1. Scope of the reference
Referral to the Commission
1.1 The Attorney-General, the Hon. Martin Pakula MP, has asked the Victorian Law Reform Commission (the Commission), under section 5(1)(a) of the Victorian Law Reform Commission Act 2000 (Vic), to report on a number of issues concerning access to justice by litigants who seek to enforce their rights using the services of litigation funders and/or through group proceedings.
1.2 The terms of reference are set out on page x.
1.3 The referral was made by letter dated 16 December 2016 and publicly announced on 16 January 2017.
1.4 The Chair of the Commission has exercised his powers under section 13(1)(b) of the Victorian Law Reform Commission Act to constitute a Division to guide and oversee the conduct of the reference. Joining him on the Division are: Helen Fatouros; His Honour David Jones AM; Alison O’Brien; and the Hon. Frank Vincent AO QC.
Terms of reference
Access to justice
1.5 The full title of the reference is Access to Justice—Litigation Funding and Group Proceedings. The first three words establish the focus of the Commission’s approach.
1.6 Access to justice is a broad concept that means different things in different contexts. In general terms, it is the extent to which those who seek to enforce their rights are able to use the legal system to obtain an outcome by means of a fair and open process.
1.7 For the purposes of this reference, it refers both to access to the legal system and to a fair and just outcome.
1.8 A variety of factors can prevent access to justice. They can be features of the way the justice system is designed and how it operates; they can arise from legal procedure; some are caused by the complexity of the law; others reinforce economic, social, cultural and geographic disadvantage within the wider community. Whether in practice they prevent access to justice differs from one individual to the next, though it is clear that, across the community, there are barriers to be overcome.
1.9 Often there is a disparity between the resources available to the parties, which manifests as unequal bargaining power. This is particularly evident when one of the parties is a well-resourced and repeat user of the legal system, such as a government agency or large corporation, and the other is a member of the public with no prior experience. Victoria Legal Aid has observed:
For many Victorians, access to justice is illusory. Interactions in the justice system often occur in circumstances where there is a significant power imbalance—be it with the state, powerful corporations or other individuals. Our system is one where a person’s ability to access a fair outcome and due process is often predicated on the financial and personal resources at their disposal.
1.10 The terms of reference concern two features of the legal system that can reduce the cost barrier and financial risk of litigation and offset any imbalance of power between the parties: the services of commercial litigation funders and the legal mechanism of group proceedings.
1.11 Litigation funders remove the financial risk by indemnifying plaintiffs for all costs if they lose, in return for a share of the award if they win. Group proceedings enable plaintiffs who have claims arising out of the same, similar or related circumstances to spread the risk and costs—and the award if successful—among the group members.
1.12 The types of case covered by the terms of reference commonly attract media attention and public debate. They often concern the actions of a well-known defendant, and the harm caused is shared by many people. Progress in resolving the matter may be seen as too slow. When a case is resolved, the outcome may be seen as inadequate or unfair. Recently, for example, there has been controversy about:
• payment of about $3 million of a $23.5 million settlement to thousands of investors in failed plantations group Great Southern, the remainder being used to pay legal fees
• an expected tax of about $20 million on the interest accrued on settlement money for victims of the 2009 bushfires
• the amount for which the Murrindindi–Marysville fire class action settled, and how it is being distributed among the 5800 claimants
• the allocation of the full amount that was awarded to pay the entitlements of former employees of Huon Corporation to meet the litigation funder’s fee, legal fees and the administration and other costs of bringing the legal action on their behalf.
1.13 While the Commission welcomes comments from people who have participated in group proceedings, whether as group members, parties, or in a professional capacity, individual cases will not be reviewed or assessed. The focus of the terms of reference is on system-wide issues and possible reforms.
1.14 The terms of reference ask the Commission to report on three principal matters:
1) 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.
2) Whether removing the existing prohibition on law firms charging contingency fees would assist to mitigate the issues presented by the practice of litigation funding. (If it were removed, lawyers, like litigation funders, could be paid an agreed share of the funds recovered from settlement or judgment if the claim is successful.)
3) Whether there should be further regulation of group proceedings (often called class actions).
1.15 In preparing the report, the Commission is asked to consider, among other matters, the implications of any reforms for the workload and requirements of the Supreme Court of Victoria; and relevant provisions and potential reforms in other jurisdictions.
1.16 The Commission will not be reviewing the regulation of the litigation funding industry. Rather, it will be examining the impact that the commercial decisions of litigation funders are having on access to justice—and especially on the access that the introduction of group proceedings was intended to provide.
1.17 ‘Litigation funding’, as used in the terms of reference and in this paper, refers to an arrangement between a commercial litigation funder and one or more potential litigants to pay the costs of the litigation in return for a share of the award if the claim succeeds. This type of arrangement is also known as ‘third-party litigation funding’ and ‘third-party financing’ because the litigation funder is a commercial entity that does not represent the litigant and has no other interest in the litigation.
1.18 The term does not refer to the financing of legal claims by another third party, such as a government agency or an insurer, or by the plaintiff’s lawyer working pro bono or under a ‘no win, no fee’ cost agreement. Such financing is excluded by the terms of reference.
1.19 The Commission has been asked to report on whether removing the existing prohibition on law firms charging contingency fees would help to mitigate the issues presented by the practice of litigation funding.
1.20 ‘Contingency fees’ has a specific meaning in this context. It refers only to the practice of charging clients a percentage of the amount recovered if the claim is successful. While this is standard practice among litigation funders, lawyers are not permitted to charge on this basis.
1.21 Legal costs can be contingent on the outcome of legal action, but the amount charged is based on the regular fee (including an additional ‘uplift fee’ that is a percentage of the regular fee) rather than on the amount recovered. This is known as a ‘no win, no fee’—or ‘conditional cost’—agreement. The terms of reference expressly distinguish between a litigation funder and a lawyer acting on a ‘no win, no fee’ basis.
1.22 ‘Group proceedings’ is the procedure in Victoria whereby a single representative can bring or conduct a claim on behalf of others in the same, similar or related circumstances. The term commonly used for all procedures of this type is ‘class action’. In this paper, the term class action is used except when discussing specific legislation.
1.23 The first Australian class action regime was established on 4 March 1992, when part IVA of the Federal Court of Australia Act 1976 (Cth) came into effect.
1.24 A similar regime commenced in Victoria from 1 January 2000. It was initially established by Supreme Court rules for a group proceeding. Previous rules had allowed for a representative action procedure but they had been interpreted narrowly and fallen into disuse.
1.25 The first case to be initiated under the new Victorian group proceeding rules was Schutt Flying Academy (Australia) Pty Ltd v Mobil Oil Australia. Mobil challenged the Supreme Court’s powers to make the rules and the Court of Appeal upheld them (by a majority). The Parliament subsequently passed the Courts and Tribunals Legislation (Miscellaneous Amendments) Act 2000 (Vic), which introduced part 4A into the Supreme Court Act and backdated it to 1 January 2000.
1.26 Part 4A of the Supreme Court Act is substantially the same as part IVA of the Federal Court Act. Although the terms of reference concern the operation of Victorian law, and the recommendations of the Commission will relate to Victorian legislation and practice, the Commission is not confining the scope of its research to Victorian cases. Most class action litigation has been conducted in the Federal Court, and some of the most significant decisions have been made under the Commonwealth legislation. As the two regimes are similar, the Commission will be informed by the experience of both jurisdictions in undertaking this reference.
1.27 Group proceedings, litigation funding—especially the funding of group proceedings by litigation funders—and the ban on law firms charging contingency fees have been subjects of protracted debate and various reviews over the past 25 years. Three reviews in particular have stimulated and shaped discussion of the issues and are frequently mentioned in this paper:
• the Australian Law Reform Commission’s report Grouped Proceedings in the Federal Court (1988)
• the Victorian Law Reform Commission’s Civil Justice Review (2008)
• the Productivity Commission’s report Access to Justice Arrangements (2014).
Australian Law Reform Commission (1988)
1.28 The Australian Law Reform Commission’s report on grouped proceedings in the Federal Court put forward recommendations for a class action regime, and included a draft Bill to establish it. Part IVA of the Federal Court Act is broadly based on that report.
1.29 Today, the report remains the first point of reference for discussion about the objectives of the Commonwealth’s class action regime, the Victorian and other regimes that have been based on it, and the merits or otherwise of proposed reforms.
1.30 In a subsequent report on the adversarial system of litigation, published in 2000, the Australian Law Reform Commission discussed the procedural and ethical issues which arise in class actions and made recommendations to improve efficiency, transparency and fairness. It did not support the lifting of the ban on lawyers being able to charge contingency fees.
Victorian Law Reform Commission (2008)
1.31 In 2008, the Victorian Law Reform Commission completed a wide-ranging review of the civil justice system. The report contained 177 recommendations to make civil litigation cheaper, simpler and fairer. Many were implemented by the Civil Procedure Act 2010 (Vic). Among the recommendations were:
• the introduction of new requirements for the disclosure of the identity of litigation funders and insurers exercising control over proceedings
• legislative amendments to improve remedies in class actions
• a call to reconsider the prohibition on lawyers charging contingency fees.
1.32 The Commission is revisiting some of the issues that it considered at that time, and considering them afresh. Developments in class action procedure, the commercialisation of law practices and the growth of the litigation funding industry have substantially changed the context within which the issues need to be considered.
Productivity Commission (2014)
1.33 The Commonwealth has before it recommendations made by the Productivity Commission to strengthen consumer protections. If they are adopted, it will affect the reform options considered during this review.
1.34 The recommendations followed a review by the Productivity Commission of Australia’s system of civil dispute resolution, with a focus on constraining costs and promoting access to justice and equality before the law. The private funding of litigation was among the comprehensive range of issues addressed by the report. The following recommendations are of particular relevance to the current review:
• establish a licence for litigation funding companies to verify their capital adequacy and properly inform clients of relevant obligations and systems for managing conflicts of interest
• remove the ban on lawyers being able to charge contingency fees, except in family and criminal law matters, and apply a percentage cap on a sliding scale
• amend court rules to ensure that the court’s discretionary power to award costs against non-parties, and obligations to disclose funding agreements, apply equally to lawyers charging a contingency fee and litigation funders.
1.35 The challenges and reform options that the terms of reference raise are being addressed internationally. While it is wrong to expect that replicating the policies and laws of another country will create the same results in Victoria, it is prudent to take account of overseas experience when exploring ways to resolve local issues.
1.36 The experience of three overseas jurisdictions is particularly relevant to this review:
• The United States, because the Australian Law Reform Commission drew from the law and experience of the United States when recommending a class action regime for Australia. The legal profession in the United States has long been able to charge contingency fees and—unlike plaintiffs in Australia, Canada and the United Kingdom—plaintiffs in the United States do not face the risk of paying the other side’s costs if the litigation is unsuccessful.
• England and Wales, which has a national self-regulatory scheme for litigation funders overseen by the Association of Litigation Funders of England and Wales. England and Wales has recently removed the blanket prohibition on lawyers being able to charge contingency fees, to a muted response from the legal profession. In addition, there is extensive use of ‘after the event’ insurance. Comparisons must be made with care, because the litigation funding market is quite different to that in Australia for a number of reasons, and so are the issues.
• Canada, which does not have a large litigation funding industry, and now also allows lawyers to charge contingency fees, although the regulations vary between the provinces. Contingency fees are mainly charged in personal injury actions but are less common in Canada than in the United States.
1.37 These and other features of the approaches taken by other countries are considered in this paper where relevant to the issues under discussion.
Summary of key issues
The purpose of the reference
1.38 The terms of reference make the purpose of the reference clear: to report on specified issues to ensure that litigants are not exposed to unfair risks or disproportionate cost burdens when using the services of litigation funders and/or when participating in class actions. The Commission encourages submissions that discuss the features of litigation funding and class actions which contribute to any such exposure and how they could be addressed. For this reason, some of the questions posed in this paper are broad ranging and invite responses that might address more than one issue.
1.39 While it is likely that other issues will be raised in submissions and during consultations, the terms of reference indicate a number of areas where reform may be desirable and specific questions are asked about them in this paper. Although reform options have been identified, the Commission has not drawn conclusions about them and would welcome ideas about other alternatives.
Issues raised in this paper
The tripartite relationship between litigation funders, lawyers and plaintiffs
1.40 When a litigation funder is involved in legal proceedings, a tripartite relationship is established between the litigation funder, the plaintiff’s lawyers and the plaintiff. The litigation funder and lawyers are contractually obligated to each other as well as individually to the plaintiff.
1.41 Conflicts of interest exist in this relationship. They expose the plaintiff to the risk that the commercial interests of the litigation funder or the lawyers will be given priority over the plaintiff’s interests. In class actions, the lawyers act for all class members, who have competing needs that can give rise to conflicts of interest as well.
1.42 The conduct of litigation in class actions and the use of litigation funding are guided by lawyers’ professional responsibilities. Lawyers who act for clients are officers of the court. They have ethical duties to the court and the client. The potential conflict of interest between a lawyer’s duty to the client and the lawyer’s financial interest in the proceedings is frequently raised in public debate, particularly in relation to the ban on lawyers charging contingency fees. In 2016, the Chief Justice of the Federal Court, referring to class actions, stated:
If commercial interests and commercial returns (as opposed to professional responsibilities) are seen to drive a substantial section of this work then the cost of defending claims and the public cost of providing the infrastructure for them will come to be seen as an impost on Australian business and public infrastructure that will not be seen as acceptable.
1.43 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 the litigation funder and the lawyers has led to calls for stronger disclosure requirements, as indicated by the terms of reference.
1.44 There is a further risk because litigation funders are not subject to any regulation that requires them to hold sufficient capital to meet their obligations. This risk is borne by the plaintiff, who is exposed if the litigation is unsuccessful and the litigation funder does not pay either the plaintiff’s legal costs or the other side’s costs. It is also borne by the defendant, although the risk can be mitigated by seeking an order for security of costs.
Comparisons between class actions funded by litigation funders and those
that are not
1.45 As litigation funders have become involved in funding class actions, the contrast between two broad types of class actions appears more pronounced. Litigation funders select class actions that are low risk and profitable, and are notably for the benefit of shareholders and investors. Class actions for the benefit of vulnerable people, or for non-monetary award, or which are complex and likely to be costly and risky to prosecute, are conducted by law firms on a ‘no win, no fee’ basis or with funding support from government or the community.
1.46 Therefore, while litigation funding improves access to justice through the use of class actions, it does so only in narrow circumstances. Class actions are providing access to justice without the assistance of litigation funders, but the cases are resource intensive and few law firms can afford to conduct them on a ‘no win, no fee’ basis and carry the risk of losing.
1.47 The distinction between the two broad types of class actions is reinforced by differences in where they are filed. Litigation funders are involved in about half of the class actions filed under the Commonwealth class action regime and managed by the Federal Court. However, only 10 of the 80 class actions that have been filed under the Victorian class action regime have been funded by litigation funders.
1.48 The Supreme Court of Victoria allocates class actions between the Commercial Court, which manages mainly shareholder and investor class actions, and the Common Law Division, which manages class actions arising from natural disasters and personal injury and other mass torts. The supervision and management challenges differ between the two broad types of class actions and this raises questions about whether they should be subject to different procedural rules.
Gateway issues in class actions
1.49 A class action can commence if threshold requirements set out in the Supreme Court Act are met. Once it has commenced, the onus is on the defendant to prove that it should not continue as a class action. This has been identified as the reason why class actions are often subject to numerous interlocutory applications and satellite litigation. The alternative view, noted by the Federal Court, is that these applications are used as a tactic to avoid a trial and are not an unavoidable consequence of the current law.
1.50 It is possible that the incidence and impact of numerous interlocutory applications differs between class actions funded by litigation funders and those which are not. If so, different procedural or regulatory responses may be appropriate.
Settlement approval and distribution in class actions
1.51 Public debate and media attention about class actions commonly focus on the amounts recovered for class members at settlement compared to the amounts paid to the lawyers and litigation funders for bringing the proceedings. Concern is also expressed about the way the settlement amounts are distributed, and the associated administrative costs and delay.
1.52 Under their respective class action regimes, the Federal Court and the Victorian Supreme Court have introduced procedures and mechanisms to protect the interests of all class members when assessing legal costs and funding fees, allocating cost burdens and approving distribution schemes. The resource implications for the court, particularly in large scale class actions, are extensive. These developments raise questions about how in Victoria the Supreme Court can be better supported in this role.
1.53 It is unclear whether lifting the ban on lawyers being able to charge contingency fees would improve access to justice through class actions other than those for the benefit of shareholders and investors. The Commission encourages submissions on this question, particularly from law firms that do not currently conduct class actions.
Structure of this paper
1.54 The first three chapters of this paper contain explanatory material. This chapter has described the scope of the review and outlined the issues arising from the terms of reference. Chapter 2 contains information about class actions and the involvement of litigation funders and law firms. Chapter 3 outlines the regulatory framework for litigation funding and the legal profession. Together, Chapters 2 and 3 are intended to assist readers who are unfamiliar with this area of law.
1.55 Chapters 4 to 8 address the reform proposals conveyed by the terms of reference. Chapter 4 discusses the adequacy of disclosures by litigation funders and lawyers to plaintiffs. While lawyers are subject to prescriptive disclosure requirements about legal costs and disbursements before and during proceedings, litigation funders are not. Litigation funders are required only to disclose information about conflicts of interest. There are no specific obligations on lawyers to disclose information to plaintiffs about the distribution of the amount recovered in damages or settlement when the litigation is successful.
1.56 In Chapter 5, the disclosure of funding agreements to the Court in proceedings supported by litigation funders is examined. There is currently no requirement to disclose litigation funding agreements to the Supreme Court of Victoria in class actions. The Court determines disclosure requirements on a case-by-case basis. In contrast, disclosure is mandatory in insolvency proceedings and class actions in the Federal Court.
1.57 Chapter 6 explores whether a certification requirement should be introduced to class actions, either in every case or only when the proceedings are financed by a litigation funder. If certification were required, a class action could not commence until the representative plaintiff proved to the court at a separate hearing that criteria had been met and the case should go forward as a class action. While certification is seen by proponents as a way to improve efficiency by eliminating unsuitable class actions, others have pointed to the risk that it would lead to an increase in appeals at the interlocutory stage and attendant inefficiencies.
1.58 The question of whether further criteria for approval of settlement of a class action should be introduced is discussed in Chapter 7. Another key issue is the question of how far the court should intervene in a funding agreement between the litigation funder and funded class members. The court’s role in protecting unrepresented class members during settlement is an important consideration when addressing these issues.
1.59 Chapter 8 turns to the question of whether permitting lawyers to charge contingency fees would mitigate the issues of litigation funding. The issues discussed include:
• the limited case selection
• the size of the funding fee
• the subordination of the client’s interests to commercial objectives.
1.60 Chapter 9 concludes the paper.
1.61 In preparing this consultation paper, the Commission was greatly assisted by preliminary consultations with academics, lawyers, litigation funders, judges of the Supreme Court of Victoria, Victoria Legal Aid and the Legal Services Commissioner. The publication of this paper marks the start of the formal consultation period. The questions posed in the paper are set out on page xiv. You are encouraged to read the relevant chapters which give background to the issues that the questions address.
1.62 The Commission invites written submissions in response to the questions by 22 September 2017. Information about how to make a submission is on page viii.
Attorney-General of Victoria, ‘Making Civil Justice Fairer for Victorians’ (Media Release, 16 January 2017).
Victoria Legal Aid, Submission No 67 to Department of Justice and Regulation, Access to Justice Review, March 2016, 2.
Sean Smith, ‘$23m Great Southern Settlement’, The West Australian (Perth) 12 December 2014.
Pia Akerman, ‘Black Saturday Bushfire Victims Left to Count the High Cost of Class Actions’, The Australian (Sydney) 13 December 2016.
Pia Akerman, ‘Bushfire Victims Demand Inquiry into Legal Firm’, The Australian (Sydney) 22 May 2017.
Ben Butler, ‘Victims Get Nothing as Litigation Funder, Lawyers Share the Spoils’, The Australian (Sydney) 22 August 2016.
Supreme Court (General Civil Procedure) Rules 1996 (Vic) O 18A (repealed). In 1997, judges of the Supreme Court suggested to the Attorney-General that Victoria introduce legislation along the lines of pt IV of the Federal Court of Australia Act 1976 (Cth). When this appeared unlikely to occur, the procedure was established by means of rules of court that came into operation on 1 January 2000: Schutt Flying Academy (Australia) Pty Ltd v Mobil Oil Australia (2000) 1 VR 545, 549 (Brooking J).
Supreme Court Act 1958 (Vic) s 62(1C); Supreme Court Act 1986 (Vic) ss 34, 35. See also Victoria, Parliamentary Debates, Legislative Council, 4 October 2000, 431 (Marsha Thomson, Minister for Small Business).
(2000) 1 VR 545. On 24 January 2000, Schutt Flying Academy brought a claim against Mobil Oil on behalf of the owners, operators and pilots of light aircraft that had been grounded in the preceding two months because of what was thought to be contaminated fuel supplied by Mobil.
Law Reform Commission, Grouped Proceedings in the Federal Court, Report No 46 (1988).
Victorian Law Reform Commission, Civil Justice Review, Report No 14 (2008).
Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014).
Australian Law Reform Commission, Managing Justice: A Review of the Federal Civil Justice System, Report No 89 (2000) [7.87]–[7.128]; Recommendations 78–82.
Victorian Law Reform Commission, Civil Justice Review, Report No 14 (2008) 461, 471–2; Recommendation 86.
Ibid 521–60; Recommendations 101–7.
Productivity Commission, Access to Justice Arrangements, Inquiry Report No 72 (2014) vol 2, 601–37; Recommendations 18.1–18.3.
In British Columbia, for example, there is a 40% limit on personal injury cases, while other provinces require fees to be ‘reasonable’ and subject to court approval.
Rupert Jackson, Review of Civil Litigation Costs, Preliminary Report (The Stationary Office, May 2009) 635.
Chief Justice J Allsop, ‘Class Actions 2016 Key Topics’ (Speech delivered at Law Council of Australia Forum, Sydney, 13 October 2016) Federal Court of Australia <www.fedcourt.gov.au/digital-law-library/judges-speeches/>.
Bright v Femcare Ltd (2002) 195 ALR 574, 607 .