Litigation funders advance money to a plaintiff or class of plaintiffs to cover their legal costs in exchange for a percentage of any judgment sum obtained or settlement amount reached if the case is successful. This is a relatively unregulated industry, but change is afoot.

In this month’s issue, Fiona Trime and Mike Dudman from our Sydney office take a closer look at the funding of litigation in Australia and where it’s headed.

Background

Despite historical scepticism toward funders of litigation, the common law doctrines of maintenance and champerty prohibiting profiteering from litigation were abolished in New South Wales by The Maintenance, Champerty and Barratry Abolition Act1993 (NSW). The Act constituted a turning point for class actions and insolvent litigants, as did the High Court’s decision in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd  (2006) 229 CLR 386, which confirmed the Court’s view (at [432-433]) that litigation funding was neither an abuse of process nor contrary to public policy.

Litigation funding has since become big business in Australia. Already a global phenomenon, a recent increase in Australian companies funding international suits has also led the industry to

being dubbed an “Australian export” (Michael Legg et al, ‘The Rise and Regulation of Litigation Funding in Australia’ (2011) 38 Northern Kentucky Law Review626,629).

Notwithstanding the apparent Court approval for such schemes, concerns have been raised regarding appropriate levels of regulation required to ensure that litigation funding does not undermine the objectives of litigation and the Court’s process.

Why Regulate?

In response to criticisms of the sector, by 21 December 2018 the Australian Law Reform Commission will deliver a Report to the Attorney General following its inquiry into class actions and third party litigation funders:

The extent to which litigation funders should be subject to regulation and the extent of any conflicts of interest between litigation funders and plaintiffs, are a key focus of the inquiry.

This conflict issue was recently highlighted in proceedings in the Supreme Court of New South Wales: In the matter of Legal Practice Management Group Pty Ltd, nSynergy Pty Ltd, nSynergy International Pty Ltd [2018] NSWSC 527 (27 April 2018). In these proceedings, the Court went to great lengths to consider the conflict between a term of a litigation funding agreement and a Plaintiff’s obligations under s56 of the Civil Procedure Act 2005 (NSW) (“Act”). That term purported to provide the funder the right to give day-to-day instructions to the Plaintiff’s solicitors and to make binding decisions on behalf of the Plaintiff in relation to any matter relating to the proceedings. The Court recognised a potential conflict with s56 of the Act, which imposes on a party to civil proceedings a duty to assist the court to further its overriding purpose – to facilitate the just, quick and cheap resolution of the real issues in the proceedings. A further potential conflict arose with r 3.1 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, which provides that a solicitor’s duty to the Court and the administration of justice is paramount and prevails to the extent of inconsistency with any other duty. The Court was ultimately persuaded in nSynergy that a parties’ obligations to the Court overrode its contractual obligations to a funder.

Other authorities provide litigation funders avenues to argue that obligations already imposed by the Courts and legislation effectively regulate the industry. In Jeffrey and Katauskas Pty Limited v SST Consulting Pty Limited (2009) 239 CLR 75, it was established that a third party litigation funder was under no obligation to ensure that a litigant they funded was able to meet an adverse order for costs. This was supported by Rule 42.3 of the Uniform Civil Procedure Rules 2005 (NSW) preventing orders for costs against non-parties. This rule has since been repealed, allowing the New South Wales Supreme Court to use its discretion under s98 of the Act.

The Victorian Court of Appeal considered this discretion in detail in Carter v Caason Investments Pty Ltd [2016] VSCA 236, holding that, if a litigation funder “was not merely a passive funder but by reason of what it stood to gain, the funder could properly be characterised as a party to the proceeding”, it should utilise its discretion under s98 of the Civil Procedure Act to order costs against the funder.

The provision of security for costs by third parties for potential adverse cost orders has recently been considered by the Courts in cases such as Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited [2017] FCA 699. In this case, the Federal Court considered the adequacy of an “After The Event”(ATE) insurance policy offered by the funder (a policy insuring against an adverse costs order) as security for costs in the amount of $578,000. The Court ultimately determined that such a policy could, in principle, provide such security but that the policy in question provided insufficient security: the funder having no assets within Australia.

This issue also was discussed in DIF III Global Co-Investment Fund LP & Anor v BBLP LLC & Ors [2015] VSC 484, where the Court held that a proposed deed of indemnity should include a provision submitting to the jurisdiction in which the proceedings are taking place. It was noted in this case that although payment of cash or a bank guarantee was the preferred form of security, the Court’s primary concern was that justice was unfettered by the requirement to provide security. This was echoed by the Court in Australian Property Custodian Holdings Ltd (In Liquidation) v Pitcher Partners (a firm) & Ors [2015] VSC 513 in which it was held that, providing the object of security was achieved, its form should be that which is least disadvantageous to the plaintiff.

As it stands, applications for security for costs imposed on a third party funder are dealt with on a case by case basis by the Courts. The nature of Court-ordered security for costs are, however, potentially problematic for a plaintiff of a class action suit. Although security provided by a litigation funder might cover the legal costs incurred by the defendant of the proceedings, they do not necessarily extend as far as guaranteeing the legal costs of the plaintiff without an ATE policy in place.

Licencing on the Way

As such, the Australian Legal Reform Commission has raised important questions to be answered in their report concerning the potential regulation of litigation funders.

The ALRC’s discussion paper into litigation funders has proposed the introduction of a licence for litigation funders, incorporated into the Corporations Act (2001) (Cth). One proposal is that funders undergo an annual audit as part of their licenced obligations, ensuring that the funder has met and continues to meet license conditions.

It is envisaged that the introduction of license requirements would ensure that litigation funders operating within Australia are reputable and financially capable of meeting obligations made to clients and the Court.  It has been argued that, as there are no current licensing requirements imposed upon litigation funders, there are currently no minimum standards to be met. The introduction of regulated standards would be advantageous to the clients they serve – securing payment of their legal costs – and to defendants in situations where security for costs is ordered.
The Courts’ willingness to grant orders for security for costs against third party funders has been influential in the argument against a regulatory scheme for litigation funders.  In their submissions to the Victorian Law Reform Commission, Slater and Gordon suggested that the Courts’ involvement in ensuring that an acceptable form of security is provided is sufficient protection for defendants from potentially unrecoverable costs orders as well as plaintiffs in ensuring the funder’s ability to pay the defendant’s legal costs.

The outcomes of the Australian Law Reform Commission’s Inquiry are being cautiously welcomed by the established funders in Australia, as it appears some regulation is not only likely but also needed.

Stay tuned for our report on the Inquiry’s findings in early 2019.