ALRC announces preliminary ideas on the regulation of litigation funding and class action reform
In a blog back in December we commented on the newly-announced inquiry by the Australian Law Reform Commission into litigation funding and the costs charged by lawyers in funded class actions.
At two class action conferences held in Melbourne and Sydney last week, ALRC chair Justice Sarah Derrington announced some of the Commission’s preliminary ideas – what her Honour described as a “kite flying exercise”, prior to the formal submission stage which will take place in June / July, before the final report is submitted in December 2018.
The proposals – regulation of litigation funding:
- Whilst the litigation funding market has not suffered market failure, regulation is considered desirable. Policy makers should “look to the horizon” and head off consequences which are not improbable.
- Funders will be required to obtain and maintain a licence from ASIC. The licence requirements will include holding sufficient financial resources (i.e. a capital adequacy ratio), technological and human resources; holding adequate arrangements to manage conflicts of interest; and being audited annually.
- The introduction of contingency fees is recommended, but only for class actions and subject to a number of limitations – including that the law firm acting on contingency must also indemnify the funded party against adverse costs orders.
- The Federal Court should be given an express statutory power to reject or amend the commission rate charged by funders; possibly a statutory cap may also be introduced so that class members receive at least 50% of the proceeds; and possibly this same cap may also apply to contingency fees.
Class action reform:
- All class actions be initiated as open classes, bringing to an end the practice of funding “closed class” actions.
- The issue of competing open classes will be resolved by an early and expedited case management process. The court will determine “the most appropriate representative plaintiff, plaintiff law firm, and funder (if any) and which funder (if any) provides the best value for the class”. The court will also “approve costs agreements and funding agreements so that they are legally enforceable as a common fund”.
- The common fund fee, which it appears will be expressed as a percentage of proceeds, will be the sole fee charged to class members. There cannot, for example, be a contingency fee AND a funding fee.
- Recognising the concerns around the potential for there to be a “rush to the court house”, there will be no first mover advantage given to the first law firm / funder to file, though the court will set a cut-off date by which all competing matters will have to be filed.
- A US-style deposition process should be introduced to help reduce procedural costs (particularly to cut through complex discovery exercises).
The proposals are necessarily preliminary and market users such as IMF will be contributing to help add detail in due course. Two immediate thoughts spring to mind – both in part prompted by experiences of recent reforms in the UK.
First, the Commission may wish to clarify whether so-called “hybrid” funding arrangements are to be permitted. In the UK, confusion caused by the drafting of the Damages-Based Agreements Regulations 2013 on this issue has contributed to a very low take up of DBAs by the market – leading to the nickname “Don’t Bother Agreements”. However, hybrid arrangements are a commercially logical and increasingly common way for contingency law firms and funders to work together and share risk. For example, portfolio financing arrangements are common in the USA, whereby the funder provides a credit facility to a law firm and receives a cross-collateralised return across a basket of cases. The structure allows the firm to cover its working capital needs (downside risk), whilst providing a share of the litigation upside.
In a recent decision in one of IMF’s funded cases in Canada, the Ontario Supreme Court approved a hybrid litigation funding arrangement, whereby the class counsel were paid some hourly fees by IMF in addition to a partial contingency fee at the conclusion of the case, and found that such a structure would meaningfully contribute to access to justice. In Houle v St Jude Medical  O.J. No. 4489, 2017 ONSC 5129, Justice Perrell held that “the novelty of the hybrid retainer that combines a partial contingency fee with a fee-for-services retainer strikes me as a positive factor….. this approach which partially protects the financial and human capital of class counsel may expand the roster of firms prepared to assume the risks of class action litigation”.
In Australia, we anticipate there is likely to be similar demand from law firms who have negotiated a contingency fee with the class, but then wish to share some of that fee with a funder in exchange for laying off risk (including the adverse costs risk, which may be prohibitive for thinly capitalised firms seeking to run large and long running matters).
Put simply, access to justice will be better served if litigants (including defendants, if they so wish) are able to freely choose from a range of options, including the option of a funder and law firm working together, rather than obliging litigants to take a binary choice between a law firm on contingency OR a funder paying hourly rates.
Secondly, the inquiry has not been asked by former AG George Brandis to consider the legal costs charged for defending claims. However, high defence costs can also be a barrier to accessing justice – particularly where representative plaintiffs in class action proceedings carry the risk of paying adverse costs if the claim fails. For example, in one recent UK case the defence costs were reported to be GBP 125m (circa AUD 230m). Posting adequate security for those costs would be beyond the means of even the most well-resourced litigants.
As part of the UK civil procedure reforms introduced by LASPO 2012, mandatory cost budgeting was introduced on certain cases, requiring both claimant and defendant lawyers to file in court their estimated costs to act on the proceedings through to determination. If the budgets are exceeded, there is a presumption that the excess will not be recoverable inter-partes unless exceptional circumstances apply. If such a measure was introduced in Australia as part of the Federal Court’s early case management process, it may help provide the court, parties and funders with greater certainty about the financial risks of the proceedings. It may also help to address an ancillary issue, which is how a successful law firm acting solely on contingency fee (and not recording hourly rates) would recover its costs from an unsuccessful opponent; if budgeting were introduced, firms on contingency would have to continue recording time, and the firm’s total billing at the end of the matter versus the filed cost budget would help to determine the appropriate amount of any costs recovery paid by the unsuccessful party.
Post by Oliver Gayner and Gavin Beardsell.
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