The pressure on litigation funders continued to mount throughout 2021 as the Federal Government took steps to further increase the regulation of the Australian funding market. Throughout the year, developments unfolded against a backdrop of recent reforms which have impacted litigation funders, including:
- the requirement for funders to comply with the managed investment scheme provisions in the Corporations Act; and
- legislative reforms which opened the door to lawyers charging on a contingency basis in class action proceedings filed in the Supreme Court of Victoria.
Proposed minimum returns reform
While funders were still grappling with recent reforms, a Bill was tabled in the Commonwealth Parliament which (if passed) would regulate funding commissions more stringently through a rebuttable presumption that a return to group members of less than 70% of the gross proceeds of a claim is not fair and reasonable (and consequently, impermissible).
The Bill identifies several factors for the court to consider when determining if a proposed distribution is fair and reasonable, including:
- the amount of expected claim proceeds;
- the amount and reasonableness of the legal costs incurred on behalf of group members;
- the extent of the commercial return to the funder relative to the costs incurred in running the proceeding; and
- the risks accepted by the parties to the funding agreement.
The Bill also requires the court to consider a report on the proposed remuneration of the litigation funder and representations from a contradictor representing the interests of group members, unless it is not in the interests of justice to do so.
Given these requirements would only apply to class actions filed after the law comes into effect, when the Bill was tabled in Parliament it sparked a flurry of filings in late 2021 as funders moved swiftly to commence proceedings before the proposed legislation came into effect.
The Bill passed the House of Representatives in late 2021 but the government has indicated it will not be pushed through the Senate before the next federal election.
Other potential reforms
In October 2021, the Federal Government released a response to recommendations made in two recent class action inquiries. The response indicates the government is poised to further tighten the screws on litigation funding through further reforms, including:
- a requirement that funding agreements provide complete indemnity against adverse costs orders and a presumption the funder will provide security for costs in a form enforceable in Australia; and
- providing the Court with an express statutory power to make costs orders against litigation funders.
As with the proposed minimum returns reform, these reforms are unlikely to be passed into law before the election.
The government also announced that it does not intend to:
- legislate to permit contingency fee arrangements due to the 'unmanageable conflicts of interest' that such arrangements can create; or
- introduce a statutory power to make common fund orders (which require all participating group members to contribute towards a litigation funder's commission, regardless of whether they have signed a funding agreement).
In 2019, the High Court determined courts do not have the power to make common fund orders at an early stage in proceedings. However, question marks remain on the court's power to make common fund orders at the settlement or judgment stage. While the government's response represents a potential missed opportunity to clarify this issue of uncertainty, the outcome of an application for a common fund order as part of the settlement of the 7-Eleven franchisee class action may go a long way towards resolving this issue in early 2022.
Early developments in contingency fees
2021 saw the Supreme Court of Victoria hand down its first decisions on applications for so-called 'group costs orders' (or GCOs), allowing a plaintiff firm to be remunerated on a contingency fee basis. Contingency fees are only available in class actions in the Supreme Court of Victoria and only when the Court makes a GCO.
The first bid for a GCO failed when the Court determined the pre-existing 'no win, no fee' retainer in that matter produced a more favourable financial outcome for group members than the GCO in question. However, the Court left the door open for the application to be resubmitted at a later stage in the proceedings.
In the second application to be decided, the Court granted a GCO for 27.5% of any future damages award or settlement amount. This rate may be reduced if it will ultimately result in a disproportionate return for the plaintiff lawyers. A key factor in the Court's decision was the structure of the retainer agreement, which permitted third party funding to be obtained if a GCO was refused.
While 2021 saw a dip in the record rate of filings in the Supreme Court of Victoria in 2020, filings in that Court remained elevated compared to historical figures. In 2022, we expect the Supreme Court of Victoria to remain an attractive jurisdiction for commencing proceedings, as plaintiff firms adjust their proposed GCO models to account for the factors that were relevant to the two recent decisions. This is likely to place additional pressure on litigation funders (and funding commissions) as the competition to finance proceedings intensifies amongst class action promoters.