An Inquiry currently underway in Australia offers good insights into whether, and if so in what circumstances, third party litigation funding, particularly of class actions, should be permitted.

Traditionally, third party litigation funding has been prohibited in many countries, and there has been resistance to proposals for its introduction or expansion.  Litigation funding has been permitted in Australia for some time, however.  The experience there, as reviewed in the current Inquiry and summarised in a Discussion Paper released on 31 May 2018, suggests that there can be a legitimate role for third party funding if it is appropriately regulated.

Background to Inquiry

On 11 December 2017, the Attorney-General of Australia issued Terms of Reference to the Australian Law Reform Commission (ALRC) for an Inquiry into Class Action Proceedings and Third-Party Litigation Funders. The Terms of Reference were described as addressing the overarching themes of both the “integrity of third-party funded class actions” and the “efficacy of the class action system”.

The Inquiry comes at a time where there has been a marked increase in the prevalence of third party-funded class actions in Australia. The ALRC reported that, over the past five years, 64% of class action proceedings filed in the Federal Court received funding. Stakeholders have suggested that the growth of litigation funding in Australia can be attributed to factors such as its “opt-out” model, the significant costs associated with class action proceedings and the prohibition on contingency fee arrangements for solicitors. Litigation funding has also been the subject of other recent Australian inquiries, such as the Victorian Law Reform Commission’s Inquiry in relation to Access to Justice: Litigation Funding and Group Proceedings, the final report of which was tabled in the Parliament of Victoria on 19 June 2018.

To assist with the preparation of the Discussion Paper, the ALRC conducted 43 consultations with a wide variety of stakeholders and was also assisted by two expert panels constituted for the purposes of the Inquiry, being the “Academic Expert Panel” and the “Judicial Expert Panel”. The ALRC considered framework in other jurisdictions, including the self-regulatory Code of Conduct for Litigation Funders dated 2011 in the United Kingdom and Wales and the Class Actions Project instituted by the Law Commission of Ontario in March 2018.

Proposals for Reform and Further Questions

The Discussion Paper contains 16 proposals for reform with respect to areas such as “regulating litigation funders”, “conflicts of interest”, “commission rates and legal fees”, “competing class actions”, “settlement approval and distribution” and “regulatory redress”. Significant proposals include the following:

  • requiring third-party litigation funders to obtain and maintain a “litigation funding licence” to operate in Australia, which would impose obligations on licence holders to (among other things) do all things necessary to ensure services are provided “efficiently, honestly and fairly”, and communicate clearly, honestly and accurately with class members/potential class members (see Proposal 3-1 and Proposal 3-2);
  • amending the Australian Solicitors’ Conduct Rules to both require disclosure of third-party funding in any dispute resolution proceedings and also prevent solicitors and law firms from having “financial and other interests in a litigation funder” that is funding the same matters in which the solicitors/law firms are acting (see Proposal 4-4 and Proposal 4-5);
  • permitting solicitors acting for the representative plaintiff in class action proceedings to enter into contingency fee arrangements. This would be subject to certain limitations, including that Part IVA of the Federal Court of Australia Act 1976 (Cth) be amended to provide that such arrangements are only permitted with leave of Court (see Proposal 5-1 and Proposal 5-2);
  • amending the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) to permit the Court to appoint a referee to consider the “reasonableness of costs charged” prior to its approval of settlement, including whether the work was done “in the most efficient manner” (see Proposal 7-1); and
  • the Australian Government commissioning a review of the “legal and economic impact” of the continuous disclosure obligations of entities listed on the public stock exchange under the Australian Securities and Investments Commission Act 2001 (Cth) and Corporations Act 2001 (Cth) with respect to various matters such as the “propensity for corporate entities” to be the target of funded shareholder class actions in Australia (Proposal 1-1).

The Discussion Paper also contains eleven questions relating to the proposals, such as:

  • what should be the minimum character and qualification requirements be for obtaining a litigation funding licence (Question 3-1);
  • should current prohibitions on contingency fee arrangements remain in place for certain types of class actions, such as personal injury matters (Question 5-1);
  • what other funding options are available for “meritorious claims” that are unable to attract third-party litigation funding (Question 5-4); and
  • should the terms of class action settlements be publicly disclosed and, if so, should there be any limits on disclosure? (Question 7-2).

Next Steps

The ALRC called for submissions in response to the Discussion Paper by 30 July 2018. The ALRC will be required to provide its final report to the Attorney-General by 21 December 2018.