Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021


Introductory Info

Date introduced:  27 October 2021
House:  House of Representatives
Portfolio:  Treasury
Commencement:  The day after Royal Assent

Purpose of the Bill

The Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021  (the Bill) proposes amendments to the Corporations Act 2001 (Cth) to introduce a new type of managed investment scheme called a class action litigation funding scheme. The amendments introduce additional requirements within Chapter 5C of the Corporations Act for these types of managed investment schemes. The stated purpose of the Bill is to ensure that ‘returns to litigation funders out of the claim proceeds of a scheme are fair and reasonable’.[1]

Background

Class actions and litigation funding in Australia

Australia’s first class action regime was established on 4 March 1992, when Part IVA of the Federal Court of Australia Act 1976 (Cth) came into effect. Part IVA applies to class actions brought under the jurisdiction of the Federal Court of Australia. Similar class action statutory frameworks have been introduced in most state jurisdictions including Victoria, New South Wales, Queensland, and Tasmania.[2]

A class action may be commenced in Australia where the following three thresholds are satisfied:

  • seven or more persons have claims against the same person
  • the claims of all those persons are in respect of, or arise out of, the same, similar, or related circumstances
  • the claims of all of those persons give rise to a substantial common issue of law or fact, and

compliant originating process is filed.[3]

The Australian Law Reform Commission (ALRC), in a 2018 report, described the purpose of the federal class action regime as providing:

[…] a remedy where, although many people are affected and the total amount at issue is significant, each person’s claim is small, and to deal efficiently with similar individual claims that would nevertheless be large enough to justify individual actions. To date, the cases that have been brought under the regime reflect a broad range of both commercial and non-commercial causes of action, including shareholder and investor claims, anti-cartel claims, mass tort claims, consumer claims for contravention of consumer protection law, environmental claims, trade union actions, claims under the Migration Act 1958 (Cth), and human rights claims.[4] [footnotes in original omitted]

Part IVA of the Federal Court of Australia Act operates on the default basis of an opt-out structure. Under this system a class action can be commenced without the express consent of group members (section 33E). Instead, the class action defines the group (section 33H) and then a court‑approved notice is given to group members advising that they may exclude themselves from the proceedings by advising the court (sections 33J and 33X(1)(a)). The opt-out class action is also referred to as an open class action.[5]

At the time of enactment, an opt-out procedure was considered preferable on grounds both of equity and efficiency. The then Attorney-General said:

It ensures that people, particularly those who are poor or less educated, can obtain redress where they may be unable to take the positive step of having themselves included in the proceeding. It also achieves the goals of obtaining a common, binding decision while leaving a person who wishes to do so free to leave the group and pursue his or her claim separately.[6]

An open class action can pose problems when it comes to quantifying the claims, as not all class members are necessarily identified, or even identifiable. Given that understanding the total quantum of registered members' claims is important to facilitating a settlement, the Federal Court developed 'class closure orders' to respond to this challenge. A class closure order operates to require individuals who meet the definition of a class member to either opt-out or register their participation in the class action by a certain date. If a class member has not registered or opted out by that date, their claim to be part of that action is extinguished, and they are not entitled to share in any settlement proceeds.[7]

A 'closed' class action means the class is limited to members who have signed up with the representative plaintiff's solicitors and/or the litigation funder. Closed class actions have been permissible since the Federal Court's decision in Multiplex Funds Management Ltd v Dawson Nominees Pty Ltd [8] (Multiplex) in 2007. In that case, it was held that section 33C of the Federal Court of Australia Act expressly provided that a proceeding could be commenced by only some of the persons who had claims against a defendant.[9]

Litigation funders operating in Australia

Since its enactment in 1992, the most striking development in the law relating to class actions has been the growth in the involvement of litigation funders. Such funding involves a third party (a litigation funder) with no direct interest in the proceeding agreeing to finance some or all of a party’s legal costs (which can include solicitors’ fees, counsels’ fees and other disbursements) in return for a share of any proceeds of the litigation. Calculation of the funder’s share of the proceeds is typically based on a percentage of the sum recovered or a multiple of the funding provided.[10]

The proportion of Part IVA proceedings that received third-party litigation funding has grown over time. The ALRC in its 2018 report states that in the period from March 1992 to March 2013, 15% of class action proceedings filed in the Federal Court were funded. From 2013 to 2018, the percentage of funded class actions proceedings grew to 64%, with funded class action proceedings filed in the final year of that period constituting 78% of all filed class actions.[11]

Furthermore, shareholder and investor class action filings have been steadily increasing. The ALRC report states: 

From the time periods 1992–2004 to 2005–2017, shareholder class actions went from representing 5% (15) to 23% (70) of all filed class action proceedings. In the last five years, shareholder actions have grown even more to represent 34% (37) of all filed class actions.[12]

The exact number of litigation funders operating in Australia is considered difficult to determine.[13]

In 2018, the ALRC indicated that approximately 25 litigation funders operated in Australia and 33 funders operated in either the United Kingdom or Australia, or both jurisdictions.[14]

Data collated by the Parliamentary Library indicate that, as at 18 June 2020, 22 litigation funding companies were known to be operating in Australia, 14 litigation funders were foreign owned or based overseas, six were Australian owned or based, and the information for two funders was unknown.[15]

Studies confirm that returns to class members decrease when a class action involves a litigation funder. The ALRC found that when litigation funders were involved in a class action, the median return to class members was 51 per cent, compared to 85 per cent when a funder was not involved.[16] The corollary to this is that the financial risk to class members is higher when a funder is not involved; for example, in the case of an adverse costs order. A 2020 Parliamentary Joint Committee on Corporations and Financial Services report quotes empirical data provided by the Law Council of Australia that found that, across the period 2001 to 2020, the portion of the gross settlement of funded class actions going to lawyers and litigation funders was 41.4 per cent.[17]

Inquiries into class action proceedings and third party litigation funders

A series of inquiries and reports have examined the need for regulation of the litigation funding industry, the most recent being inquiries by the ALRC and the Parliamentary Joint Committee on Corporations and Financial Services.

The ALRC undertook an inquiry into Class Action Proceedings and Third-Party Litigation Funders and tabled its final report in Parliament on 24 January 2019. The report examined the increased prevalence of class action proceedings and the adequacy of regulation around the distribution of proceeds.[18]

The ALRC report included a suite of recommendations to improve the regulation of litigation funders and to support the unique role of the Federal Court in protecting the interests of all group members. The recommendations included that:

  • class actions be initiated as an open class
  • the Federal Court have the power to deal with competing class actions
  • the Federal Court be granted an express statutory power to grant common fund orders
  • the court may appoint a referee to assess the reasonableness of legal costs and
  • the Federal Court have an express statutory power to reject, vary, or amend the terms of a third-party litigation funding agreement.[19]

In May 2020, the Government referred an inquiry to the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) into regulations applying to the class action industry and their impact on fair and equitable outcomes for plaintiffs. The PJCCFS report tabled in Parliament on 21 December 2020 determined that litigation funding plays a vital role in enabling individuals to access the civil justice system by minimising the risk of an adverse cost order. The report however, raised concerns over the regulatory arrangements and disproportionate share of proceeds obtained by litigation funders at the expense of class members.[20] The report includes 31 recommendations and as set out in the Explanatory Memorandum, the Bill responds to seven of the committee’s recommendations summarised below:

  • the Government legislate to provide clarity around common fund orders (Recommendation 7)
  • the Federal Court be empowered to approve, vary, reject, or amend litigation funding agreements in the interests of justice in a class action (Recommendations 11 and 12)
  • the court appoint a referee to assess the funding arrangements, the costs of which should be borne by the funder (Recommendations 13 and 16)
  • a presumption that the court should appoint a contradictor in complex funding situations or situations in which a significant conflict of interest is likely to arise (Recommendation 18) and
  • the Government consult on a proposed statutory minimum return to class action members, including consideration of a 70% return of gross proceeds or a graduated approach based on risk, complexity, length of the action, and other factors (Recommendation 20).[21]

2020 regulatory changes to litigation funders

As a result of regulatory changes introduced by the Corporations Amendment (Litigation Funding) Regulations 2020, litigation funding was made subject to the general provisions of Chapter 5C as well as Chapter 7 of the Corporations Act. Since August 2020, the amendment requires operators of litigation funding schemes to hold an Australian Financial Services Licence and register as a Managed Investment Scheme, subject to certain exemptions.[22]

Committee consideration

Parliamentary Joint Committee on Corporations and Financial Service

On 28 October 2021 the Bill was referred to the Parliamentary Joint Committee on Corporations and Financial Service (PJCCFS) for inquiry and report by 19 November 2021. Details of the inquiry are at the inquiry webpage.

The PJCCFS reported on 22 November 2021 (‘PJCCFS report on the Bill’) with the majority report recommending the Bill be passed, subject to one amendment, the deletion of the word ‘only’ from proposed subsection 601LG(3) of the Corporations Act, at item 7 of Schedule 1 to the Bill.[23] This amendment (discussed below) would have the effect of allowing the court discretion in determining if a class action litigation funding scheme's claim proceeds distribution method is fair and reasonable.

Dissenting reports by Australian Labor Party and Australian Greens PJCCFS members recommended that the Bill be opposed.[24]

The PJCCFS received and published 25 submissions.[25] These are considered below under headings, Position of major interest groups and Key issues and provisions.

Senate Economics Legislation Committee

On 2 December 2021 the Bill was referred to the Senate Economics Legislation Committee (Economics Committee) for inquiry and report by 3 February 2021. Details of the inquiry are at the inquiry webpage.

The Committee received 15 submissions, many of them from the same stakeholders who submitted to the PJCCFS inquiry.[26] Because of this duplication, the Bills Digest does not quote from the Economics Committee submissions, focusing only on the submissions to the PJCCFS inquiry.

Senate Standing Committee for the Scrutiny of Bills

The Senate Standing Committee for the Scrutiny of Bills (Scrutiny Committee) raised an issue with an amendment in the Bill which it considered to be an insufficiently justified Henry VIII clause. Henry VIII clauses authorise delegated legislation (such as a legislative instrument) to make substantive amendments to primary legislation. The Committee has significant scrutiny concerns with Henry VIII-type clauses noting:

[…] such clauses impact on the level of parliamentary scrutiny and may subvert the appropriate relationship between the Parliament and the executive.[27]

The particular provision of concern to the Committee relates to proposed subsection 601LG(4) of the Corporations Act.

Item 7 of Schedule 1 to the Bill inserts proposed section 601LG into the Act to provide that a court may approve a class action litigation funding scheme's claim proceeds distribution method if the method is fair and reasonable. Proposed subsection 601LG(3) sets out the matters the court must have regard to when determining that the method is fair and reasonable. Proposed subsection 601LG(4) provides that regulations may be made that would omit, modify or vary the list of factors the court must have regard to when deciding if the method is fair and reasonable.

The Explanatory Memorandum argues this modification power via regulations is necessary so that the fairness and reasonableness test remains a relevant and appropriate protection for class members into the future. It states:

In order to ensure that the test is always relevant and provides effective protection for members of the scheme, the Government should be able to respond to new developments by modifying the test with respect to factors the Court must consider when conducting the test […] The modification power will be exercised through a disallowable instrument, meaning Parliament can maintain control over the use of this modification power.[28]

While acknowledging this explanation, the Scrutiny Committee report states that the Committee has not generally accepted a desire for administrative flexibility to be a sufficient justification for allowing delegated legislation to modify the operation of primary legislation. The report argues:

The committee notes that delegated legislation, made by the executive, is not subject to the same level of parliamentary scrutiny inherent in bringing proposed changes in the form of an amending bill. From a scrutiny perspective, it is not clear to the committee that any changes to the factors the court must consider could not be made through primary legislation.[29]

The Scrutiny Committee therefore draws this matter to the attention of Senators and leaves to the Senate as a whole the appropriateness of this clause.[30]

Policy position of non-government parties/independents

Labor Party Committee members on the PJCCFS inquiry into the Bill issued a dissenting report recommending that the Bill should not proceed in its current form and be withdrawn. The dissenting report’s second recommendation was that should the Government insist on proceeding with the Bill, it should not do so until:

· The bill has been the subject of a proper inquiry process (whether by this committee or another parliamentary committee). Necessarily, such an inquiry must provide witnesses with sufficient time to respond to questions.

· The Attorney-General’s Department has comprehensively addressed, in writing, the concerns raised by Justin Gleeson SC and other legal experts about the constitutionality of the bill.[31]

Senator Nick McKim, the Australian Greens Committee member on the PJCCFS inquiry into the Bill, issued a dissenting report recommending that the Bill be opposed.[32]

Katter Australia Party MP Mr Bob Katter opposes the Bill. In his speech during debate in the House of Representative Mr Katter stated:

The Treasurer is acting with the best will here, and I praise him greatly for trying to overcome some of the excesses and bad aspects of class actions, but I am afraid I just cannot be part of cutting down our rights to our only pathway of redress, the class action.[33]

United Australia Party MP Mr Craig Kelly opposes the Bill in its current form and has also moved amendments.[34] During debate in the House of Representatives Mr Kelly stated:

The reality, as much as we don't like it, is that class actions are the only things that provide many small businesses and many small plaintiffs the opportunity to seek justice before the courts.[35]

At the time of writing other non-government parties and independents do not appear to have commented publicly on the Bill.

Position of major interest groups

Submitters and witnesses to the PJCCFS inquiry into the Bill generally endorsed the need for effective regulation of the litigation funding industry.[36] However, there were divergent views about whether the Bill would achieve this, with many submissions expressing serious concerns about the operation and effect of the Bill.

The following is a selection of submitters’ views. The Key issues and provisions section below includes further views on specific provisions in the Bill.

Business Council of Australia

The Business Council of Australia (BCA) strongly supports the Bill arguing that the current system of class actions and litigation funding is failing class members by allowing ‘funders and lawyers to maximise their own profits at the expense of class members’.[37]

The BCA submission argues a guaranteed minimum rate of return for class members should be implemented as an urgent priority pointing to recent figures showing an unfair distribution of compensation awards. The submission states:

[…] in 2019, 61% of the compensation award for shareholder class actions in Australia went to litigation funders and lawyers, leaving less than 40% for class members. In 2018, when litigation funders provided funding for class actions, the median return to class members was 51%, compared to 85% in non-funded matters.[38]

Australian Industry Group

The Australian Industry Group (Ai Group) strongly supports the Bill. It claims that ‘businesses are being targeted in a class action boom that is being driven by litigation funding firms that are pursuing excessive profits at the expense of businesses, plaintiffs and the broader community’.[39] Ai Group points to a 600% increase in insurance costs for businesses driven by the rise in class actions. Ai Group further argues, ‘the current poorly regulated system is allowing litigation funders to take a disproportionate share of any award or settlement’.[40]

Law Council of Australia

The Law Council of Australia raised concerns that the reforms proposed in the Bill are likely to have a range of unintended consequences and concluded the Bill ‘should not proceed in its current form’.[41]

The Law Council also cautioned the Bill was likely to face challenges to its constitutional validity noting three key concerns in this regard. The PJCCFS report on the Bill summarised these concerns stating:

The first relates to whether the corporations power of the Constitution (section 51(xx)) can support the provision of the bill. The second relates to whether the bill impairs, curtails, or weakens the capacity of states and state courts to exercise their constitutional powers. The third relates to apparent inconsistencies between the bill and the Federal Court of Australia Act 1976, regarding which the Law Council suggested the proposed amendments may imply a repeal of parts of that Act.[42]

The Law Council submits that these constitutional issues are matters of particular significance and the wider implications of the Bill ‘should be the subject of careful consideration including inter-governmental consultation, in particular given that the Commonwealth’s legislative power, if any, may depend on a referral of powers by states’.[43]

International Litigation Partners Pte Ltd and the Association of Litigation Funders of Australia: legal opinion

A legal opinion submitted by the Association of Litigation Funders Australia (ALFA) and International Litigation Partners (ILP), and authored by former Solicitor-General, Justin Gleeson SC, and Sebastian Hartford-Davis and Myles Pulsford argues that certain provisions within the Bill may be beyond the Commonwealth’s legislative power to impose. The submission states:

It appears to us that insufficient attention has been given to the source of Commonwealth legislative power to sustain the Bill, and in our opinion, some provisions may be beyond power.[44]

Amongst the issues raised, the opinion questions whether the Bill as drafted would be supported by the corporations power in section 51(xx) of the Constitution.

The joint opinion further submits that the provisions of the Bill may ‘transgress the doctrine of inter-governmental immunities’ that prevents the Commonwealth from curtailing the exercise of state power, or interfering with state operations.[45]

This opinion is considered in more detail below.

Lachlan Armstrong QC and Dr Peter Cashman

Lachlan Armstrong QC and Dr Peter Cashman, in an opinion provided to the Class Actions Committee of the Law Council, argue a number of facets of the Bill are ‘very problematic’. The submission makes the following three overarching comments:

(a) first, the very title for the Bill identifies its objective as ‘improving outcomes’ for what might be called ‘funded’ group members, but the Bill appears to us to create a real risk that meritorious but difficult class actions, that could not be expected to be run without funding, will not be run at all because of the constraints and uncertainties arising from the Bill;

(b) second, the Bill has the curious effect of taking one detailed statutory regime, namely the ‘class action’ regime in Part IVA of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and its cognates in most State jurisdictions, and not merely overlaying but modifying it using a separate regime that was framed for a quite different purpose;

(c) third, the Bill appears to be directed at corralling class actions either into closed actions limited to funded group members, or else into open actions in which a ‘common fund order’ is sought – but in the latter regard it does nothing to resolve questions over the availability of CFOs. By that missed opportunity it perpetuates an uncertainty that, if anything, would be expected to drive funders to require closed actions. This is a less draconian impact than (a) above but the effect is similar. It still reduces access to justice for victims, by discouraging actions for unfunded group members, and it still has the important consequence of also limiting the benefits that defendants can otherwise obtain by settling an open action, namely ‘ruling a line’ under their exposure to claims arising from events with ‘group’ consequences.[46]

The submission concludes:

Leaving aside policy considerations, the provisions of the Bill give rise to an amalgam of constitutional complications, technical complexity, legal uncertainty and practical problems in their application. We also consider it regrettable that such little time has been allowed for consultation with practitioner experts regarding the difficult questions created by this Bill.[47]

Professor Vicki Waye

Vicki Waye, Professor of Law, University of South Australia: Justice and Society, disputes the argument that a specialist set of rules to address litigation funding is needed because the current regulation is perceived as inadequate. She argues that the impact of 2020 regulations that brought litigation funding within the purview of the Corporations Act are comprehensive and onerous and should see a substantial decrease in funded class actions. Professor Waye states:

Consequently, without an assessment of the efficacy of the 2020 regulatory changes, the evidence that the further constraints contained in the Bill are required to ensure fairness and reasonableness is weak.[48]

In relation to litigation funding fees, Professor Waye argues that as a result of the Full Federal Court’s decision in Money Max Int Pty Ltd v QBE Insurance Group Ltd (‘Money Max’)[49] and growth in funder numbers, competition among class law firm and funder teams has intensified placing downward pressure on funding fees. At the same time the courts have been more willing to discount funding commissions at settlement.[50] She submits:

Thus, while in the early stages of the Australian litigation funding industry when there were few litigation funders commissions may have been very high, more recently the courts have been active in constraining class action transaction costs and more active in acknowledging the potential conflicts of interest between funders and class members at settlement.[51]

Professor Waye also points to empirical research by Professor Vince Morabito and others confirming that litigation fees have not been outlandishly high. She states:

Between 2013 and 2018, 26.87% of all the settlement proceeds generated in all funded class actions ($582,953,453 out of $2,169,021,672) were applied towards funding fees. During that time the median funding rate was 25.5%. Professor Morabito also found that a funding rate of over 40% only applied in 4.7% of cases. A review of post Money Max case law undertaken by Professor Morabito found that in most instances funder commissions were even lower than the 2013 – 2018 average and median commission rates.[52] [footnotes removed].

Investor Claim Partner Pty Ltd

Investor Claim Partner Pty Ltd (ICP), a litigation funder company, supports the stated aim of the Bill as being to achieve fair and reasonable distributions from the proceeds of funded class action litigation. However, ICP also has serious concerns with the operation and effect of the Bill arguing it fails in this primary objective and is instead ‘liable to lead to unfair and unintended outcomes’.[53]

Shine Lawyers

Shine Lawyers submits that the Bill, in its current form, will unnecessarily inhibit access to justice, increase the costs of proceedings and reduce efficiency in the use of Court resources. These outcomes are contrary to the very purpose of the class actions regime.[54]

Shine Lawyers acknowledges the excessive returns to funders in some cases, but argues these were ‘in the minority and do not warrant statutory intervention, given the consequences [of the proposed bill]’.[55]

S Stuart Clark

S Stuart Clark, Adjunct Professor at the Macquarie University Law School, and former President of the Law Council, argues the Bill is a welcome reform and will for the first time, restrict the funders and plaintiffs’ lawyers to fees and commissions that are fair and reasonable. He states that the Bill

[…] will also go some way to ensuring that class members, often some of the most vulnerable members of the Australian community, are protected from the excesses of the litigation funding industry.[56]

Omni Bridgeway

Omni Bridgeway[57] recommends the Bill not be passed, cautioning it ‘will reduce the availability of litigation funding for meritorious actions and reduce claimant’s ability to access justice’.[58] The submission further argues:

What is dressed up as reform to increase returns to group members is in reality a bid to place more hurdles in the way of funded class actions, removing an avenue for redress to the Australian public.[59]

Financial implications

The Explanatory Memorandum states that the Bill will have no financial impact on the Commonwealth.[60]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[61]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights reported that the Bill does not raise any human rights issues.[62]

Key issues and provisions

Schedule 1—Litigation funders

The Bill consists of one Schedule that proposes amendments to the Corporations Act to provide for a new type of managed investment scheme called a class action litigation funding scheme.

Items 1 to 5 of Schedule 1 propose amendments defining key terms relevant to the new scheme.

Item 2 amends section 9 to include a class action litigation funding scheme within the meaning of a managed investment scheme.[63]

Meaning of a ‘class action litigation funding scheme’

Proposed subsection 9AAA(1)[64] provides that a class action litigation funding scheme has all of the following features:

  • the dominant purpose of the scheme is to seek remedies to which seven or more people (the claimants) may be legally entitled arising out of:
    • the same, similar or related transactions or circumstances that give rise to a common issue of law or fact, or
    • different transactions or circumstances but the claims of the claimants can be appropriately dealt with together
  • the steps taken to seek remedies for each of the claimants include one or more lawyers providing services in relation to:
    • making a demand for payment in relation to a claim
    • lodging a proof of debt
    • commencing or undertaking legal proceedings
    • investigating a potential or actual claim
    • negotiating a settlement of a claim, or
    • administering a deed of settlement or scheme of settlement in relation to a claim
  • a person, (the funder) provides funds or indemnities or both under a funding agreement to enable the claimant to seek remedies.
Comment

Some submitters argued this definition could inadvertently capture non-commercial entities and could give rise to constitutional problems including in relation to the 2001 States referrals of power to the Commonwealth. The subject of those referrals was, relevantly, the power to legislate with respect to ‘corporate regulation’ and the ‘regulation of financial products and services’.[65]

Gleeson, Hartford-Davis and Pulsford in their joint opinion, explain:

In our opinion, a “class action litigation funding scheme” as defined in proposed s 9AAA of the Act would not readily be characterised as a “financial product or service” […] It is not immediately apparent to us that there is a “financial product or service” merely because a person, defined as “the funder”, provides funds and/or indemnities under an agreement (defined as the “funding agreement”) to enable the claimants to seek remedies. This is particularly so where group members in an open class action: (a) may not have signed a litigation funding agreement, (b) may not be in any contractual relationship with the litigation funder, (c) will not necessarily have consented to a remedy being sought in respect of their claim, and (d) may not even know about the proceedings or the litigation funding arrangement.

As defined, a litigation funder need not be a commercial entity. It could be, for example, a not-for-profit, a public interest group, a farmers’ federation, a trade union and so on. Neither a textual or purposive construction of the State referrals of power readily suggests they were intending to confer on the Commonwealth Parliament the power to regulate such organisations in their support of litigation under the ordinary processes of the courts of the land, let alone alter the procedures of those courts in the drastic manner contemplated by the Bill.[66] [footnotes removed]

Other submitters also raised questions regarding the suitability of the managed investment scheme regime to regulating class action funders, broadly claiming it was inappropriate, impractical and may be beyond power.[67]

In response to a question during the PJCCFS inquiry into the Bill regarding the heads of power that the Bill relies on, the Attorney-General’s Department stated that the Government is confident of the constitutionality of the Bill. However, the Department’s response also notes while the Government did obtain legal advice on the constitutionality of the Bill, it is against the public interest to disclose confidential legal advice.[68]

Membership of a class action litigation funding scheme

Item 4 amends section 9 to define a ‘member’ of a class action litigation funding scheme as a person who holds an interest in the scheme as a claimant and who has agreed in writing to be a member of the scheme and subject to the terms of the scheme’s constitution.

Comment

The Explanatory Memorandum states that this definition ‘ensures that a claimant cannot be co-opted into becoming a member of the litigation funding scheme, and therefore subject to the requirements of the scheme such as contributing to the funder’s fee or commission, without their active consent’.[69]

A number of submitters raised concerns with this definition arguing that requiring written consent for membership would effectively reverse the open class model that has always existed in Australian class action laws. For example, the Law Council argues: 

In short the Bill provides a powerful financial incentive for litigation funders to bring closed class actions to ensure they comply with the Bill’s requirements and are entitled to be paid.

That is contrary to the rationale behind the opt-out class action model which underpins the Commonwealth and State class action laws. It hinders access to justice for those individuals who may face social or economic barriers to opting-in and exposes defendants to the risks and costs of multiple claims, and the lack of finality of outcomes from settlements and judgments.[70]

Requirements for the constitution of a class action litigation funding scheme

As the Explanatory Memorandum explains, a registered managed investment scheme is governed by a legally enforceable constitution that complies with Part 5C.3 of the Corporations Act. ASIC may not register a scheme if the scheme’s constitution does not meet the requirements of that Part.[71] If a scheme that is required to be registered is not registered, that scheme may be wound up in accordance with section 601EE of the Corporations Act.[72]

Each managed investment scheme is operated by a Responsible Entity. The Responsible Entity must be a public company that holds an Australian Financial Services License that allows it to operate a scheme.[73]

Section 601GA sets out the requirements of the constitution of a managed investment scheme. Item 6 amends this section to provide additional requirements for the constitution of a class action litigation funding scheme.

Proposed subsection 601GA(5) provides that the constitution must require a litigation funding agreement under the scheme to specify:

  • that each funding agreement under the scheme must be in writing and must outline the same method for determining the distribution of claim proceeds to entities that are not members of the scheme (for example, the litigation funder)
  • that any entity that is to receive part of the distribution of the claim proceeds, and is not a member of the scheme, must be a party to a funding agreement under the scheme
  • that any claim proceeds for the scheme must not be distributed unless and until the claim proceeds distribution method has been approved by a court as fair and reasonable or a court has varied the method to make it fair and reasonable, and
  • that the litigation funder will pay the reasonable costs of the fees assessor or contradictor appointed by the court to assist it in determining if the proposed method of distribution is fair and reasonable.

The scheme’s constitution must also include words to the effect that each funding agreement must provide:

  • that the funding agreement is subject to the law in force in a particular state or territory and
  • that the only courts in which the funding agreement can be enforced are the courts of the Commonwealth or the courts of a particular state or territory.

Meaning of a claim proceeds

The claim proceeds of a class action litigation funding scheme are defined as:

  • the total remedies obtained by the members of the scheme as a result of a court judgment or agreed settlement in relation to class action proceedings for the scheme, together with
  • the sum of any court awarded legal costs,[74] and any agreement to pay legal costs, in favour of the members in relation to such proceedings.[75]

Class action proceedings for a class action litigation funding scheme are defined as the legal proceedings of a court through which the members of a scheme seek to realise potential legal remedies whether or not remedies are also sought in the proceedings for one or more other persons.[76]

Comment

As the PJCCFS report on the Bill notes, several submitters questioned the rationale regarding the definition of claim proceeds as the sum of gross return to members in a successful action, inclusive of costs. The report quotes the submission of Armstrong and Cashman who raised concerns:

[…] that the definition of claim proceeds in the bill would likely capture individual settlements negotiated directly between a group member and a defendant, the details of which (or perhaps even the existence of which) would not be known to the court due to confidentiality provisions and could not therefore inform group-wide settlement discussions. The effect, the submitters suggested, would be to ‘increase the complexity, reduce the prospects, and exacerbate the costs of settlement procedures both for plaintiffs and defendants’.[77]

Armstrong and Cashman warned of ‘serious consequences of aggregating compensation and costs’ stating:

It is not infrequently the case that a complex class action might be settled for many tens of millions of dollars, but because of its complexity the legal costs alone–which in almost every case are only recoverable to the extent that they are assessed by independent consultants and approved by the Court as ‘reasonable and necessary’–already equate to a substantial portion of the total settlement.[78]

The effect, they argue, would be that meritorious and moderately high-value claims would likely not proceed if they were anticipated to be complex or hard-fought by the defendant. As the PJCCFS report states, the submitters argued, ‘this appears to us to be squarely contrary to the “access to justice” objectives of the Federal and State class action regimes’.[79]

Cashman (in evidence to the PJCCFS hearings) also told of the practical challenges in determining the value of the claim when combining costs and proceeds:

The court will not necessarily know at the time of considering a settlement approval what those costs are because, unless there's agreement between the parties, they will have to go off to a process of assessment of taxation, depending on the jurisdiction. So it's just a simple practical problem that the court is required to have regard to the quantum of the claim proceeds and it simply won't be able to do so where those costs have not been quantified at that particular point in time.[80]

Omni Bridgeway also argued the inclusion of costs within the Bill’s definition of claim proceeds would reduce the type of actions funders could consider:

This means otherwise meritorious litigation against defendants will not proceed if there is uncertainty around the proposed defendant’s insurance or asset position. It will also curtail the funding of smaller actions where costs as a proportion of claim size tend to be higher.[81]

Enforceability of funding agreements

Item 7 inserts new Part 5C.7A—Class action litigation funding schemes. It consists of proposed sections 601LF and 601LG which set out the requirements for the enforcement of funding agreements for a class action litigation scheme.

Proposed section 601LF provides that claim proceeds distribution method in a litigation funding agreement is enforceable only if:

  • In the case of a federal court or a state court exercising federal jurisdiction
    • in the proceedings, the Court approves or varies, under section 601LG, the scheme’s claim proceeds distribution method, and
    • the court in the proceeding does not make a common fund order.
  • In the case of a state court not exercising federal jurisdiction
    • in the proceedings, the court approves or varies the scheme’s claim proceeds distribution method under any powers or procedures of the Court that are substantially similar to those in section 601LG, and
    • the court in the proceeding does not make a common fund order.

Proposed subsection 601LF(7) states that to avoid doubt nothing in this section implies that a court has the power to make a common fund order.

Comment

Several submitters consider the drafting of section 601LF problematic in two ways; firstly in relation to its dealing with common fund orders and secondly in relation to the potential constitutional problems it may give rise to.

Common fund orders

A common fund order is an order made by the Federal Court that requires all class members to equally contribute from their share of the proceeds from a settlement or judgment to the costs of the litigation, including the litigation funder's commission. This includes those class members who have registered to share in the proceeds of the class action but have not entered into a funding agreement with the litigation funder.[82]

The rationale of a common fund order is to address a disparity of outcomes between funded and unfunded class action members, where unfunded class members could 'free ride' by claiming the benefits of a settlement or judgment sum without contributing to the risks and funding costs.[83] 

Common fund orders became a standard feature of the Australian class action regime in 2015 following the decision in in Money Max.[84] As noted above, this decision determined that the Federal Court had the power to make a common fund order regarding litigation funding commissions in class actions irrespective of whether class members had entered into funding agreements. The decision also determined that the Court had the power to fix the litigation funder commission referring to a range of factors incorporating funder risk and reward.[85]

However, only three years after the Money Max case, the High Court cast doubt on the availability of common fund orders when in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall,[86] it found that courts were not authorised to make common fund orders, at least at an early stage of the proceeding.[87]

Both the ALRC and the PJCCFS in their reports into litigation funding had recommended that the Government should legislate to remove any uncertainty around the court’s power to make common fund orders,[88] and several submitters to the PJCCFS inquiry expressed disappointment that the Bill does not implement this recommendation.

For example, the Law Council states that the drafting of the Bill in relation to common fund orders is unclear and confusing. As it notes, proposed section 601LF does not allow courts to enforce agreements where the court has made a common fund order. That implies that a common fund order might be made. Curiously, proposed subsection 601LF(7) is then included to state that ‘[t]o avoid doubt, nothing in this section implies that a court has the power to make a common fund order’. The Law Council argues:

This represents a serious failure in the drafting of the Bill. Rather than clarifying the law, the Bill creates confusion.

In the Law Council’s view, the opportunity should be taken by the Parliament to resolve any uncertainty in relation to common fund orders and positively state that a court has the power to make a common fund order.

Experience during the period in which common fund orders were permissible was that the competitive pressure introduced by the common fund order regime and the greater involvement of the courts in setting rates had a significant downward impact on commissions charged and increased the transparency of litigation funding arrangements. In short, competition and market forces combined with court oversight to reduce fees for funders and improve returns for group members, is consistent with the stated purpose of the Bill.[89]

Constitutional issues

Several submitters expressed concern that proposed section 601LF could cause constitutional problems in relation to federal intrusion into the power of state courts to enforce litigation funding agreements.

ICP for example, states:

The proposed ss 601LF(1) and (4) provide that a CPDM [claim proceeds distribution method] will be unenforceable if the underlying proceeding is brought in a State Court not exercising federal jurisdiction, unless the Court approves the CPDM under powers or procedures that are ‘substantially similar to those in section 601LG’.

These provisions would constitute an extraordinary intervention by the Commonwealth in the operation and conduct of litigation in State Courts. What ‘substantially similar’ means in this context is unclear. However, there is no provision in any State legislation that is equivalent to the proposed s 601LG. It appears the intended effect is to prevent funded class actions being commenced in a State Court exercising non-federal jurisdiction, unless the State enacts equivalent legislation. There is a real question whether such an exercise of federal legislative power would be constitutionally valid.[90]

Mr Armstrong and Dr Cashman also note:

The provisions purport to apply to state courts not exercising federal jurisdiction. However, federal legislative power does not permit legislation that significantly impairs, curtails or weakens the capacity of states or state courts to exercise their constitutional powers or functions.[91]

Court approval of the distribution method of the claim proceeds

Proposed subsection 601LG(1) provides that in class action proceedings for a class action litigation funding scheme the court may make an order to:

  • approve the claim proceeds distribution method if the method is fair and reasonable when considering the interests of the scheme’s members as a whole, or
  • vary that method to ensure that that method is fair and reasonable when considering the interests of the scheme’s members as a whole.

The court may make an order under this section in relation to each of the funding agreements

  • on its own initiative
  • on the application of a member of the scheme or a party to any of the funding agreements, or
  • on the application of the responsible entity of the managed investment scheme.[92]

The fair and reasonable test to be applied by the court

Proposed subsection 601LG(3) sets out the test that the court must apply in determining ‘whether the scheme’s claim proceeds distribution method, or any variation of that method, is fair and reasonable when considering the interests of the scheme’s members as a whole’.

It is of significance that the prescribed list of factors for the court to consider are the only factors the court may have regard to. These exclusive factors are:

  • in relation to the proceedings:
    • the amount, or expected amount, of claim proceeds for the scheme
    • whether the proceedings have been managed in the best interests of the members to minimise the costs for the proceedings
    • the complexity and duration of the proceedings
    • the legal costs for the proceedings incurred by, or on behalf of, the members, and the extent to which those legal costs are reasonable
    • the costs (other than legal costs) for the proceedings incurred by the funder for the scheme, and the extent to which those costs are reasonable
    • the costs (other than legal costs) for the proceedings incurred by the parties to each of the funding agreements (other than the funder for the scheme), and the extent to which those costs are reasonable
    • the extent of the commercial return to the funder for the scheme in comparison to the reasonable costs for the proceedings incurred by the funder
  • the costs for the scheme incurred by the responsible entity of the scheme, and the extent to which those costs are reasonable
  • the risks accepted by the parties to each of the funding agreements for the scheme by becoming parties to the funding agreement;
  • any other compensation or remedies obtained by any of the members in relation to the transactions or circumstances to do with the particular action
  • any amounts that the members have contributed towards paying the costs for the scheme incurred by the parties to any of the funding agreements for the scheme
  • any other factors prescribed by regulations.

Proposed subsection 601LG(4) provides that regulations may be made that would omit, modify or vary this list of factors that the court must consider when deciding whether the claim distribution method is fair and reasonable.

Proposed subsection 601LG(5) provides that the agreement is presumed by the court to be unfair if more than 30 per cent of claim proceeds are to be paid to entities that are not members of the scheme. This is a rebuttable presumption which the court can set aside if considering the prescribed factors, the claim proceeds distribution method is fair and reasonable.

Comment

Many submitters raised concerns with the fair and reasonable test in proposed section 601LG focusing particularly on:

  • the lack of discretion available to the court in applying the fair and reasonable test
  • the potential for regulations to override the statutory list of factors for court consideration
  • the 30% cap on the settlement available to litigation funders and the consequent minimum gross return of 70% to class members.
Lack of court discretion

In relation to the lack of court discretion the Law Council expressed strong opposition stating:

It is of great concern to the Law Council that the current proposal in the Bill exhaustively prescribes for the court the only factors that it is permitted to consider when determining whether a claim proceeds distribution method, or any variation of that method, is fair and reasonable. Such a proposal, if enacted, would unduly fetter the court’s discretion by preventing it from acting as justice requires in a particular case. There are risks that this may produce injustice in some circumstances with unintended consequences that are at odds with the intention of the laws and fundamental principles which underpin the administration of justice.

The current drafting of this provision risks prescribing matters today, which may or may not be relevant in the future, rather than allowing courts to have regard to further considerations that may be appropriate in determining whether a claim proceeds distribution is fair and reasonable in the particular circumstances of a case. The limitation may mean a court cannot have regard to a highly relevant matter.[93]

The Law Council argued for an amendment to this provision stating:

The Bill would have a greater compatibility with cardinal principles of the rule of law and the due administration of justice by removing the word ‘only’ from the drafting of proposed subsection 601LG(3). That would still require the court to consider the listed factors as prescribed by the Parliament, while also allowing the court the discretion to consider other factors that may be relevant in ensuring a fair and reasonable outcome in a particular case. Alternatively, the Law Council would suggest including an additional factor which provides the court with some level of discretion to determine other relevant matters that may arise.[94]

As noted above, the PJCCFS report on the Bill also recommended removing the word ‘only’ from the drafting of proposed subsection 601LG(3).[95]

Many other witnesses and submitters also questioned whether it was appropriate for the Bill to fetter the power of the court by providing an exhaustive list of factors to be considered in determining returns to funders, potentially excluding other relevant factors.

For example, Professor Waye broadly supported the factors listed in the Bill that the court must consider when determining the fairness and reasonableness of costs, describing them as reflective of ‘much of the existing case law’. She nevertheless expressed concern that the Bill would limit the court’s discretion, barring it from giving regard to the volume of scheme members as a proportion of the total class or the rate initially agreed between scheme members and funders. She argued, instead, that the list provided in the legislation be indicative of the factors the court should consider rather than exclusive.[96]

Dr Cashman told the PJCCFS inquiry, the Bill would require the court to apply a different set of considerations when determining a fair and reasonable distribution of claim proceeds to class members (who would be governed by the provisions in the Bill) than would apply to non-class members (for whom the court would continue to have unfettered discretion).[97] Dr Cashman stated:

No sensible legislative scheme should require a court to engage in that level of numerical gymnastics and apply two different statutory tests in relation to the one settlement.[98]

Regulations to override the statutory list

Concerns were raised in the joint opinion of Gleeson, Hartford-Davis, and Pulsford, who noted that the factors set out in the Bill to which the court can have regard when determining whether a claim proceeds distribution method is deemed fair and reasonable, may be omitted, modified or varied by delegated legislation (proposed subsection 601LG(4)). The submission argued:

The scale of the abandonment here of the legislative task to the executive cannot be overstated and would be likely to provoke close High Court scrutiny.[99]

It was noted above that the Senate Scrutiny Committee also had concerns with this provision arguing there was insufficient justification in the Explanatory Memorandum for the need to allow regulations to override statutory provision.[100]

Some submitters were concerned the Government could further amend the factors a court could consider when evaluating a claim proceeds distribution method. For example, Omni Bridgeway submitted that courts already make a determination regarding the fairness and reasonableness of funding fees, but the provisions of the Bill ‘circumvent the court’s discretion and provide far too much power to the government of the day’. Omni Bridgeway suggested:

Who is to say that a future government which is a defendant to funded litigation would not seek to stymie the litigation by amending the list of factors?[101]

The 70/30 rebuttable presumption

The rebuttable presumption placing a cap of 30% on the claim proceeds to be allocated to non-members was considered one of the more contentious aspects of the Bill. Many submitters and witnesses questioned whether the fairness and reasonableness of returns to funders should be evaluated by the share of a settlement received by funders relative to class members. The PJCCFS Committee report quotes Mr Armstrong QC who questioned the appropriateness of trying to arrive at such a formula, stating:

Just because you see some group members getting a very low return in a particular settlement doesn't mean that something has gone wrong. It might mean that the claim that was brought on their behalf and in good faith turns out, with better information that can only be got through the court procedures, not to have been very valuable at all. There are many class actions that have had to be settled on a walk-away basis because it turns out that the defendant is just not good for the judgement or there's some flaw in the cause of action. That's just a normal aspect of litigation and the courts can and should take it account. Sometimes it means that most of the available money ends up having been consumed in legal fees and funders commission.[102]

The Federal Chamber of Automotive Industries (FCAI) made a similar point arguing it is an arbitrary measure which bears no necessary relationship to the actual risk and reward in a particular class action and may lead to unintended consequences. The submission states:

It is possible that a funder who recovers 30% of the proceeds of a particular class action may still achieve a return which does not justify their investment. Equally, there may be class actions where the ultimate entitlements of group members are ultimately shown to be less than 70% (including, for example, minimal or non-existent). The question of whether a litigation funder should make a profit from such litigation and, if so at what level, will need to be determined by a Court, but that should not be done by reference to an arbitrary limit on recovery.[103]

As the PJCCFS report on the Bill states, some witnesses also questioned whether the rebuttable presumption should apply to all forms of litigation funding, or whether shareholder and non-shareholder actions should be treated differently. The report notes that Mr Stephen Conrad, CEO of Litigation Lending, told the committee:

the proposed reforms failed to distinguish between non-shareholder and shareholder class actions, despite the very different levels of risk and return.[104]

Mr Conrad conceded a rebuttable presumption may be well-suited to shareholder actions but proposed amending the Bill such that funder returns for non-shareholder class actions would be capped at 20% of the claim proceeds after the reimbursement of the costs of running the action.[105]

The Law Council argued there is a significant risk the arbitrary 70/30 presumption would ‘have a tangible deleterious effect on access to justice by reducing the availability of litigation funding and legal services for meritorious cases’. The submission states:

There is particular risk that implementing the Bill will disproportionately impact on the availability of litigation funding and legal services for lower value or higher risk actions. Those are often based on common law causes of action arising from faulty products, property damage consequent upon environmental disaster, misleading conduct by financial services providers and institutional abuse. They affect some of the most vulnerable members of the community. Such an outcome would not be in accordance with the stated objective of improving outcomes for class action members.[106]

The Law Council argued these concerns arise due to a combination of the definition of ‘claim proceeds’ (which includes costs) and the provisions concerning the 70/30 cap. The submission states:

Together, these may have the effect of limiting the commercial viability of many otherwise meritorious actions.

There are circumstances in which meritorious but complicated actions are brought but due to the complexity of the issues, legal and other costs incurred (leaving aside funding costs) are significant, although in the circumstances, fair, reasonable and proportionate. However, under the reforms proposed in the Bill, where these complicated issues arise and/or where the anticipated claim value is small, it is unlikely that funders (and therefore, many smaller legal firms) will be willing to support an action given the limitation of the 70/30 presumption.[107]

ICP also argued against the 70/30 presumption stating:

Of primary concern is that such a minimum will make many meritorious and valuable claims uneconomic for a litigation funder to support.[108] 

ICP along with other submitters pointed to a 2021 analysis of recent class action settlements conducted by PricewaterhouseCoopers which found that a 30% cap on total costs and commissions would have had adverse impacts in 91% of the cases.[109] While conceding that the Bill expresses the 30% cap as a rebuttable presumption, rather than a statutory maximum ICP argued that the uncertainty about how the presumption may be rebutted, coupled with the limits on the court’s discretion when approving the claim proceeds distribution method under proposed subsection 601LG(3), means the presumption is likely to have the same effect of discouraging the funding of many meritorious claims. ICP considered that this would have ‘profound implications for access to justice in Australia’.[110]

The PJCCFS report on the Bill also noted that several witnesses and submitters expressed concern that the 70-30 presumption would ‘become a standard rather than a limit, driving up settlement costs, increasing litigation costs, reducing returns for class members, and creating an uneven field in which class members face a structural disadvantage’. As an example, the report pointed to the FCAI submission which ‘cautioned the 30 per cent cap would likely become the baseline return sought by litigation funders, making settlements more costly and harder to achieve’.[111]

The use of funding fee assessors and contradictors

Proposed subsection 601LG(6) provides that in making the order to approve or vary the claim proceeds distribution method under this section, the court must:

  • receive and consider a report from a person appointed as an independent fee assessor who will assist the court in determining if the proposed method is fair and reasonable and
  • consider submissions of a contradictor representing the interest of the class members.

These obligations on the court to use fee assessors and contradictors apply unless the interests of justice dictate otherwise.

The litigation funder must bear the costs of the court appointed assessor and contradictor.[112]

Comment

This provision appears relatively uncontroversial. Both the ALRC and PJCCFS reports made recommendations in line with these amendments and there appears to be little opposition from submitters to the PJCCFS inquiry into the Bill.