2.1
This chapter outlines evidence on general and specific aspects of the bill, and provides the committee’s view on these matters.
Views on the bill
General views on the bill
2.2
Submitters and witnesses widely endorsed the need for effective and fit-for-purpose regulation of the litigation funding industry, however, the committee acknowledges widely divergent views as to the best way to achieve these objectives and about the merits of the bill.
2.3
The Federal Chamber of Automotive Industries (FCAI) expressed support for the bill (subject to specific concerns, detailed below), stating:
[The bill] will increase court supervision of litigation funders, give participants in funded class actions comfort that their interests are a key consideration of the court in approving payment to a funder and help to ensure that the remuneration paid to litigation funders is commensurate with the investment and risk and is not excessive.
2.4
Mr S Stuart Clark AM welcomed further regulation of the litigation funding industry–which he alleged was ‘essentially unregulated’—citing the ‘enormous fees’ taken by funders and plaintiff’s lawyers’ that have ‘driven an explosion in the number of class actions in Australia’.
2.5
The Australian Industry Group (Ai Group) welcomed the bill, claiming ‘businesses are being targeted in a class action boom that is being driven by ligation funding firms that are pursuing excessive profits at the expense of businesses, plaintiffs and the broader community’. Ai Group pointed to a 600 per cent increase in insurance costs for businesses driven by the rise in class actions. Ai Group further argued, ‘the currently poorly regulated system is allowing litigation funders to take a disproportionate share of any award or settlement’.
2.6
Mr Stephen Smith, Head of National Workplace Relations Policy at Ai Group, told the committee, ‘the bill would implement balanced and fair changes to class action and litigation funding laws to achieve a fairer outcome for plaintiffs and businesses’.
2.7
The National Council of Women Australia gave its support to the bill, submitting its members had long raised concerns about the lack of regulation of the litigation funding industry, ‘leading to poor justice outcomes for those men and women who join class actions expecting to get fair compensation’.
2.8
Associate Professor Sulette Lombard and Professor Christopher Symes questioned the exclusion of insolvent litigation funding arrangements from the reforms, describing the bill as a missed opportunity that would leave this area of the law ‘largely unregulated’.
2.9
Mr Lachlan Armstrong QC and Dr Peter Cashman offered the following critique of the bill:
From a policy perspective, although purporting to improve outcomes for those who sign up to funding agreements in respect of class actions, the bill, if enacted, is likely to reduce the incidence and ambit of funded cases and prevent or constrain remedies for the majority of those who suffer loss or injury which might otherwise be compensable through the ‘opt out’ class action regime.
2.10
Dr Cashman told the committee, ‘this bill proposes unduly simplistic solutions that do not appear to be well considered, in terms of their drafting and practical consequences’.
2.11
Omni Bridgeway recommended 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’. They further argued,
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.
2.12
Professor Anne Wayne pointed to evidence that class actions have ‘substantially decreased’ over recent years because of amendments to the Corporations Act in 2020. She consequently argued:
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.
2.13
The Law Council of Australia raised concerns that the reforms proposed in the bill are likely to have a range of unintended consequences, concluding the bill ‘should not proceed in its current form’.
2.14
Shine Lawyers acknowledged the excessive returns to funders in some cases, arguing these were ‘in the minority and do not warrant statutory intervention, given the consequences [of the proposed bill]’.
2.15
Shine Lawyers also argued various aspects of the bill would ‘cut directly across its stated objective’ of improving outcomes for litigation funding participants.
2.16
Mr Lindsay Clout raised concerns at the focus of Parliamentary attention on the costs and profits of funders, claiming ‘the credibility of a class action to a community call for justice cannot be underestimated’. Mr Clout submitted the successful class action with which he had been involved would not have proceeded if not for the backing of a litigation funder.
2.17
Litigation Capital Management (LCM) described the bill as ‘premature and underdone’ and in need of ‘finessing in some parts’ and a ‘fundamental rework’ in others.
2.18
Maurice Blackburn Lawyers submitted:
In its current form, the proposed legislation, despite its name, actually creates a multitude of additional policy and practical complications, complexities and uncertainty, none of which improves outcomes for participants.
Views on the definition of a claim proceed within the bill
2.19
Several submitters and witnesses called into question the treatment in the bill of claim proceeds as the sum or gross return to members in a successful action, inclusive of costs. For example, Mr Armstrong QC and Dr Cashman 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’.
2.20
Mr Armstrong QC and Dr Cashman also warned of ‘serious consequences of aggregating compensation and costs’:
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.
2.21
The effect, Mr Armstrong QC and Dr Cashman submitted, 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. The submitters noted, ‘this appears to us to be squarely contrary to the “access to justice” objectives of the Federal and State class action regimes’.
2.22
Evidence received by the committee suggested the definition of a claim proceed within the proposed legislation may also lead to practical challenges in determining the value of that claim. For example, Dr Cashman told the committee of another problem of 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.
2.23
Investor Claim Partner (ICP) cautioned the definition of claim proceeds may capture individual settlements reached between class members and the defendant. These proceeds would have to be accounted for before the court could approve a claim proceeds distribution method (CPDM)—a process the submitter suggested could take years—‘creating serious practical impediments to the settlement of class actions’ and ‘significantly delaying the distribution of claim proceeds to members’.
2.24
Omni Bridgeway submitted, ‘the inclusion of costs in the definition of claim proceeds is unjust and unreasonable, and will reduce the availability of funding to the detriment of potential group members’.
Views on the definition of a class action litigation funding scheme within the bill
2.25
Concerns were raised by submitters relating to the definition of a class action litigation funding scheme within the bill that would inadvertently capture non-commercial entities. For example, Mr Daniel Meyerowitz-Katz described the definition as ‘absurdly broad’. He submitted that small groups of private litigants may become illegal under the bill, arguing the legislation should aim to capture only commercial enterprises.
2.26
Shine Lawyers argued the definition of a class action litigation funding scheme within the proposed bill would inappropriately capture not-for-profit support to plaintiffs as well as co-plaintiff pooling where litigants back an action with their own money. ‘These consequences seem to fall outside the stated objectives of the bill’, Shine Lawyers argued, ‘and if not addressed will cause significant, unintended hardship for group members in a number of circumstances’.
2.27
A legal opinion submitted by the Association of Litigation Funders Australia (ALFA) and International Litigation Partners (ILP), and authored by former Solicitor-General, Mr Justin Gleeson SC, and Mr Sebastian Hartford-Davis and Mr Myles Pulsford questioned whether the treatment of litigation funding as a ‘financial product or service’ in section 9AAA of the bill was justifiable. The opinion cautioned that litigation funders need not be commercial entities, and the definition used in the bill would capture also not-for-profit groups, public interest groups, or trade unions, for example. The submitters offered the following opinion on this matter:
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.
Views on impacts of the bill on the type and nature of class actions
2.28
Evidence was received of concerns regarding the likely impact of the proposed bill on the type and nature of class actions. Many submitters and witnesses were concerned at the likelihood that higher risk, lower value class actions may become commercially unviable for funders. Several submitters suggested many of the most meritorious class actions that serve the public good would fall into this category, and therefore would not proceed if the bill becomes law.
2.29
For example, Omni Bridgeway 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.
2.30
The Law Council of Australia submitted there was ‘a significant risk’ the bill would disproportionately impact funding for lower value and higher risk actions, thereby impeding access to justice in many meritorious cases. The Law Council expressed concern that the impact of the bill would be ‘that many genuine, socially valuable class actions funded at the margin will not be brought when they otherwise may have been’.
2.31
Mr Armstrong QC and Dr Cashman cautioned that meritorious but difficult class actions may not be funded in the future because of the constraints and uncertainties the bill creates.
2.32
Dr Michael Duffy noted the rebuttable 70-30 presumption (see below) would have ‘unintended consequences’, such as rendering smaller aggregate claims uneconomical. Dr Duffy argued ‘the public importance of a proceeding cannot be said to correlate automatically or precisely with the total or aggregate amount of the damages claimed or recovered’.
2.33
Shine Lawyers warned funders would back only high value claims under the proposed amendments.
2.34
Professor Anne Waye suggested those class actions that are funded would likely be skewed towards high value claims, like securities, thereby decreasing access to justice for other types of claims, like consumer or competition law breaches.
2.35
Levitt Robinson submitted the legislation would ‘effectively ring the death knell for Class Actions involving commercial issues with any level of complexity or requiring substantial discovery or compliance with subpoenas’.
2.36
Levitt Robinson also advocated ‘wholistic’ reforms to the class action industry, describing the bill as ‘a massive legal “gerrymander” in favour of Defendants’. Levitt Robinson further argued the proposed amendments would incentivise defendants ‘to tie up their victims up [sic] in expensive legal knots, to make representative actions an uneconomical proposition for Plaintiffs’ lawyers and funders’.
2.37
LCM submitted the bill would ‘undoubtedly prevent hundreds of thousands of Australians from seeking redress for wrongs that have effected them. LCM described the appetite of funders to support class actions was ‘not inelastic’, arguing:
If class action regulation is changed in a way that shifts the balance between risk and return beyond acceptable limits, funders simply will not continue to fund these claims and will instead continue to increase their investments in other claim types such as insolvency, arbitration and commercial litigation.
2.38
Mr Andrew Watson, Head of Class Actions at Maurice Blackburn, told the committee prior to CFOs class actions in Australia had predominantly consisted of shareholder actions. CFOs had facilitated the funding of meritorious public interest actions, including consumers harmed by financial institutions and aboriginal workers whose wages had been stolen.
2.39
Mr Chris Merritt, Vice-President of the Rule of Law Institute of Australia, disputed the relevance of these concerns, telling the committee, ‘the fact that economically unviable matters will no longer proceed does not undermine the legitimacy of the bill’.
Views on the impact of the bill on the open class model
2.40
The Law Council of Australia emphasised the value of Australia’s open class model, pointing to the potential for all group members to benefit from an action, including those who may not be identified at the beginning or who may be unable to elect to participate in the action due to social or economic barriers.
2.41
The Law Council of Australia submitted the open class model ‘promotes efficiency by including all group members at the outset and binding them, unless they opt-out, to the outcome of the proceedings’, whilst also promoting finality for defendants.
2.42
Shine Lawyers also noted the value of the open class model:
Open class proceedings are an essential feature of the class action regime as they protect the interests of group members who would otherwise be unaware of their right to litigate their claim(s) and/or face barriers in providing active consent, and to ensure that defendants can achieve finality in a single proceeding.
2.43
LCM submitted, in the interests of equity and efficiency, Australia’s class action regime had been operated as an ‘opt-out’ model since its inception.
2.44
In contrast to open class actions, the Law Council submitted ‘closed class is contrary to access to justice and efficiency as some (maybe many) group members are excluded from the funded class action. They may therefore not claim and be unable to obtain a remedy, unless they are included in a separate, subsequent class action (or other form of proceeding) meaning that multiple proceedings are commenced.’
2.45
ICP submitted closed class actions ‘generate a multiplicity of proceedings and do not offer defendants finality’.
2.46
Ai Group expressed support for limiting members to only those who consent in writing to participate, as proposed in the bill, arguing this ‘would ensure that prospective class members are not “railroaded” into participating in class actions without their consent’.
2.47
Other submitters and witnesses, however, claimed the proposed reforms would effectively reverse the open class model in Australia. The Law Council of Australia, for example, suggested the bill appears likely to regulate the industry in such a way as to drive many funders to revert to closed classes. By requiring claimants agree in writing to participate in a funding scheme, the reforms would provide ‘a powerful financial incentive’ for litigation funders to bring closed class actions to ensure they are remunerated. The Law Council submitted this is ‘contrary to the rationale behind the opt-out class action model which underpins the Commonwealth and State class action laws’.
2.48
Phi Finney McDonald raised concerns that the proposed amendments would disincentivise open funded class actions by limiting the benefits to only those who actively sign up to a scheme. This, they submitted, would lead to an increase in competing claims, increasing litigation costs, and would limit access to justice. Moreover, Phi Finney McDonald alleged this aspect of the bill ‘subverts the broader legislative intention underpinning Australian class actions by imposing an opt in requirement’, running ‘counter to a decade of Federal Court jurisprudence’.
2.49
ICP pointed to the explanation in the EM for defining members of a class action as only those who consent in writing to participate to avoid individuals being ‘co-opted’ into a scheme. ICP argued this reflects ‘a basic misunderstanding of the operation of litigation funding and the “opt out” model of Australian class action regimes’ as individuals already have to consent to become a member of a litigation funding scheme and are not liable for costs unless they actively sign on to an action.
2.50
Litigation Lending argued the bill would effectively change Australia’s class action from opt-out to an opt-in model. Litigation Lending argued the closed (opt-in) model ‘sits in direct contrast to the Government’s prior regime that determined that an opt-out procedure was preferable on the grounds of equity as well as efficiency’.
2.51
Levitt Robinson submitted the bill would likely have the effect of ending ‘opt-in’ class actions, thereby interfering with the freedom of contractual relations.
2.52
LCM suggested the requirement for positive action (that is, members must agree in writing to participate in a scheme under the bill) shifts the class action regime to an ‘opt-in’ model. LCM described the impact of this aspect of the proposed amendments:
This change reverses the approach to class member participation that has been a cornerstone of Australian class actions since its inception, which will have far-reaching consequences and will negatively impact fair and equitable outcomes for plaintiffs.
2.53
Litigation Lending also cautioned the imposition of a de facto opt-in class action model through this bill would lead to multiple closed class actions being run against a single defendant, driving up costs and uncertainty for defendants.
2.54
Shine Lawyers noted the effect of closed actions may be to increase barriers to negotiated settlements due to defendants being exposed to further litigation relating to the same case by claimants who did not sign on to the initial scheme, leading to more actions proceeding to trial.
2.55
The Law Council of Australia pointed to negative impacts they anticipated the bill would have on defendants, arguing the reforms would lead to multiple closed class actions, higher settlements driven by the need for funders to cover their costs under the rebuttable presumption (see below), and more cases proceeding to trial to enable funders to recoup their investment despite good faith efforts by defendants to settle. The Law Council submitted the provisions of the bill would ‘significantly prejudice corporate defendants, company directors and their insurers who would be faced with multiple class actions, increased costs and a near impossibility of efficiently and cost effectively settling all actions’.
2.56
Other submitters raised concerns the proposed amendments exacerbate confusion over the court’s use of common funding orders (CFOs). The Law Council of Australia noted the bill fails to address uncertainty around CFOs, claiming the current drafting is ‘unclear and confusing’. The Law Council further submitted these ambiguities constitute ‘a serious failure in the drafting of the bill’ that creates further confusion.
2.57
Mr Armstrong QC and Dr Cashman suggested the bill was a ‘missed opportunity’ that perpetuates uncertainty as it ‘does nothing to resolve questions over the availability of CFOs’. Mr Armstrong QC and Dr Cashman described the absence of clarity in this respect as ‘somewhat ridiculous’, suggesting:
Parliament could resolve the question over CFOs in a sentence, but instead this bill creates an inherent uncertainty that will certainly expose some unfortunate collection of plaintiffs, defendants and judges to a tortuous process of running the issue back up the line to the High court.
2.58
Mr Armstrong QC and Dr Cashman further submitted that the definition of a ‘common fund order’ in the bill may capture funding equalisation orders as well, increasing the free rider problem and creating ‘a real disincentive for a funder to countenance the possibility of an open action covering both funded and unfunded group members’.
2.59
Dr Cashman told the committee the disincentives within the bill for funders to back open class actions would likely lead to ‘a proliferation of competing and overlapping class actions’.
2.60
Levitt Robinson outlined the value of CFOs:
When a case is settled or won, the people who were too scared to join in, finally come forward in great numbers to claim their share, a share to which, without a Common Fund Order, they would otherwise not have had to contribute towards the costs of gaining, with the burden being unfairly borne only by those who had had the courage to commit to the action in the first place.
2.61
Mr Watson argued CFOs had driven competition in Australia, leading to a ‘significant drop in funding commissions’ to rates well below 30 per cent.
2.62
The Law Council of Australia claimed the common fund order regime and greater involvement of the courts in CPDMs had led to ‘a significant downward impact on commissions charged and increased the transparency of litigation funding arrangements’.
2.63
Shine Lawyers argued CFOs were essential for the continuation of an open class action regime. The restrictions in the bill, however, would create an unacceptable risk of free riders, making it ‘virtually certain that all funded class actions will be commenced as a ‘closed class’. These closed class actions, according to Shine Lawyers, would see increased costs borne primarily by members of the class (rather than shared with the broader group, as in an open class action) resulting from increased book building.
2.64
Johnson & Johnson and Stryker pointed to the recognition in the EM that the bill would encourage greater book building, raising concerns at the negative publicity this would generate for defendants. Johnson & Johnson and Stryker also cautioned public outreach or advertising to build a book may deter vulnerable patients from using therapeutic goods associated with a future class action, potentially leading to patients opting to stop medication–whether or not it is in their interests to do so.
2.65
Johnson & Johnson and Stryker concluded, ‘there is a high risk that advertising to book build may be detrimental to potential group members, public health and healthcare’.
2.66
Shine Lawyers noted book building increases the costs of running a class action and ‘presents a barrier to access to justice where potential group members are unable to be identified or contacted, and in circumstances where there are logistical difficulties in group members providing written consent’.
2.67
Levitt Robinson cautioned book building may not be possible in cases in which scare tactics and intimidation are deployed by defendants.
2.68
Some evidence also suggested the bill may particularly undermine access to justice for indigenous Australians, small business owners, farmers, and vulnerable groups.
2.69
Mr Christian Gergis, Head of Policy at the Australian Institute of Company Directors (AICD), described AICD as having an open mind on open versus closed class actions. Mr Gergis noted defendants value the finality that is associated with an open action, pointing out, however, that book building in shareholder class actions tends to be relatively straightforward.
2.70
Ai Group, argued CFOs encourage speculative class actions by removing the expense of book building.
2.71
Mr Smith supported the bill’s provisions that would require class members to sign on to a scheme in writing, asking the committee: ‘what is wrong with the idea of people having to actively agree to the financial arrangements that will affect the outcome that they get?’
2.72
Mr Anshu De Silva Wijeyeratne, Principal Legal Officer at the Attorney-General’s Department, assured the committee ‘the reforms are not intended to prohibit or prevent open class actions as a matter of law’. He summarised the purpose of the bill as concerned with ‘ensuring that there is informed consent before funder’s fees and commissions are imposed on plaintiffs’ and ‘placing some level of restriction on the use of common fund orders’. Mr Wijeyeratne further claimed, ‘the ability to share expenses in an open class action through other mechanisms is not affected by this bill’.
Views on limiting returns to litigation funders
2.73
Several submitters supported the approach taken in the bill to limit returns to funders from non-scheme members. For example, Mr Clark AO argued:
When the court made a CFO it enabled the funder to take a percentage of every class member’s compensation despite not having their agreement or consent. While this was portrayed as an answer to the so-called free rider problem it was both inherently unfair and ensured that the litigation funders and their lawyers were guaranteed truly enormous returns on their investment.
2.74
Mr Merritt expressed support for limiting returns to litigation funders, telling the committee funders face ‘a moral hazard’ whereby their interests are served by pursuing lengthy and costly actions with higher settlements that may not be in the best interests of their clients.
2.75
Professor Waye disputed assertions in the EM regarding litigation funders continuing to reap massive windfalls, claiming competition in the industry had intensified, ‘placing downward pressure on funding fees’. Professor Waye also argued courts have increasingly acted to constrain class action costs, citing a 2019 study that found less than 27 per cent of settlement proceeds went on funding fees, while funding rates were agreed at over 40 per cent of settlement proceeds in fewer than 5 per cent of cases.
2.76
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.
2.77
The Law Council of Australia submitted, rather than improving the powers of the courts to improve outcomes for litigation funding participants, the proposed reforms may ‘impose undue limits on the courts’ powers’. The Law Council stated:
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… 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.
2.78
The Law Council of Australia advocated instead a widening and clarifying of court powers as the best mechanism to protect group members. The submission concluded, ‘the exercise of judicial discretion is critical to doing justice’.
2.79
Concerns were raised also in the joint opinion of Mr Gleeson SC, Mr Hartford-Davis, and Mr Pulsford, submitted by ALFA and ILP, that section 601LG(3) of the bill relies on delegated legislation with respect to the issues to which the court can have regard when determining whether a claim proceeds distribution method is deemed fair and reasonable. 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.
2.80
Mr Armstrong QC and Dr Cashman argued, ‘we cannot conceive of any defensible rationale for seeking to limit the factors to be taken into [sic] by the Court’.
2.81
Dr Cashman told the committee 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). 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.
2.82
FCAI noted the exclusive list of factors the court may consider outlined in the legislation ‘may not allow for relevant case specific factors to be considered’.
2.83
Levitt Robinson criticised these provisions; ‘this restraint on Court discretion is unreasonable and inappropriate’. Associate Professor Lombard and Professor Symes described them as an ‘extraordinary measure of fettering the Court’s discretion’. Litigation Lending advocated the court ‘retain an unfettered judicial discretion’.
2.84
ICP pointed to three particular areas a court would no longer be able to consider when determining the fairness of a CPDM, including the distribution to scheme members as a proportion of their best-case recovery, the funding commission that scheme members may have already agreed to pay, and the costs incurred by the defendant. The Law Council submitted two areas that would be excluded from consideration by the court under the reforms, including the solvency status of a defendant, and whether or not the settlement had included an apology, the provision of services, or conditions not to do something in the future.
2.85
Mr Andrew Watson, Head of Class Actions at Maurice Blackburn, told the committee the exhaustive list of factors would also force the court to ignore the anticipated outcome if the case went to trial in the event of a pre-trial settlement.
2.86
Evidence was also received relating to concerns the Government could further amend the factors a court could consider when evaluating a CPDM. 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 the bill may have the following impact:
Under the proposals, the government will limit the factors the court can take into account when determining a CPDM and will have the power to amend the prescribed factors by regulation after a funder has made its investment.
By reserving to the responsible Minister the ability to change what the court can and cannot consider when determining if a CPDM is fair and reasonable, the provisions circumvent the court’s discretion and provide far too much power to the government of the day. 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?
2.87
ICP also pointed to a concern with the bill whereby a future government could amend by regulation the factors a court may consider when approving the distribution of claim proceeds in an action in which the government is a defendant.
2.88
LCM submitted the exhaustive list of factors the court must consider when determining the fairness and reasonableness of a CPDM was ‘entirely inappropriate’ and would ‘open the door for Government to subsequently interfere with judicial discretion by way of Regulation’.
2.89
Witnesses from Treasury and the Attorney-General’s Department told the committee the list of factors in 601LG(3)(c) the courts were required to consider cover a broad range of issues and reflect recent jurisprudence. Mr Wijeyeratne told the committee the list was largely drawn from factors applied by the courts. Mr Tom Dickson, the Head of the Corporations Branch at the Department of the Treasury, contended the range of factors in the bill provided the courts with the ability to consider ‘a whole range of things’.
The rebuttable 70–30 presumption
2.90
The committee received extensive evidence related to the rebuttable presumption. Witnesses and submitters 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. Mr Armstrong QC questioned the appropriateness of trying to arrive at such a formula:
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… That’s just a normal aspect of litigation, and the courts.
2.91
FCAI described the rebuttable presumption as ‘not well-adapted’ to prevent abuse by funders, claiming 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. FCAI further argued:
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%... 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.
2.92
Mr John Sheahan, a member of the Class Actions Committee at the Law Council of Australia, told the committee, rather than looking at funder fees as a percentage of the settlement, courts should consider ‘a fair reward for risks undertaken and capital deployed in a more conventional commercial way’.
2.93
Dr Duffy described the rebuttable presumption as a ‘blunt instrument’ that failed to account for overall legal costs or the quality of legal and funding services. Dr Duffy instead proposed a sliding scale, in which the distribution of claim proceeds varied depending on the value of the settlement.
2.94
Rather than employing the 30 per cent rebuttable presumption, Mr Sean McGing FIA FIAA FAICD suggested a determination regarding a fair and reasonable return for litigation funders should take account of the time value of money, and proposed an investment and insurance risk-return principles approach, detailed further in his submission.
2.95
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. 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. 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 per cent of the claim proceeds after the reimbursement of the costs of running the action.
2.96
Submitters and witnesses also questioned the evidentiary basis for the 70–30 presumption, suggesting it was unworkable in many cases. For example, Mr Andrew Saker, Omni Bridgeway Managing Director and CEO, told the committee, ‘no evidence of any kind has been advanced by the Government to support this arbitrary 70 per cent figure, or to assess its impacts’.
2.97
Omni Bridgeway submitted, ‘there is no sound evidentiary basis to conclude that the 70% figure is a fair or sensible starting position. As such, it is potentially invalid as being beyond power’.
2.98
Omni Bridgeway further described the rebuttable presumption as ‘inherently unjust and unreasonable’ in situations in which a defendant may agree to cover the plaintiff’s legal costs that had been borne by the funder, yet the plaintiff would then be entitled to at least 70 per cent of these costs. Omni Bridgeway argued:
There are no policy grounds for the bill to require group members to receive 70% of the costs recovered which they did not pay, unless the policy is to adversely affect the availability of class actions for the Australian public.
2.99
Professor Waye questioned whether the proposed 70 per cent (rebuttable) minimum return for class members would unduly limit the number of class action cases, pointing to modelling which suggested ‘a significant proportion of meritorious class proceedings might not proceed’ under the cap.
2.100
Omni Bridgeway, ICP, and LCM referenced a 2021 analysis of recent class action settlements conducted by PricewaterhouseCoopers (PwC). The PwC study found a 30 per cent cap on gross returns for litigation funders would have led to settlement costs not covering litigation costs in more than a third (36 per cent) of recent class actions. The report concluded:
This demonstrates the tradeoff [sic] inherent in any cap on litigation funder returns; it would provide higher returns to some class members, but some members would not receive returns they would have otherwise expected as fewer actions would be undertaken.
2.101
The PwC report concluded legal fees would be unlikely to be impacted by the rebuttable presumption as these costs already come under court scrutiny.
2.102
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. For example, FCAI cautioned the 30 per cent cap would likely become the baseline return sought by litigation funders, making settlements more costly and harder to achieve.
2.103
Johnson & Johnson and Stryker expressed concern the bill may have the effect of entrenching the 30 per cent return for funders, perversely leading to lower returns to class members and higher settlement costs for defendants.
2.104
Mr Armstrong QC cautioned the 30 per cent rebuttable presumption may become ‘something like a default standard’ that for judges may be ‘a sticky thing to move away from’.
2.105
Mr Sheahan anticipated the rebuttable presumption would have the following impact:
It will affect the behaviour of the courts in approving fees and costs and will, therefore, affect the behaviour and decisions of lawyers and funders as to whether to take on claims first at the margins. Secondly, it will affect particular funders’ decisions about whether to oppose or support settlements.
2.106
Shine Lawyers warned the cap on returns to non-members would encourage defendants to drive up legal costs to render an action economically unviable.
2.107
Mr Saker warned the committee the bill’s ‘arbitrary price cap’ would be ‘an open invitation for defendants to engage in “deep pocketing” tactics”… prolonging and complicating proceedings to make it unviable for group members to pursue their claims’.
2.108
ICP cautioned the rebuttable presumption would encourage defendants to drive up costs in a ‘scorched earth’ campaign to maximise costs and render an action commercially unviable for funders. ICP also submitted the cap may incentivise funders to pursue early settlements to ensure a return on investment, potentially to the detriment of returns to scheme members.
2.109
Mr Watson told the committee:
In those cases which do get funding, defendants will have every incentive to needlessly run up costs in a war of attrition that will ensure cases are determined by financial resources rather than justice and fairness.
2.110
Mr Conrad told the committee the bill would place victims as a ‘colossal disadvantage’, asking the committee why victims should be placed on a budget and not the defendants.
2.111
LCM cautioned, if the bill was seeking to restrict claimants’ fees to fit within a viable funding model, ‘[claimants] would be at a colossal tactical disadvantage when facing a well-heeled defendant with unlimited resources and large, highly skilled legal teams. The bill would ensure that the claimants are simply “out-gunned”’.
2.112
LCM cautioned the presumption—whilst rebuttable—would have a ‘chilling effect’ on small and mid-sized claims as funders would have to presume their return to be below 30 per cent when calculating the commercial viability of an action.
2.113
Mr Armstrong QC told the committee, in the absence of case history, funders would have to assume the court would cap their returns at 30 per cent when determining the risk and commercial viability of backing a future action.
2.114
Mr Armstrong QC and Dr Cashman further cautioned that claim proceeds can only be quantified after lengthy taxation procedures have been completed. This could delay by months or years the ability of a court to determine the exact ratio of returns to group members that is required by the rebuttable assumption.
2.115
Johnson & Johnson and Stryker pointed to the ongoing legal and administration costs that would accrue after settlement, questioning whether it was even possible to accurately determine the ratio of settlement proceeds attributed to group members.
2.116
Other witnesses offered support for the rebuttable presumption. For example, Mr Smith told the committee the rebuttable presumption was ‘flexible enough to look at different circumstances and different outcomes’. Mr Merritt warned of allowing too much court discretion in the rebuttable presumption, as ‘the more flexibility there is on that 70 per cent requirement, the less benefit you’re going to see for consumers’. Mr Gergis dismissed the suggestion by some submitters that the rebuttable presumption would increase litigation costs as ‘speculative’.
2.117
Mr Dickson clarified to the committee the government was not proposing a cap, rather, the reforms aimed to establish a flexible principle in law aimed at ensuring a fair distribution of settlement proceeds.
Views on the suitability of the Managed Investment Scheme regime to regulating class action funders
2.118
Some witnesses and submitters raised concerns regarding the applicability of the MIS regime to litigation funders, broadly claiming it was inappropriate, impractical, and may be beyond power. For example, Mr Armstrong QC and Dr Cashman raised concerns that the bill appears to rely on the Corporations Act 2001 to modify the class action regime, which the submitters described as ‘a separate regime that was framed for a quite different purpose’. Mr Armstrong QC and Dr Cashman argued the application of the Managed Investment Scheme (MIS) regime to class actions was inappropriate due, in part, to questions related to whether funders or lawyers would constitute the ‘responsible entity’.
2.119
Dr Cashman told the committee the MIS regime ‘was conceived for an entirely different purpose and is ill suited to the regulation of class actions’.
2.120
Mr Meyerowitz-Katz argued that MIS regulations are an inappropriate means of regulating the class action industry, claiming ‘a person agreeing to fund litigation is not the same as a person conducting a property development or managing a hedge fund, and should not be regulated in the same way or by the same legislation’.
2.121
The joint opinion of former Solicitor-General Mr Gleeson SC, Mr Hartford-Davis, and Mr Pulsford, submitted by ALFA and ILP, offered the following opinion in relation to the application of the corporations powers to litigation funding:
While a law need not have a single character, the connection between the measure and the company, which s 601FA requires operate a registered managed investment scheme, may be too “insubstantial, tenuous or distant” to permit the bill to be characterised as a law “with respect to” either matter.
2.122
Mr John Emmerig, Co-Chair of the Class Actions Committee at the Law Council of Australia, elaborated on this concern:
Even if we’re dealing with managed investment schemes there is still a characterisation issue about whether or not the goal here is to regulate corporations or to improve outcomes for class action litigation funding schemes. So you’ve got to get across that insubstantial, tenuously distant connection test.
2.123
Mr Armstrong QC suggested not all litigation funders need be corporations and hence may not otherwise come under the Corporations Act 2001. He also questioned whether the extension of the provisions to non-commercial activities may be beyond power.
2.124
Dr Duffy argued the application of the MIS regime to funded class actions appeared to ‘somewhat strain the regulatory framework and may not be the most apt form of regulation’.
2.125
LCM drew the committee’s attention to its submission on the exposure draft of this legislation detailing concerns with the application of MIS to the class action industry. LCM submitted to the committee:
There are a significant number of important aspects of the substantive regime governing the MIS which at best produce no discernible benefit to group members and at worst are impossible or impractical to comply with.
Views on the constitutionality of the bill
2.126
Several submitters raised questions around the constitutional validity of the proposed bill, as discussed below. For example, the Law Council of Australia cautioned the bill was likely to face challenges to its constitutional validity. The Law Council raised three key constitutional concerns with the bill. 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.
2.127
Concerns were raised in the joint opinion of Mr Gleeson SC, Mr Hartford-Davis, and Mr Pulsford, submitted by ALFA and ILP, that the provisions of the bill may ‘transgress the doctrine of inter-governmental immunities’ that prevent the Commonwealth from curtailing the exercise of state power and courts. The joint opinion further suggested certain provisions within the bill may be beyond the Commonwealth’s legislative power to impose.
2.128
Mr Armstrong QC and Dr Cashman raised questions around the extent to which the proposed amendments were permitted under the constitution. In particular, they noted:
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.
2.129
Mr Armstrong QC and Dr Cashman raised concerns that the provisions of the bill may amount to an implied repeal of the Federal Court of Australia Act 1976 and an overriding of the powers of state courts pursuant to section 109 of the Constitution relating to the inconsistency of laws.
2.130
ICP pointed to one effect of the bill being that funded class actions could no longer be run in a state court not exercising federal jurisdiction, and submitted these provisions would ‘constitute an extraordinary intervention by the Commonwealth in the operation and conduct of litigation in State Courts’, questioning whether ‘such an exercise of federal legislative power would be constitutionally valid’.
2.131
Mr John Walker, Chairman of ALFA and Director of ICP, summarised his concerns with the proposed bill:
The federal parliament is looking at passing a bill that seeks, in a broad sense, to have overall coverage of all class actions, irrespective of state legislation, irrespective of federal legislation that's already in place and may be affected by this bill, and, in my view, without due regard to assessing whether or not in fact it has the power to pass this bill.
2.132
Mr Meyerowitz-Katz also raised constitutional concerns, noting the bill purports ‘to regulate the procedure applying to litigation in state courts in a manner that is directly in conflict with state legislation’. He pointed to state laws governing the appointment of contradictors, which he alleged would be ‘inconsistent’ with the provisions of this bill. Mr Meyerowitz-Katz argued the proposed legislation ‘gives rise to significant constitutional difficulties’, concluding, ‘to the extent it purports to apply to matters not in federal jurisdiction, it has no clear basis in the Constitution’.
2.133
Maurice Blackburn Lawyers pointed to ‘unresolved constitutional concerns’ in the bill relating to the limiting of state powers.
2.134
The committee put the question of the bill’s constitutionality to witnesses from the Attorney-General’s Department. Dr Albin Smrdel, Assistant Secretary at Attorney-General’s, told the committee the Department had received ‘a number of different pieces of legal advice’ throughout the legislative development process and was ‘confident, on that advice, that the legislation is constitutional’. Dr Smrdel expressed confidence in the terms of the legal advice received by the Department and told the committee the current Solicitor-General had signed off on the constitutionality of the bill.
Views on the process of consultation on the bill
2.135
Submitters raised concerns regarding the short period of consultation on the exposure draft and the small window during which the committee could accept submissions. For example, Mr Armstrong QC and Dr Cashman expressed regret ‘that such little time has been allowed for consultation with practitioner experts regarding the difficult questions created by this bill’.
2.136
The Law Council of Australia noted the ‘unusually short period of time’ provided to consider the bill, claiming the timeline failed to provide sufficient time to adequately consider certain aspects of the bill.
2.137
The Law Council also submitted:
No clear justification has been provided for the failure to allow a reasonable time for stakeholder consultation and subsequent evaluation of shareholder views on important matters with widespread impact.
2.138
The Law Council of Australia suggested complexity and ambiguity in the reforms would lead to ‘satellite litigation’ over the validity of certain provisions within the bill. The Law Council also pointed to some subsections proposed in the bill that have the same numbers as provisions that have already notionally been inserted into the Corporations Act 2001.
2.139
Mr Saker described ‘a deeply flawed policy development process’, telling the committee:
The haste with which this bill is being progressed can be seen from the four business days provided by Treasury for comment on the exposure draft legislation, the six business days provided for input on the bill to this committee and the one-day hearing to ventilate issues with the legislation.
2.140
Litigation Lending submitted Treasury and the Attorney General’s Department had ‘not adopted a consultative approach’ when they gave only three business days to submit to the draft bill, and failed to publish submissions made in July and October 2021 until November 2021.
2.141
ICP claimed the consultation period for this bill was ‘wholly inadequate to consider and address the complex issues arising from the bill’. They also argued the proposed legislation appeared rushed, suffering from drafting errors, inconsistencies between the EM and the text of the bill, and confusion about basic aspects of the class action industry. ICP pointed to ‘practical issues’ that are not addressed in the bill or EM, suggesting ‘a rushed and poorly considered legislative intervention into a complex and well-established area of law’.
2.142
Maurice Blackburn Lawyers described the consultation period as ‘exceedingly short notice’.
2.143
In contrast, Mr Smith expressed support for the consultation process:
The bill follows an extensive inquiry by the ALRC [Australian Law Reform Commission] and a subsequent extensive inquiry by the PJC [Parliamentary Joint Committee]. An exposure draft was then published, submissions were called for, the government took into account those submissions before finalising the bill and now we have this inquiry. So, on any assessment, there’s been an extensive consultation process.
2.144
Mr Dickson told the committee he believed the consultation process had been adequate, enabling the government to gather the necessary information related to the reforms. Mr Dickson detailed each stage of the consultations:
[The consultation process] really dates back to the ALRC examination that commenced in 2017. In June of 2018 there was a discussion paper, and there was a consultation that happened for several months, between May and September. That reported at the end of that year, in December 2018. There were 78 submissions to that. There was the PJC inquiry, which was initiated around May 2020. Between July and August, there were hearings. There was a December 2020 report. There were 101 submissions. There was a Treasury consultation, in partnership with the Attorney-General's Department, that ran from 1 June to 28 June this year. That was in response to some of the findings of the earlier reports that I've mentioned. There were 23 submissions to that process. Then there was an exposure draft that was released on 30 September for consultation. That closed on 6 October this year, and we received 21 submissions.
Committee view
Committee view on the distribution of claim proceeds and the rebuttable presumption
2.145
The committee echoes the arguments put forward in the Australian Law Reform Commission and Parliamentary Joint Committee reports—and the Government Response to these inquiries—regarding the importance of third-party litigation funding in the promotion of access to justice for Australians who have been wronged.
2.146
However, the agreements under which litigation funders continue to operate have too often resulted in profits that are disproportionate to the risks and costs they bear. The committee is mindful that median returns to plaintiffs in cases involving litigation funders remain well below those received by class members in non-funded actions. The committee does not accept that funders ought to be compensated for past losses. Such a consideration would not serve the interests of justice and would place the interests of litigation funders ahead of plaintiffs. The committee therefore endorses the intention of this bill to ensure class action funding agreements come under the purview of the court, be appraised by a qualified and independent third-party, and be rejected or varied, where they are deemed to be unfair or unreasonable. The committee is also convinced of the need for a contradictor to be appointed by the court—the costs of which should be borne by the funder—to ensure there is no repeat of the travesty in the Banksia case.
2.147
The committee further upholds the provisions of the bill that seek to limit the windfall profits reaped by litigation funders through the imposition of the rebuttable presumption of a return to class members of at least 70 per cent of the settlement proceeds. The committee recognises litigation funders should receive an appropriate return on their investment and emphasises the court’s discretion enshrined in the bill to approve or vary the proportion of any settlement received in the interests of fairness and reasonableness.
2.148
The committee acknowledges concerns raised by some witnesses and submitters at the exhaustive list of factors the court would be required to consider under these reforms when determining the fairness and reasonableness of a claim proceeds distribution method. The committee is concerned this may unduly fetter the court’s discretion and therefore recommends subsection 601LG(3) be amended to remove the word ‘only’.
2.149
The committee notes any future amendments to these regulations—by this or another government—would be subject to scrutiny and may be disallowed in the Senate. The committee is therefore reassured that adequate checks and balances are in place.
Committee view on common fund orders and open class actions
2.150
The committee notes the bill expressly does not invalidate common fund orders. The committee therefore presumes CFOs may continue to be deployed at the court’s discretion, as is currently the practice. The committee nevertheless remains concerned that common fund orders, by their very nature, disregard conventions around informed consent. Their disputed legal basis and mixed application further calls into question the value of relying on CFOs alone to limit windfall returns to funders. Therefore, the committee endorses the provisions of the bill that ensure all group members actively consent to participate in an action.
2.151
The committee also notes evidence from the Attorney-General’s Department that nothing in the bill is designed to overturn the current open class action model. The committee is not convinced by some of the speculative and alarmist claims that the proposed reforms would mean the end of open class actions in Australia.
2.152
The committee acknowledges concerns raised regarding the application of the MIS regime to litigation funding, but notes this has already been achieved through the Corporations Amendment (Litigation Funding) Regulations 2020, which came into effect in August 2020.
Committee view on the constitutionality of the bill
2.153
The committee places significant weight on the evidence from the Attorney-General’s Department that these constitutional questions (and other legal issues) were sufficiently canvassed in the legal opinions it received. The committee therefore defers to the Department’s conclusion—and that of the Solicitor-General—that the bill is constitutionally valid. The committee looks forward to receiving further evidence from the Attorney-General’s Department reinforcing this position.
Committee view on the consultation process
2.154
The committee acknowledges the concerns raised by some submitters and witnesses at the condensed period of consideration around this bill. The committee nevertheless notes the central issues addressed through this bill have been the subject of widespread public consultation since 2017—through the ALRC inquiry, the PJC inquiry, and the exposure draft. The committee believes these consultations have provided adequate opportunity for stakeholders to inform the process. The committee therefore remains confident in the adequacy and integrity of the multi-year consultation process around this bill.
2.155
The committee recommends the bill be passed subject to the deletion of the word ‘only’ from s 601LG(3).
Mr Andrew Wallace MP
Chair