants’ interests could be detrimentally affected by a funder recommending that only the most promising causes of action are run in the interest of minimising the costs and risks of the proceedings and maximising the potential outcome.^[104]

2.103 Decisions at settlement have raised the greatest concerns. In their submission, Ashleigh Leake, Josephine Vernon and Bruce Efron described how conflicts of interest could produce unfair outcomes if not managed:

As a purely financially-driven party, litigation funders comparatively perceive the ‘best settlement’ as one with the greatest return and the least expense. In seeking to achieve this goal, a litigation funder will be more inclined to aggressively seek return on investment over legal justice. The nature of these commercial interests can result in striving for awards that have greater commercial benefit with the sacrifice of integrity, as the dignity lost is not necessarily their own but the class members’. Litigation funders are more inclined to settle out of court if the settlement offer exceeds the perceived commercial award of the court; this does not always guarantee a conclusion in the best interest of the class members. Inclination for settlement can be increased if the litigation funder perceives the expenses (eg Court costs, solicitor’s fees, etc.) to be approaching their maximum limit of expenses budgeted for; similarly, if they perceive the proceedings to be ‘drawn out’, litigation funders are inclined to settle.^[105]

Regulation of litigation funders’ conduct

2.104 It has been often observed that, unlike lawyers, litigation funders are not officers of the court, nor are they subject to the same ethical obligations.^[106] While it is possible for a fiduciary relationship to arise from the funding arrangement, in class actions, most funding agreements seek to contractually exclude any fiduciary duties arising between the funder and class members.^[107]

2.105 However, obligations to the court have been imposed on litigation funders under the Civil Procedure Act 2010 (Vic) and ASIC has issued a regulatory guide on how litigation funders should manage conflicts of interest.

Civil Procedure Act 2010 (Vic)

2.106 The Civil Procedure Act specifies a range of ethical and procedural obligations, known as the ‘overarching obligations’, which apply to participants in litigation, including litigation funders.^[108]

2.107 There are 10 overarching obligations, which require participants to:

• act honestly

• only make claims that have a proper basis

• only take steps to resolve or determine the dispute

• cooperate in the conduct of the civil proceeding

• not mislead or deceive

• use reasonable endeavours to resolve the dispute

• narrow the issues in dispute

• ensure costs are reasonable and proportionate

• minimise delay

• disclose the existence of documents critical to the resolution of the dispute.^[109]

2.108 The US Chamber Institute for Legal Reform proposed that litigation funders have a statutory obligation to comply with their overarching obligations and be held to account should they fail to do so, and ‘At the very least, they should be obliged to certify to the Court that they have complied with those obligations when funded proceedings are commenced’.^[110]

2.109 The Commission considers that the existing obligations are clear and that the Court has adequate powers to address problems that may arise during proceedings as a result of a participant’s failure to comply. The Court has broad discretion to impose a costs order or other sanction on a person who contravenes an overarching obligation. If satisfied that a breach has occurred, the court may make ‘any order it considers appropriate in the interests of justice’.^[111] Judges of the Supreme Court told the Commission that the codification of the overarching obligations has been a useful means of conveying expected standards of behaviour.^[112]

ASIC conflict of interest regulatory guide

2.110 As noted at [2.23], litigation funders are not required to hold an Australian Financial Services Licence (AFSL) as long as they have adequate practices in place to manage conflicts of interest.^[113] ASIC has issued a regulatory guide which sets out ASIC’s expectations for compliance with the obligation to maintain adequate practices and follow certain procedures for managing conflicts of interest.^[114]

2.111 The guide is comprehensive and aligns with the standards required of AFSL holders. It states that litigation funders should have written procedures for dealing with a range of situations in which conflicts of interest can arise.^[115] Any conflicts of interest should be disclosed prior to entry into a funding agreement so that prospective plaintiffs can make an informed decision about how a conflict may affect the service being provided to them.^[116] In addition, the funding agreement should disclose the terms of the agreement between the funder and the lawyer.^[117]

2.112 Disclosure about conflicts of interest should be ‘timely, prominent, specific and meaningful’^[118] and ongoing throughout the course of the litigation scheme.^[119] The method of disclosure (either paper or electronic) may differ according to the method that best suits the members of the scheme.^[120]

2.113 The level of compliance monitoring to date has contributed to concern that there is no effective oversight of industry practices or prevention of unethical conduct.

2.114 A number of submissions suggested that the potential for conflicts of interest could be reduced by stronger regulation of conduct. Proposals included the following:

• A legal practitioner or class action law firm could be prohibited from directly or indirectly holding any share or other ownership in the litigation funder or class representative involved in the proceeding. The regulation would be similar to regulation recently introduced in Singapore and Hong Kong in relation to litigation funding of arbitration proceedings.^[121]

• Litigation funders could have a fiduciary duty to their client imposed on them, on the basis that they tend to deny such a relationship exists and exclude the possibility by contract.^[122]

• Litigation funders could be subject to a statutory duty of good faith in the same manner as insurers are under sections 13–14 of the Insurance Contracts Act 1984 (Cth). It would not be possible to contract out of the statutory duty. Unlike a fiduciary duty, the statutory duty would not require the funder to prefer their client’s interests over its own interests; rather, it would require the funder to have regard to the interests of both parties.^[123]

• Costs agreements and funding agreements could include provisions for managing conflicts of interest and state that plaintiff lawyers have a continuing obligation to manage potential conflicts of interest.^[124]

2.115 Consistent with its view that national regulation of the litigation funding industry is necessary, the Commission considers that the imposition of any stronger rules to prevent or manage conflicts of interest for litigation funders should be under Commonwealth law.

2.116 Within Victoria, the Commission does not consider that the Supreme Court of Victoria requires additional statutory powers to enforce compliance with the overarching obligations in the Civil Procedure Act. Where instances of unethical conduct have arisen in funded litigation, the Court has exercised its inherent powers to stay the proceedings.^[125]

2.117 On a case-by-case basis, the risk arising from conflicts of interest is usually managed through disclosure to the client of the fact that the conflict exists, and how it is being mitigated. The lack of transparency about the relationship between litigation funders and the lawyers has led to calls for stronger disclosure requirements, as indicated by the terms of reference.

2.118 By increasing transparency, accountability improves. The client is better informed about the conditions under which the funding is provided and the implications for the way the litigation is conducted. The court is better able to identify any impact that a conflict of interest may be having on the proceedings and the terms of any settlement. In her submission, Vicki Waye drew attention to the importance of disclosure in enabling the court to ensure that justice is done:

The capacity of the courts to bring flexibility and nuance to their supervisory or oversight role in an individual case (including supervising funding terms generally and confirming capital adequacy) is contingent upon full information provided as early as possible.^[126]

2.119 Proposals to improve disclosure about funding arrangements to clients and the court are discussed at [2.140]–[2.208].

Reform proposals

2.120 The terms of reference ask the Commission to report on whether there is scope for the supervisory powers of Victorian courts or Victorian regulatory bodies to be increased in respect of proceedings funded by litigation funders. Three possible reforms are suggested:

• placing limits on funding fees, or requiring them to be subject to an approval process

• imposing clearer disclosure requirements on litigation funders and lawyers to advise plaintiffs about the progress, costs and possible outcomes of proceedings supported by litigation funders

• requiring disclosure of funding arrangements in proceedings supported by litigation funders.

2.121 These proposals are directed at protecting the plaintiff’s interests, by controlling the amount of the funding fee and improving transparency about the proceedings and the terms on which the litigation funder is providing financial support. The US Chamber Institute for Legal Reform has argued that any solution must address all funded proceedings because the same funding issues arise in every type of proceeding in which a litigation funder is involved.^[127] The Commission agrees that the litigation funding industry should be regulated nationally, but the protective measures suggested in the terms of reference would not be necessary in every funded case.

2.122 In the large commercial cases that litigation funders often finance, the plaintiff is likely to have a sophisticated understanding of contractual obligations and financial undertakings, and direct access to legal advice in entering the funding agreement. Plaintiffs in this category can be expected to have the resources and bargaining power to look after their interests without further protection.

2.123 Similarly, additional measures appear unnecessary to safeguard the interests of plaintiffs who have less experience and influence but instruct the lawyers who are conducting the litigation and directly participate in funded proceedings. Plaintiffs in this category are not at a discernible disadvantage compared to plaintiffs who receive financial support by other means, such as a bank loan or private funding agreement. Their lawyers have a fiduciary duty to act in their interests and can advise them about funding options, the conditions under which any financial support is provided, and the progress of the litigation.

2.124 The need for greater protection is more likely to arise when funded litigation is conducted by an intermediary on behalf of multiple disputants. In these cases, the ultimate recipients of any recovered amount may not be clients of either the litigation funder or the lawyer and may not know about or understand the funding agreement. They may be relying on the intermediary to ensure that their interests are taken into account during proceedings or settlement negotiations.

2.125 The imbalances of information and power in litigation of this type have been recognised in class actions and insolvency proceedings, where the court has a particular role in protecting the interests of people who are not parties to the litigation but are affected by the outcome. However, safeguards that apply in these proceedings did not apply in Huon Corporation.

2.126 For these reasons, the discussion in this chapter about the reforms suggested by the terms of reference concerns funded litigation that is conducted by an intermediary on behalf of multiple disputants, including class actions, rather than all litigation in which a funder may be involved.

Regulation of funding fees

2.127 Courts, litigation funders and lawyers frequently observe that, if not for the financial support of a litigation funder, the plaintiff would have been unable to bring the proceedings at all. The point was made by LCM when commenting on Huon Corporation:

It is an unfortunate reality that commercial litigation is unpredictable and risky, and that the cost of advancing a claim, particularly against an adversarial defendant, can have a very significant impact on the action’s ultimate proceeds. This is true of both funded and unfunded proceedings. However, LCM submits that the services of a litigation funder allow the rights of a litigant to be enforced with that litigant facing no risk or cost, while retaining the majority of the interest in any net upside.^[128]

2.128 Similar sentiments were expressed in a recent decision by the Supreme Court of New South Wales approving a litigation funding agreement to fund insolvency proceedings:

Even if the funder receives more than 50 per cent of any judgment, 40 per cent of such if any judgment as might be obtained is a better result for the company’s creditors than nothing. Because of the terms of the funding agreement, there is no downside for creditors in the prosecution of the litigation in question. There is no risk of the liquidators or creditors having to bear an adverse costs order, as it will be borne by the funder. In those circumstances, it does not take extensive reasoning or explanation to realise that there is benefit for the company in funding this litigation to an end.

That benefit—of an agreeing to an arrangement that will permit the litigation to be funded to an end—is that the company may get 50 (or some lesser percentage) of something, for distribution amongst creditors; against the position that there will plainly be nothing if the litigation is not funded and does not proceed. Against that potential benefit, no downside or detriment to the company from protracting an administration that would otherwise generate nothing for creditors has been identified.^[129]

2.129 Observations such as these do not necessarily mean that, even if the litigation would not have proceeded but for the financial support of the funder, the court will always consider the funding fee to be reasonable. This is particularly evident in class actions, and the court’s approach to the assessment of funding fees in class actions is discussed in detail in Chapter 5.

2.130 The scope for limits to be placed on, or approval processes required for, funding fees in proceedings other than class actions is discussed below.

Limits on funding fees

2.131 In class actions, the court has a crucial role in supervising the proceedings. It fixes the date by which class members may opt out; it approves the formal notices that are sent to them; and its approval is required before a proposed settlement can have legal effect.^[130] The settlement approval process ensures that the court considers whether the settlement is fair and reasonable as between the parties and in the interests of class members as a whole. It also provides class members with the opportunity to object.^[131]

2.132 Should the court determine that the litigation funding fee, as set out in the funding agreement, is not fair and reasonable, it may refuse a settlement. Although the possibility has not been considered in decisions of the Supreme Court, the Federal Court has indicated that, in certain circumstances, it may modify the fee as part of settlement approval. In Chapter 5, the Commission recommends that the Supreme Court be given specific power to review and vary all legal costs, litigation funding fees and charges, and settlement distribution costs in class actions, to ensure that they are fair and reasonable.

2.133 The Supreme Court also considers the funder’s remuneration in insolvency proceedings, if the liquidator seeking to enter the funding agreement asks the court for approval.^[132] When considering an application for approval, the size of the funding fee is a relevant consideration and the court will ensure that the funder is not given a ‘grossly excessive profit’.^[133] However, the court generally will not interfere with the liquidator’s commercial judgment in seeking to enter the agreement unless there is error of law or principle or grounds for suspecting bad faith. Court approval is not an endorsement of the agreement, but merely permission for the liquidator to exercise their own commercial judgment.^[134]

2.134 The National Union of Workers proposed that the court be given the power to vary the litigation funder’s remuneration in funded proceedings other than class actions by adjusting the distribution of the judgment amount. It suggested that the court could use a formula that would ensure that the disputants on whose behalf the litigation was conducted would receive a share. This would have enabled the former employees in Huon Corporation to receive a dividend.^[135]

2.135 It is possible that, had Huon Corporation been conducted as a class action, the outcome for the former employees would have been better. The class action procedure, and the court’s supervisory role and associated powers, are designed to provide for the interests of all class members to be taken into account even though they are not parties to the proceedings. Unlike other litigation conducted on behalf of others, the outcome of class actions directly affects the rights of all class members unless they opt out of the proceedings, including those who were unaware they had commenced. For this reason, the court has more onerous responsibilities than in other civil litigation. This is seen not only in the formal exercise of its power but in case management practices throughout the proceedings.

2.136 Moreover, in class actions, the representative plaintiff is not appointed by the class members; nor are they an intermediary or an agent of the class members. In contrast, in other litigation where a party to the proceeding participates on behalf of other people, it is reasonable to expect there to be communication between them, and with the lawyer, about the progress of the litigation and issues in dispute. The relationship in these cases between the lawyer, the client, and anyone on whose behalf the litigation is brought, does not, of itself, require the court to intervene in the arrangements they make. This includes arrangements with a litigation funder established by a funding agreement that the parties entered freely and with independent legal advice.

2.137 In the absence of an inherent need to do so, the Commission considers that the court’s powers to vary funding fees and associated costs should not be extended beyond the context of class actions. The court has extensive capacity, within the boundaries of its traditional role, to respond to issues that may arise during the course of funded proceedings that unfairly affect any person connected with the litigation.^[136] For example, the Civil Procedure Act requires litigation funders—and lawyers—to ensure that costs are reasonable and proportionate,^[137] and provides the court with broad discretion to impose a costs order or other sanction in the event that this obligation is not met.^[138] The court’s power in relation to costs has been extended to litigation funders where the interests of justice allow a departure from the general rule that only parties to proceedings may be subject to costs orders.^[139]

2.138 A further consideration is the impact on the viability of the industry if the court were empowered to vary funding fees generally, rather than only in class actions where it has a protective role. It would undermine the basis on which commercial decisions to invest in litigation are made if funders were unable to rely on their contractual rights. The National Union of Workers has suggested that the market would adapt to any such reform, but the Commission is concerned that the response would reduce the availability of funding for litigation and the access to justice that it enables. If the reform were confined to proceedings in Victoria, it would create a disincentive for litigation funders to invest in proceedings within this jurisdiction.

2.139 The Commission’s conclusion that it is unnecessary to extend the court’s powers in this way is predicated on the condition that all affected parties, and the court, know that the litigation is funded and are aware of the terms of the funding agreement. Huon Corporation illustrates that this is not always so, and why stronger disclosure requirements should be introduced. Proposals to improve disclosure practices are discussed below.

Disclosure to the court

2.140 The terms of reference raise the question of whether there should be an obligation to disclose funding arrangements not only in funded class actions but also in other funded proceedings—and, if so, which proceedings.

2.141 In its report on the civil justice system, released in 2008, the Commission recommended that parties to civil litigation be required to disclose the identity of an insurer or litigation funder that exercises control or influence over the insured or assisted party in the course of civil proceedings. The recommendation flowed from the requirement that insurers and funders comply with the overarching obligations, which are now contained in the Civil Procedure Act.^[140] The Commission further recommended that the court have discretion to order disclosure of a party’s insurance policy or funding arrangement if appropriate.^[141] These recommendations were not implemented.^[142]

2.142 While the Court does not have a specific power to require disclosure of litigation funding arrangements, it has a broad case management power to give any direction or make any order it considers appropriate in the interests of the administration of justice or in the public interest.^[143] In class actions, it also has a general power to make any order it thinks necessary or appropriate to ensure that justice is done in the proceeding.^[144]

Disclosure that a litigation funder is involved

2.143 The court may not be aware when a litigation funder has an interest in the proceedings. It is not apparent, for example, that the Court knew that a litigation funder was involved in Huon Corporation. In the judgment handed down on 2 October 2014, the Supreme Court noted a conversation in which a trustee mentioned that the liquidator had agreed to fund the litigation and would be seeking the Court’s sanction to do so.^[145] In fact, a litigation funder had been funding the proceedings since September 2011, after the trustees and the liquidator had failed to make a funding arrangement.^[146] Neither the funder, nor the funding fee, were mentioned in the final judgment on 1 May 2015. In that decision, the Court was critical of the way in which the litigation was conducted, attributing responsibility to both parties for wasted costs and delays, and it reduced the adverse costs that the defendant would normally be required to pay.

2.144 Reflecting on the outcome, the National Union of Workers submitted that:

there should be a mechanism that informs the court that a litigation funder is a private partner to the proceedings, to assist the court in any determinations it may make in the administrative proceedings of the trial and ultimately the administration of justice.^[147]

2.145 The proposal is not controversial. No opposition was expressed to the court being informed when a litigation funder is involved. However, the court does not need to be informed in every funded case. The fact that a litigation funder is involved in proceedings is not in itself an issue if there is only a single plaintiff (although it may affect the defendant’s decision about whether to seek an order for security for costs), but it can be significant in class actions and other proceedings brought by a plaintiff on behalf of other people whose interests will be affected by the outcome. The Commission considers that, in these cases, the court should not only be informed of the litigation funder’s involvement but be given a copy of the funding agreement.

Disclosure of funding agreement

2.146 The significance of the funder’s involvement will be apparent to the court from the funding agreement. The agreement is at the core of the issues raised by litigation funding practices, not only because it determines the allocation of risks, costs and rewards, but because it provides the framework for the relationship between the funder and the lawyer. Its disclosure to the court would assist in managing the proceedings and protecting the integrity of the legal process. The court could assess whether the terms are reasonable and adequately provide for the interests of people on whose behalf the litigation has been brought. It could also identify actual or potential conflicts of interest.^[148]

2.147 Judges of the Supreme Court noted during consultations that litigation funding arrangements can be very opaque. It can be difficult for the court to be aware of the impact of the litigation funder on proceedings, or the extent of its control.^[149] While the degree to which disclosure is likely to be useful in each case would vary, disclosure of the funding agreement would assist the court more than simply being notified that a funder is involved.

2.148 A further consequence of disclosing the funding agreement to the court is that it would protect the legitimate interests of the defendant.^[150] The defendant may wish to seek security for costs, particularly if there is doubt about the funder’s financial capacity to meet its obligations under the agreement;^[151] conversely, disclosure may lead the defendant to decide not to apply for a security for costs order.^[152]

2.149 The Commission invited comments on whether disclosure of the funding agreement to the court should be mandatory in all funded proceedings.^[153] The proposal received almost universal support. Julie-Anne Tarr, for example, called for disclosure because:

The capacity of the courts to bring flexibility and nuance to their supervisory or oversight role in an individual case (including supervising funding terms generally and confirming capital adequacy) is contingent upon full information provided as early as possible.^[154]

2.150 Vicki Waye submitted that the key terms of the funding agreement should be disclosed in all cases to support settlement and any application for security for costs, and to ensure that all parties are apprised of the nature of the financial arrangements for the proceedings:

There appears to be little justification for lack of transparency at least insofar as key terms are concerned, such as the extent of the indemnity provided for adverse costs, the percentage of recoveries that the funder is entitled to receive and the extent of any other substantial fees.^[155]

2.151 Any requirement to disclose the agreement to the defendant should provide for information that is privileged, or might confer an unfair advantage on the defendant, to be redacted first.^[156] Phi Finney McDonald provided an example of why this is necessary:

For instance, if there are terms pursuant to which the funding provided under the agreement is capped at a particular amount (such that the funder may elect not to continue funding the proceeding if costs exceed a certain amount), then a counterparty in the litigation might deliberately engage in interlocutory tactics intended to increase the costs incurred by the representative plaintiff beyond the relevant funding cap threshold, in an attempt to stymie the litigation.^[157]

2.152 The Commission agrees that the funding agreement should be disclosed, although it recommends different disclosure requirements in funded class actions, compared to other funded proceedings, for reasons discussed below.

Disclosure in class actions

2.153 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.^[158] However, this obligation does not appear in the current version of the practice note, issued on 30 January 2017 (Supreme Court Practice Note).^[159] The practice note was most recently revised in conjunction with steps by the Supreme Court to modernise and streamline its procedures, leading to a reduction in the number of practice notes from more than 150 to 48.

2.154 In contrast, the Federal Court and the Supreme Courts of New South Wales and Queensland require the disclosure of the funding agreement to the court in all funded class actions, at or prior to the first case management conference.^[160] The relevant provisions for class actions in New South Wales and Queensland replicate the provision that has since been withdrawn in Victoria:

At or prior to the initial [case management conference] or directions hearing, each party will be expected to disclose any agreement by which a litigation funder is to pay or contribute to the costs of the proceeding, any security for costs or any adverse costs order. Any funding agreement disclosed may be redacted to conceal information which might reasonably be expected to confer a tactical advantage on the other party.^[161]

2.155 The requirement to disclose is set out in greater detail in the Federal Court practice note on class actions (Federal Court Practice Note). Disclosure of the full agreement to the Court is on a confidential basis. It may be a standard form agreement, and individual variations to the standard form that might be negotiated with different class members need not be disclosed.^[162]

2.156 The funding agreement must also be disclosed to other parties at least a week before the first case management conference. Information which might be expected to confer a tactical advantage on another party, may be redacted.^[163]

2.157 In addition, the plaintiff’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.^[164]

2.158 There is broad agreement that the Supreme Court Practice Note should contain similar disclosure requirements.^[165]

2.159 The US Chamber Institute for Legal Reform proposed that the obligation to disclose should be placed on the funder, rather than on the plaintiff’s lawyer.^[166] However, the Commission considers that the obligation should rest with the lawyer, who in any event is accountable for ensuring that all necessary documentation for the proceeding is provided to the court. It is also likely that the litigation funder could be based overseas.

2.160 Some stakeholders proposed the introduction of an obligation on the court to review funding agreements.^[167] Allens proposed that the court review them at the first case management meeting, to ensure that they meet minimum content standards and are fair:

Courts should be given the express power to stay the proceeding, or make other orders considered to be appropriate, in circumstances where funding agreements do not meet the minimum content requirements or are otherwise unfair. The onus will then be on the funder to address those concerns to the satisfaction of the Court.^[168]

2.161 The Commission has reservations about proposals for state-based regulation of litigation funders, and notes that the proponents would prefer the industry to be regulated nationally. Should national regulation be introduced, compliance with required standards should be a matter for lawyers to consider when advising their clients about entering a funding agreement, and for an industry regulator to monitor across the industry. It would not be appropriate for the courts to be given a regulatory role beyond their proper supervisory role.

2.162 The Commission has been told that the Supreme Court of Victoria prefers to deal with the disclosure of funding agreements in class actions on a case-by-case basis rather than having a standard requirement. This provides the Court with flexibility where different degrees of disclosure are sought.^[169]

2.163 While this is a reasonable approach to take in view of the small number of funded class actions in Victoria, the Commission is concerned that, unless funding agreements are routinely disclosed, the Court may not become aware of issues that have affected how the proceedings have been conducted until the settlement approval stage. By then, there is little scope to address costs and delays that could have been avoided, or options for settlement that could have been explored.

2.164 Moreover, if the representative plaintiff applies for a common fund order for the payment of the funding fee, disclosure of the funding agreement to the Court is critical. A common fund order enables the Court, at an appropriate point of proceedings, to approve the funding fee to be paid by all class members, not just those who have signed a litigation funding agreement. In order to determine the appropriate fee, the Court must have oversight of the terms upon which the funding has been provided.

2.165 The Supreme Court could consider reinstating the provision that was removed from the practice note on class actions in January 2017. This would align its practices with those in other state-based class action regimes. However, the Commission recommends that consideration be given to adopting the more prescriptive requirements of the Federal Court. As Allens highlighted in its submission, an increasing number of class actions are being brought by law firms with no prior experience in this form of litigation.^[170] Clearer procedures would reduce costs and delays in establishing for newcomers the form and content of the required disclosures and the need to inform the Court promptly when any substantive changes occur. The more experienced law firms tend to file class actions in the Federal Court as well, and the obligations introduced by the recommended reform would not be novel for them. The Court would retain the discretion to depart from the standard requirements when appropriate.

Recommendation

3 The Supreme Court should consider amending its practice note on class actions to require the disclosure of litigation funding agreements to the Court and other parties to class actions in similar terms to paragraph [6] of the Federal Court of Australia’s practice note on class actions.171

Disclosure in other funded proceedings[171]

2.166 Submissions that commented on the issue indicated that the requirement to disclose funding agreements should not be confined to class actions.[172] The Commission agrees in principle but does not consider that the Court needs to be as prescriptive in requiring disclosure in other funded proceedings, or that disclosure of the agreement is necessary whenever a litigation funder is involved.

2.167 There are three reasons for this view.

1) Unlike its role in class actions, the Court does not supervise the settlement of other proceedings. It does not have the power to review the terms of the agreement.

2) In non-representative funded proceedings, the terms of the agreement will not apply to anyone who is not a participant in the proceedings. The plaintiff will have entered the agreement on the advice of their lawyer, who has a fiduciary duty to their client and a paramount duty to the court and the administration of justice. These duties apply in all proceedings, whether or not a litigation funder is involved.

3) It is not clear how many proceedings, other than insolvency proceedings (where disclosure is already likely under Commonwealth law), are conducted by an intermediary with the financial support of a litigation funder in Victoria, rather than by another funding arrangement. Where other forms of financial assistance are used, there would be no requirement to disclose.

2.168 The Commission is concerned to ensure that, in funded cases such as Huon Corporation, where the outcome and costs affect the interests of persons who do not directly participate in the proceedings, the Court is made aware that a litigation funder is involved and the nature of its involvement. These persons are not clients of the lawyer and have not signed the funding agreement. They may be well aware of the terms of the agreement and able to protect their interests, but it is possible that they are not. The Court should be able to dispense with the requirement to disclose, if appropriate, such as when the disputants are knowledgeable and experienced in litigation of that type.

2.169 A requirement to disclose the funding agreement in these proceedings could be introduced by amendments to the practice notes to proceedings in the Commercial Court^[173] and relevant lists in the Common Law Division.^[174] The requirement could be couched in the same terms as the provision that was removed from the practice note in class actions.

Recommendation

4 In addition to the introduction of disclosure obligations in class actions, the Supreme Court should consider requiring the plaintiff’s lawyers to provide the Court with a copy of the litigation funding agreement whenever a litigation funder is involved in a proceeding where a number of disputants are represented by an intermediary. Any funding agreement disclosed to the other party should be able to be redacted to conceal information which might reasonably be expected to confer a tactical advantage on that party.

Disclosure of other sources of external funding

2.170 Some stakeholders suggested that the requirement to disclose should extend to the disclosure by both plaintiffs and defendants of any source of external funding, including from an insurer, employer or union.^[175] It was argued that information about the terms on which the defendant’s lawyers are acting, their likely costs, and any indemnity available under an applicable insurance policy is as relevant to the plaintiff as information about the plaintiff’s funding arrangements is to the defendant.^[176]

2.171 The Commission does not consider that disclosure of other sources of external funding, whether or not they exercise effective control, should be introduced in funded proceedings. The fact that the plaintiff has entered an agreement with a litigation funder is not sufficient basis to impose additional disclosure requirements of this nature on both the plaintiff and the defendant in these proceedings, as distinct from unfunded proceedings.

Disclosure to class members or other represented disputants

2.172 The terms of reference raise the question of whether clearer requirements should be imposed on litigation funders and lawyers to advise funded plaintiffs about the progress, costs and possible outcomes of proceedings.

Disclosure by litigation funders

2.173 The funding agreement is the primary means by which litigation funders disclose information about the funding arrangements. The terms can be complicated, and how much the funder is entitled to receive if the litigation is successful may not be clear until the resolution of the proceedings. The US Chamber Institute for Legal Reform noted that funding agreements are not readily understood by non-lawyers and it is critical that clients understand the terms of the arrangement they are entering into, the costs they will incur and the ultimate return they may receive from the litigation.^[177] While lawyers have a duty to inform their clients about the costs of the litigation and should explain the terms of the funding agreement to them, the litigation funder is the source of the information and needs to ensure that it is accurately and clearly expressed.

2.174 IMF Bentham, for example, indicated that it has a comprehensive approach to disclosure:

IMF’s practice in the class actions it funds is for prospective class members to be made aware of the litigation funding fees before they sign a funding agreement with IMF. IMF sends to these class members a copy of the proposed retainer agreement, the litigation funding agreement, a list of frequently asked questions and a disclosure document (which explains, among other things, the services IMF provides and identifies risks to

claimants in funded litigation). These documents contain information about the likely legal costs and disbursements that are anticipated to be incurred and information about the funding fee, reimbursement of costs and any other charges that are payable to IMF in the event of success.^[178]

2.175 Of greatest importance is that the potential client receives the information they need, in a form that they understand, to enable them to decide whether to enter the funding agreement. What is not provided directly by the funder should be provided by the lawyer.

2.176 Although the content of litigation funding agreements is not regulated, litigation funders have significant responsibilities to disclose information that reveals actual or potential conflicts of interest, and how they will be managed, before the client enters the funding agreement. In addition, the funding agreement should disclose the terms of the agreement between the funder and the lawyer. These and other requirements regarding managing conflicts of interest are set out in a regulatory guide issued by ASIC, discussed at [2.110]–[2.113]. The Commission considers that any additional obligations on litigation funders to disclose information about funding arrangements should be imposed by national regulation.

2.177 Once the funding agreement is in place, both the funder and the client rely on the lawyer for advice about the progress, costs and possible outcomes of the litigation. There would be little utility in requiring funders to advise the client about these things.

Disclosure by lawyers

Legal costs and disbursements

2.178 At the commencement of any proceeding—including class actions, whether or not they are financed by a litigation funder—lawyers in Victoria are required to inform their clients of what they expect the legal costs to be.^[179] Their legal costs must be fair, reasonable and proportionate.^[180]

2.179 The Legal Profession Uniform Law sets out duties of disclosure regarding costs.^[181] These are reinforced by the courts’ power to require lawyers to give their clients written information about accrued and estimated costs and the expected length of the proceedings.^[182] Not only must lawyers disclose the information, they must satisfy themselves that the client, or potential client, understands what they have been told.^[183]

2.180 The requirements to disclose information about legal costs are well established and do not appear to raise particular issues in funded proceedings. Clients, and potential clients, in funded proceedings are entitled to the same information about costs as they would receive in other proceedings. The information provided should be sufficient to inform their decision about whether to enter a legal retainer, and they will also be informed of any significant changes during the proceedings.

2.181 In class actions, not all class members will necessarily be clients, yet all contribute to legal costs. The Commission recommends in Chapter 4 that law firms provide the Supreme Court, and all class members, with a summary statement about the class action, including how legal costs and disbursements will be charged; see [4.235]–[4.241].

Litigation funding costs

2.182 As the Victorian Legal Services Board and Commissioner pointed out, litigation funding fees do not fall within the definition of legal costs.^[184]

2.183 Even though lawyers are not expressly required to disclose information about the funding fee and associated costs in funded proceedings, their clients should normally receive this information under current regulatory requirements. Lawyers would need to disclose the terms of the litigation funding agreement to their clients when explaining the estimated costs of the litigation. In addition, disclosure of the funding fee will always occur when a lawyer advises a client who is considering whether to enter a litigation funding agreement.

2.184 In contrast, in funded class actions there is ambiguity about the lawyer’s duty to disclose information about funding costs to class members who are not clients. The Federal Court has addressed the issue by requiring lawyers to disclose comprehensive information about litigation funding charges in class actions. This is discussed below.

Disclosure to class members

Information about the funding agreement

2.185 By the time a funded class action commences, the funder and the lawyer will have entered into contractual arrangements with each other, as well as individually with the representative plaintiff. Disclosures to the representative plaintiff, and other class members who enter the funding agreement and legal retainer at the commencement of proceedings, will not necessarily reach all of the class members who ultimately participate in the proceedings or contribute to the costs.

2.186 In an open class action, the class is likely to include members who have not entered a funding agreement as well as those who have. If the court makes a common fund order or a funding equalisation order, all class members must pay a proportion of any settlement or judgment amount they receive to cover the costs of bringing proceedings, whether or not they have executed agreements to this effect. Disclosure about the funding arrangement in these circumstances is even more important to enable them to make informed decisions about their participation.^[185]

2.187 Stakeholders generally agreed that lawyers should be expressly required to disclose funding costs to class members. This is important not only to ensure that all class members can make informed choices, but also to manage the risk of conflicts of interest. It was observed, for example, that there is no evidence that lawyers ‘shop around’ for the best funding arrangement for class members and that increasing transparency would improve accountability.^[186]

2.188 As the lawyer is a party to the funding agreement in class actions, the client should have the opportunity to obtain independent legal advice.^[187] This is a matter that could be addressed in professional guidelines for lawyers on managing conflicts of interest, but the Commission does not consider that independent legal advice should be mandatory. Whether to seek additional legal or financial advice, from whom, and at what cost, is a matter for the client to decide.

2.189 The task of disclosing funding costs clearly and simply is not easy. Costs arise from a number of sources and are unlikely to be standard or consistent for the duration of proceedings. For example, a litigation funder may stipulate a particular funding fee in the funding agreement, but also hold a contractual entitlement to increase the rate in particular circumstances, such as when the commencement of proceedings is delayed. A litigation funder may also be contractually entitled to additional fees, such as a project management fee, upon crystallisation of certain events or timeframes.

2.190 Maurice Blackburn pointed out that funding agreements invariably specify the basis on which the fee is charged but that it is impractical to disclose estimated total amounts because they are not known until settlement. It noted that the Federal Court’s requirement to disclose information about litigation funding costs is satisfied if class members have been given a document that properly discloses these charges, and this is likely to be the funding agreement.^[188]

2.191 IMF Bentham pointed out that compliance with a disclosure requirement would be difficult when the law firm does not hold the precise identity and contact details of all class members.^[189] Slater and Gordon agreed:

In most class actions, the identity of all group members is unknown to both plaintiffs and defendants alike. In most mass torts, there is rarely a central registry of relevant individuals who have suffered the harm complained about. In shareholder litigation, the share registry is a helpful but quite imperfect guide to those that may have claims in the action; its key deficiency arises from the prevalence of nominee or custodian holders of securities who appear on the register but do not hold the beneficial interest in the shares. Newspaper adverts have become increasingly ineffective at reaching the population at-large. In most cases, plaintiffs need the assistance of court orders to gain access to the relevant lists identifying potential group members or for notices to be sent to relevant lists identifying potential group members.^[190]

2.192 The Commission considers that an obligation to disclose information about the funding agreement should nevertheless be introduced. While logistical difficulties in contacting class members may be increasing, so too are the options for overcoming them. Experienced class action law firms are developing innovative methods of communicating effectively with large numbers of people.^[191] As the primary aim of class actions is to enable access to justice, it is essential to continue to give priority to reaching class members.

Obligation to disclose funding information

2.193 A number of submissions supported the introduction of a requirement, in the Supreme Court Practice Note, for lawyers to disclose litigation funding costs to class members on terms similar to those that apply in the Federal Court.^[192]

2.194 The Federal Court Practice Note sets out how lawyers should disclose legal costs and any ‘litigation funding charges’ to current (and potential) clients in class actions, both at commencement and during the proceedings. Litigation funding charges include any funding fee and any other charges (including those estimated) to be charged to class members.

2.195 The requirements regarding litigation funding charges include the following:

• The litigation funding agreement must be in writing.

• Any notification of litigation funding charges must be in clear terms, and provided as soon as practicable.

• The obligation is ongoing and applies to any material change to the charges.

• Failure to notify class members of the litigation funding charges may be taken into account by the Court at settlement.

• The obligation regarding disclosure of litigation funding charges is satisfied if class members have been provided with a document that properly discloses those charges.^[193]

2.196 The Commission agrees that the Federal Court Practice Note provides a useful approach to the disclosure of funding costs and considers there would be benefit in introducing similar provisions into the equivalent practice note issued by the Supreme Court. However, the Commission does not propose that the accompanying provisions regarding disclosure of legal costs should be incorporated because existing legal costs disclosure rules in Victoria are adequate.

2.197 Lawyers could be encouraged to disclose funding costs in conjunction with the disclosure of legal costs, which would ensure that class members are better placed to understand the cumulative effect.

2.198 The disclosure requirement should not be a significant burden on law firms. It would be similar to existing obligations, as explained by the Victorian Legal Services Board and Commissioner:

Many plaintiff lawyers are already used to advising of other deductions from settlement monies, like Medicare and Centrelink repayments. The lawyers are in possession of the information and can reasonably be expected to be in a position to explain and disclose this information to class members, particularly its relationship to legal costs. Lawyers need to consider their duty to act in the best interest of their clients in the context of disclosure about features of the litigation funding agreement, the fee in its various scenarios and other matters such as opt out provisions for the litigation funder.

The litigation funding fees are intricately related to the conduct of the litigation in class actions so the burden imposed by a Practice Note requirement does not appear significant.^[194]

Recommendation

5 The Supreme Court should consider amending its practice note on class actions to provide that, if a class action is funded by a litigation funder:

(a) the representative plaintiff’s lawyers should notify class members (whether they are actual or potential clients), in clear terms and as soon as practicable, of any applicable litigation funding charges and any material changes to those charges

(b) the obligation to notify is satisfied if class members have been provided with a document that properly discloses those charges

(c) failure to meet the obligation to notify may be taken into account by the Court in relation to settlement approval under section 33V of the Supreme Court Act 1986 (Vic).

Funding Information Summary Statements

2.199 The effectiveness of disclosure depends not only on the information being given, but also the form in which it is given. A number of submissions proposed that class members be provided with simplified information. In Chapter 4, the Commission makes recommendations to simplify and standardise, where possible, formal notices

provided to class members and to enhance the information about class actions that the Supreme Court publishes on its website. Recommendations are also made to simplify the information that lawyers provide about the proceedings.

2.200 With regard to information about funding costs, Allens proposed that class members should not only be provided with a copy of the funding agreement but also an accompanying notice which explains the material terms of the agreement and associated risks in Plain English.^[195] Chartered Accountants Australia and New Zealand highlighted the need to set parameters around disclosure so that it provides ‘relevant, comparable and understandable’ information about the terms of the funding, charges and additional fees or arrangements, including any indemnities given to the representative plaintiff by the funder.^[196] Michael Duffy proposed that, before entering a funding agreement, the litigation funder should be subject to a statutory requirement to provide clients with a Key Facts disclosure document that sets out key conditions and litigation funding charges in a standard and simplified form.^[197]

2.201 Some litigation funders already provide simple summary information to potential clients. This practice should be encouraged under any national regulatory scheme. Some law firms publish useful information for class members on their websites, written in a simple style. Funders and lawyers with less experience in class actions or involved in smaller claims tend to provide fewer details than those with a more established presence in the market.

2.202 The Commission considers that there would be benefit in publishing standard key facts about the funding arrangements of class actions on the Supreme Court’s website. It would be published in conjunction with a summary statement about the class action (recommended in Chapter 4). This measure would provide a supplementary means of contacting class members who are not known to the lawyers conducting the class action. It would also ensure that class members in all funded proceedings are aware that a litigation funder is involved and the implications for them generally.

2.203 The standard information would be drawn from a Funding Information Summary Statement that the lawyers would provide to the Supreme Court. The key facts to be provided should be identified by the Supreme Court in consultation with stakeholders. They should be brief and not provide a tactical advantage to the defendant. They could include, for example, the identity of the litigation funder, the basic terms of the agreement, the basis on which the funding fee is calculated, whether the funding fee adds to or replaces other costs if the litigation is successful, and where to obtain more information.

Recommendation

6 The Supreme Court should consider amending its class action practice note to require the representative plaintiff’s lawyers in funded class actions to provide to the Court, when the writ for the proceeding is filed, a brief Funding Information Summary Statement that accurately sets out litigation funding charges and key conditions in a simplified form, for publication on the Supreme Court’s website.

Disclosure to other represented disputants

2.204 The Commission does not recommend imposing obligations on lawyers in funded proceedings other than class actions to disclose information to any represented disputants. It is reasonable for the lawyer concerned to expect a client who brings proceedings on behalf of others to be conveying to them information about the progress of the proceedings and be directly answerable to them. This is unlike the position of the representative plaintiff in class actions, who is not appointed by the class members and is not their agent or intermediary.

2.205 The client would be advised about the litigation funding agreement when deciding whether to enter it. In addition, the need to disclose and explain the costs of the proceedings is well established in current regulations, and keeping the client informed of progress is inherent to the responsibilities of legal practice.

2.206 In funded proceedings other than class actions, the client may also be directly informed by the litigation funder about the terms of the agreement, as observed by Litigation Funding Solutions:

It is important to note that every case involving litigation funding is different. In many cases the funder has no relationship with the lawyer at all. From LFS’ experience however, when a litigation funder agrees to fund a case on a bi-lateral basis, they do so by entering into a litigation funding agreement with the plaintiff. This means that the plaintiff and the funder are, usually, the only two parties to the contract. Consequently, this means that the plaintiff is aware of the cost structure and is up to date with any changes to the funding agreement. Therefore, the lawyer is not in a position to withhold any funding charges, or some such, in the first place.^[198]

2.207 IMF Bentham, while not objecting to it, submitted that it would not be necessary to introduce a specific obligation on lawyers to disclose funding information in funded proceedings other than class actions:

When IMF funds proceedings other than class actions, it enters into a litigation funding agreement with the plaintiff client. The litigation funding agreement discloses information about the litigation funding fee (or commission) and reimbursement of costs and any other charges that may be payable to IMF in the event of success. IMF and the plaintiff enter into a litigation funding agreement after IMF has performed due diligence on the proposed claim and has made a funding proposal to the plaintiff. In all cases, IMF recommends that its prospective funded plaintiffs obtain independent legal advice as to the meaning and effect of its litigation funding agreements before entering into the litigation funding agreement. It is difficult to conceive of a situation in which a plaintiff would enter into a litigation funding agreement with a commercial funder without being aware of the litigation funding commission, the reimbursement of costs and other charges payable to the litigation funder.^[199]

2.208 All but one submission that commented on the issue agreed that an additional disclosure obligation on the lawyer is not warranted.^[200] The Commission agrees.

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1. 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, 28. Non-representative class members are statutorily immune from costs orders, except as authorised by s 33Q or
   
   s 33R: Supreme Court Act 1986 (Vic) s 33ZD.

   ↑

2. Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014) vol 2, 608.

   ↑

3. Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386.

   ↑

4. Vince Morabito, An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (July 2017) 33.

   ↑

5. Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275.

   ↑

6. Jason Betts, David Taylor and Christine Tran, ‘Litigation Funding for Class Actions’ 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) 205, 207.

   ↑

7. Ibid 226–7; Vicki Waye and Vince Morabito, ‘When Pragmatism Leads to Unintended Consequences: A Critique of Australia’s Unique Closed Class Regime’ (2018) 19 Theoretical Inquiries in Law 303.

   ↑

8. Patrick Moloney, ‘One Size Doesn’t Fit All’ (2016) 26(3) The Australian Corporate Lawyer 36, 37.

   ↑

9. Marc Krestin and Rebecca Mulder, ‘Third-Party Funding in International Arbitration: to Regulate or Not to Regulate?’ on Wolters Kluwer, Kluwer Arbitration Blog, (12 December 2017) <http://arbitrationblog.kluwerarbitration.com/2017/12/12/third-party-funding-international-arbitration-regulate-not-regulate>. See also International Council for Commercial Arbitration, Draft Report for Public Discussion of The ICCA—Queen Mary Task Force on Third-Party Funding in International Arbitration (1 September 2017) ICCA < http://www.arbitration-icca.org/projects/Third_Party_Funding.html>.

   ↑

10. Submission 19 (US Chamber Institute for Legal Reform). The Institute is an affiliate of the US Chamber of Commerce.

    ↑

11. The ‘light touch’ approach to regulating litigation funders has also been adopted internationally. In England and Wales, there is voluntary self-regulation; in Hong Kong and Singapore, litigation funders are self-regulated but may operate only in international commercial arbitration; in the United States of America, regulation varies between the states.

    ↑

12. They have been abolished in New South Wales, South Australia and the Australian Capital Territory: Crimes Act 1900 (NSW) sch 3; Civil Liability Act 2002 (NSW) sch 2; Criminal Law Consolidation Act 1935 (SA), sch 11; Civil Law (Wrongs) Act 2002 (ACT) s 221. Queensland, Western Australia, Tasmania and the Northern Territory have not yet abolished them.

    ↑

13. Wrongs Act 1958 (Vic) s 32(2).

    ↑

14. (1996) 54 FCR 380.

    ↑

15. Susanna Khouri, Wayne Attrill and Clive Bowman, ‘Litigation Funding and Class Actions—Idealism, Pragmatism and a New Paradigm’ 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) 229, 235.

    ↑

16. (2006) 229 CLR 386.

    ↑

17. Ibid 435 (Gummow, Hayne and Crennan JJ).

    ↑

18. International Litigation Partners Pte Ltd v Chameleon Mining NL (2011) 276 ALR 138.

    ↑

19. Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11.

    ↑

20. International Litigation Partners Pte Ltd v Chameleon Mining NL (rec and mgr apptd) (2012) 246 CLR 455.

    ↑

21. The Australian Government, The Treasury, Post-Implementation Review—Litigation Funding—Corporations Amendment Regulations 2012 (No 6) (October 2015) 5, 9 <http://ris.pmc.gov.au/2016/03/15/litigation-funding>.

    ↑

22. The Commission has identified three litigation funders listed on the ASX: IMF Bentham Ltd; JustKapital Litigation Partners Ltd; and LCM.
    
    No litigation funder holds an Australian Financial Services Licence (AFSL). IMF Bentham Ltd held an AFSL from 4 July 2005 through to 18 April 2013: IMF (Australia) Ltd, ‘Australian Financial Services Licence’ (Release to Australian Securities Exchange (ASX), 19 April 2013) <www.imf.com.au/docs/default-source/site-documents/australian-financial-services-licence>; Kate Kachor, ‘IMF voluntarily cancels AFSL’, Financial Observer (online), 22 April 2013 <www.financialobserver.com.au/articles/imf-voluntarily-cancels-afsl>.

    ↑

23. Corporations Act 2001 (Cth) s 911A(2)(k); Corporations Regulations 2001 (Cth) regs 5C.11.01, 7.1.04N, 7.6.01(1)(x), 7.6.01(1)(y), 7.6.01AB.

    ↑

24. Corporations Regulations 2001 (Cth) reg 7.6.01AB(3).

    ↑

25. Ibid regs 5C.11.01, 7.1.04N, 7.6.01(1)(x), 7.6.01(1)(y), 7.6.01AB.

    ↑

26. Australian Securities and Investments Commission, Regulatory Guide 248—Litigation Schemes and Proof of Debt Schemes: Managing Conflicts of Interest (April 2013).

    ↑

27. See, eg, Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014); Law Council of Australia, Regulation of Third Party Litigation Funding in Australia, Position Paper (June 2011); Wayne Attrill, ‘The Regulation of Conflicts of Interest in Australian Litigation Funding’ (2013) 2 Journal of Civil Law Procedure 193; Michael Legg et al, ‘The Rise and Regulation of Litigation Funding in Australia’ (2011) 36 Northern Kentucky Law Review 625; John Walker, ‘Policy and Regulatory Issues in Litigation Funding Revisited’ (2014) 55 Canadian Business Law Journal 85.

    ↑

28. Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014) vol 2, 632.

    ↑

29. Ibid 633; Recommendation 18.2.

    ↑

30. Submission 4 (Chartered Accountants Australia and New Zealand).

    ↑

31. Submission 26 (Australian Institute of Company Directors).

    ↑

32. Submission 12 (Allens).

    ↑

33. Submission 1 (Ashleigh Leake, Josephine Vernon, Bruce Efron).

    ↑

34. Submission 22 (Dr Michael Duffy).

    ↑

35. Submission 19 (US Chamber Institute for Legal Reform).

    ↑

36. Submission 21 (Law Council of Australia).

    ↑

37. Submission 25 (IMF Bentham Ltd).

    ↑

38. Submission 3 (Professor Julie-Anne Tarr).

    ↑

39. Submission 28 (Slater and Gordon Lawyers).

    ↑

40. Submission 11 (Litigation Funding Solutions).

    ↑

41. Australian Law Reform Commission, Australian Law Reform Commission Terms of Reference—Inquiry into Class Action Proceedings and Third Party Litigation Funders (15 December 2017) <https://www.alrc.gov.au>.

    ↑

42. Submission 35 (Professor Vince Morabito).

    ↑

43. Ibid. The figures are correct as at 29 November 2017.

    ↑

44. The four transferred cases were shareholder and investor claims where other law firms had also filed class actions, or the federal regulator had commenced proceedings, regarding the same events: Webster (as Trustee for the Elcar Pty Ltd Super Fund Trust) v Murray Goulburn Co-operative Co Ltd [2017] VSC 249 (12 May 2017); John William Cruse Webster (as Trustee for the Elcar Pty Ltd Super Fund Trust) v Vocation Ltd S CI 2014 06270; Dorajay Pty Ltd v Aristocrat Leisure Ltd (Matter 8983 of 2003); Karageorgiou v Vocation Ltd (2015) S CI 2015 00856.

    ↑

45. Vince Morabito, An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (July 2017) 33.

    ↑

46. Submission 35 (Professor Vince Morabito). Data as at 29 November 2017.

    ↑

47. John William Cruse Webster (as Trustee for the Elcar Pty Ltd Super Fund Trust) v Vocation Ltd S CI 2014 06270; Dorajay Pty Ltd v Aristocrat Leisure Ltd (Matter 8983 of 2003); Karageorgiou v Vocation Ltd S CI 2015 00856; Walsh v WorleyParsons Limited (No 4) [2017] VSC 292
    
    (26 May 2017); Camping Warehouse v Downer EDI [2016] VSC 784 (21 December 2016); Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 (19 December 2012).

    ↑

48. Bolitho v Banksia Securities Ltd (No 4) [2014] VSC 582 (26 November 2014); Webster (as Trustee for the Elcar Pty Ltd Super Fund Trust) v Murray Goulburn Co-operative Co Ltd [2017] VSC 249 (12 May 2017).

    ↑

49. Regent Holdings v State of Victoria [2013] VSC 601 (7 November 2013).

    ↑

50. Roo Roofing Pty Ltd v Commonwealth of Australia S CI 2015 03382.

    ↑

51. Fitzgerald v CBL Insurance Ltd [2014] VSC 493 (2 October 2014). The view that this was the catalyst for the reference was reported in:
    
    Ben Butler, ‘Victims Get Nothing as Litigation Funder, Lawyers Share the Spoils’, The Australian 22 August 2016; Sol Dolor, ‘Vic AG Launches Review of Litigation Funder Rules’, Australasian Lawyer 17 January 2017. It was repeated in Submission 14 (LCM).

    ↑

52. IMF Bentham Ltd submitted that it has provided pro bono assistance in matters: ‘Although IMF is a for-profit company and has an obligation to its shareholders, it has, for example, provided financial assistance and adverse cost indemnities for individuals who have made discrimination claims, such as racial and disability discrimination claims.’: Submission 25.

    ↑

53. Jason Betts, David Taylor and Christine Tran, ‘Litigation Funding for Class Actions’ 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) 205, 209.

    ↑

54. Litigation Funding Solutions, ‘Characteristics of a good case’ (2018) Litigation Funding Solutions <http://www.litigationfundingsolutions.com.au/characteristics-of-a-good-case-page/>.

    ↑

55. IMF Bentham, ‘Commercial litigation’ (2018) IMF Bentham <https://www.imf.com.au/practice-areas>.

    ↑

56. Submission 13 (Maurice Blackburn Lawyers).

    ↑

57. Submission 12 (Allens); Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014) vol 2, 619.

    ↑

58. Vince Morabito, An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (July 2017) 34.

    ↑

59. Patrick Windle, Litigation Funding in Australia—IBIS World Industry Report OD5446 (February 2017) IBISWorld, 13 <www.ibisworld.com.au/industry-trends/specialised-market-research-reports/advisory-financial-services/litigation-funding.html>.

    ↑

60. The funding by Insolvency Litigation Fund Pty Ltd (a subsidiary of Bentham IMF) of two class actions that had been filed in the Federal Court in 1998 and 2000 regarding the termination of waterside worker contracts: Batten v CTMS Ltd [1999] FCA 1576 (12 November 1999); Batten v CTMS Ltd [2000] FCA 915 (7 July 2000); Vince Morabito, An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (July 2017) 13.

    ↑

61. Vince Morabito, An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (July 2017) 34.

    ↑

62. Ibid.

    ↑

63. Mass torts; products; employees; franchisees; agents and/or distributors; cartels; racial discrimination in non-migration litigation and miscellaneous claims.

    ↑

64. Jason Betts, David Taylor and Christine Tran, ‘Litigation Funding for Class Actions’ 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) 205, 207.

    ↑

65. John Walker, Susanna Khouri and Wayne Attrill, ‘Funding Criteria for Class Actions’ (2009) 32 University of New South Wales Law Journal 1036, 1042.

    ↑

66. Vince Morabito, An Empirical Study of Australia’s Class Action Regimes, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (July 2017) 30.

    ↑

67. Submission 25 (IMF Bentham Ltd). Examples given were: cartel claims, consumer protection claims, mass tort claims including actions for property damage, actions on behalf of employees, franchisees, agents and/or distributors, and racial discrimination claims.

    ↑

68. Vince Morabito and Jarrah Ekstein, ‘Class Actions Filed for the Benefit of Vulnerable Persons—An Australian Study’ (2016) 35 Civil Justice Quarterly 61, 87. However, in 2015 IMF Bentham reportedly provided pro bono litigation funding for vulnerable people: Human Rights Law Centre, ‘High Court Action Against Northern Territory Government to Challenge Police Powers which will Disproportionately Impact Aboriginal People’ (Media Release, 31 March 2015).

    ↑

69. Vince Morabito and Jarrah Ekstein, ‘Class Actions Filed for the Benefit of Vulnerable Persons—An Australian Study’ (2016) 35 Civil Justice Quarterly 61, 88.

    ↑

70. $500 million on behalf of victims of the Kilmore East/Kinglake Black Saturday bushfire, and $300 million on behalf of victims of the Murrindindi/Marysville bushfire: Matthews v AusNet Electricity Services Pty Ltd [2014] VSC 663 (23 December 2014); Rowe v AusNet Electricity Services Pty Ltd [2015] VSC 232 (27 May 2015).

    ↑

71. Submission 25 (IMF Bentham Ltd).

    ↑

72. The Commission was told, anecdotally, that litigation funders have charged project management fees in class actions in the past but they are less likely to be charged in recent proceedings.

    ↑

73. [2016] FCA 1433 (28 November 2016).

    ↑

74. Ibid [179].

    ↑

75. Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014) vol 2, 622.

    ↑

76. Vince Morabito and Vicki Waye, ‘Seeing Past the US Bogey—Lessons from Australia on the Funding of Class Actions’ (2017) 36 Civil Justice Quarterly 213, 242.

    ↑

77. Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191, 208 (Murphy, Gleeson and Beach JJ).

    ↑

78. Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 (19 December 2012) [13], [15] (Pagone J). After the legal costs were deducted, $103 million was available for distribution to class members and to pay the litigation funder: Submission 35 (Professor Vince Morabito).

    ↑

79. Re Banksia Securities Ltd (rec and mgr apptd) [2017] VSC 148 (31 March 2017) [11] (Robson J). BSL Litigation Partners is now Australian Funding Partners Limited.

    ↑

80. Re Banksia Securities Ltd (rec and mgr apptd) (in liq) (No 2) [2018] VSC 47 (16 February 2018) [42] (Croft J).

    ↑

81. Regent Holdings v State of Victoria [2013] VSC 601 (7 November 2013).

    ↑

82. Regent Holdings v State of Victoria [2015] VSC 422 (18 August 2015).

    ↑

83. Camping Warehouse v Downer EDI [2016] VSC 784 (21 December 2016).

    ↑

84. Standing Committee of Attorneys-General, Litigation Funding in Australia, Discussion Paper (2006) 4. The gross fee has been higher but it is important to consider the terms under which it has been paid. For example, the funding agreement in Robinson, re Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 (1 May 2017) [18] entitled the litigation funder to 85% of the settlement amount (less costs incurred in pursuing the claim), but the funder was required by the funding agreement to pay a number of creditors, leaving a final net share of no more than 55%.

    ↑

85. Fitzgerald v CBL Insurance Ltd [2014] VSC 493 (2 October 2014).

    ↑

86. Submission 16 (National Union of Workers).

    ↑

87. Ibid.

    ↑

88. Ibid.

    ↑

89. Ibid.

    ↑

90. Fitzgerald v CBL Insurance Ltd (No 2) [2015] VSC 176 (1 May 2015) [43] (Sloss J).

    ↑

91. Ibid [44] (Sloss J).

    ↑

92. Submission 14 (LCM).

    ↑

93. Submission 16 (National Union of Workers).

    ↑

94. Ibid.

    ↑

95. Ibid.

    ↑

96. Ibid.

    ↑

97. Victorian Law Reform Commission, Access to Justice—Litigation Funding and Group Proceedings, Consultation Paper (2017) 44–9.

    ↑

98. Submission 28 (Slater and Gordon Lawyers).

    ↑

99. Submission 25 (IMF Bentham Ltd).

    ↑

100. Barton v The Queen (1980) 147 CLR 75, 96 (Gibbs ACJ and Mason J). See also Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd; re Treasury Wine Estates Ltd [2016] FCA 787 (5 July 2016); Treasury Wines Estates Ltd v MCI Pty Ltd (2014) 318 ALR 121.

     ↑

101. Submission 25 (IMF Bentham Ltd). See Bolitho v Banksia Securities Ltd (No 4) [2014] VSC 582 (26 November 2014).

     ↑

102. [2.140]–[2.208].

     ↑

103. This is consistent with ASIC’s expectation that funders consider including in funding agreements an obligation for the lawyer to give priority to the plaintiff’s instructions over those of the funder: Australian Securities and Investments Commission, Regulatory Guide 248—Litigation Schemes and Proof of Debt Schemes: Managing Conflicts of Interest (April 2013) RG 248.59.

     ↑

104. Submission 25 (IMF Bentham Ltd).

     ↑

105. Submission 1 (Ashleigh Leake, Josephine Vernon, Bruce Efron). References omitted.

     ↑

106. See, eg, Submissions 19 (US Chamber Institute for Legal Reform), 22 (Dr Michael Duffy); Roundtable 1 (professional stakeholders).

     ↑

107. Roundtable 1 (professional stakeholders).

     ↑

108. Civil Procedure Act 2010 (Vic) s 10(1). They also apply to the parties, expert witnesses, lawyers and insurers.

     ↑

109. Ibid ss 17–26.

     ↑

110. Submission 19 (US Chamber Institute for Legal Reform).

     ↑

111. Civil Procedure Act 2010 (Vic) s 29.

     ↑

112. Consultation 4 (Judges of the Supreme Court of Victoria).

     ↑

113. Corporations Act 2001 (Cth) s 911A; Corporations Regulations 2001 (Cth) regs 7.1.04N, 7.6.01(1)(x), 7.6.01(1)(y), 7.6.01AB.

     ↑

114. Australian Securities and Investments Commission, Regulatory Guide 248—Litigation Schemes and Proof of Debt Schemes: Managing Conflicts of Interest (April 2013).

     ↑

115. Corporations Regulations 2001 (Cth) reg 7.6.01AB.

     ↑

116. Australian Securities and Investments Commission, Regulatory Guide 248—Litigation Schemes and Proof of Debt Schemes: Managing Conflicts of Interest (April 2013) RG 248.59–RG 248.61.

     ↑

117. Ibid RG 248.71.

     ↑

118. Ibid RG 246.85.

     ↑

119. Ibid RG 248.56.

     ↑

120. Ibid RG 248.62–RG 248.63.

     ↑

121. Submission 2 (Professor Vicki Waye).

     ↑

122. Submission 19 (US Chamber Institute for Legal Reform).

     ↑

123. Submission 22 (Dr Michael Duffy).

     ↑

124. Submission 13 (Maurice Blackburn Lawyers).

     ↑

125. See, eg, Walsh v WorleyParsons Limited (No 4) [2017] VSC 292 (26 May 2017) (Cameron J).

     ↑

126. Submission 3 (Professor Julie-Anne Tarr).

     ↑

127. Submission 19 (US Chamber Institute for Legal Reform).

     ↑

128. Submission 14 (LCM).

     ↑

129. Re City Pacific Ltd [2017] NSWSC 784 (18 May 2017) [20]–[21] (Brereton J).

     ↑

130. Supreme Court Act 1986 (Vic) ss 33J, 33Y, 33V.

     ↑

131. Roundtable 3 (professional stakeholders).

     ↑

132. Corporations Act 2001 (Cth) s 477(2B). See also [2.74].

     ↑

133. Anstella Nominees Pty Ltd v St George Motor Finance Ltd [2003] FCA 466 (14 May 2003) [11] (Finkelstein J).

     ↑

134. Stewart, re Newtronics Pty Ltd [2007] FCA 1375 (28 August 2007) [26] (Gordon J).

     ↑

135. Submission 16 (National Union of Workers).

     ↑

136. Civil Procedure Act 2010 (Vic) ss 7(1), 8, 65C(1).

     ↑

137. Ibid s 24.

     ↑

138. Ibid s 29.

     ↑

139. Carter v Caason Investments Pty Ltd [2016] VSCA 236 (7 October 2016).

     ↑

140. Civil Procedure Act 2010 (Vic) ss 17, 26.

     ↑

141. Victorian Law Reform Commission, Civil Justice Review, Report No 14 (2008) 471–2, 476; Recommendation 86.

     ↑

142. However, if the effect of a contract of insurance is that the party has no meaningful control over the conduct of proceedings, the insurer may, instead of the party, comply with the requirement on each party to certify, at the commencement of proceedings, that it has read and understood the overarching obligations and paramount duty. This provision was introduced in 2012 to provide flexibility when, for example, the party does not consider it appropriate to sign the certification or cannot be found. Civil Procedure Act 2010 (Vic) s 41(4); Explanatory Memorandum, Civil Procedure Amendment Bill 2012.

     ↑

143. Civil Procedure Act 2010 (Vic) s 47.

     ↑

144. Supreme Court Act 1986 (Vic) s 33ZF.

     ↑

145. Fitzgerald v CBL Insurance Ltd [2014] VSC 493 (2 October 2014) [73] (Sloss J).

     ↑

146. Submission 16 (National Union of Workers).

     ↑

147. Ibid.

     ↑

148. Submission 1 (Ashleigh Leake, Josephine Vernon, Bruce Efron). For example, in Bolitho v Banksia Securities Ltd (No 4) [2014] VSC 582 (26 November 2014) (Ferguson JA), 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.

     ↑

149. Consultation 3 (Judges of the Supreme Court of Victoria).

     ↑

150. Submission 4 (Chartered Accountants Australia and New Zealand).

     ↑

151. Submission 2 (Professor Vicki Waye).

     ↑

152. Submission 11 (Litigation Funding Solutions).

     ↑

153. Victorian Law Reform Commission, Access to Justice—Litigation Funding and Group Proceedings, Consultation Paper (2017) 68.

     ↑

154. Submission 3 (Professor Julie-Anne Tarr).

     ↑

155. Submission 2 (Professor Vicki Waye).

     ↑

156. Submissions 11 (Litigation Funding Solutions), 12 (Allens), 13 (Maurice Blackburn Lawyers), 14 (LCM), 15 (Phi Finney McDonald), 21 (Law Council of Australia).

     ↑

157. Submission 15 (Phi Finney McDonald).

     ↑

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

     ↑

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

     ↑

160. Federal Court of Australia, Class Actions Practice Note (GPN-CA)—General Practice Note, 25 October 2016, [6]; Supreme Court of New South Wales, Practice Note SC Gen 17—Supreme Court Representative Proceedings, 12 August 2014, [7.2]; Supreme Court of Queensland, Practice Direction Number 2 of 2017—Representative Proceedings, 27 February 2017, [8.2].

     ↑

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

     ↑

162. Federal Court of Australia, Class Actions Practice Note (GPN-CA)—General Practice Note, 25 October 2016, [6.1]–[6.2].

     ↑

163. Ibid [6.4].

     ↑

164. Ibid [6.3].

     ↑

165. Submissions 3 (Professor Julie-Anne Tarr), 9 (Professor Simone Degeling, Associate Professor Michael Legg, Dr James Metzger), 11 (Litigation Funding Solutions), 12 (Allens), 13 (Maurice Blackburn Lawyers), 14 (LCM), 15 (Phi Finney McDonald), 21 (Law Council of Australia), 26 (Australian Institute of Company Directors).

     ↑

166. Submission 19 (US Chamber Institute for Legal Reform).

     ↑

167. Submissions 1 (Ashleigh Leake, Josephine Vernon, Bruce Efron), 12 (Allens).

     ↑

168. Submission 12 (Allens).

     ↑

169. Correspondence from the Supreme Court of Victoria to the Commission, 5 June 2017.

     ↑

170. Submission 12 (Allens).

     ↑

171. See, eg, Submission 3 (Professor Julie-Anne Tarr). Professor Tarr proposed that funding agreements be disclosed at or before the first case management hearing or directions hearing in all funded proceedings.

     ↑

172. Supreme Court of Victoria, Practice Note SC CC1 (revised), 21 December 2017.

     ↑

173. For example, the Major Torts List: Supreme Court of Victoria, Practice Note SC CL4, 30 January 2017.

     ↑

174. Submissions 14 (IMF Bentham Ltd), 15 (Phi Finney McDonald).

     ↑

175. Submission 15 (Phi Finney McDonald).

     ↑

176. Submission 19 (US Chamber Institute for Legal Reform).

     ↑

177. Submission 25 (IMF Bentham Ltd).

     ↑

178. A client is broadly defined under the legislation as ‘a person to whom or for whom legal services are provided’: Legal Profession Uniform Law Application Act 2014 (Vic) sch 1 (Legal Profession Uniform Law) s 6.

     ↑

179. Legal Profession Uniform Law s 172.

     ↑

180. Ibid ss 174, 181–2.

     ↑

181. Civil Procedure Act 2010 (Vic) s 65B.

     ↑

182. Submission 10 (Victorian Legal Services Board and Commissioner).

     ↑

183. Ibid.

     ↑

184. Submission 28 (Slater and Gordon Lawyers).

     ↑

185. Roundtable 1 (professional stakeholders).

     ↑

186. Submissions 19 (US Chamber Institute for Legal Reform), 25 (Dr Michael Duffy), 28 (Slater and Gordon Lawyers).

     ↑

187. Submission 13 (Maurice Blackburn Lawyers).

     ↑

188. Submission 25 (IMF Bentham Ltd).

     ↑

189. Submission 28 (Slater and Gordon Lawyers).

     ↑

190. Submissions 13 (Maurice Blackburn Lawyers), 15 (Phi Finney McDonald), 28 (Slater and Gordon Lawyers).

     ↑

191. Submissions 10 (Victorian Legal Services Board and Commissioner), 11 (Litigation Funding Solutions), 13 (Maurice Blackburn Lawyers), 15 (Phi Finney McDonald), 21 (Law Council of Australia), 28 (Slater and Gordon Lawyers).

     ↑

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

     ↑

193. Submission 10 (Victorian Legal Services Board and Commissioner).

     ↑

194. Submission 12 (Allens).

     ↑

195. Submission 4 (Chartered Accountants Australia and New Zealand).

     ↑

196. Submission 22 (Dr Michael Duffy). The standard form document would be analogous to that prescribed for insurance contracts in s 33D of the Insurance Contracts Act 1984 (Cth). While endorsing the provision of standard key facts, the Commission considers that any statutory requirement to disclose should be imposed under a national regulatory scheme.

     ↑

197. Submission 11 (Litigation Funding Solutions).

     ↑

198. Submission 25 (IMF Bentham Ltd).

     ↑

199. Submissions 11 (Litigation Funding Solutions), 13 (Maurice Blackburn Lawyers), 14 (LCM), 15 (Phi Finney McDonald), 17 (Adley Burstyner), 21 (Law Council of Australia), 22 (Dr Michael Duffy). The US Chamber Institute for Legal Reform proposed disclosure requirements as part of a comprehensive regulatory regime for the litigation funding industry: Submission 19.

     ↑