The Victorian Attorney-General, the Hon. Martin Pakula MP, has asked the Victorian Law Reform Commission to report on specified issues concerning access to justice by litigants who seek to enforce their legal rights using the services of litigation funders or through group proceedings, to ensure that litigants are not exposed to unfair risks or disproportionate cost burdens.
For centuries, financial services of the type offered by litigation funders were illegal. They were proscribed by the old offences of maintenance and champerty, the history and development of which were set out in the classic judgment of Danckwerts J in Martell v Consett Iron Co Ltd. The policy underlying those offences, which sounded both in crime and in tort, was to prevent the legal system being subverted by persons who were not parties to proceedings but who had a financial interest in the outcome of the proceedings. Champerty (involving the sharing of the proceeds of litigation) was an aggravated form of maintenance (providing financial assistance to a litigant without lawful justification).
Maintenance and champerty, both as crimes and torts, were abolished in Victoria by the
Abolition of Obsolete Offences Act 1969 and similarly in other Australian jurisdictions. They continue to apply in some other common law jurisdictions. In Victoria, two residues of the old offences remained unaffected. 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. Secondly, lawyers continued to be prohibited from charging contingency fees,
as they still are.
Today, litigation funding services are a part of the legal system. They can enable access to justice by reducing financial risk and postponing or removing the cost burden. While initially operating in insolvency law, they have broadened their application and have a significant impact on class actions, particularly for shareholders and investors.
Victoria has had procedures in place for class actions (referred to in the legislation as group proceedings) since 2000, as part 4A of the Victorian Supreme Court Act 1986. They were introduced as a means of providing access to justice in cases where many people seek redress and the total amount at issue is significant, but each person’s loss is limited and not economically viable to recover in individual actions. Eighty class actions have been conducted under the Victorian regime; 10 involved litigation funders.
The predominant sources of funding for class actions, other than litigation funders, have been law firms with the capacity to offer services on a ‘no win, no fee’ basis. Unlike litigation funders, law firms are not permitted to charge a percentage of the amount recovered in litigation, known as a contingency fee, for their services.
The services provided by litigation funders and the introduction of class actions in Victoria have enabled thousands of Victorians to obtain redress when otherwise legal action was beyond their reach. At the same time, there is concern within the judiciary, the legal profession and the wider community about the impact of these developments on the legal system, the role of the court,
the interests of plaintiffs and the rights of defendants.
At the core of the concern are the conflicts of interest that arise in proceedings in which a litigation funder is involved. The litigation funder seeks to maximise its return on the investment and closely monitors the process; the lawyer has duties to the court and to the plaintiff but is being paid by the litigation funder; and the plaintiff is unlikely to be in a position to negotiate the terms of the agreement with the funder. In class actions, there is the added dimension of the divergent interests of class members, not all of whom have signed a funding agreement with the litigation funder or a legal retainer with the lawyer.
The reference to the Victorian Law Reform Commission under section 5(1)(a) of the Victorian Law Reform Commission Act 2000 encompasses the conduct of proceedings funded by litigation funders, whether the issues with litigation funding would be mitigated by allowing lawyers to charge contingency fees, and the operation of the class action regime in Victoria. In the review the Commission will take into account individual cases, but the focus of the inquiry is on systematic issues and their productive resolution.
The publication of this consultation paper marks the beginning of the formal consultation period of the reference. I warmly encourage those who wish to do so to respond to the questions it raises by 22 September 2017.
The Hon. P. D. Cummins AM
Victorian Law Reform Commission
(1955) 1 Ch D 363, 375.
The Supreme Court of Ireland recently declined to develop the common law on the tort of champerty, where it remains: Persona Digital Telephony Limited v Minister for Public Enterprise  IESC 27. Chief Justice Denham stated that to do so ‘would involve complex situations more suited to legislation’: [54(v)]. In New Zealand, the torts of maintenance and champerty have not been abolished by statute and still remain: Saunders v Houghton  3 NZLR 331.