The Third Party Litigation Funding Law Review: Australia

Market overview

Australia is home to a sophisticated third-party litigation funding market. Initially third-party litigation funding was used to support insolvency claims but since the turn of the millennium, it has increasingly been utilised in a broad range of civil and commercial litigation and arbitration matters. In 2020, the market size of the Australian litigation funding industry, measured by revenue, was A$141.2 million. The market size of the industry grew 20.1 per cent per year on average between 2015 and 2020 and is anticipated to continue growing over the next five years.

The increasing use of litigation funding for a broad range of class actions is another well-established trend in the Australian funding market. In the five-year period between 1 January 2014 and 31 December 2018, approximately 62 per cent of the class actions filed in Australia were supported by third-party litigation funders, although, and contrary to popular belief, since 2018 there has been a steady decrease in funded class actions as a proportion of the overall number of class actions commenced in Australia.

The Australian Law Reform Commission (ALRC) estimates there are approximately 33 litigation funders active in the Australian market.

Legal and regulatory framework

i The legal basis and limits of third-party funding

Prior to 2006, encouraging litigation and funding another's claim for profit were prohibited in Australia by the common law doctrines of maintenance and champerty. These doctrines prevented the courts from being used for speculative business ventures. Maintenance and champerty were the foundation for numerous challenges to the legitimacy of litigation funding before being progressively abolished as crimes and torts. Even after the statutory abolition of maintenance and champerty in most states of Australia, courts may still intervene in funded litigation where funding agreements are considered to be contrary to the public policy considerations upon which the previous prohibitions were based at common law. More than 20 challenges to funding agreements were mounted in the eight years prior to the 2006 landmark decision of the High Court in Campbells Cash and Carry Pty Ltd v. Fostif Pty Limited (Fostif).

In a pivotal moment in the development of the Australian jurisprudence, the High Court held in Fostif that third-party litigation funding of a class action was not an abuse of process or contrary to public policy. The Court stated that notions of maintenance and champerty could not be used to challenge proceedings simply because they were funded by a litigation funder. Following Fostif, litigation funding has become an entrenched part of the Australian legal system, playing a crucial role in providing greater access to the courts and bringing equality of arms to claims against often well-resourced respondents. Even so, challenges to litigation funding agreements still arise from time to time, predominantly in states where the torts of maintenance and champerty have not yet been abolished by statute.

The ability of lawyers to fund claims in the same way that third-party funders do continues to be debated and under constant review. With the exception of Victoria, legal practitioners in the states and territories of Australia remain prohibited from entering into any arrangement for payment of damages-based contingency fees (where fees are calculated by reference to a percentage of the amount recovered). Unsurprisingly, practitioners in all states are entitled to enter into conditional billing arrangements whereby their ordinary fees are payable upon a successful outcome. These arrangements are known as 'no-win no-fee' agreements and sometimes permit an uplift of up to 25 per cent of the lawyer's ordinary fees where a successful outcome is achieved. For obvious reasons, such arrangements are often not commercially viable for practitioners, particularly for larger or more complex claims such as class actions. As at 1 July 2020, Victoria has been the only state to move forward on this issue, with the Victorian parliament passing legislation enabling practitioners to enter into damages-based contingency fee arrangements for class actions.

The extent to which a lawyer may be associated with the litigation funder has been extensively tested in Australia by a Melbourne-based solicitor, Mark Elliott, who was the sole director and shareholder of Melbourne City Investments Pty Ltd (MCI). In 2014, securities class actions were commenced by MCI, as the representative plaintiff, against ASX listed Treasury Wine Estates (TWE) and Leighton Holdings (LEI). At incorporation, MCI acquired shares in TWE and LEI and other small parcels of shares costing less than A$700 in various other ASX-listed companies. Mr Elliott had also appointed himself as the legal representative for MCI, which was receiving litigation funding to conduct the claims.

In December 2014, the Victorian Court of Appeal stayed the proceedings as an abuse of process because they had been commenced with the predominant purpose of earning legal fees for the solicitor, rather than the fees being an incident or by-product of the vindication of legal rights. In their majority judgment, Maxwell P and Nettle JA emphasised the importance of maintaining public confidence in the fairness of court processes; confidence that 'would undoubtedly be shaken' if the enrichment of a solicitor were held to be a legitimate purpose for bringing proceedings.

Earlier in 2014, Mr Elliott had trialled a different funding model for a class action brought against Banksia Securities. He again sought to act as the lead plaintiff's solicitor, while also being a director and secretary of the litigation funder and holding an indirect shareholding in the funder. The litigation funding agreement entitled the litigation funder to a 30 per cent commission and to exercise control over the conduct of the proceeding. In November 2014, the Supreme Court of Victoria restrained Mr Elliott from acting in the Banksia Securities class action owing to conflicts of interest. Justice Ferguson considered that the main risk arising from Mr Elliott's pecuniary interest in the outcome of the class action was that he might not fulfil, or might not be perceived to fulfil, his duties to the court or be independent and objective. Her Honour found 'it would be inimical to the appearance of justice for lawyers to skirt around the prohibition on contingency fees by this means; particularly where the legal practitioner's interest in the funder is sizeable'.

In February 2018, a A$64 million settlement of the Banksia Securities class action was approved but was subsequently subject to judicial review following an appeal from a disgruntled group member. The review involved the appointment of a contradictor to assist the Court to consider the amounts to be paid for legal costs and funding commission. In dramatic developments that followed, allegations were presented to the Court suggesting the plaintiff's solicitor and counsel had engaged in serious misconduct in connection with their billing practices. In response, both the plaintiff's senior and junior counsel elected not to dispute the allegations and offered to have their names removed from the bar roll. The review hearing before Supreme Court Justice Dixon will examine the funder's and lawyers' conduct, including whether they should be ordered to forego all costs and commission and pay additional damages to the 16,000 class members.

ii The past decade of litigation funding regulation

As providers of financial services and credit facilities, litigation funders are subject to the consumer provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), which contains protections against unfair contract terms, unconscionable conduct, and misleading and deceptive conduct. These provisions provide avenues for redress against unfair or false and misleading terms or omissions in funding agreements.

In 2009, litigation funding regulation became the subject of national debate following the landmark case of Brookfield Multiplex Funds Management Pty Ltd v. International Litigation Funding Partners Pte Ltd (Multiplex), which determined that litigation funding agreements and the lawyer's retainer in a funded class action constituted managed investment schemes within the meaning of Section 9 of the Corporations Act 2001 (Cth) (the Corporations Act). Managed investment schemes are required to be registered and managed by an entity holding an Australian Financial Services Licence (AFSL). Failure to comply is an offence.

A second landmark case involved a dispute between a funder and client, which raised similar questions regarding the nature and regulation of funding arrangements. In Chameleon Mining NL (Receivers and Managers Appointed) (Chameleon) the client sought to rescind a funding agreement under Section 925A of the Corporations Act and thereby avoid payment of the funder's commission. The client argued that the funding agreement was a financial product and that the funder did not hold an AFSL. The High Court concluded that the funding agreement was a 'credit facility' rather than a financial product and, while it did not need an AFSL, the funder did require an Australian credit licence.

In the aftermath of these two landmark cases the federal government intervened, announcing that it would protect funded class actions from too heavy a regulatory burden. In 2010, the Australian Securities and Investment Commission (ASIC) issued class orders granting transitional relief to the lawyers and litigation funders involved in funded class actions, exempting them from the managed investment regulatory obligations. ASIC subsequently granted transitional relief from financial product regulatory requirements of the Corporations Act.

The Multiplex and Chameleon cases also led to the introduction of a new conflict management regime. In 2012, regulations were enacted exempting litigation funders from the managed investment scheme provisions of the Corporations Act subject to compliance with new conflict management requirements. Litigation funders providing both single-party funding (litigation funding arrangements) and multiparty funding (litigation funding schemes) were required to conduct reviews and maintain written procedures identifying and managing conflicts of interest. In April 2013, ASIC released a regulatory guide detailing how litigation funders may satisfy these obligations.

However, on 22 May 2020, the federal Treasurer announced a dramatic policy change with the introduction of the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (the New Regulations). The stated effect of the New Regulations was twofold: first, to require third-party litigation funders to hold an AFSL, and secondly, to comply with the managed investment scheme regime under Chapter 5C of the Corporations Act. The New Regulations were published on 23 July 2020, under a cloud of controversy, and took effect on 22 August 2020 – without industry consultation or any federal government response to the detailed recommendations of the ALRC report 'Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders' (the ALRC Report) delivered on 21 December 2018.

iii Reviews into the regulation of litigation funding

The regulation of litigation funding is subject to constant review and remains a heavily debated reform issue.

Productivity Commission Report

In September 2014, the Productivity Commission delivered a comprehensive report regarding access to justice, which favoured two major reforms that, if implemented, would greatly impact litigation funding. The two proposed reforms were (1) the introduction of a licensing regime for litigation funders, and (2) the removal of the ban on lawyers charging damages-based contingency fees, thereby introducing another funding option for clients. Both reforms (and an array of other proposals) received further consideration at state and federal level by the Victorian Law Reform Commission (VLRC) and the ALRC respectively.

VLRC

On 16 December 2016, the Victorian Attorney-General commissioned the VLRC to report on litigation funding and the conduct of class actions and to consider how regulators might better protect litigants from unfair risks or disproportionate costs burdens. The VLRC report 'Access to Justice: Litigation Funding and Group Proceedings', tabled in the Victorian parliament on 19 June 2018 (the VLRC Report), recommended that, subject to careful regulation, legal practitioners be permitted to charge contingency fees so as to provide another funding option for clients who are unable to bring proceedings without financial assistance in appropriate cases. The VLRC Report also supported industry-wide, national regulation of litigation funders and recommended that Victoria advocate for stronger national regulation through the Council of Australian Governments.

ALRC

On 11 December 2017, the federal Attorney-General announced that the ALRC would conduct a similar federal review into litigation funding and the conduct of class actions. The ALRC Inquiry, led by the Hon Justice Sarah Derrington QC, consulted broadly with judicial and expert panels, regulators, stakeholders and interested parties in the United Kingdom and Canada. A discussion paper released on 1 June 2018 (the ALRC Paper) attracted more than 70 formal submissions from a broad range of industry stakeholders, including: funders, law firms, insurers, industry super funds, non-government organisations, business lobby groups, and regulatory bodies and professional associations.

The ALRC Report was delivered to the Attorney-General on 21 December 2018 and tabled in the federal Parliament on 24 January 2019. The ALRC Report makes 24 recommendations, predominantly relating to the reform of class action law and procedure.

Consistent with the earlier recommendations of the VLRC and the Productivity Commission, the ALRC Report recommends that 'percentage-based fee arrangements' or contingency fee arrangements for solicitors be permitted in Australian class action proceedings with some limitations. This would allow solicitors to receive a proportion of the sum recovered at settlement, subject to court approval, to ensure arrangements are reasonable and proportionate. The four key arguments advanced in favour of contingency fee arrangements are that they will: (1) increase access to justice for prospective group members of medium-sized class actions (between A$30 million and A$60 million); (2) promote competition; (3) increase returns for group members; and (4) provide clarity and certainty for group members. The recommended limitations to be placed on contingency fee arrangements include that the contingency fee be the one and only form of funding; the solicitors are precluded from also recovering any professional fees on a time-cost basis; and the solicitors bear the onus of paying for the disbursements and must account for these within the contingency fee.

Notably, in relation to the regulation of litigation funders, the ALRC Report recommends against the introduction of a licensing regime (contrary to the initial proposal in the ALRC Paper), and suggests improved court oversight of litigation funders on a case-by-case basis. The ALRC considers this will 'achieve at least the same level of consumer protection without the regulatory burden of a licensing regime'. The ALRC Report suggests a suite of amendments to the Federal Court of Australia Act 1976 (Cth) (the FCA Act) aimed at strengthening the Federal Court's supervision of litigation funders, including to provide that litigation funding agreements for class action proceedings are enforceable only with the approval of the Court; expressly empowering the Court to award costs against litigation funders (and insurers) who fail to comply with the overarching purposes of the FCA Act (to facilitate the just resolution of disputed claims according to law and as quickly, inexpensively, and efficiently as possible); and a statutory presumption that litigation funders who fund class action proceedings will provide security for costs in a form that is enforceable in Australia.

The ALRC Report also recommends that the ASIC Guide 248 be strengthened to require that litigation funders who fund class action proceedings report annually to ASIC on their compliance with the requirement to implement adequate practices and procedures to manage conflicts of interest. In recognition of the wide range of funding models that have emerged since the 2012 'conflict management' procedures were introduced, the ALRC also recommends that the scope of Regulation 5C.11.01 of the Corporations Regulations 2001 (Cth) be amended to include 'law firm financing' and 'portfolio financing' within the definition of a 'litigation funding scheme', so that litigation funders who provide such funding are also required to implement conflict management procedures.

Parliamentary review of litigation funding and the regulation of the class action industry

Prior to responding to the ALRC Report, in May 2020, the federal government announced yet another review of litigation funding and the regulation of the class action industry – this time via a referral to the Parliamentary Joint Committee on Corporations and Financial Services. A short four-week period was allowed for submissions followed by a short series of hearings in July and August 2020. The stated terms of reference of the inquiry are to consider whether the present level of regulation applying to Australia's growing class action industry is impacting fair and equitable outcomes for plaintiffs. The inquiry is due to report on 7 December 2020.

Structuring the agreement

i Typical structure

Funded litigation can involve a contractual relationship between the litigation funder, the lawyer and the funded client, whereby the funder agrees to provide for some or all of the client's legal costs and disbursements in return for receiving a percentage of any damages recovered. This percentage typically ranges between 20 per cent and 45 per cent of the settlement proceeds depending on the risks and time involved and the type of funding required. The ALRC Report noted that the median commission rate for third-party litigation funding of Federal Court class actions between March 2017 and March 2018 was 30 per cent. However, in the context of insolvency litigation funding, commission rates can be considerably higher. In contrast, the median rate for 'common fund' orders in class actions during the period October 2016 to December 2019 was 21.9 per cent.

In class actions, the funder may also assist with project management, administration and pre-claim investigation and may charge a project management fee. Litigation funders routinely agree to provide security for costs and an indemnity to cover the risk of adverse costs orders in the event that the proceeding is unsuccessful.

As litigation funders do not act as the legal representatives for the funded litigant, clients generally enter into two agreements: (1) a standard retainer agreement with their lawyer recording the scope and terms under which the legal services are to be provided; and (2) a litigation funding agreement with their funder recording the terms on which litigation funding is to be provided. Commonly, the funder and lawyers have no direct contractual relationship, although clients often authorise their lawyers to report directly to the funder. Funders may agree to pay a proportion, or all, of the lawyer's fees during the course of the claim. Where legal fees are partially deferred they are generally recovered from any resolution sum if a successful outcome is achieved.

Funding agreements often allocate project management responsibilities and day-to-day administrative control over the litigation to the funder, allowing the funder the right to provide instructions and administrative support to the lawyers, subject to the client's overriding instructions. In theory, the ultimate level of control given to the funder might be seen to give rise to potential conflicts between the interests of the client, in achieving the best possible outcome, and the interests of the funder, in resolving the claim for an acceptable return on its investment. In Fostif the Court of Appeal recognised that a high level of control by the funder is expected and permissible but cautioned that it would be contrary to public policy for the lawyers to fully abdicate to the funder the obligation to act for the representative party. Therefore, while it is permissible for a funder to maintain day-to-day control of a claim, the legal representatives are expected to consult with the client on key issues. Hence funding agreements often preserve the client's right to override the funder's instructions and commonly include dispute resolution mechanisms.

The client usually authorises the lawyer to receive any resolution sum on the client's behalf to be applied in accordance with an agreed priority. Generally a resolution sum is prioritised by first reimbursing the lawyer for any deferred fees and the funder for legal costs and disbursements outlaid, then paying any funding commission and then distributing the balance to the funded clients.

ii Judicial intervention

Somewhat controversially, Australian courts have shown a willingness to scrutinise the commercial terms of litigation funding agreements and, in some instances involving representative proceedings, intervene if they consider funding commissions to be excessive. In Earglow Pty Ltd v. Newcrest Mining Ltd, Justice Murphy considered that the court had power to reduce a litigation funder's commission rate when approving a class action settlement. His Honour held that the court was not limited to the binary choice of either approving or rejecting the settlement – instead, the court had power to approve the settlement, while at the same time varying, of its own motion, the amount payable to the funder (thus, in effect, overriding the contractual arrangements between the funder and group members). Justice Murphy considered that this power derived from a combination of Sections 23, 33V, 33Z and 33ZF of the FCA Act, and was analogous to the court's power to fix the amount of costs payable to the lawyers.

In deciding whether to exercise that power in the context of a class action settlement approval, Australian courts have also shown a willingness to review and consider legal costs, the amount that funded litigants will receive 'in hand', the risks assumed by the funder, the amount of adverse costs exposure, and the sophistication and experience of funded litigants. Applying these principles to the Newcrest settlement approval application, Murphy J concluded that the aggregate funding commission of A$6.78 million, at rates of between 26 per cent and 30 per cent, was fair and reasonable. His Honour considered the published empirical research into the funding commission rates paid in Australian class actions, and previous settlement approval decisions, before concluding that those rates were at the lower end of the range. He also emphasised the need for transparency about matters relating to funding in settlement approval judgments to allow proper benchmarking.

In Mitic v. OZ Minerals Ltd (No. 2), Justice Middleton agreed that the court had power to vary the amount payable to a litigation funder out of a settlement in a class action, but preferred to base that view on Section 33V(2) of the FCA Act, rather than on the other provisions referred to by Justice Murphy.

This issue appears not to be settled though. In Liverpool City Council v. McGraw-Hill Financial Inc (now known as S&P Global Inc), Lee J approved a comparatively large funding commission of A$92 million out of a total settlement of A$215 million (about 43 per cent) through a funding equalisation order, but, in doing so, considered that Section 33V(2) of the FCA Act did not give the court the power to interfere with the amount of a funding commission to make a settlement reasonable, or to alter a 'valid contract' between parties (including a funding agreement). Lee J noted that there were no objections or applications to set aside the agreement and that a large portion of the class were sophisticated institutional investors. His Honour did not ultimately decide on whether the court has an inherent power to alter a funding agreement, although he did express significant doubt about the existence of such a power, which would allow the court to interfere and vary funding agreements in the context of a settlement by altering the contractual promises of group members to pay a commission.

Therefore, the question (and extent) of judicial power to vary terms of litigation funding agreements remains somewhat controversial and unresolved in Australia. The courts have considered this question in a number of cases since and have either declined to vary the commission rate or, in some cases, varied the commission rate. The federal government has yet to respond to the ALRC Report recommendation that the Federal Court be given an express statutory power to reject, vary or amend the terms (such as the commission rate) of such litigation funding agreements and that litigation funding agreements (for class action proceedings) be enforceable only with the approval of the Federal Court.

Disclosure

The Federal Court's Class Action Practice Note requires the disclosure of legal costs and any litigation funding charges to current and potential clients in class actions, in clear terms, as soon as is possible. Broader disclosure to the court and other parties is also required in any class action. Funded applicants are entitled to redact these materials to conceal information that might confer a tactical advantage on another party. Commercial terms such as the litigation budget, the commission and costs structure are generally redacted whereas the court is given a complete version. On occasion, the Federal Court has been prepared to order production of unredacted litigation funding agreements where relevant, for example, where funding rates were relevant to the respondent's application to set aside the proceeding as an abuse of process, or where an application to de-class the proceeding on the ground that a closed class was said to be an abuse of process.

Conversely, outside the class action realm, there are limited areas of mandatory requirement for disclosure of funding agreements. Parties have successfully resisted production of funding agreements and documents associated with the funding relationship, such as investigative reports and correspondence between the funder and a funded party, on the ground of legal professional privilege under Section 119 of the Evidence Act 1995 (NSW) (the Evidence Act). In Hastie Group Ltd (in liq) v. Moore the respondent successfully obtained orders at first instance for production of an expert report that had been provided to the prospective litigation funder. However, the NSW Court of Appeal overturned that decision and upheld a claim of legal professional privilege. It did so on the ground that the report was prepared for the dominant purpose of the provision of professional legal services in relation to proceedings or anticipated proceedings under Section 119 of the Evidence Act, having regard to the engagement letter attached. Importantly, the Court of Appeal also held that the disclosure of the report to a litigation funder was not sufficient to waive privilege in circumstances where it was clear that the report was being provided on a confidential basis.

Adverse costs

Superior Australian courts generally have power to order costs against a non-party, including a third-party funder. In Knight v. FP Special Assets Ltd, the High Court held that the relevant provisions of the Supreme Court Act 1867 (Qld) empowered the Court to award costs against a non-party where the party to the litigation is an insolvent person or 'man of straw' and the non-party has played an active part in the conduct of the litigation and has (or some person on whose behalf that non-party has been appointed has) an interest in the subject of the litigation.

However, examples exist where a litigation funder did not provide any contractual indemnity against adverse costs and where the court subsequently refused to order that third-party funder to pay adverse costs. In Jeffery & Katauskas Pty Ltd v. SST Consulting Pty Ltd (SST), the High Court held that it was not an abuse of process where a plaintiff was unable to meet an adverse costs order simply because the funder had not assumed any liability for adverse costs. In that case, the defendant had not sought adequate security for costs during the proceeding. The High Court clarified that a litigation funder does not always have to put the funded party in a position to meet any adverse costs order.

At the time, the High Court's SST decision generated apprehension from some quarters, suggesting that funders might refuse to provide indemnities for adverse costs to the detriment of successful respondents. Perhaps as a result of commercial realities and market competition, these fears have not materialised. In practice, litigation funders routinely agree to indemnify clients against adverse costs exposure and provide security for costs that may be ordered. Representative applicants in funded class action claims will often not be prepared to assume personal liability for costs without such indemnities.

In Domino's Pizza Enterprises Limited v. Precision Tracking Pty Ltd (No. 2), the funded party opposed a security for costs order being made on the grounds that there was no risk that a costs order would not be satisfied because of the combined effect of the litigation funding indemnity, an adverse costs insurance policy and proposed undertakings by Precision Tracking Pty Ltd to notify the parties of any relevant change of funding circumstances. The court ordered security for costs to be lodged, concluding that: (1) Precision Tracking did not have the capacity to meet an adverse costs order; (2) the funding agreement restricted the indemnity to a counterclaim in the proceedings; and (3) the adverse costs insurance was taken out for the primary claim. Additionally, the funder had an absolute discretion to terminate its funding arrangements with Precision Tracking at any time, including the adverse costs indemnity and the adverse costs insurance.

The adequacy of adverse costs insurance as a form of security was again tested in Petersen Superannuation Fund Pty Ltd v. Bank of Queensland Ltd (Petersen)and Equititrust Limited v. Tucker. In the Petersen case, Justice Yates accepted that, depending on the circumstances, 'an appropriately worded ATE policy might be capable of providing sufficient security for an opponent's costs'; but on the facts of Petersen concluded that the specific policy offered was not sufficient, noting the beneficiary of the policy was the applicant, not the respondents. His Honour also found that there was no mechanism by which the respondents could compel the applicant to sue on the policy if it were breached. Although this could potentially be overcome by direct proceedings against the insurer under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), there were other potential difficulties, including numerous policy exclusions that might be relied on, and a lack of evidence in relation to procurement of the policy that might have an impact on non-disclosure and avoidance rights.

Costs

Not Applicable

The year in review

i Further regulation of funded class actions

A Regulatory Impact Statement issued on 15 June 2020 addressed the basis for the introduction of the federal government's New Regulations. It states the primary outcome to be achieved through this government intervention is, 'to subject litigation funders to greater regulatory oversight that ensures they meet certain standards in how they operate their business and their schemes, on a systemic level, beyond the powers exercised by the courts over litigation funders on a case-by-case basis'. Arguably these policy announcements added fuel to an already polarised debate as to the need for such significant regulatory reforms, particularly in light of the contrasting recommendations of the ALRC Report and the announcement of a new Parliamentary Joint Committee review of litigation funding and the class action industry, which was not scheduled to report until December 2020.

The New Regulations also resulted in some unintended consequences for non-class action third-party litigation funding. Although the Explanatory Memorandum stated that the New Regulations 'do not remove the effect of . . . exemptions that currently apply to certain litigation funding schemes in the insolvency context and litigation funding arrangements (which are used in actions involving a single plaintiff)', it appears that objective has not been achieved on close analysis of the text. In removing the exemptions previously available to litigation funders and lawyers in respect of funded class actions (defined as litigation funding schemes), the drafters appear to have overlooked the fact that not all multiparty funded litigation is conducted as a class action. Consequently, there is considerable doubt as to the ability of third-party litigation funders to enter into funding arrangements with more than one claimant, notwithstanding that such arrangements may not be constituted as class actions.

Casting further doubt and uncertainty as to the future of the New Regulations, on 26 August 2020, the Hon Senator Deborah O'Neill introduced a notice of motion seeking to disallow the New Regulations as a legislative instrument. This motion must be dealt with within 15 parliamentary sitting days and will operate to automatically repeal the New Regulations unless a favourable vote is achieved in the Senate within that period.

ii Common fund orders

A significant evolutionary step in the Australian system has been the judicial consideration of common fund orders (CFOs) in class actions. CFOs can provide for the legal costs of the proceedings and the commission charge of a litigation funder to be shared by all members of a class who succeed in, or achieve a settlement in, a class action, irrespective of whether they have signed any legal retainer or funding agreement. However, the ability of the court to make a CFO at an early stage of a class action proceeding was successfully challenged in the High Court (by a 5 : 2 majority) in the Lenthall and Brewster class actions on 4 December 2019.

The first CFO in a class action was made by the Full Court of the Federal Court on 26 October 2016 in the QBE class action. The order was made at an early stage of the proceedings to assist group members in making an informed decision as to their participation in the class action prior to opting out. In approving the order, Murphy, Gleeson and Beach JJ stated that upon any successful settlement or judgment in the proceedings the applicant and class members must pay a reasonable court-approved funding commission from any monies received, prior to distribution of those monies. The Full Court declined to set the funding commission rate, preferring to determine that issue at a later stage, 'when more probative and more complete information will be available to the Court, probably at the stage of settlement approval or the distribution of damages'.

Following the QBE class action a number of CFOs were made in a range of class actions, including: Blairgowrie Trading Ltd v. Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No. 3); Camping Warehouse v. Downer EDI (Approval of Settlement); Lenthall v. Westpac Life Insurance Services Limited (the Lenthall class action); Catherine Duck v. Airservices Australia.

The judicial power enabling CFOs at an early stage of the proceeding was ultimately challenged in a landmark series of cases involving the Lenthall class action and Brewster v. BMW Australia Ltd (the Brewster class action), where a separate question for determination as to the power to make CFOs was referred directly to the NSW Court of Appeal. In a historic first joint sitting of the Full Federal Court of Australia (via Lenthall) and the NSW Court of Appeal (via Brewster), the Courts heard these challenges. On 1 March 2019, both Courts concluded that there is sufficient statutory power enabling CFOs to be made. Allsop CJ, Middleton and Robertson JJ were unanimous in dismissing the Lenthall appeal, finding that Section 33ZF of the FCA Act (the basis for the general power of the courts to make orders appropriate or necessary to ensure that justice is done in the proceedings) enabled the courts to make such orders. Likewise, Meagher JA, Ward JA and Leeming JA agreed that CFOs were authorised pursuant to Section 183 of the Civil Procedure Act 2005 (NSW) (CPA). It was held that the making of CFOs was a proper exercise of judicial power and in no way contravened Chapter III of the Commonwealth Constitution.

The High Court subsequently granted special leave to hear appeals in both the Lenthall and Brewster matters as to whether the Courts had erred in concluding that Section 33ZF of the FCA Act and Section 183 of the CPA validly enabled the making of CFOs. On 4 December 2019, a majority of the High Court of Australia (Kiefel CJ, Bell, Keane, Nettle and Gordon JJ) held that neither Section 33ZF of the FCA Act nor Section 183 of the CPA empowers a court to make a CFO. In a joint judgment, Kiefel CJ, Bell and Keane JJ held that although the power conferred on the court by those sections is broad, considerations of text, context and purpose all point to the conclusion that it does not extend to the making of a CFO. However, the High Court's judgment left unresolved two questions: (1) whether the court has power to make a CFO at the conclusion of a representative proceeding, pursuant to Section 33ZF of the FCA Act and Section 183 of the CPA (following a judgment) or Section 33V(2) of the FCA Act and Section 173(2) of the CPA (following a settlement); and (2) whether the making of a CFO would be unconstitutional.

Following the High Court's decision in the Brewster and Lenthall class actions, on 20 December 2019 the Federal Court issued a new Class Actions Practice Note (GPN-CA) to indicate that the Court will still consider appropriate applications for orders sharing the costs of class actions at the conclusion of proceedings of this kind.

Different approaches have been taken by judges in interpreting the scope of the High Court's decision in Brewster and Lenthall.

Beach J, Murphy J and Lee J of the Federal Court, have expressed the view that the court has the power to make CFOs (sometimes referred to as 'expense sharing orders') at the time of settlement under Section 33V(2) of the FCA Act, with Murphy J and Lee J making such orders in recent cases. Other Federal Court judges have taken a different view, with some considering the majority of the High Court gave strong reasons favouring a funding equalisation order over a CFO.

The question of whether CFOs can be made at settlement under Section 173 of the CPA was recently referred to the Court of Appeal of the Supreme Court of NSW in Brewster, although the Court of Appeal promptly declined to decide the issue because no settlement had been reached and therefore the Court was effectively being asked to deal with the issue in a factual vacuum. The Full Court of the Federal Court of Australia, adopted a similar approach when dealing with the equivalent to Section 173 of the CPA under federal legislation in the 7-Eleven class action. While not determining the question, Justice Lee took the opportunity to provide some useful guidance on CFOs generally, providing a helpful explanation as to the differences between 'commencement CFOs', 'settlement CFOs' and 'judgment CFOs'. With these two decisions, the NSW Court of Appeal and the Federal Court of Australia now unanimously consider that the High Court's earlier decision in Brewster prohibiting CFOs is limited to commencement CFOs and does not address or decide whether settlement CFOs or judgment CFOs are beyond judicial power.

In Pearson (the stolen wages class action), Murphy J of the Federal Court also considered whether a CFO made pre-Brewster had continuing effect. His Honour found that although it is apparent, as a result of the decision in Brewster, that the extant CFO made earlier in the proceeding was beyond power, as an order of a superior court, the CFO remained valid until and unless set aside, and as no party had sought to have the CFO set aside, it continues in effect.

The result of the High Court's decision in the Brewster and Lenthall class actions has been to reduce flexibility for the courts to adopt CFOs and to deal with commission rates. With some judges now calling for legislative intervention on the issue, there appears to be a strong basis for regulatory change.

iii Contingency fees in the Supreme Court of Victoria (class actions)

Another evolutionary step in the Australian system occurred on 18 June 2020 with the introduction of damages-based contingency fees in class actions applicable in the Supreme Court of Victoria. These changes were introduced via a new Section 33ZDA of the Supreme Court Act 1986 (Vic), allowing for group costs orders in class actions. Group costs orders can now be made where it is 'appropriate or necessary to ensure that justice is done'. This is a first in Australia and, consistent with recommendations from academics, the Productivity Commission, VLRC and ALRC, permits the court to make orders allowing a plaintiff law firm to charge its fees as a percentage of the amount recovered rather than on a time or scale fee basis. Fundamental to the making of a group costs order is that the plaintiff law firm must assume liability for adverse costs risk as a condition of the order and also be prepared to satisfy any security for costs orders. Consequently, comparisons with no-win no-fee contingency fee arrangements (which do not require the plaintiff's lawyers to provide security or cover adverse costs exposure) are not apt. At an early stage in the proceeding, the court will determine the percentage to be allocated to the plaintiff law firm that can be charged as a contingency. It may revisit this percentage at a later stage. Guidance as to procedural matters is set out in the Supreme Court's new Practice Note, which came into operation on 1 July 2020 with the commencement of Section 33ZDA.

Conclusions and outlook

Litigation funding in Australia has evolved into a mature and sophisticated market. Common law and regulatory developments have steadily refined and clarified the regime's requirements since the High Court's seminal decision in Fostif. Market competition, spurred by new local and international funding entrants and law firms now offering to conduct traditional no-win no-fee funding in competing class actions coupled with the availability of group costs orders in Victoria, is continuing to drive innovation and placing downward pressure on commission rates and funding terms.

Key issues for determination will be the federal parliament's vote on repealing the New Regulations and the extent of judicial power available to make CFOs by reference to Section 33V of the FCA Act.

Irrespective of the outcome, the adoption of the common fund doctrine in class actions since QBE has arguably improved fairness and equity between class members and enabled funders to more efficiently consider the commercial viability of multiparty claims, while decreasing the need to engage in costly client book-building. Should the High Court further constrain CFOs in class actions, there will be a stronger basis for regulatory change as recommended by the ALRC Report. As Justice Beach lamented in McKay Super Solutions Pty Ltd (Trustee) v. Bellamy's Australia Ltd, 'Trial judges need flexible tools to regulate these funding arrangements and to tailor solutions to each individual case. And preferably that regulation should take place closer to the outset of proceedings rather than at the other end, particularly where competing class actions are in play.' Outside CFOs, further regulatory changes and funder reporting requirements are expected following the VLRC and ALRC recommendations and the parliamentary inquiry (see Section II.iii), particularly if the Senate votes to repeal the New Regulations.

Clearly, an important recent step in the evolution of litigation funding in Australia has been the introduction of damages-based contingency fees for lawyers in Victoria. Changes to harmonise the damages-based contingency fee provisions for class actions in other states and territories and federally should further enhance consumer outcomes and provide even greater levels of access to justice.

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