Productivity Commission - third party litigation funding and contingency fees

In brief

The Productivity Commission's draft report on its inquiry into Australia's system of civil dispute resolution has now been released. The comprehensive review focuses on ways to constrain costs and promote access to justice. One of the areas the Productivity Commission is examining is Australia's private funding for litigation regime, focusing on third party litigation funding and contingency fees. Partner Peter O'Donahoo , Senior Associate Tim Maxwell and Lawyer Simone Kaser report.

Introduction

The Productivity Commission began a 15-month inquiry into Australia's system of civil dispute resolution in June 2013. The inquiry was prompted by concerns that the civil justice system is too slow, too expensive and too adversarial. The draft report, released on 8 April 2014, presents the Productivity Commission's preliminary findings and recommendations.

One of the areas the Productivity Commission is examining as an avenue for achieving lower cost dispute resolution is private sources of litigation funding. As part of its inquiry, the Productivity Commission is assessing how third party litigation funders, class actions, and conditional and contingent fee arrangements can improve access to the civil justice system. It is also reviewing changes that could be made in relation to court processes (including discovery), costs and court fees. Key proposals include:

• requiring third party litigation funders to hold a financial services licence, be subject to capital adequacy requirements, and be required to meet ethical and professional standards;
• removing the present ban on contingency fees for most civil matters, subject to comprehensive disclosure requirements, and possibly introducing regulations such as a sliding percentage scale to control the amount lawyers can recover;
• reforms in relation to court processes, such as greater adoption of elements of the Federal Court's Fast Track model, and promoting a tailored approach to discovery;
• awarding costs in the Federal Circuit, Magistrates', District and County courts according to fixed, event-based scales set in proportion to the amount that is in dispute;
• requiring parties to submit costs budgets, in Supreme courts and the Federal Court, at the outset of litigation in order to cap costs that a winning party can recover; and
• increasing court fees.

Increased regulation of litigation funding

Third party litigation funding has been available in Australia since the 1990s. In 2006, the High Court of Australia found such funding was not contrary to public policy or an abuse of process,¹ ensuring third party litigation funding became an established feature of litigation in Australia. In its draft report, the Productivity Commission found that litigation funding plays an important role in:

• equalising the imbalance of resources and financial capability between plaintiffs and corporate firm defendants, helping to promote corporate accountability;
• giving claimants access to third party litigation funders who can help their clients as a result of their extensive commercial and legal experience, and manage the dispute on the client's behalf;
• meeting an adverse costs order; and
• promoting access to justice by providing a litigant with upfront funding for a claim they may not otherwise have the financial ability to pursue.

The debate surrounding third party litigation funding has shifted from permissibility to regulation. To address concerns about the profit motives of funders, the extent of influence they have on cases and a lack of prudential supervision, the Productivity Commission recommends that litigation funders should be:

• required to hold a financial services licence;
• subject to capital adequacy requirements set out in legislation and regulated under a financial services licence; and
• required to meet appropriate ethical and professional standards.

The Productivity Commission does not specify what form an appropriate financial services licence should take. It recommends that Treasury and ASIC consult with relevant stakeholders to determine whether an Australian Financial Services Licence or a separate licence category under Chapter 7 of the Corporations Act 2001 (Cth) would be more appropriate. As for regulatory oversight, the Productivity Commission proposes that ASIC monitor the litigation funders' financial conduct while the courts monitor their ethical conduct.

The Productivity Commission's recommendations significantly address the current concerns arising from the current minimal regulation of third party funding. However, the proposed reforms do not address the submissions made that clear and uniform regulations requiring litigation funders to disclose funding agreements to the court and other parties to the litigation are still needed.²

Class actions and access to justice

The Productivity Commission does not make any specific recommendations addressing class actions in its draft report. However, it does make a number of findings in its assessment of the efficacy of class action procedures in providing access to justice, including:

• the benefits of a class action can spread to other consumers outside the class;
• court processes are well equipped to overcome concerns relating to third party funding of class actions; and
• class actions promote access to justice for inexperienced claimants who might not have taken action as an individual due to the scale of costs and benefits.

The Productivity Commission does not address, in any detail, the current class action regimes and their utility in its draft report.

Reforming the prohibition on contingency fees

The Productivity Commission recommends removing the ban on contingency fees – a billing arrangement where the lawyer's fee is calculated as a share of the amount recovered for the client – for most civil matters. The prohibition on contingency fees would remain for family and criminal law matters. As part of its proposal, the Productivity Commission recommends that contingency fee arrangements would be subject to comprehensive disclosure requirements, including informing clients about their obligations in relation to disbursements and potential adverse costs orders. Reasons identified for recommending that the ban be lifted include that:

• the incentives for lawyers under a contingency fee arrangement are no worse than those under a conditional fee arrangement;
• contingency fees align the interests of the lawyer with their client in that the incentive for both parties is for the largest payout and the lowest costs;
• contingency fees result in a proportional payment to the lawyer;
• contingency fee arrangements are simpler and easier for clients to understand; and
• it increases access to justice by providing a client with upfront funding for a claim they may not otherwise have the financial ability to pursue.

Having released its draft report and recommendations, the Productivity Commission is seeking submissions on appropriate caps for conditional fees and contingency fees. It is also considering the application of a sliding scale in respect of contingency fee agreements so that, as the amount recovered by the client increases, the percentage share lawyers receive, decreases.

Contingency fees give lawyers a direct financial interest in the outcome of the litigation. As was pointed out in Allens' submissions to the inquiry, the incentives for lawyers being paid on a contingency fee basis are arguably more likely to undermine their independent judgment than conditional fee arrangements.³ The Productivity Commission does not address concerns raised in response to its inquiry regarding the importance of maintaining lawyers' independence so that the risks associated with third party litigation funding are managed appropriately.⁴

Other points of note

The Productivity Commission is also comprehensively reviewing how the areas of court processes (including discovery), costs and court fees can improve access to justice. It makes a number of significant recommendations, including:

• all courts should apply elements of the Federal Court's Fast Track model more broadly, including the abolition of formal pleadings and a focus on early identification of the real issues in dispute;
• a number of Australian courts should consider whether their rules and practice notes should more clearly contain a presumption against standard discovery, at least for complex cases, and the discovery options available;
• courts should be expressly empowered to make targeted cost orders in respect of discovery to ensure proportionality of discovery efforts;
• Federal Circuit, Magistrates', District and County courts should award costs using fixed scales that reflect the typical market costs of resolving a dispute of a given value and length, where the amount awarded would vary according to the stage reached in the trial process and the amount that is in dispute;
• superior courts in Australia should introduce processes for costs management, such as a requirement that parties submit costs budgets at the outset of litigation, which would limit the costs that a winning party could recover; and
• increasing court fees to reflect the cost of providing the service for which the fee is charged, and as contributions to the indirect and capital costs of operating the courts.

Conclusion

The Productivity Commission's recommendations in relation to private funding for litigation will continue to provide fertile ground for debate. While the Productivity Commission's recommendations for regulating litigation funders is a positive development, serious concerns arise as to its proposal to permit lawyers to charge contingency fees. If the Productivity Commission's recommendations concerning the private funding of litigation are implemented, questions will arise as to how conflict of interest risks are to be appropriately addressed.

In addition, the Productivity Commission's recommendations concerning court processes (including discovery), costs and court fees would, if accepted and implemented, significantly change the way civil litigation is conducted in Australia.

Submissions in response to the draft report are open until 21 May 2014. The final report will be presented to the Australian Government in September 2014.