Proposed reforms to litigation funding
On 30 September 2021, the Australian Government released draft legislation aimed at promoting a fair and reasonable distribution of proceeds in class actions involving litigation funders. The draft legislation builds on recommendations made in the Report of the Parliamentary Joint Committee on Corporations and Financial Services’ inquiry into litigation funding and the regulation of the class action industry (PJCCFS Report). If ultimately passed, the legislation will have the effect of:
- legislating a rebuttable presumption against Court approval for any claims distribution method that would result in general members receiving less than 70% of the gross proceeds from any funded class action;
- prescribing an exhaustive list of factors to which the Court may have regard when deciding whether to approve a proposed claims distribution method as, or vary it so that it becomes, fair and reasonable; and
- providing that funders may only recover commissions and fees from persons who have agreed in writing to become members of the class action litigation funding scheme.
In this Limelight edition, we we consider the potential impacts of these latest proposed reforms to the class action regime in Australia.
Litigation funding agreements
The Australian Government has proposed the Treasury Laws Amendment (Measures for Consultation) Bill 2021 (Draft Bill).
The Draft Bill proposes amending Chapter 5C of the Corporations Act 2001 (Cth) to implement the Australian Government’s response to certain recommendations in the PJCCFS Report. In summary, the proposed amendments include:
- The constitution of the class action litigation funding scheme must provide that the general members of the scheme are only those who have agreed to be members of the scheme.
- In a class action litigation funding scheme, the litigation funding agreement must state the way in which the proceeds of the class action would be distributed between general members of the scheme and the litigation funder.
- A litigation funding agreement is only enforceable if a Court approves the method of distribution of the proceeds under the agreement as fair and reasonable or varies the agreement to ensure the distribution is fair and reasonable, and the Court does not make a common fund order.
- When approving or varying a proposed distribution method, the Court must only consider certain prescribed factors as well as a rebuttable presumption that a share of the proceeds of less than 70% to members of the scheme is not fair and reasonable. The Court must also consider the report of a fees assessor and representations of a contradictor unless it is in the interests of justice not to do so. The funder must pay the fees of the assessor and the contradictor.
- The prescribed factors, which may be supplemented or varied by regulations, include:
- the amount, or expected amount, of claim proceeds for the scheme;
- the amount and reasonableness of the legal costs incurred by the funder;
- whether the proceedings have been managed in the best interests of the members to minimise legal costs;
- the complexity and duration of the proceedings;
- the extent of the commercial return to the funder in comparison to the costs incurred;
- the risks accepted by the parties to the funding agreement;
- the sophistication and level of bargaining power of the general members in negotiating the agreement; and
- any other compensation or remedies obtained by any of the scheme’s members.
- The litigation funding agreement must state that the governing law of the agreement is the law of an Australian jurisdiction and disputes regarding the agreement are to be heard in an Australian Court.
- The claims distribution method is not enforceable if the Court hearing the proceeding does not possess the power to make an order approving the method as fair and reasonable, or varying the method so that it is fair and reasonable, or a substantially similar order. The risk lies with the litigation funder to ensure that the Court in which approval is sought has such powers.
Financial interests in litigation funders
The Australian Government has also proposed the Corporations Amendment (Litigation Funding) Regulations 2021 draft bill (Draft Regulations). The Draft Regulations propose amending the Corporations Regulations 2001 by imposing:
- new conditions on the AFSL of a litigation funding entity to prevent the plaintiff’s lawyers from having or obtaining a material financial interest in the funder for that action; and
- an obligation for persons providing an exempt financial service (such as insolvency litigation funding schemes) to maintain adequate practices for managing conflicts of interest and ensuring lawyers providing services in relation to the exempt scheme from having or obtaining a material financial interest in the scheme.
Potential impact of reforms
These proposed amendments appear to address two common issues arising from class actions in Australia over the years, namely whether:
- a settlement is reasonable having regard to the litigation funder’s commission and plaintiff’s lawyers’ fees, and the net proceeds returned to group members; and
- the Courts have the power to make common fund orders.
Under section 33V(1) of the Federal Court of Australia Act 1976 (Cth), a representative (class action) proceeding may not be settled or discontinued without the approval of the Court.
When applying for Court approval of a settlement, the parties to a class action will be required to show that the proposed settlement is fair and reasonable and in the interest of class members. Generally, the Court will consider the reasonableness of the claimed legal costs and litigating funding charges.
If passed, the Draft Bill will provide an exhaustive list of factors to which the Court may have regard in deciding whether the claim proceeds distribution model is fair and reasonable. The Court will be required to adopt a rebuttable presumption that anything less than a 70% return to members of the scheme is not fair and reasonable. The Court will not maintain a general discretion to consider other factors it considers relevant and the rebuttable presumption can only be displaced by consideration of the prescribed factors.
Further, and importantly, the 30% of distribution proceeds that do not attract the rebuttable presumption are inclusive of costs and expenses incurred by the funder. As such, escalating costs and expenses incurred by funders may promote early and commercial settlement discussions, as such costs could crowd out the percentage of funds otherwise available for distribution for the funder’s commission.
Common fund orders
Under a common fund order, a group member is required to contribute to the litigation funder a percentage of their entitlement to any proceeds from a class action. It does not matter whether they have entered into a litigation funding agreement with the funder. The Draft Bill has the effect of:
- prohibiting a Court from approving a claims distribution method where a common fund order has been made; and
- requiring plaintiffs to consent to become members to a class action litigation funding scheme before funders can impose their fees or commission on them.
If the Draft Bill is passed, it will likely have the effect of ensuring that common funder orders are not sought by litigation funders going forward (even though recent High Court authority had significantly limited the circumstances in which such orders could be made in any event).[i]
The window for comment is exceptionally short with the Australian Government seeking stakeholder views on the Draft Bill and the Draft Regulations by 6 October 2021.[ii]