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Litigation funding in the spotlight

Litigation funding in the spotlight

By VLRC

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Inquiry terms of reference raise the question of lifting the ban on law firms charging contingency fees.

Litigation funders reduce the financial risk to plaintiffs if the litigation fails. They typically cover the plaintiff's legal costs if they lose, plus adverse costs, in return for a share of the recovered amount if they win. Group proceedings – or class actions – provide a cheaper and more efficient means of obtaining redress than individual actions and are often funded by litigation funders. Class actions have been available in Victoria under part 4A of the Supreme Court Act 1986 (Vic) since 2000.

For centuries, the common law crime and tort of maintenance and champerty made it illegal to provide financial assistance to a party in civil proceedings without lawful justification, and to be rewarded for doing so by receiving a share of the proceeds. The aim was to prevent the legal system from being subverted by someone who is not a party to the proceedings and has a financial interest in achieving a particular result.

Although they were largely abolished in Victoria by the Abolition of Obsolete Offences Act 1969 (Vic) – and in the other Australian jurisdictions – they continued to apply in two significant ways. First, a contract could still be treated as contrary to public policy or illegal on the ground that it was in aid of maintenance or champerty. This put in doubt the legality of any financial agreement between a third party funder and a litigant to assist the litigation in return for reward. Second, lawyers continued to be prohibited from charging contingency fees, as they still are today.

Litigation funders were given a capacity to operate by a decision in 1996 by the Federal Court. In Movitor Pty Ltd v Sims,1 the Court found that a third party could fund legal action by a liquidator on behalf of insolvent companies and individuals, notwithstanding the public policy against maintenance and champerty. This decision allowed commercial litigation funders to raise capital to provide funding to insolvency practitioners, and insolvency matters continue to represent a large part of the market for litigation funding.

Investment by litigation funders in class actions increased significantly after the 2006 High Court decision in Campbells Cash & Carry Pty Ltd v Postif Pty Ltd.2 By majority decision, the Court held that there had not been an abuse of process when a litigation funder sought out claimants to participate in representative proceedings under NSW Supreme Court Rules and gave instructions for the conduct of the litigation.

The involvement of the litigation funding industry in class actions has enabled them to be viable. Few law firms have the capacity to conduct class actions without external funding. The financial risk to the representative plaintiff in class actions, and to the law firm, has been identified as a reason for a decline in class actions, which were at their lowest level in 2000-2004. Today, litigation funders finance almost half the proceedings filed under the Commonwealth's class action regime, although they have been less involved in class actions under Victoria's class action regime. Of the 80 class actions filed in Victoria since part 4A of the Supreme Court Act came into effect, only 10 have involved litigation funders.

Litigation funders fund low risk, large-scale litigation that is likely to generate a good return on their investment. Most of the class actions with which they are involved are claims by shareholders and investors. Matters where the claimants do not seek substantial damages, or which have a social justice objective rather than a financial one, tend to be financially supported by lawyers working pro bono or on a "no win, no fee" basis.

At the core of the terms of reference is the enduring concern to ensure that the interests of the litigants are protected and given priority in proceedings funded by litigation funders and in class actions.

Conflicts of interests can arise, particularly in class actions, due to the tripartite relationship between the litigation funder, the plaintiff's lawyer and the plaintiff. There is lack of transparency in how the relationship in each case operates, and it is difficult for class members to know how the financial arrangements between the litigation funder and the lawyer affect the distribution of the proceeds if the litigation is successful.

The terms of reference set out possible reforms to improve transparency and efficiency, and raise the question of whether lifting the ban on law firms being able to charge contingency fees would help to mitigate the issues presented by the practice of litigation funding.

The VLRC has held preliminary consultations with academics, litigation funders, lawyers and the Supreme Court among others. The VLRC welcomes comments and submissions until 22 September 2017 from people who have participated in relevant matters. However, individual cases will not be assessed. Make a submission online at www.lawreform.vic.gov.au.

This column is contributed by the VLRC. For further information ph 8608 7800 or see www.lawreform.vic.gov.au.

1. (1996) 54 FCR 380.

2. (2006) 229 CLR 386.

Snapshot

  • The Attorney-General has asked the VLRC to report on issues concerning access to justice by litigants who seek to enforce their rights using the services of litigation funders and/or through group proceedings.
  • The VLRC has published a consultation paper and is calling for submissions.
  • The focus of the inquiry is on access to justice and specifically ensuring that litigants are not exposed to unfair risks or disproportionate cost burdens.

Disclaimer: Views expressed by commentators are not necessarily endorsed by the Law Institute of Victoria Ltd (LIV). No responsibility is accepted by the LIV for the accuracy of information contained in the comments and the LIV expressly disclaims any liability for, with respect to or arising from any such views.

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