Attorney General announces reference to the Australian Law Reform Commission into class actions and third party litigation funders

December 15, 2017 |

The Commonwealth Attorney General has announced a formal reference to the Australian Law Reform Commission, made on 11 December 2017, of class actions and litigation funders.  The heading of the media release leaves little doubt on what is on the Government’s mind: Protecting Australians from exorbitant legal fees.  It is hard to see class actions being abolished given they are part of the legal fabric of common law  systems and used in Europe.  There is also a need for such a mechanism where there are multiple plaintiffs affected by a single tortious wrong by a single party but where there is an economic imbalance.   But it is not surprising that there would be some form of review.  There has been some controversy with some cases involving high legal costs and complaints by some class members in certain cases. It is hardly a secret that the Australian has consistently run pieces on what it saw as rorting and a need for review.  It hasn’t changed much with today’s article Growth in class actions to come under scrutiny.

The Attorney General’s media release provides:

On 11 December, I made a reference to the Australian Law Reform Commission (ALRC) asking it to inquire into class action proceedings and third party litigation funders, to maximise access to justice for ordinary Australians.

With class actions becoming more common in courts across Australia, the Turnbull Government wants to ensure the costs of such proceedings are appropriate and proportionate and that the interests of plaintiffs and class members are protected.

There is a significant risk, in such proceedings, that members of plaintiff groups may be required to pay lawyers’ fees which are exorbitant and unjustifiable. 

Unlike lawyers, third party funding entities are not bound by professional ethical obligations, despite playing a significant role in enabling and maintaining class action proceedings.

Third party litigation funders are not subject to any comprehensive Commonwealth or state and territory regulation to address the structure, operation and terms on which they participate in the Australian legal system.

I have asked the ALRC to consider whether and to what extent class action proceedings and third party litigation funders should be subject to Commonwealth regulation, with reference to specific matters that have arisen including the proportionality of lawyers’ costs and the lack of ethical constraints on their operation such as those binding legal practitioners.

The ALRC will consult widely with institutions and individuals with experience in litigation, class action proceedings and access to justice issues including the legal profession, courts and tribunals, litigation funding entities and the academic community.  

The ALRC will report by 21 December 2018. 

The Australian article provides:

Third-party litigation funders that have supported the enormous growth of class actions — and take up to 40 per cent of any money awarded in court — will be the subject of a federal inquiry.

It will focus on whether there is a need for regulation — a move likely to be strongly opposed by class-action law firms with strong Labor links.

The internal processes of class-action law firms will be examined to determine whether their cost structures and commercial arrange­ments with litigation funders are harming the interests of clients.

This comes soon after one of the nation’s leading plaintiff law firms, Maurice Blackburn, faced calls for a royal commission into its handling of the massive class-­action payout from Victoria’s Black Saturday bushfires.

After winning a settlement of $494 million for victims of the Kilmore East-Kinglake fire, Maurice Blackburn took $100m in fees while the firm’s work was being overseen by the Supreme Court of Victoria.

The firm told the Federal Court in NSW last year that its charges for administering another class ­action would be $849 an hour for partners, $665 an hour for senior associates and $566 an hour for solicitors.

The federal inquiry, which will be conducted by the Australian Law Reform Commission, will cover the increased incidence of class actions and examine whether the interests of clients need greater protection.

It comes soon after the number of class actions launched in the year to June hit 36, one up from the year before, according to figures assembled by law firm King & Wood Mallesons. Half of all class actions were fin­anced by litigation funders last year; this year’s figures show NSW is the nation’s class-­action capital, with 16 new claims compared with 12 in Victoria.

The Attorney-General George Brandis is understood to have had discussions about the inquiry with newly appointed Law Reform Commission president Sarah Derrington, who has worked as a barrister and lawyer for leading commercial firms.

The government’s move comes after a 2014 report by the Productivity Commission recommended litigation funders should be subjected to a licensing regime that focuses on capital adequacy and disclosure requirements.

Despite concerns over the bushfire class action, Maurice Blackburn has told a Victorian inquiry into litigation funding that the class-action system is working well and there is no need for any change to the regulation of ­litigation funders.

The firm’s submission to the Victorian inquiry accepts that “there have been isolated in­stances where class actions appear to have been prosecuted purely for the purpose of enriching the ­litigation funder and/or plaintiff lawyer”, but it says the rules should be changed to allow law firms to charge US-style contingency fees.

This would allow lawyers to adopt the same practices as litigation funders and take a percentage of whatever they win for their clients.

Maurice Blackburn told the inquiry that if law firms could charge contingency fees, more class ­actions could be run and this would improve access to justice.

The federal inquiry’s focus on the capital adequacy of litigation funders is likely to be strongly opposed by Slater & Gordon, the other leading class-action firm. Slaters told the Victorian inquiry it was unclear what practical benefit such a change would achieve.

NSW Chief Justice Tom Bathurst has drawn attention to a 2007 incident in which a foreign litigation funder withdrew its funding midway through a trial and refused to make a security for costs payment. This left the National Australia Bank, which had spent $63m defending itself, unable to recover what it was owed.

The federal inquiry follows years of lobbying by the US Chamber of Commerce, which is deeply concerned about the litigation risk confronting American companies in Australia.

A report last year by law firm Allens said there was no doubt that third-party litigation funders have had a significant and sustained impact on the risk of class actions in Australia. That report said the commercial imperatives of third-party funders “have pushed the boundaries of what is permissible under the class-action regimes with a view to making class actions better suit their entrepreneurial business models”.

In 2013, the US Chamber Institute for Legal Reform warned that the rise of third-party litigation funding in Australia was undercutting control of litigation by lawyers and their clients.

A year later, institute president Lisa Rickard urged the federal government to consider regulating litigation funders, which she said were “influencing, investing and spreading across the globe”.

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