Terms of reference
1 On 16 December 2016, the Attorney-General, the Hon. Martin Pakula MP, asked the Victorian Law Reform Commission to report on ways to ensure that litigants who use the services of litigation funders or participate in group proceedings (class actions) are not exposed to unfair risks or disproportionate cost burdens.
2 In accordance with the full title of the terms of reference, Access to Justice—Litigation Funding and Group Proceedings, the overarching theme of this report is access to justice. Litigation funding and class actions help plaintiffs overcome two impediments to accessing justice: the cost of bringing proceedings; and the risk that, if the litigation is unsuccessful, the plaintiff will be required to pay the other side’s costs (adverse costs).
3 The potential for litigants to be exposed to unfair risks and disproportionate cost burdens arises from the conditions under which litigation funding is provided, the manner in which class actions operate, and how these two factors affect each other.
4 Litigation funders commonly agree to pay the costs of bringing proceedings and adverse costs if the plaintiff loses, in return for a share of the settlement or judgment amount if the plaintiff wins. In this way, the financial risks and costs are shifted from the plaintiff to the funder.
5 If the litigation is successful, the litigation funder is reimbursed the costs of the proceedings, and receives a share of the recovered amount. The plaintiff must also pay any outstanding costs, such as legal costs that the litigation funder did not pay. The funding fee is usually the largest single cost and the typical range appears to be between 20 and 45 per cent of the recovered amount, although in some insolvency cases it has been 75 per cent.
6 Class actions create economies of scale that make it cost-effective for individual claimants to take legal action against a well-resourced defendant to recover a small loss. By grouping individual claims from the same, similar or related circumstances, the cost of bringing proceedings can be spread across many claimants. If unsuccessful, the representative plaintiff is liable for both the cost of bringing the proceedings and adverse costs. If successful, the cost of bringing the proceedings, as well as the settlement or judgement amount, is shared among the class members.
7 Large class actions can cost around $10 million to bring, with an adverse costs risk of a similar amount. This is a significant financial burden on the representative plaintiff that is far greater than the value of their individual claim. The disparity has created a demand for litigation funding that, in turn, has fostered an industry. At the same time, class action law and practice in Australia have developed in response to the influence of litigation funders.
8 The Commission has not been asked to investigate whether litigants are being treated unfairly or charged excessively; rather, the report focuses on how to prevent this happening. The terms of reference set out possible reforms to funded proceedings and class actions, and raise the question of whether the existing prohibition on lawyers being able to charge contingency fees should be removed.
9 The Commission’s recommendations are summarised below and set out at page xix. While this report is about funded proceedings and class actions in Victoria, these issues are the subject of ongoing discussion nationally and current review by the Australian Law Reform Commission (ALRC). The recommendations have been informed by the experience of other Australian jurisdictions, but grounded in the context of Victorian circumstances.
Litigation funding and class actions in Victoria
10 Class actions may be brought in the Supreme Court of Victoria under a regime set out in part 4A of the Supreme Court Act 1986 (Vic). Related rules and procedures are set out in the Supreme Court (General Civil Procedure) Rules 2015 (Vic) and the Court’s practice note on the conduct of class actions.
11 Victoria’s class action regime commenced on 1 January 2000. It is based on Australia’s first class action regime, which was established in 1992 within the jurisdiction of the Federal Court of Australia. The model generally follows the recommendations of the ALRC in its seminal 1988 report Grouped Proceedings in the Federal Court. Similar regimes were introduced in New South Wales in 2011 and Queensland in 2017.
12 As at 10 November 2017, 85 class actions had been filed in the Supreme Court of Victoria. The number each year has fluctuated between zero and 16; the annual average is between four and five. Five were filed in 2017.
13 Approximately two-thirds of the class actions commenced in Victoria settled before trial, leading to the distribution of at least one billion dollars to more than 28,300 class members. The two largest class action settlements in Australia were secured under Victoria’s class action regime. Neither involved a litigation funder.
14 While actively involved in class actions in the Federal Court, litigation funders have invested in only 10 class actions in Victoria. Eight were claims by shareholders or investors, and half of these were transferred to the Federal Court.
15 It is not known how many types of civil proceeding in Victoria, other than class actions, have involved litigation funders. The plaintiff’s financial arrangements and costs in these cases are not subject to the same degree of court supervision and public scrutiny as class actions.
16 One funded case that has attracted public attention is a funded claim by trustees for former employees of Huon Corporation Limited against CBL Insurance Ltd (Huon Corporation). The Court found in the trustees’ favour following a protracted dispute between the parties but, once the costs were paid from the amount awarded, the former employees ultimately received nothing. This case was discussed in submissions and consultations and the Commission has used it as an example in the report.
Role of the Court
17 The Commission’s recommendations reinforce the role of the Supreme Court of Victoria in safeguarding litigants from exposure to unfair risks and disproportionate costs burdens, and in improving efficiency.
18 In all litigation, the Court has broad powers to give effect to the overarching purpose of the Civil Procedure Act 2010 (Vic): to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.
19 In class actions, where the outcome affects class members who have not directly participated in the proceedings, the Court has additional supervisory responsibilities to protect the interests of class members. It also has case management powers to ensure that the class actions are conducted efficiently, which reduces costs and delay for all parties.
20 These responsibilities are heightened in funded class actions. The involvement of a litigation funder creates conflicts of interest and can affect the rights of all class members. Significantly, litigation funding was instrumental in the introduction of closed class actions, which enable class membership to be limited only to class members who have signed funding agreements. It also led to the introduction of common fund orders for litigation funding costs, which allow a funder to obtain a funding fee from every registered class member even if they have not signed a funding agreement.
21 Developments such as these increase the need to ensure that the terms on which funders are involved in class actions, and the relationship they have with the lawyers for the representative plaintiff, are transparent both to the Court and to class members.
22 Similarly, in other funded proceedings where the outcome affects persons who do not directly participate in the proceedings, as occurred in Huon Corporation, there is a need for greater transparency.
23 The Commission’s recommendations affect the Court’s role and powers in protecting the interests of class members in the following ways:
• Stronger case management: The Commission recommends own motion powers by the Court to order that a proceeding no longer continue as a class action and to substitute the representative plaintiff with another class member; clearer procedures for managing competing class actions; and a proposal for a cross-vesting judicial panel to manage class actions filed in different jurisdictions. The Commission does not recommend certification because it is unnecessary, would impede access to justice, and had little support in submissions to this review.
• Certainty of powers to control costs: The Commission makes recommendations to clarify the Court’s powers to review and vary costs and make common fund orders, in which the Court approves the funder’s percentage share of the settlement or judgment amount. The Commission does not consider that funding fees should be subject to statutory caps.
• Better information and support for the Court’s protective role: The Commission recommends statutory principles for settlement approval. Recommendations are made for the Court to consider amending its practice note on class actions to include guidance for the appointment of a contradictor to assess the terms of settlement, or the settlement distribution scheme, on behalf of class members, and to specify the supporting information that must be provided to the Court when settlement approval is sought. The Commission recommends disclosure of the funding agreement to the Court and other parties (after redaction as necessary) in all funded class actions, and to the Court in other funded litigation where a number of disputants are represented by an intermediary.
• Better information for class members: The Commission recommends that the Court, in upgrading its website, consider publishing clear information about class actions generally and specific information about proceedings before the Court, including summary statements on each class action, prepared by the representative plaintiff’s lawyers. The Commission also recommends that the Court consider drafting standard opt-out and settlement notices in Plain English and publishing them on its website.
Responsibilities of plaintiff lawyers
24 In all litigation, lawyers have a fundamental duty to their clients that has contractual, professional and fiduciary dimensions. It applies whether or not a litigation funder is involved.
25 The duty includes responsibilities to avoid or manage conflicts of interest. In class actions, the conflicts of interest that lawyers encounter are more complex than in single-party litigation. For example, there may be differences between the interests of the representative plaintiff when compared to class members or between the class members themselves. These differences may arise due to the different nature of the claim or the harm suffered; they may arise from the different categories of class member (for example, whether funded or unfunded); or they may exist because of the structure of the class action mechanism, in which the representative plaintiff has responsibilities that class members do not share. They can be exacerbated when a litigation funder is involved, particularly if the funder actively participates in decisions about how the class action is conducted.
26 The Commission does not consider further regulation of the legal profession necessary, as the existing regulation is sufficient to prevent, detect or sanction unprofessional conduct. However, there is no formal recognition of lawyers’ responsibilities when acting for multiple class members or guidance on how to manage the conflicts that arise in class actions. The Commission recommends that professional guidelines be produced for lawyers on their duties and responsibilities to all class members in class actions.
27 Additional measures do not need to be introduced to protect the interests of plaintiffs in other proceedings in which a litigation funder is involved. The plaintiff in single-party cases has direct and ongoing contact with their lawyer, who should advise the plaintiff about the terms of the funding agreement. Unlike class actions, where the funding agreement establishes a tripartite relationship between the funder, lawyer and representative plaintiff, in single-party proceedings the agreement may be bilateral, between the funder and plaintiff. If a plaintiff in other funded proceedings brings the action on behalf of a number of disputants, the lawyer’s only client will be the plaintiff.
Regulation of litigation funders
28 The courts can supervise the involvement of litigation funders in legal proceedings only on a case-by-case basis, but state regulation of litigation funding is not a viable option because a national response is required.
29 While litigation funding has become integral to Australia’s legal system, the litigation funding industry is not regulated. Apart from those listed on the Australian Securities Exchange (ASX), litigation funders in Australia are free from mandatory licensing, financial disclosure requirements, reporting obligations or prudential supervision. A systemic risk for clients of litigation funders is that the funder may not meet its obligations under the funding agreement.
30 The Productivity Commission has recommended that litigation funders be licensed, to ensure that they hold adequate capital to meet their financial obligations. Many contributors to this review endorsed the Productivity Commission’s recommendation and called for stronger regulation by the Commonwealth.
31 In December 2017, the Australian Law Reform Commission commenced an inquiry into whether, and to what extent, litigation funders should be subject to Commonwealth regulation. The report is to be completed by 21 December 2018. In the meantime, Victoria should press for regulation at a future meeting of the Council of Australian Governments.
32 While it is standard practice for litigation funders to charge clients a percentage of the amount recovered if the claim is successful, lawyers are not permitted to charge on this basis. The Commission was asked to report on whether lifting the ban (except in personal injury, criminal and family law matters and other areas in which contingency fees would be inappropriate) would mitigate the issues presented by the practices of litigation funding.
33 As a matter of principle, the Commission considers that lawyers should be able to charge contingency fees, as it provides another avenue of funding for clients who may be otherwise unable to pursue proceedings due to the cost. While their use should be subject to certain conditions, the need for regulatory controls is not sufficient reason to prevent the ban being lifted. The matter requires national consideration, and the Commission recommends that this be pursued.
34 Notwithstanding the need for national consideration of the issue, the Commission believes there is scope for lawyers to be paid a percentage of the recovered amount in Victorian class actions, where costs are already borne, and paid, in a different manner to other litigation. This would increase competition with litigation funders, which may reduce costs in some cases, and enable claims that are not financially viable investments for litigation funders to be pursued.
National dimensions to class action issues
35 The common procedural form of Australian class action regimes is a valuable basis on which to ensure they evolve in a broadly consistent way. Consistency provides greater certainty for stakeholders, reduces the likelihood of forum shopping and encourages national jurisprudence as to important procedural and other issues that arise.
36 However, uniformity is not a necessary end in itself; nor is uniformity necessary if there is national consistency. It is important to recognise that there are differences in the types of class action being filed in each jurisdiction, particularly as between the Supreme Court of Victoria and the Federal Court:
• The Supreme Court has dealt with more mass tort class actions than the Federal Court, and continues to do so. This is the type of claim that the ALRC expected (in its 1988 report) would be brought as a class action.
• Large commercial claims, particularly shareholder class actions, which usually attract litigation funding, are more prevalent in the Federal Court.
• Litigation funders are far more active in the Federal Court. Over the past five years, the number of funded class actions brought in the Federal Court outnumbered the unfunded class actions.
37 These differences may change over time and it is desirable that innovations continue to develop in a consistent manner across jurisdictions rather than creating, or appearing to create, arbitrary distinctions. The Commission’s recommendations are not intended to entrench current practices, but they are intended to underpin best practice as it is perceived now and may develop in the future. If implemented, they would:
• establish express statutory powers for the Court in place of reliance on its discretionary powers
• introduce more prescriptive requirements to provide funding information to the Court and class members
• align practices and powers with those in the other jurisdictions with class action regimes to support national consistency.
38 The Commission proposes that the recommendations made in this report be implemented with a view to reinforcing a nationally consistent approach.
39 The Supreme Court will need to allocate staff to assist in developing and introducing the changes, and implementing them into the future as the Court’s protective role strengthens and it raises its profile as a source of information about class actions generally. The Class Action Coordinators for the Common Law Division and the Commercial Court have responsibilities that are affected by many of the recommendations and may need assistance for their part in responding to them. The Commission recommends that the Court consider appointing legally qualified staff to assist them in implementing the recommendations.
40 All of the changes will benefit from consultation with stakeholders about their introduction. The Commission recommends that the Court consider expanding its class action user group to include individuals with experience in class actions, and consult the group about the recommended amendments to the practice note on class actions, or the production of materials for class members, or any of the other changes that affect the way in which class actions are conducted and managed.