Law | Australia

16 February 2022

The government’s new policies on litigation funding and class actions are causing regulatory chaos and will deprive ordinary Australians of fair legal representation, Andrew Watson writes.

For the last 18 months, the federal government has waged a sustained campaign against class actions and litigation funding.

Through a series of legislative interventions it has created regulatory chaos and will restrict the ability of everyday Australians to gain access to justice by restricting litigation funding.

Rather than adopt the recommendations of three separate, independent inquiries conducted by the Australian Law Reform Commission (ALRC), Productivity Commission, and Victorian Law Reform Commission, it has set out about enacting a series of its own reforms which will come at the expense of ordinary Australians.

The Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021, currently before the Senate, seeks to impose a series of restrictions on how litigation can be funded.

While it promises to ensure greater returns to members of a class action, its actual outcome will be to reduce the number of cases which receive litigation funding. This ensures, in effect, that some victims of egregious corporate or government misconduct will be unable to pursue compensation.

In particular, it creates confusion regarding the availability of common fund orders.

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The Bill’s apparent intent is to restrict litigation funding to only class action members who sign a funding agreement. Previously, a court could allow for a common fund order to be in place, where lawyers could commence proceedings with some confidence that the court could rule all members of a class action would be required to contribute to its costs.

The option of a common fund order has seen litigation funding become available for worthy cases which had previously struggled to get funding.

Before common fund orders were an option, shareholder class actions were the predominant focus of litigation funders. Once common fund orders were an option, it became possible to bring cases that carried more risk, or a lower overall financial outcome, to the courts if their cause was important.

It meant those ripped off by financial institutions, First Nations peoples who had had their wages stolen, Indonesian seaweed farmers affected by an oil spill, and other small groups of worthy claimants could take legal action.

The competition of common fund orders also drives a significant drop in funding commissions – or the proportion of compensation from a class action goes to the lawyers who helped secure it. In 2017-18, third-party funded rates sat routinely north of 30 per cent, while the median rate for common fund order funded class actions was roughly 22 per cent.

By stipulating that only members who have signed up to a funding agreement can fund action, the Bill will restrict access to justice by ensuring that some meritorious cases simply do not obtain funding because their members are apt not to sign up to a funding agreement.

Even in those cases which do obtain funding, those who do not sign will be excluded from the action, and these are often the most disadvantaged in the group, who are in most in need of redress.

It will also increase transaction costs, because these will be spread across a smaller pool of claimants, and finally it will encourage multiple proceedings over the same matter, often involving multiple closed groups who signed onto funding agreements with different firms, followed by larger ‘mop up’ cases of open groups.

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The Bill also contains a presumptive 30 per cent cap on commission fees, which is likely to have a particularly noxious effect. Whilst is ostensibly guarantees class members a minimum proportion of any settlement, its practical effect will be to deter the funding of worthy claims on financial grounds.

If the Bill passes, litigation funders will be forced to go back to only funding very large, sure cases – for the most part shareholder claims.

Smaller, riskier, or more difficult cases will simply not get funding. In the end, everyday Australians who have been ripped off or harmed by corporations or governments will be denied redress because they won’t be able to get the funding to support their claims without a common fund order.

In those cases which do get funding, defendants will have every incentive to needlessly run up costs in a ‘war of attrition’ that will ensure cases are determined by financial resources rather than justice and fairness.

If it is really concerned about the costs faced by members of class actions, the government has other options. For one, it could improve outcomes for class action participants by facilitating competition in the provision of funding.

Instead of pursuing these reforms, it should adopt the Australian Law Reform Commission’s recommendations and legislate to confirm the capacity of courts to make common fund orders and introduce contingency fees.

Allowing lawyers to charge contingency fees – where legal costs are funded through a percentage of the amount recovered by the litigation – has also been shown to return more to the pockets of class action members, with law firms seeking such arrangements in the Supreme Court of Victoria for 25 per cent and below, lower than the proposed cap in the government’s Bill.

As it stands, the Bill instead proposes interfering with freedom of contract, introducing price controls, and giving legislation power that should be within the jurisdiction of the courts. This will both reduce competition and restrict litigation finances, even for worthy cases.

Ultimately, it is competition which will produce lower fees and better outcomes for class action members, rather than this Bill, which is ham-fisted regulation.

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