Litigation funding returns in Australian class actions - the facts

Litigation funding returns in Australian class actions - the facts

By Andrew Saker

One consistent theme that has been marketed by those who oppose litigation funding and class actions is that litigation funders take too much of the recoveries and that their returns are avaricious and out of step with other types of investments. It follows that the ‘mums and dads’ who comprise group members in class actions are left to fight over the scraps.

Omni Bridgeway supports appropriate regulation of the Australian class action landscape and funding industry and welcomes a balanced debate regarding any reform. But this kind of misinformation and flawed statistical analysis – presented in a way that serves its authors’ own commercial interests – should have no place in that debate.

Who is looking out for the mums and dads?

The first thing to note is that those making the loudest complaints are not the group members whose returns have been affected by the payment of commissions to litigation funders. Instead, it is industry advocacy organisations such as the Australian Institute of Company Directors, Ai Group and advocates such as the Menzies Research Centre (MRC).

They have shrouded their self-interest – protecting their own members from class actions for wrongdoing – in hand-wringing concern for the ‘mum and dad’ group members. 

This line of attack was developed, perfected and disseminated by the US Chamber of Commerce and its ‘independent’ think tank – the Institute for Legal Reform (ILR). The Chamber’s motivation seems to be to cut off litigation funding, thereby limiting or eliminating class actions to protect its constituents (the three million businesses it represents) from being held to account when they have breached their obligations to their shareholders, their clients or their communities.

The ILR has not been content to confine its activities to its home market and has been running a long campaign to influence policy and politics in Australia. (It has, for example, lodged a submission to the current Parliamentary Joint Committee inquiry into litigation funding and class actions.) Sadly, other parties are now singing from the same self-interested song sheet.

What is lacking in their critique of litigation funding and class actions is widespread outrage from the ‘mum and dad’ group members they purport to protect. With few exceptions, group members are not lining up to complain about litigation funding, having funds to access justice or receiving a portion of a claim, when they would otherwise receive none. 

This is the real issue: how many claimants in funded class actions would have received nothing because they were unable to take action as individuals without the support of litigation funding?

One example, funded by Omni Bridgeway, is the class action taken by the 6700 victims of the mismanagement of Queensland’s Wivenhoe Dam during the 2011 floods.

The lead claimant representative, Vince Rodriguez, says:

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.

I found the funding process fair and reasonable for the claimants, understood the terms of the Funding Agreement and Omni Bridgeway and the lawyers kept me fully informed during the claim and the litigation process.

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.

I would support a requirement for a minimum of 50 per cent of any of the recoveries going to claimants in class actions.  That would be a fair arrangement for all concerned. I also support the requirement that funders have a financial services licence.

In approving the settlement in the class actions against the Department of Defence over contamination caused by the use of toxic firefighting chemicals on Defence facilities in Williamtown in NSW, Oakey in Queensland and Katherine in the Northern Territory (PFAS cases), Justice Lee said the case would have been “impossible to bring without a funder”.

In quotes, which were misleadingly cherry-picked by the MRC for its submission but appear here in full, he made the following observation about the role of litigation funders:

There is a live contemporary controversy about litigation funding. I do not propose to enter the arena of this policy debate save to make a few comments.

The term ‘access to justice’ is commonly misused, most often by some funders who fasten upon it as an inapt rhetorical device. To those with a long and close involvement with litigation funding, it is evident that there is not only a danger in generalisation (and assuming all funders are the same), but there is also a danger of using well-worn phrases to obscure the reality that litigation funding is about putting in place a joint commercial enterprise aimed at making money. As I said in Turner v Tesa Mining (NSW) Pty Limited [2019] FCA 1644; (2019) 290 IR 388 (at 401 [41]): ‘the funder is not so much facilitating access to justice by the funded party as itself gaining access to justice for its own purposes’.

But recognition of this reality does not diminish the importance of litigation funding in allowing these class members to vindicate their claims against the Commonwealth. Without litigation funding, the claims of these group members would not have been litigated in an adversarial way but, rather, they would likely have been placed in the position of being supplicants requesting compensation, in circumstances where they would have been the subject of a significant inequality of arms ... But it strains credulity to think that claims of this complexity and attended by such potential expense could have been litigated to a conclusion without third party funding of some sort. It seems to me a testament to the practical benefits of litigation funding, that these complex and costly claims have been able to be litigated in an efficient and effective way and have procured a proposed settlement. It must be recalled that an acceptable settlement was only forthcoming after a vast outlay of resources, and the assumption of risk of a third-party funder for potential adverse costs.1

In the Williamtown matter, fewer than 3 per cent of group members lodged objections to the settlement amount, the litigation funder’s commission or the fees and costs of the lawyers. The Court said that the settlements achieved “can fairly be described as excellent."2 It said each of the three class actions settled for an amount either just under or just exceeding 100 per cent of the likely best possible quantum recoverable should the class members’ claims succeed at trial.

Litigation funding returns and misleading comparisons  

The other myth perpetuated by critics of litigation funders is that the returns generated by funders are outrageous when compared with returns on other investments.

In one part of its submission, the MRC compares returns derived from Australian bonds, the ASX 200, US private equity and other investments to the return on investments (ROI) reported by three funders.  While the information is undoubtedly correct, it is comparing two completely different measures and holding it out as science.

The ROI cited for Omni Bridgeway is a measure of average returns from investments concluded between 2001 to 2019. 

The numerator is the total revenue, which includes commission and return of legal fees and costs, on all successful investments. The total revenue during this period was $1,022.4 million.

The denominator is the costs paid to third parties, including legal fees, experts’ fees, disbursements and adverse costs on investments that were lost, and some capitalised internal costs, such as a portion of interest associated with our debt, and direct employee costs. The total of all of these costs during this period were $552 million.

What the ROI does not include is the operational overheads that are not capitalised into the investments. These costs of running the business are expensed each year. The total of these costs during this period were $296.2 million.

As such, the comparison of ROI to returns from other investments should take into account the complete picture, not one manufactured for convenience.  The appropriate comparison is that Omni Bridgeway has generated an all-in ROI of 21% during the period from 2001 to 2019 – still strong compared to some other considerably lower-risk investments but far from the outrage critics have attempted to seed.

The other piece of information missing in the MRC paper is the nature of the investment.  As anyone with knowledge of investing will be aware, comparing one investment class to another requires consideration of multiple factors, including liquidity, loss mitigation strategies and risk.

In terms of liquidity, investments in bonds or equities are highly liquid; investments in litigation are not. In fact, unlike a bond or a share, there is no active market for litigation, so when a funder makes an investment, it does so knowing that it will be committed to that investment until it completes, for better or for worse. Across the industry, that is an average commitment of 2.6 years for class actions – and it is often far longer – for example in Wivenhoe Dam, the investment is ongoing after more than eight years, and for PFAS cases for over four and half years.

In terms of loss mitigation, if your bond or equity investment is not going well, you can sell out, maybe for a loss, but you don’t lose the lot. For litigation, while there are termination rights in some circumstances, if you exit you lose the lot – every dollar you have invested to date – and will possibly be liable for 70 per cent of the other side’s costs.  As such, your maximum downside from an investment is 170 per cent of every dollar you invest. For bonds and equity, the maximum you can lose is 100 per cent – and only if you have gone to sleep and don’t take remedial steps before that occurs.

The MRC claims, laughably, that the “high returns and low risk of litigation funding make this a tantilising investment class”.  What is absurd about this statement is that litigation is not “low risk” and anyone who suggests otherwise has never been involved in litigation. There is not a single decent lawyer in the world who would advise you that a piece of litigation is low risk or certain. Certainly not at the time an investment decision is made – and usually not even after trial and a decision is rendered.

A decision to invest into litigation is usually made before a claim is made, before any evidence is discovered from the other side, when the witnesses are unknown, and before expert evidence is provided. Litigation funders are required to evaluate and then assume risks – often running to tens of millions of dollars – when there are material uncertainties in terms of the time it will take to resolve the matter, the legal and other costs of the case and, of course, the outcome.

There is no sensible way to describe this a low-risk investment.

Omni Bridgeway has lodged a comprehensive, evidence-based submission to the Parliamentary Joint Committee inquiry that addresses this myth and others peddled by the ILR and its fellow travellers.

An edited version of this article was published in The Australian on 24th June 2020.

  1. Smith v Commonwealth of Australia (No 2) [2020] FCA 837, paras 83-85

  2. Ibid, paragraph 68.