The Rise and Minor Fall of Litigation Funding in Australia.

• Author: Williams, Greg

IN 1992, the Federal Court of Australia Act 1976 (Cth)(the "Federal Court Act") was amended to introduce Part IVA which established a federal representative proceedings (class action) regime. Subsequently, similar class action regimes have been introduced in Victoria, (1) New South Wales, (2) and Queensland, (3) with Western Australia poised to follow in 2020. (4)

The stated objective of the class action regime when introduced to the Federal Court of Australia (the "Federal Court") was to provide access to justice, resolve disputes more efficiently, avoid respondents facing multiple suits and the risk of inconsistent findings across those suits, and reduce costs for both the parties and the courts. (5) Similar objectives were cited on the introduction of each of the state-based regimes. Nearly thirty years later, most institutions and individuals with experience in the conduct of litigation, class actions, and access to justice issues agree that Part IVA and its state counterparts, while not perfect, have largely met these objectives. It is undeniable that the class action regimes have provided practical access to justice for a large number of claimants with a wide-range of claims, many of whom who would have been unable to bring their claims before the court but for the existence of the regimes. (6)

However, one element of the class action regimes that has attracted an increasing amount of attention is the role of litigation funders in securing access to justice. Supporters claim that litigation funding is vital to the health of the Australian class actions regime, whereas critics argue that it represents the worst of entrepreneurial litigation. This article seeks to provide an overview of the current status of litigation funding in Australia. First, we explain the origins of the litigation funding market. Next, we consider the recommendations made by the Australian Law Reform Commission ("ALRC") in its report Integrity, Fairness and Efficiency--an Inquiry into Class Action Proceedings and Third-Part Litigation Funders. (7) Third, we explore the High Court of Australia's decision in BMW Australia Ltd v Brewsterand its implications for the funding market. (8) Finally, we consider the Victorian Government's proposal to introduce contingency-fee based billing in the Supreme Court of Victoria.

1. The Origins and Rise of Litigation Funding in Australia

   Historically, the rules against maintenance and champerty prohibited third parties from financing litigation where they had no direct interest in the claim. Towards the end of the twentieth century, some Australian states began to gradually relax the prohibition by abolishing maintenance and champerty, either as a tort, or a crime, or both. Yet the approach was inconsistent and questions as to the relevance and impact of the rules were not always straightforward.

   The situation was clarified somewhat by the Federal Court in 1996 in Movitor Pty Ltd (receivers and managers appointed) (in liq) v Sims. (9) The Federal Court held that an agreement in which an insurance company would fund a liquidator's cause of action against the directors of the liquidated company fell within an exception to the prohibition on champertous agreements. This exception was that a trustee in bankruptcy may lawfully assign the bankrupt's causes of action. The liquidator, having statutory powers to dispose of the property of the company, was allowed to dispose of a cause of action on terms that the insurance company was to share in part of the profits, so long as it was not making a grossly excessive profit. This decision legitimized third-party funding arrangements and created an opportunity for litigation funders to develop their business model in Australia. However, it was limited to raising capital to provide funding for insolvency practitioners.

   Over the next ten years, the litigation funding industry in Australia grew and evolved, and litigation funders began to explore funding mass claims. Litigation funders' ability to provide funding more generally was considered by the High Court of Australia (10) in 2006 in Campbells Cash and Carry v Fostif. (11) The initial proceeding was commenced by tobacco retailers in an attempt to recover from tobacco wholesalers' amounts relating to a licensing fee. A litigation funder funded the proceedings in exchange for one third of any judgement sum or settlement sum if the action was successful. A majority of the High Court found that the litigation funding arrangements were not contrary to public policy and did not lead to any abuse of process. The High Court decided that neither the litigation funder's motive for profit, nor their attempts to seek out plaintiffs to join the proceedings, were alone or in combination enough to warrant an overarching rule of public policy to bar litigation funding agreements. (12)

   The decision in Fostif gave litigation funders a legitimate role in financing multi-party proceedings, including class actions, and allowed them to exercise influence over how that litigation is conducted. As a consequence, litigation funding was no longer restricted to raising capital to provide funding for insolvency practitioners. In the years that followed, the number of litigation funders (both domestic and international) operating in Australia steadily increased, as did the number of funded class actions filed in the federal and state courts.

   The rise of litigation funding in Australia is, in part, a result of the prohibition on lawyers charging contingency fees, which is a fee calculated as a proportion of any verdict or settlement obtained by the client. Litigation funders have filled a market gap by introducing a third person into the relationship between a client and a lawyer who is not subject to such a prohibition. The typical structure of an Australian funding arrangement is:

   (a) a contract between the funder and the claimant pursuant to which the claimant agrees to pay the funder a percentage of any amount they obtain by way of judgment or settlement in exchange for the funder agreeing to pay the costs of the litigation (usually including any cost order made against the claimant);

   (b) a contract between the funder and the lawyer, pursuant to which the funder agrees to pay the lawyer's fees and the lawyer agrees that the funder may direct certain aspects of the litigation (subject always to the lawyer's overriding obligation to their client); and

   (c) a contract between the claimant and the lawyer pursuant to which the lawyer agrees to represent the client and the client acknowledges role of the funder in directing the conduct of the litigation.

   Notwithstanding the growth of the litigation funding industry in Australia, Australian governments have been reluctant to...