4. Disclosure to plaintiffs

 

Introduction

  1. 4.1 Litigation, by its very nature, is risky, uncertain and complex. Disclosure by lawyers to their clients about the costs, likely progress and possible outcomes of litigation ensures that the client is able to make a fully informed decision as to whether pursuing litigation is in their best interests.
  2. 4.2 In a typical lawyer–client relationship, this information will either be set out in the legal retainer and costs agreement signed between the lawyer and the client, or disclosed to the client prior to the commencement of proceedings. The client will consent to all matters set out in the retainer and will be informed of material changes to them throughout the course of the relationship.
  3. 4.3 Similar disclosure obligations apply in proceedings financed by a litigation funder (funded proceedings). The lawyer must give the plaintiff an estimate of the legal costs and disclose any conflict of interest. The litigation funder must disclose how conflicts of interest in funded proceedings will be managed.
  4. 4.4 The problem is that in funded proceedings—and particularly in class actions—disclosures made at the start of proceedings in a litigation funding agreement or legal retainer are unlikely to provide the necessary information that all class members need in order to make a fully informed decision about their participation during the proceedings. This is due to the following factors:
  • The way in which costs arise and accrue in funded proceedings is complex. Disclosure of estimated costs at the commencement of proceedings may not accurately reflect the amount that is actually deducted from any judgment or settlement amount. In funded proceedings, 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 may also hold a contractual entitlement to increase the rate in particular circumstances, such as where 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.
  • In a class action, different legal costs may apply to different sub-groups of the class, depending on the claims to be determined at settlement.1 Where a settlement distribution scheme is particularly large or difficult, additional legal costs may be incurred which were not expected at the outset. Discretionary court orders at settlement, such as common fund orders, may also mean that class members receive different amounts to those originally disclosed.
  • In a class action, disclosures to class members who have entered a funding agreement (funded class members) 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. In an open class action, the class is likely to include members who have not entered a funding agreement (unfunded class members) as well as those who have. As discussed in Chapter 7, if the court makes a common fund order or a funding equalisation order, unfunded 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 to both funded and unfunded class members is therefore necessary and appropriate to enable them to make informed decisions about their participation.
  1. 4.5 The effectiveness of disclosure depends not only on the information being given, but also the form in which it is given. The clarity of language, how widely the information is disseminated, the period provided for response, and the ease or accessibility of response options can all affect how well the information is conveyed.2 If information is disclosed in complex and lengthy contracts or notices, it is unlikely to be comprehensible to plaintiffs lacking legal knowledge or legal assistance.3
  2. 4.6 The Commission has been asked to report on whether clearer disclosure requirements should be imposed on litigation funders and lawyers who represent funded plaintiffs about the progress, costs and possible outcomes of proceedings. The term ‘funded plaintiff’ refers to an individual plaintiff—either a person or an entity—who has entered into a funding agreement with a litigation funder to finance a claim against a defendant. In class actions financed by a litigation funder, the ‘funded plaintiff’ is referred to as the ‘funded class member’.
  3. 4.7 This chapter discusses funded proceedings at three separate stages: the commencement of proceedings; during proceedings; and after judgment or settlement. For each stage, it assesses the type and form of disclosure necessary to ensure plaintiffs are adequately informed about the evolving progress, costs and possible outcomes of proceedings.
  4. 4.8 While this chapter focuses on disclosure obligations in class actions, the Commission is also interested in whether clearer disclosure obligations should apply in proceedings other than class actions where a litigation funder is involved. As discussed in Chapter 2, litigation funders finance other types of proceedings, notably insolvency, commercial and contractual disputes, intellectual property and estates.

Commencement of proceedings

  1. 4.9 By the time funded proceedings commence, the litigation funder and the law firm will have entered into contractual arrangements with each other, as well as individually with the plaintiff. In a class action, notice must be given to class members at various points of proceedings, including at commencement. The form and content of such notices must be approved by the court.4
  2. 4.10 Court-approved notice is also used to inform the public that proceedings have been commenced against the defendant. Eligible persons will generally be invited to either register for the class action or opt out of proceedings in this notice.
  3. 4.11 Excluding the disclosure of information that is material to the individual proceedings, the information that the litigation funder and lawyers must provide to plaintiffs at this stage, either in the contract or by giving notice, can be classified into two broad categories:
  • disclosure of the expected costs of the proceedings
  • disclosure about the relationship between the lawyer and the litigation funder.

Expected costs

  1. 4.12 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 tell their clients5 what they expect the legal costs to be. Their legal costs must be fair, reasonable and proportionate.6
  2. 4.13 Schedule 1 of the Legal Profession Uniform Law Application Act 2014 (Vic) (the Uniform Law), sets out the following duties of disclosure:
  • Lawyers must provide a written estimate (or range of estimates) of total legal costs and be satisfied that the client has understood and given consent to the proposed costs.7
  • Costs information must include information about the client’s right to negotiate a costs agreement or billing method, to request an itemised bill, and to seek the assistance of the designated local authority in the event of a dispute.8
  • Costs information must be provided on an ongoing basis and enable clients to make informed choices about costs and legal options.9
  • Any conditional costs agreement must be disclosed in plain language, and a ‘no win, no fee’ agreement must disclose an estimate of total costs, as well as details of disbursements, uplift fees, and responsibility for any adverse costs.10
  1. 4.14 Costs information must be given when, or as soon as practicable after, instructions are initially given in a matter. This is an ongoing obligation, which applies to the duration of the retainer.11
  2. 4.15 Contract law requires a litigation funder to disclose material terms in a litigation funding agreement, which includes disclosure of the funding fee and any other charges that may accrue during proceedings. Unlike lawyers, however, litigation funders are not under any additional disclosure obligations in relation to these fees, such as disclosure of the basis upon which these fees are charged, or estimated total amounts of charges.
  3. 4.16 Lawyers’ disclosure obligations under the Uniform Law are reinforced by the court’s power to require them to give further information to their clients. Under the Civil Procedure Act 2010 (Vic) the court may, at any time in a proceeding, order a lawyer to disclose certain matters in a memorandum to their client, which may include:
  • the actual costs and disbursements incurred in relation to the proceeding or any part of the proceeding
  • the estimated costs and disbursements in relation to the proceeding or any part of the proceeding
  • the estimated costs that the party would have to pay another party if the claim is unsuccessful at trial
  • the estimated length of the proceeding or any part of the proceeding.12
  1. 4.17 Even though the disclosures that are, or may be, required of lawyers are comprehensive, they focus on legal costs and disbursements typically involving a single client. They do not expressly indicate how costs disclosures are to be made to multiple class members in a class action.13 Further, in funded proceedings, it is the litigation funding fee that generally represents the largest single amount deducted from the settlement or judgment.14 The disclosure of isolated legal costs by their lawyer may still leave the plaintiff ill-informed about the cumulative impact of these costs and of the fees and charges that are not included.
  2. 4.18 Therefore, in Victoria there is a gap in the disclosure obligations with which lawyers must comply, and in the court’s express powers to order disclosure to plaintiffs about costs in funded proceedings, and particularly class actions. Lawyers are not expressly required to disclose information to the plaintiff about the funding fee and associated costs at the commencement of funded proceedings.
  3. 4.19 In contrast, the Federal Court has issued a practice note that requires lawyers to disclose more detailed and comprehensive information, including about the litigation funding charges, in class actions. This is discussed in the next section.

Federal Court practice

  1. 4.20 In its report Managing Justice (2000), the Australian Law Reform Commission recommended that the Federal Court consider drafting guidelines addressing the procedures to be followed to ensure that fair costs agreements exist between class members and lawyers in class actions.15
  2. 4.21 The Federal Court’s Class Actions Practice Note sets out how lawyers should disclose their legal costs and any ‘litigation funding charges’ to current (and potential) clients in class actions.16 Litigation funding charges include any funding fee and any other charges (including those estimated) to be charged to class members.
  3. 4.22 The Federal Court Practice Note specifies a number of requirements for lawyers when discharging these obligations:
  • The costs agreement and litigation funding agreement must be in writing.
  • Any notification of the legal costs or 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 these costs.
  • Failure to notify class members of the legal costs and 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 a document that properly discloses those charges.
  • When notifying class members of legal costs, the applicant’s lawyers should provide information about the different categories of legal costs in a class action, and the different situations in which class members may be required to meet a share of unrecovered costs under the Federal Court Act 1976 (Cth).17
  1. 4.23 Similar obligations do not appear to apply to other types of proceedings in which litigation funders are involved.

 

Disclosure about the litigation funder and lawyer

  1. 4.24 As outlined in Chapter 3, a tripartite relationship is created in funded proceedings between the funded plaintiff, the lawyers and the litigation funder. It is widely accepted that conflicts of interest can arise within this relationship.
  2. 4.25 Lawyers and litigation funders are under a duty to disclose these conflicts of interest when entering into contractual arrangements with a plaintiff. It is important that the plaintiff is also kept informed about how actual or potential conflicts of interest are to be managed during proceedings.
  3. 4.26 These issues, and reform options to reduce or remove the risk that lawyers are exposed to conflicts of interest when involved in funded proceedings, are discussed in Chapter 3.

During proceedings

Expected costs

  1. 4.27 The obligation on lawyers under the Uniform Law to provide costs information continues to apply during the proceedings and throughout the course of the relationship. In class actions commenced in the Federal Court, the obligation applies to information about litigation funding charges as well as legal costs and disbursements.18

Progress and outcomes

  1. 4.28 As discussed in Chapter 3, lawyers and litigation funders involved in proceedings are subject to overarching statutory obligations that aim to facilitate the ‘just, timely and cost effective resolution of the real issues in dispute’.19 They include obligations to use reasonable endeavours to resolve the dispute, narrow the issues in dispute and minimise delays.20 These obligations reinforce the court’s role in case management.
  2. 4.29 In class actions, the Supreme Court of Victoria has specified a number of procedural steps that it will use to supervise progress. These steps are set out in a general practice note for class actions (Supreme Court Practice Note) and include: case management conferences; procedures required for interlocutory applications, summary judgment or trial of common questions and settlement.21 These procedural steps generate activity and produce information about progress and likely outcomes that is available to both plaintiffs and defendants.
  3. 4.30 Because of the uncertain and risky nature of litigation, proceedings may not progress at the rate or in the manner expected when they began. It is important to keep plaintiffs informed of the legal progress of the litigation, actual and expected costs and the likely outcomes.
  4. 4.31 In class actions, keeping class members informed of these matters is particularly important for opt out purposes. The opt out model was adopted in Australian class actions as a means of protecting class members’ interests.22 In order for it to provide meaningful protection, class members must be informed of what they are opting out of. Unless they are adequately informed of the evolving progress, costs and likely outcomes during a class action, their ability to make a fully informed decision in choosing to opt out or remain part of proceedings is reduced.
  5. 4.32 In class actions, two methods of notification are typically used to inform class members about the progress of proceedings:
  • Informal notification. Informal methods of communicating with class members about the progress and outcomes are currently used on a case-by-case basis during proceedings. The Supreme Court Practice Note provides that communication with unrepresented class members should be addressed by parties at the first case management conference or by application as required. Application can also be made for a court order in relation to how communication with class members should be undertaken.23 Typically, the representative plaintiff’s lawyers and the Supreme Court will publish updates and other information about the class action on websites. The representative plaintiff’s lawyers will also keep class members updated about the progress of proceedings via other electronic means, or through other methods such as advertisements or media releases. Where class members include vulnerable persons—being those disadvantaged by socio-economic, health, psychological and/or intellectual barriers—lawyers have had to adopt creative methods for making and maintaining contact with them and communicating complex legal concepts in a meaningful way.24
  • Formal notification via Court-approved notice. Formal Court-approved notice must be given at various points of proceedings, including at commencement and prior to the opt out date, upon application for dismissal of proceedings or settlement of individual claims by the representative plaintiff and prior to settlement approval.25 The Court has the power to order that notice be given to class members of any matter at any stage of proceedings.26
  1. 4.33 Both the form and content of formal notices are approved by the Court.27 The Supreme Court Practice Note provides some guidance regarding the content of settlement notices, which are discussed in Chapter 7. The form of the opt out notice is prescribed by the Supreme Court (General Civil Procedure) Rules 2015 (Vic).28 The Court must not order that notice be given personally to each class member unless it is satisfied that it is reasonably practicable, and not unduly expensive, to do so.29
  2. 4.34 Formal notice provisions are important in ensuring all class members (both funded and unfunded) are kept informed of issues which may affect their rights and interests. While informal methods of notification are useful, they may be limited in reach to identified class members, or those who are familiar with the details of proceedings. In attempting to reach all potential class members, it is appropriate and necessary that formal notice be mandatory and that the Court supervise the form and content of these notices.
  3. 4.35 Although formal notices convey information that the class member needs to know and understand when making a decision that affects their interests, they do not necessarily do this well. Justice Murphy commented on this problem in Kelly v Willmott Forests Ltd (in liq) (No 4):

The notices are lengthy and not straightforward for a non-lawyer to understand. I mean no criticism of the parties in this regard as the task of combining information about class member registration, security for costs and the right to opt out in one notice was not without difficulty.30

  1. 4.36 Since 2010, the Federal Court has provided a sample opt out notice written in plain English with the Federal Court Practice Note for class actions. The latest version of the practice note explains, in non-technical language, what class actions and opt out mean, the class members’ rights and obligations, and what class members must do to either opt out of or remain in proceedings.31
  2. 4.37 Where a class action involves vulnerable persons, the courts have demonstrated a willingness to adopt special practices regarding notification to ensure all class members are provided with notice in an accessible and comprehensible format.32
  3. 4.38 For example, in Gagarimabu v BHP33 the Supreme Court of Victoria ordered that opt out notice be communicated to class members in more than one language orally, in writing, in newspapers, by radio broadcast and through village meetings.34
  4. 4.39 In all cases, the notices to class members need to be clear. Despite the use of sample notices by trial judges in the Federal Court, evidence suggests that class members are still having difficulty comprehending the purpose and content of the notice.35
  5. 4.40 In Money Max, the Federal Court noted that most of the class members who filed an objection seemed to have misunderstood the nature and purpose of the notice.36 Upon assessing class members’ comprehension of the meaning and significance of opt out notices under the Commonwealth class action regime, Professor Vince Morabito found a ‘total misunderstanding’ by some of the essential characteristics of class action litigation and the opt out device.37

After judgment or settlement

  1. 4.41 Typically, funded proceedings will end in settlement or judgment, which determines both the liability of the defendant and the compensation, if any, to be received by the plaintiff. For the litigation funder, settlement or judgment is the point at which their funding fee is determined. Once this has been settled and paid, they have no further involvement in the action.

Settlement distribution schemes

  1. 4.42 In class actions, however, settlement or judgment does not represent the end of the lawyers’ obligations. The settlement or judgment amount must still be divided up and paid to participating class members. The purpose and mechanics of settlement distribution schemes are discussed in detail in Chapter 7. The present discussion relates only to disclosure of the progress, costs and possible outcomes of settlement distribution schemes to class members.
  2. 4.43 The disclosures made to class members during settlement distribution schemes have been the subject of recent media criticism in Victoria, particularly in relation to the settlement money for victims of the 2009 bushfires.38 Currently, there is no provision in part 4A or in the Supreme Court Practice Note setting out disclosure requirements during a settlement distribution scheme.
  3. 4.44 The Court may play a supervisory role in ensuring that adequate disclosure is made to class members during this stage. During the settlement distribution scheme for the Kilmore East and Kinglake Bushfires trials, the Court had a role in overseeing:
  • the progress of the claims assessment process
  • issues raised by the scheme administrator that required court direction or approval
  • keeping class members informed
  • approval of interim payments of the administrators’ costs.39
  1. 4.45 In particular, Justice Forrest observed (extra judicially):

The other point worth mentioning, and unrelated to those I have just set out, was the need to hold regular CMCs [case management conferences] and publish ‘rulings’ to keep the process under review and ensure group members were apprised of the progress of the SDS [settlement distribution scheme]. Evidence at the CMCs was given both on affidavit and viva voce by the scheme administrator and on one occasion by the special referee. Each of the SDS rulings was published on an easily accessible part of the Court website dedicated to the Black Saturday bushfire cases.40

  1. 4.46 The Federal Court Practice Note has been amended to provide some guidance for Court supervision of settlement distribution schemes. Particularly, the affidavit(s) in support of an application for Court approval of settlement requires a statement of:
  • the time at which it is anticipated settlement funds will be received by class members
  • the frequency of any post-approval report(s) to be provided to the Court about the distribution of settlement funds.41
  1. 4.47 The Federal Court also requires the scheme administrators (the lawyers) to advise the Court at regular intervals of the performance of the settlement (including any steps in the settlement distribution scheme) and the costs incurred in administering the settlement in order that it may be satisfied that distribution of settlement monies to the applicant and class members occurs as efficiently and promptly as practicable.42

Reform options

  1. 4.48 This chapter has identified a number of gaps in the information provided to plaintiffs by lawyers and litigation funders about the costs, progress and possible outcomes at various stages of funded proceedings. These gaps mean that plaintiffs involved in funded proceedings may not obtain the information necessary to make a fully informed decision as to whether involvement in litigation is in their best interests. The Commission would welcome suggestions about procedural, regulatory or other reforms that would reduce the risk of this occurring.
  2. 4.49 A starting point would be to draw on the measures introduced by the Federal Court in class actions. For example, reforms could be introduced to:
  • Expressly require lawyers to disclose litigation funding charges at the commencement of, and during, proceedings. This would be in addition to the existing requirement to keep their clients informed about their own legal costs and disbursements. It is unclear whether such a requirement, if introduced, should apply only in funded class actions or in all proceedings financed by a litigation funder.
  • Improve the informal and formal notice given to class members about progress and outcomes during proceedings by creating standardised examples that lawyers could adapt, or by issuing guidelines on how to communicate with both funded and unrepresented class members.
  • Provide guidance for lawyers about disclosures to plaintiffs during settlement distribution schemes, including what information should be provided and in what form.

Questions

  1. 6 In funded class actions, should lawyers be expressly required to inform class members, and keep them informed, about litigation funding charges in addition to the existing obligation to disclose legal costs and disbursements?
    If so, how should this requirement be conveyed and enforced?
  2. 7 In funded proceedings other than class actions, should lawyers be expressly required to inform the plaintiff, and keep them informed, about litigation funding charges in addition to the existing obligation to disclose legal costs and disbursements? If so, how should this requirement be conveyed and enforced?
  3. 8 How could the form and content of notices and other communications with class members about progress, costs and possible outcomes be made clearer and more accessible?
  4. 9 Is there a need for guidelines for lawyers on how and what they communicate with class members during a settlement distribution scheme? If so, what form should they take?

 

Footnotes

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