Without litigation funders to back class actions, everybody loses

The Australian class action system, and the role of litigation funders, is currently under attack from a number of vocal pro-business advocates. Their motive is clear: remove the funders and you remove class actions.

The Australian Parliamentary Joint Committee on Corporations and Financial Services is conducting an inquiry into litigation funding and the regulation of the class action industry. Some of the written submissions and oral evidence before the Joint Committee have sought to denigrate litigation funders and relied on inaccurate and misleading statistics and analysis.

Omni Bridgeway has welcomed the inquiry and recommended a number of reform measures that we believe will enhance the integrity of, and improve confidence in, the class action system which is almost 30 years old. These measures include the licensing of litigation funders operating in Australia and the introduction of a minimum 50 per cent return of gross proceeds to class members.

However, any reforms adopted must strike the appropriate balance and not compromise the ability of ordinary Australians to access justice and potential compensation for losses suffered.

Costly and complex actions

Class actions provide a fair and efficient mechanism for the courts to resolve disputes with a common set of issues. However, these actions are invariably complex, notoriously expensive and take years to resolve. They are usually brought against well-funded defendants – large corporates who are often insured – or government.

Australia is a ‘costs shifting’ jurisdiction – that is, the unsuccessful party is generally ordered to pay the successful party’s costs (known as adverse costs).

Prior to the advent of litigation funding, the claimant (or class representative) faced the prospect of having to pay all of the adverse costs if the action was unsuccessful, in addition to the claimant’s own costs. Other class members are immune from any court order requiring payment of adverse costs (as they are not formal parties to the litigation). Consequently, the risks the representative claimant takes on are disproportionate to the value of their claim and also disproportionate to the risks borne by other class members.

This meant that law firms would often find a so-called ‘person of straw’ who was willing to act as the claimant. That is, someone who has no assets and who was prepared to become bankrupt if the case was lost and they were faced with an order to pay adverse costs. (Literally, someone with nothing to lose.) This was unfair on successful defendants who were unable to recover their costs and stood to bring class actions into disrepute. This also placed a heavy burden on the claimant’s lawyers who would have to carry their own costs and disbursements as the case proceeded.

Litigation funding stepped in to fill this void. When a funder is involved, the funder pays the representative claimant’s costs on a non-recourse basis – that is, if the case is lost, the funder is owed nothing; the funder is only reimbursed its costs and receives a fee if the case is successful. The funder usually also indemnifies the claimant for any adverse costs on an uncapped basis. Litigation funding also provides protection to defendants who know their costs will be paid in the event the action is unsuccessful.

One recent example is the class action taken by the 6,700 victims of the mismanagement of Queensland’s Wivenhoe Dam during the 2011 floods. The class action has been co-funded by Omni Bridgeway for more than eight years. The action was successful at first instance but has been appealed by two of the defendants and is still running. To date, the total costs plus the estimated adverse costs risk amount to more than $100 million.

The lead claimant/class representative, Vince Rodriguez, recently said:

“Without funding from Omni Bridgeway, I would not have been able to successfully pursue my claim and run an action against such powerful entities. They agreed to back the Brisbane flood class action for me and thousands of other people who suffered damage from the flooding in January 2011.

…Funders take on a massive risk if they lose (not just the legal and other fees they have paid for, but also potential adverse costs). The case has been hard fought and still in May 2020 has not yet finally resolved. It is fair that funders recover their expenses and a commission for taking on the risk. Without them, claimants would recover nothing at all.”

In the PFAS class actions against the Commonwealth Department of Defence over contamination caused by the use of toxic firefighting chemicals on military bases (funded by Omni Bridgeway), the lead claimants told the court they would never have been able to bring the case, and receive any compensation for the damage done to their lives, without the support of litigation funders.

The Williamtown Steering Committee, which represented claimants, wrote:

“There is absolutely no doubt that without the class action system and litigation funding, that the community would not have been able to afford to have taken on the Department of Defence who have spent tens of millions of taxpayer dollars and five years in fighting us. The amount of time and effort put into this case and campaign by our legal team, the funder the WSC and others in Williamtown on behalf of the community has been extraordinary.”

Other funding options - no win, no fee, ATE insurance and contingency fees

Some class actions are conducted by law firms on a ‘no win, no fee’ basis, often with a person of straw as the class representative. Under these arrangements, if the case is successful, the lawyers are entitled to an uplift fee of up to 25% of the billed amount to compensate them for the carrying risk (in the event the case is lost and they receive no fees) and to represent interest on the deferred payment of fees.

However, few law firms have the financial capacity to provide their services on this basis in a class action. Where they do, the representative claimant will not be required to pay their own legal costs if they lose but will remain liable for adverse costs (and possibly their own disbursements).⁽¹⁾

In these cases, a successful defendant will probably only recover their costs if the claimant has taken out sufficient “after the event” (ATE) insurance cover. ATE insurance is taken out after a dispute has arisen and generally covers the claimant against its potential liability to pay adverse costs, as well as their own disbursements, if the case is lost. If the case is successful, the premium is reimbursed from the judgment or settlement (or paid if it was a fully deferred premium). ATE insurance may be taken out by the claimant, a litigation funder or a law firm acting on a ‘no win, no fee’ basis. However, although its use has grown in recent years, ATE insurance premiums are very expensive and ATE insurance does not have a large market in Australia.⁽²⁾

In June 2020, the Victorian Government passed legislation that permits lawyers in that State to charge “percentage-based” or contingency fees in class actions.  This will provide another funding option for class members. However, as with ‘no win, no fee’ arrangements, it is expected that few law firms will have the financial capacity to provide their services on this basis, given the significant capital required to fund a class action and consequent delays until payment (if successful) and adverse costs risks.

While these alternative funding options assist class members in certain cases, they are not currently widely available in the Australian market.

It is not surprising, therefore, that the court-recognised authority on class actions in Australia, Professor Vince Morabito, found that of the 122 shareholder class actions filed since 1992, 101, or 82.8 per cent, were supported by litigation funders, with most of the balance funded through ‘no win, no fee’ arrangements.⁽³⁾

Other benefits of funded class actions

In addition to the financial protection they provide to both claimants as well as defendants (if the case is lost), class actions supported by litigation funders have a number of other benefits:

Private enforcement: Funded class actions have augmented regulators’ enforcement of Australia’s continuous disclosure, misleading and deceptive conduct, competition and other laws introduced for the protection of the public. For example, the Australian Securities and Investments Commission (ASIC) has limited resources for enforcement activities and focuses this budget in accordance with its organisational priorities. It rarely, if ever, takes compensation actions on behalf of shareholders.

Funded class actions therefore contribute to the integrity of the nation’s financial markets, making them an attractive source of capital for Australian and international companies. In its submission to the Australian Law Reform Commission inquiry into class action proceedings and third-party litigation funders, ASIC said:

“The continuous disclosure obligations are critical to protecting shareholders, promoting market integrity and maintaining the good reputation of Australia’s financial markets …. The economic significance of fair and efficient capital markets dwarfs any exposure to class action damages.”⁽⁴⁾

And:

“Where private action can achieve a similar outcome to that which action by ASIC could achieve, it allows ASIC to allocate its enforcement resources to other priorities. Shareholder class actions provide a number of benefits to consumers and financial markets and play an important role in improving shareholder access to justice.”⁽⁵⁾

Strategic input: Funders such as Omni Bridgeway are run by highly experienced former dispute lawyers. They undertake extensive due diligence to ensure that only meritorious cases are pursued, negotiate litigation budgets with the claimants’ lawyers, ensure so far as possible that the legal costs and strategies are proportionate to the sums at stake, and assist with case management and liaising with the lawyers on a day-to-day basis (subject always to the representative claimant’s rights to override the funder’s instructions and the lawyers’ paramount professional duties to the claimants).

Experienced funders provide funding to claimants to pursue class actions that are run by a variety of law firms and therefore have awareness of common issues that may arise and can encourage best practice in the pursuit of the actions they fund.

Sophisticated systems for collection and analysis of data: Omni Bridgeway has a dedicated ‘Client Team’ that undertakes many of the administrative tasks relating to managing group members’ claims at no additional charge to group members. They assist in the management of group member data and communications, which can be a significant task when the group is very large. (The alternative is for these functions to be performed by the lawyers and form part of the legal costs that the group members are asked to pay.)

Reforms must be for benefit of class members and the class action system more broadly

In the PFAS class actions in the Federal Court, Justice Lee referred to the practical benefits of litigation funding. He said that without litigation funding “group members would likely have been placed in a situation of being supplicants requesting compensation in circumstances where they would have been the subject of a significant inequality of arms..."⁽⁶⁾

Litigation funding of class actions not only provides access to justice but also addresses this imbalance and levels the playing field against powerful, well-resourced defendants, while at the same time ensuring that successful defendants are not out of pocket.

Any reforms made to the class action system in Australia as a result of the current parliamentary inquiry must be necessary and of clear benefit to class members in particular, and to the system more broadly, including defendants. Reform that stifles the funding of class actions will not be in anyone’s best interests.

1. Justice Bernard Murphy and Vince Morabito, The First 25 Years: Has the Class Action Regime Hit the Mark on Access to Justice? in Damian Grave and Helen Mould (eds), 25 Years of Class Actions in Australia: 1992–2017 (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2017) at pages 13 and 28.
2. Australian Law Reform Commission, “Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders”, ALRC Report 134 at [7.18]. 
3. Professor Vince Morabito, Shareholder class actions in Australia – myths v facts, November 2019, at page 20.
4. ASIC, “Australian Law Reform Commission Inquiry into class action proceedings and third-party litigation funders: Submission by the Australian Securities and Investment Commission”, September 2018, at [4]. 
5. Ibid, at [47]. 
6. Smith v Commonwealth of Australia (No 2) [2020] FCA 837, paragraphs 83-85.