HAVE WE REACHED A(NOTHER) TURNING POINT IN THE COURTS’ ACCEPTANCE OF LITIGATION FUNDING OF CLASS ACTIONS?
This year marks 25 years since the introduction of a class action procedure in the Federal Court of Australia, a major innovation in dealing with mass claims which has also been adopted by the Supreme Courts of Victoria, New South Wales and Queensland, with a similar reform flagged for Western Australia. Class actions are designed to enhance access to justice for those with claims which are too small to be individually litigated, and to improve judicial economy by allowing large numbers of claims to be resolved together.
IMF Bentham (IMF), as Australia’s largest litigation funder, has been at the forefront of developments in the class action regime and has played a key role in the courts’ acceptance of litigation funding of class actions.
Acceptance of “funded” class actions – the Fostif decision
Since 1992 thousands of Australians have taken advantage of the class action regime to successfully resolve their claims, with many choosing to use litigation funding to meet the very high cost and risk of running these large and often complex actions. Litigation funding was initially strongly opposed. Numerous challenges were brought by defendants, based on medieval rules prohibiting third parties from investing in lawsuits, until the High Court endorsed litigation funding of class action proceedings in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386.
The Fostif decision is rightly seen as a turning point in the development of both litigation funding and class actions in this country, with litigation funding having a significant influence on not only how many class actions are able to be brought at all, but also on how they are prosecuted. The decisions of the courts in turn have affected the way in which litigation funders organise and operate their businesses.
In the three years to September 2016, almost half of the class actions filed in the Federal Court were supported by a litigation funder. Further, most of those proceedings are likely to have involved “closed classes” where the class is defined by those claimants who have signed an agreement with the funder (thereby securing the funder a return on its investment), excluding other claimants who have not done so (unless the class is later “opened” as often occurs to secure a settlement).
In the wake of Fostif, an increasingly competitive litigation funding industry has developed in Australia without significant regulation, which government has rejected as unnecessary and inappropriate to a developing industry that is improving access to justice. The Australian Securities and Investments Commission has implemented regulations requiring funders to have procedures in place to manage conflicts of interest, but otherwise no mandatory licensing or prudential supervision has been imposed.
Another turning point
Now 25 years on from the advent of class actions and over 10 years since Fostif, another turning point in the courts’ acceptance of litigation funding of class actions has been reached, with the Federal Court signalling an intention to more closely supervise litigation funders, regulate the amounts they may recover on class action settlements and address the problem of inefficient “competing” class actions concerning the same claims.
These developments are encapsulated in recent decisions of the Federal Court. In Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd  FCAFC 148 the Full Court approved the use of “common fund orders”, by which all class members are required to pay the funder a Court-approved fee from any settlement of their claims, whether each class member has signed a litigation funding agreement or not. Such orders should encourage funders where appropriate to support inclusive open class proceedings in which all related claims can be dealt with in one class action. In another decision, Earglow Pty Ltd v Newcrest Mining Ltd  FCA 1433, the Federal Court expressed the view that it has power, on approving a class action settlement, to reduce a funder’s contracted fee if the Court considers it to be excessive.
The Federal Court has also introduced a new Practice Note (GPN-CA) for class actions which provides for further scrutiny of litigation funders’ charges (through the use of Court-appointed experts) and disclosure to class members by funders of the terms of the funding they provide, as well as requiring disclosure of funding arrangements to the Court and opposing parties (in the latter case, with any tactically advantageous material redacted).
The extent to which litigation funders will support open class actions (a trend which was already underway prior to the Money Max decision) and agree to be bound by court orders varying or setting their returns, remains to be seen. Much will depend on the commission rates the Federal Court is willing to approve, but we expect the Court will be realistic given the competition which exists in the litigation funding market and the considerable risks funders take in supporting class actions.
Overall, these developments make it clear that the Federal Court regards litigation funding for class actions to be an important and integral part of its jurisdiction. IMF, having funded many significant class actions, has been at the forefront of these developments. To date, IMF has funded through to completion 30 class actions and representative proceedings and this financial year alone has announced funding for a further five class actions.
IMF has a strong track record of backing class actions which have been successfully resolved, in all cases by settlement. IMF has no incentive to fund class action claims that lack merit and strong prospects of success, particularly given Australia’s “loser pays” rule. IMF will continue to conduct detailed and searching due diligence on any potential class action referred to it for funding.
Recognising 25 years of Class Actions
To mark the 25th anniversary of the commencement of Australia’s class action regime, IMF Senior Investment Managers Wayne Attrill and Susanna Khouri, and Chief Executive - Australia and Asia, Clive Bowman, have contributed a chapter on the development of litigation funding in a new publication – 25 Years of Class Actions in Australia. This book, edited by Damian Grave and Helen Mould of Herbert Smith Freehills, is a definitive review of class actions practice between 1992 and 2017.
IMF is also sponsoring important research on current issues in class actions, being carried out by Associate Professor Michael Legg and Professor Simone Degeling at the University of New South Wales Law School, through the IMF Bentham Class Actions Research Initiative and has provided research funding to Professor Vince Morabito at Monash University in Melbourne. Prof Morabito has carried out valuable empirical research into Australia’s class action regimes.