Although submitters and witnesses widely endorsed the need for effective and fit-for-purpose regulation of the litigation funding industry, the committee acknowledges widely divergent views as to the merits of the bill and the best ways to achieve its stated objectives.
This chapter includes evidence previously provided to the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS) as well as to this committee. The chapter details specific aspects of the bill:
returns to litigation funders (including the potential impacts of the bill on the number, type, and conduct of class actions);
fettering the court’s consideration of factors in determining returns to funders;
the bill’s definition of a class action litigation funding scheme;
the bill’s definition of a claim proceed;
the impact of the bill on the open class model;
the suitability of the Managed Investment Scheme regime to regulating class action funders; and
specific issues raised by the National Farmers’ Federation.
The chapter concludes with the committee views and a recommendation.
Returns to litigation funders
The committee received extensive and conflicting evidence about the reasonableness of the returns received by litigation funders in class actions and the merits of providing rebuttable presumption in the bill that seeks to return 70 per cent of the claim proceeds in a class action to the plaintiffs (the 70–30 rebuttable presumption).
This section covers matters related to the 70–30 rebuttable presumption, including support for the rebuttable presumption, objections to the portrayal of excessive returns to funders, the risks assumed by the litigation funder, the evidentiary basis and appropriateness of the 70–30 rebuttable presumption, current court oversight of funding and legal fees, the potential impacts of the 70–30 rebuttable presumption on the numbers of funded class actions, the potential behaviour of defendants under the 70–30 rebuttable presumption, and alternative methods of calculating funding distribution, including differences between shareholder and non-shareholder class actions.
Support for the 70–30 rebuttable presumption
Mr Chris Merritt, Vice-President of the Rule of Law Institute of Australia, supported limiting returns to litigation funders. He 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’.
The Business Council of Australia (BCA) argued the current class action system allows funders and lawyers to ‘maximise their own profits at the expense of class members’. The BCA argued the rebuttable presumption did not go far enough, advocating returns to funders of more than 30 per cent of settlement proceeds should only be approved by a court in ‘truly exceptional circumstances’.
The Australian Industry Group (Ai Group) submitted that ‘the currently poorly regulated system is allowing litigation funders to take a disproportionate share of any award or settlement’. Mr Stephen Smith, Head of National Workplace Relations Policy at Ai Group, told the PJCCFS, ‘the bill would implement balanced and fair changes to class action and litigation funding laws to achieve a fairer outcome for plaintiffs and businesses’, and that the rebuttable presumption was ‘flexible enough to look at different circumstances and different outcomes’.
The Australian Institute of Company Directors (AICD) argued the 70–30 rebuttable presumption offered an important safeguard to guarantee returns to class members:
As a general principle, we consider that the majority of litigation proceeds should be received by class members. If class members do not receive at least a substantial majority of any recovery, it cannot be said that the action was brought for class members or in the interests of justice.
Objections to the portrayal of excessive returns to funders
Several submitters criticised assertions in both the bill’s Explanatory Memorandum and the report on the bill by the PJCCFS that litigation funders continue to reap massive windfall profits.
For example, the Association of Litigation Funders of Australia (ALFA) submitted that since the introduction of common fund orders (CFOs) in 2016, new litigation funders had entered the market. This increased competition had seen fees decrease from an average of over 30 per cent of claim proceeds prior to 2016 to between 20 and 25 per cent today.
Similarly, Professor Vicki Waye claimed competition in the industry had intensified, ‘placing downward pressure on funding fees’. She also noted that 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.
Likewise, Litigation Capital Management (LCM) disputed assertions made in the PJCCFS report into this bill that litigation funders receive disproportionate returns:
There is no evidence provided for the statement that funders receive ‘profits that are disproportionate to the risks and costs they bear’. The funding industry and respected members of academia have provided numerous comprehensive industry-wide reports, lists, schedules and figures on historical funder returns, but all of this data continues to be ignored in favour of the Government pointing to the same well-worn singular examples of higher-than-average profits. There has been no attempt to engage in a comprehensive evidence-based analysis of historical funder outcomes and their proportionality to the costs and risks faced.
Similarly, Omni Bridgeway objected to references made during the PJCCFS inquiry to ‘windfall’ or ‘unreasonable’ returns to litigation funders, arguing these assertions ‘conveniently ignore or misunderstand the financial risks assumed by litigation funders’.
Mr Tom Marland, a solicitor based in Bundaberg, Queensland, argued the data shows that litigation funders do not make excessive profits and that the returns process is already ‘regulated and managed’. He also pointed out that litigation funders face very large costs when the case they are funding is lost.
Risks assumed by the litigation funder
Omni Bridgeway opposed the rebuttable presumption on the basis that the 70 per cent minimum return to class members was based on ‘superficial or no examination of the risks assumed by funders’.
Omni Bridgeway and other litigation funders detailed some of the key risks associated with funding class actions in their submissions to this committee:
a claim may not be successful, leaving the funder out-of-pocket;
litigation funders indemnify plaintiffs and accept all the financial risks, potentially including court-ordered adverse costs (the defendant’s defence costs in the event of an unsuccessful action);
the defendant may be unable to pay due to insolvency, leaving the funder out-of-pocket;
funders agree to a percentage of an unknown settlement amount that may or may not cover costs;
the court may vary the return to funders from that agreed with class members;
the funder has no control over the investment period (even successful cases can take years before funders receive a return); and
funders commit to open-ended costs that are highly uncertain and subject to variables outside the control of the funder (including the actions of the defendant, the court, and legislators).
ALFA submitted that the risks borne by class action litigation funders were rarely reflected in debate and analysis regarding their financial returns.
Litigation Lending Services submitted that litigation funding was ‘uniquely risky’, claiming these risks were reflected in the rate of return. Litigation Lending also argued that funding risks vary enormously between shareholder and non-shareholder actions.
In contrast, Mr Justin McDonnell suggested the risks to litigation funders had been overstated. He submitted that ‘most funders’ are insured against adverse cost orders. Mr McDonnell also claimed ‘the vast bulk’ of civil cases settle before trial or early in a trial, further reducing the costs, uncertainties, and risks associated with litigation funding.
Evidentiary basis and appropriateness of the 70–30 distribution
The Attorney-General’s Department claimed ‘the design’ of the rebuttable presumption was ‘informed’ by the PJCCFS 2020 report (see Chapter 1) and the Government’s consultations in June and September 2021. Nevertheless, some submitters and witnesses questioned the evidentiary basis for, and appropriateness of, the 70–30 presumption.
For example, Mr Andrew Saker, Omni Bridgeway Managing Director and CEO, told the PJCCFS, ‘no evidence of any kind has been advanced by the Government to support this arbitrary 70 per cent figure, or to assess its impacts’.
Similarly, Marland Law claimed the 30 per cent cap on costs and funder fees appeared to have ‘materialised out of thin air’ and had ‘no objective basis’.
Slater and Gordon Lawyers argued that the 2020 PJCCFS report had erroneously endorsed the minimum return to group members on the basis that some class action law firms and funders had endorsed it. Slater and Gordon stated that ‘no class actions law firms or funders have, to our knowledge endorsed this reform’, concluding:
Thus, the proposal set out in Recommendation 20 is based on a fundamental error. Contrary to what is stated in the [PJCCFS] Report, it is not a proposal that has been recommended or endorsed by those with experience in the class action regime.
Mr Lachlan Armstrong QC questioned the appropriateness of trying to arrive at a claim proceeds funding distribution 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.
Mr Armstrong QC and Dr Peter 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 presumption.
Similarly, Johnson & Johnson and Stryker Australia 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.
Omni Bridgeway described the rebuttable presumption as ‘inherently unjust and unreasonable’ in situations where the defendant agrees to cover the plaintiff’s legal costs that had been borne by the funder, and yet the plaintiff would then be entitled to at least 70 per cent of these costs:
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.
The Federal Chamber of Automotive Industries (FCAI) described the rebuttable presumption as ‘an arbitrary measure which bears no necessary relationship to the actual risk and reward in a particular class action’ that may lead to unintended consequences:
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.
However, Mr Tom Dickson, Head of the Corporations Branch at the Department of the Treasury, stated that the government was not proposing a cap, but rather a flexible principle in law aimed at ensuring a fair distribution of settlement proceeds.
Current court oversight of funding and legal fees
Some submitters pointed out that courts currently exercise oversight of legal and funding fees.
For example, Litigation Capital Management (LCM) described the current process of court oversight:
Class actions are conducted under Court supervision and it is an explicit requirement of all Australian class action regimes that a proceeding cannot be resolved or discontinued without the Court’s approval. This means that every payment to a litigation funder has been carefully considered by a Court, which exercised a supervisory and protective role over the class members. No payment has been made to a funder without a Court considering all of the claim’s circumstances and concluding that the funder’s return is ‘fair and reasonable’.
Marland Law observed:
Solicitors and lawyers in Australia are already under a professional, ethical and statutory duty to only claim costs that are ‘fair and reasonable’ value for the legal services provided. If there is a concern that plaintiff lawyers are charging excessive fees—they can either have their invoices cost assessed or have the matter determined by the Courts.
Similarly, Slater and Gordon Lawyers submitted that legal fees are typically subject to the assessment and independent opinion of a costs assessor under the oversight of the Court.
Impact of the 70–30 rebuttable presumption on numbers of funded class actions
Many submitters and witnesses were concerned that higher risk, lower value class actions may become commercially unviable for funders under the 70–30 rebuttable presumption. 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.
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’.
Mr Marland pointed to class actions like the Brisbane floods, the bushfires class action, and the per- and polyfluoroalkyl substances (PFAS) contamination class action that, in his view, would not be brought under the statutory regime contained in the bill.
Mr Lindsay Clout was concerned at the Parliament’s focus on the costs and profits of funders and pointed out that the successful class action with which he had been involved would not have proceeded if not for the backing of a litigation funder.
Omni Bridgeway, Investor Claim Partner, and Litigation Capital Management referenced a 2021 analysis by PricewaterhouseCoopers (PwC) of recent class action settlements. 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 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.
Similarly, Professor Waye suggested the proposed 70 per cent (rebuttable) minimum return for class members would unduly limit the number of class action cases, and those that are funded would likely be skewed towards high value claims, like claims brought in relation to securities, thereby decreasing access to justice for other types of claims, such as consumer or competition law breaches.
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. LCM stated that the appetite of funders to support class actions was ‘not inelastic’:
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.
Mr Armstrong QC told the PJCCFS that in the absence of case history, 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’. Therefore, funders would have to assume the court would cap the combined returns to the funders and lawyers at 30 per cent when determining the risk and commercial viability of backing a future action.
Mr John Emmerig from the Law Council of Australia told the committee the 70–30 rebuttable presumption would mean ‘meritorious class actions are not going to be funded because that goal will be very hard to achieve or creates too much risk for funders’.
Mr John Sheahan from the Law Council of Australia anticipated the rebuttable presumption 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 at the margins; and
particular funders’ decisions about whether to oppose or support settlements.
However, Mr Merritt 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’.
Potential behaviour of defendants under the 70–30 rebuttable presumption
Several submitters and witnesses warned the cap on returns would encourage defendants to drive up legal costs to render an action economically unviable.
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’.
Investor Claim Partner (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.
Marland Law submitted:
[The rebuttable presumption] will only incentivise defendant lawyers [to engage] in unnecessary and strategic delays to increase the plaintiff parties’ costs as a way of frustrating a party to either settle or withdraw an action due to funding pressures.
Mr Marland explained:
If you put a cap on a plaintiff litigation funder in charge and the lawyers in charge, defendant lawyers will use that as a strategy to effectively bat out time. They will delay, frustrate and not only use that as a direct process to frustrate the economic and efficient use of our judiciary; they will use that as a battering ram to effectively starve out plaintiff groups, and it will disincentivise early settlement of these matters. It is remiss of this parliament to seek to statutorily restrict the ability of a plaintiff to represent themselves and also not look at the conduct of defendant lawyers and defendants themselves.
Mr Andrew Watson, Head of Class Actions at Maurice Blackburn, told the PJCCFS:
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.
Mr Stephen Conrad, CEO of Litigation Lending, told the PJCCFS the bill would place victims as a ‘colossal disadvantage’, asking the committee why victims should be placed on a budget and not the defendants.
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”’.
Levitt Robinson argued the proposed amendments would incentivise defendants ‘to tie their victims up in expensive legal knots, to make representative actions an uneconomical proposition for plaintiffs’ lawyers and funders’. This 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’.
The Attorney-General’s Department rejected suggestions the bill would promote poor behaviour by defendants, stating that the rebuttable presumption allows the court to consider the complexity and duration of proceedings when determining the distribution of claim proceeds. The Department also noted the obligations under which lawyers already operate that require them to act ‘with honesty, competence and diligence’.
Alternative methods of calculating the distribution of claim proceeds
Mr Sean McGing 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).
Dr Michael Duffy proposed a sliding scale, in which the distribution of claim proceeds varied depending on the value of the settlement.
Mr Sheahan told the PJCCFS that 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’.
Mr Conrad questioned whether the rebuttable presumption should apply to all forms of litigation funding, or whether shareholder and non-shareholder actions should be treated differently He told the PJCCFS 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.
Fettering the court’s consideration of factors in determining returns to funders
Most witnesses and submitters 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 (subsection 601LG(3)), potentially excluding other relevant factors.
The Law Council of Australia submitted that 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’:
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.
Investor Claim Partner Pty Ltd pointed to three areas a court would no longer be able to consider when determining the fairness of a claim proceeds distribution method (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 of Australia noted other areas that would be excluded from consideration by the court under the reforms, including the solvency status of a defendant, whether the settlement had included an apology, the provision of services, or conditions not to do something in the future.
Mr Watson told the PJCCFS 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.
Dr Cashman told the PJCCFS 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.
AICD also expressed concern at the exhaustive lists the court could consider when determining whether a claim proceeds distribution model was fair and reasonable, arguing for the bill to be amended to empower the court to consider any other factors it deemed relevant.
Mr Anshu de Silva Wijeyeratne, Principal Legal Officer at the Attorney-General’s Department, told the PJCCFS the list was largely drawn from factors applied by the courts.
The Attorney-General’s Department defended the exhaustive list of factors, claiming they could be varied to ensure their relevance and appropriateness through future regulations.
Mr Dickson from 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’.
Nevertheless, Professor Waye argued, instead, that the list provided in the legislation be indicative of the factors the court should consider rather than exclusive.
Likewise, the Law Council of Australia advocated widening and clarifying the powers of the court as the best mechanism to protect group members. In this regard, Mr Emmerig suggested removing the word ‘only’ and adding a ‘catch-all phrase’ to subsection 601LG(3) to allow the court to consider other factors it deemed relevant.
Excessive executive discretion in delegated legislation
Evidence to the committee also suggested the bill uses delegated legislation to provide excessive discretion to the executive.
The joint opinion of Mr Justin Gleeson SC, Mr Sebastian Hartford-Davis, and Mr Myles Pulsford, submitted by ALFA and International Litigation Partners (ILP), pointed out that subsection 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.
Omni Bridgeway submitted that courts already determine 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?
Similarly, Investor Claim Partner Pty Ltd pointed out that the bill would allow a future government to 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.
Likewise, LCM submitted the bill would ‘open the door for government to subsequently interfere with judicial discretion by way of regulation’.
Definition of a class action litigation funding scheme
Several submitters were concerned that the definition of a class action litigation funding scheme in the bill would inadvertently capture non-commercial entities.
For example, the joint legal opinion submitted by ALFA and ILP, and authored by former Solicitor-General, Mr Gleeson SC, and Mr Hartford-Davis and Mr Pulsford, cautioned that litigation funders need not be commercial entities, and the definition used in the bill would capture not-for-profit groups, public interest groups, or trade unions.
The National Farmers’ Federation (NFF) were concerned that their legal fund, the Australian Farmers Fighting Fund, established to support farmers and regional communities participating in litigation and run as a charitable trust, would be captured by the provisions of the bill and subject to the same restrictions as commercial funders.
Shine Lawyers submitted the definition in the bill would capture not-for-profit support to plaintiffs as well as co-plaintiff pooling where litigants back an action with their own money. They argued this ‘will cause significant, unintended hardship for group members in a number of circumstances’.
Definition of a claim proceed
Several submitters and witnesses were concerned that the bill defines claim proceeds as the gross return to members in a successful action combined with the costs.
Mr Armstrong QC and Dr Cashman warned of the ‘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.
Dr Cashman outlined the practical problem for the court:
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.
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’.
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.
Relatedly, ICP raised concerns that 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 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’.
Similarly, Mr Armstrong QC and Dr Cashman observed 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 would be to ‘increase the complexity, reduce the prospects, and exacerbate the costs of settlement procedures both for plaintiffs and defendants’.
Impact on Australia’s open class model
This section provides views on the likely impact of the bill on Australia’s open class action regime. It begins with submitter views on the advantages and disadvantages of open and closed class actions, and summarises evidence provided to the committee on the likely impact of the bill on the open class action regime, book building, and funding orders.
Advantages and disadvantages of open and closed class actions
Several submitters 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.
For example, the Law Council of Australia submitted that 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.
Similarly, Mr Marland described open class actions as ‘the most efficient and easiest way to run a class action’. He noted that many class actions develop over time—often years—requiring them to be left open to identify and bring on plaintiffs throughout the process.
Shine Lawyers emphasised 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.
The Law Council of Australia pointed to several disadvantages of closed class actions:
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.
Mr Emmerig, Co-Chair of the Class Action Committee at the Law Council of Australia suggested that closed class actions would particularly disadvantage the following groups of people:
Aboriginal and Torres Straight Islanders;
people in rural areas and regional areas;
people of low educational background;
people who might be injured; and
people who are socially challenged in some way.
Mr Emmerig also warned that closed class actions would lead to a ‘multiplicity of class actions’ that would increase the costs for ‘everybody’ and make it more difficult to resolve cases. He also warned that under a closed model, defendants would face difficulties settling a case as they would potentially be exposed to future claims by further groups of plaintiffs who would otherwise be part of the original class.
The Law Council of Australia, Litigation Lending Services, Shine Lawyers, Phi Finney McDonald, and Litigation Capital Management variously warned that the imposition of a de facto opt-in class action model through this bill would lead to negative impacts on defendants, including:
multiple closed class actions run against a single defendant;
uncertainty for defendants; and
increased costs for corporate defendants, company directors and their insurers because of the near impossibility of efficiently and cost effectively settling all actions despite good faith efforts by defendants.
The National Farmers’ Federation told the committee that in the class action related to the 2011 ban on live cattle exports, plaintiffs had faced a ‘traumatic experience’—in many cases involving financial loss, divorce, families breaking up, bankruptcy, and even suicide—and had consequently been slow to join the action:
To close the class before the proceedings are commenced would have a really detrimental impact on those people and on the little guys.
By contrast, Mr McDonnell acknowledged that data on settlement amounts for open versus closed actions was very limited but submitted defendants would ‘probably’ pay less when settling a closed action, allowing funds to be reallocated for any follow-on claims. Mr McDonnell expressed support for the bill’s provisions that may promote closed actions, noting:
The intention behind the proposed change appears to be more encouraging class claimants to agree to a relationship by signing a funding agreement rather than having litigation conducted on their behalf, possibly without their knowledge.
Impact of the bill on Australia’s open class regime
Many submitters and witnesses claimed the proposed reforms would effectively reverse the open class model in Australia.
For example, the Law Council of Australia 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 bill 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’.
Mr Emmerig described the bill’s impact on open class actions as ‘a significant and fundamental shift, and it’s not a good one’.
Litigation Capital Management pointed out that the requirement for positive action (that is, members must agree in writing to participate in a scheme, as is proposed in 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.
Likewise, Phi Finney McDonald argued that 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’.
Maurice Blackburn Lawyers submitted:
The Bill represents serious change in how access to justice is administered and delivered in the Australian courts system. It is vital that such radical and ideological change receives thorough and careful scrutiny. That has not happened to date.
ICP argued that the bill 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. ICP pointed to the explanation in the Explanatory Memorandum (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.
The Attorney-General’s Department stated the legislation underpinning a court’s class action regime regulates the open-class model and that the proposed reforms would ‘not prohibit or prevent open class actions’.
Several submitters drew the committee’s attention to the disadvantages of book building, which would be required under a closed or opt out regime.
For example, in Stanwell Corporation Limited v LCM Funding Pty Ltd (2021), Justice Beach concluded that the class action in question should have been brought as an open action, arguing:
The book building here has resulted in an unnecessary, costly and inefficient delay of seven months in order that over 50,000 retail customers be separately signed up to individual funding agreements. There is little justification for such a barrier to entry so to speak or justice.
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’. Levitt Robinson cautioned book building may not be possible in cases in which scare tactics and intimidation are deployed by defendants.
Woodsford Litigation Funding submitted the provisions of the bill promoting book building would, in certain actions, make it too impractical and costly to sign up all group members. Woodsford further argued:
Such an approach undermines the very purpose of an opt-out regime, which is to allow class member to participate in an action passively, not to compel them to actively sign up to funding agreements or otherwise ‘opt-in’. Further, book-building is an extremely expensive process, which could ultimately lead to lower net returns to group members, as unnecessary costs are wasted which eat into any recovery that might be available.
Johnson & Johnson and Stryker Australia noted that the EM recognised the bill would encourage greater book building. They raised two concerns. First, the negative publicity this would generate for defendants. Second, the public outreach or advertising needed 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. They concluded, ‘there is a high risk that advertising to book build may be detrimental to potential group members, public health and healthcare’.
By contrast, Ai Group expressed support for the bill in so far as it would limit class members to only those who consent in writing to participate, arguing this ‘would ensure that prospective class members are not “railroaded” into participating in class actions without their consent’.
Mr Christian Gergis, Head of Policy at 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.
Several submitters outlined the value of common fund orders (CFOs). Levitt Robinson explained:
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.
Mr Andrew Watson, Head of Class Actions at Maurice Blackburn, told the PJCCFS that prior to CFOs, class actions in Australia had predominantly consisted of shareholder actions. He argued two points:
First, CFOs had facilitated the funding of meritorious public interest actions, including consumers harmed by financial institutions and Aboriginal workers whose wages had been stolen.
Second, CFOs had driven competition in Australia, leading to a ‘significant drop in funding commissions’ to rates well below 30 per cent.
Similarly, the Law Council of Australia claimed the common fund order regime and greater involvement of the courts in claims proceeds distribution models had led to ‘a significant downward impact on commissions charged and increased the transparency of litigation funding arrangements’.
Several submitters raised concerns that the proposed amendments exacerbate confusion over the court’s use of CFOs.
For example, 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.
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.
Mr Armstrong QC and Dr Cashman further submitted that the definition of a CFO in the bill may capture funding equalisation orders (see Chapter 1) 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’.
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’. Shine Lawyers argued that book built closed class actions would lead to increased costs borne primarily by members of the class (rather than shared with the broader group, as in an open class action).
By contrast, Ai Group, argued CFOs encourage speculative class actions by removing the expense of book building. Mr McDonnell submitted that ‘access to justice should be open and voluntary not clouded in the device of common fund orders’. And Mr S Stuart Clark 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.
Mr Anshu De Silva Wijeyeratne, Principal Legal Officer at the Attorney-General’s Department, assured the PJCCFS, ‘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’.
Suitability of the Managed Investment Scheme regime to regulate class action funders
Several witnesses and submitters variously raised concerns about the applicability of the Managed Investment Scheme (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 MIS regime to class actions was inappropriate due, in part, to questions related to whether funders or lawyers would constitute the ‘responsible entity’.
Mr Daniel Meyerowitz-Katz argued that the 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’.
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, and submitted:
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.
Marland Law described the August 2020 MIS reforms as having had a ‘stifling effect’ on class action litigation funders.
Litigation Lending Services cited the study by Allens Linklaters (see Chapter 1) as showing the significant decrease in funded class actions following the August 2020 MIS reforms and submitted:
The Government has not considered recent trends in the class action landscape or the impact of the major legislative reform in 2020 regulating litigation funders previously exempt from holding an AFSL and complying with the MIS regime under the Corporations Act
However, the Business Council of Australia argued litigation funding was clearly a financial product and should be regulated as such:
At its most basic level, a litigation funding scheme is an investment vehicle in which members are charged by the funder for a financial service; where their financial interests are managed on their behalf by the funder; and where the funder takes a cut of the return on the investment. It is untenable to argue that such an arrangement should not be regulated as a financial service.
Mr McDonnell noted the bill appears to do no more than ‘implement what the current regime requires’ in relation to the application of MIS to the class action industry.
Issues raised by the National Farmers’ Federation
The NFF submitted that the legislation should seek to limit strategies deployed by defendants to drag out proceedings and increase costs with the aim of exhausting a claimant’s funding.
The NFF submission made seven recommendations related to procedural reforms for streamlining class action litigation processes and leveling the playing field between plaintiffs and defendants.
Mr Tom Marland, a solicitor from Bundaberg in Queensland, responded to the procedural reforms proposed by NFF, telling the committee ‘you’re already seeing those types of case management procedures being implemented’.
Similarly, Mr Emmerig from the Law Council of Australia told the committee that national legal profession arrangements under the Federal Court of Australia Act 1967 already provide binding obligations that ensure cases are run as quickly, inexpensively, and efficiently as possible. The Law Council of Australia similarly advised the committee of a number of safeguards on the legal process, including the Australian Solicitors Conduct Rules, Section 37N of the Federal Court of Australia Act 1967, and the inherent powers of the court to control their own process and prevent abuses.
Mr Emmerig argued the reforms proposed by NFF were not appropriate to consider alongside this bill, suggesting they be considered instead by court practice and procedure committees, the Australian judicial college, liaison groups, and during the drafting of practice notes.
The Law Council further advised the NFF’s proposals could be considered through a review of the Federal Court’s Class Actions Practice Note (GPN-CA).
The committee received conflicting evidence and acknowledges the differing views regarding the merits of this legislation. It also notes the marked differences in the anticipated impacts of this bill on class action litigation. Some submitters argued that the bill will substantially curtail the number of class actions able to be funded. Others posited that the bill may increase competition in the market and lead to more cases being run on a contingency fee basis.
The committee echoes the arguments put forward in the Australian Law Reform Commission and Parliamentary Joint Committee on Corporations and Financial Services reports—and the Government Response to these inquiries—regarding the important role played by third-party litigation funders in the promotion of access to justice. The committee also notes evidence that returns to litigation funders have fallen over recent years. However, the committee remains concerned about the ongoing potential for litigation funders to generate windfall profits at the expense of class members. The rebuttable presumption and other measures contained in the bill provide greater barriers to litigation funders charging unfair and disproportionate fees and commissions. This is to the benefit of potential members in a class action.
The committee therefore endorses the provisions of the bill that seek to limit returns to litigation funders through the imposition of the rebuttable presumption of a return to class members of at least 70 per cent of the claim proceeds. The committee recognises litigation funders should receive an appropriate return on their investment and emphasises the court’s discretion, as is enshrined in the bill to approve or vary the proportion of any claim proceed received in the interests of fairness and reasonableness.
In the committee’s view, the rebuttable presumption—to the effect that a court is required to assume that a distribution is unfair and unreasonable if the distribution to entities that are not class members is greater than 30 per cent of the total claims proceed—is a valuable check and balance. When combined with the role of a litigation funding fee assessor and the requirement for the representations of contradictor, a regime is established which will provide substantial protection to the members of a class action.
At the same time, the committee is cognisant of the concerns of a range of credible and persuasive stakeholders and witnesses that by providing for an exhaustive list of factors that the court may consider in determining whether a distribution is fair and reasonable, the discretion of the court is inappropriately fettered. There could be relevant factors in a particular case which, as a matter of justice, the court should be able to consider, but would be prevented from doing so under the proposed bill.
Whilst the committee notes the evidence from the Attorney General’s Department that the factors listed in 601LG(3) are intended to reflect matters which the courts currently consider, the committee recognises the importance of a court having the discretion to consider relevant matters which go to fairness and distribution in the particular circumstances of a case. In the committee’s view, the court is best placed to identify these matters. In coming to this view, the committee notes that its concerns were shared by the Parliamentary Joint Committee on Corporations and Financial Services, as was reflected in its report on the bill. Accordingly, the committee recommends the subsection be amended to ensure the discretion of the court is not unduly fettered.
To achieve this, the committee recommends two changes to the bill. First, subsection 601LG(3) should be amended to remove the word ‘only’, as recommended by the Parliamentary Joint Committee on Corporations and Financial Services. Second, a new paragraph (g) should be added to subsection 601LG(3) that inserts the words, ‘any other factors considered relevant by the court’ (as recommended by the Law Council of Australia—see paragraph 2.71). Given the importance of this issue, this second amendment is recommended to remove any doubt in relation to the matter. This reflects the importance the committee attaches to this issue. These changes would ensure the court’s discretion is not fettered by allowing the court to consider other relevant factors when determining whether a claim proceeds distribution model is fair and reasonable in the circumstances of a particular case. This recommendation is included in recommendation 2 at the end of Chapter 3.
The committee is 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 common fund orders alone to limit returns to funders. The committee acknowledges the bill seeks to regulate and place some level of restriction on the use of common fund orders, but notes evidence from the Attorney-General’s Department that nothing in the bill is designed to overturn the current open class action model. Therefore, the committee endorses the provisions of the bill that ensure all group members actively consent to participate in an action.
The committee also notes concerns raised by some submitters regarding the application of the Managed Investment Scheme 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.
The committee acknowledges the concerns of the National Farmers’ Federation in relation to the conduct of class actions, including the potential for the trauma already suffered by plaintiffs to be exacerbated by a lengthy drawn-out legal proceeding. However, after careful consideration, the committee is of the view that this bill does not provide an appropriate vehicle to adequately address these concerns. That said, the committee encourages court practice and procedure committees and other appropriate legal fora to continue to identify ways to increase the efficiencies of conducting class actions, including by considering each of the ideas advanced in the submission from the National Farmers’ Federation. The committee draws these matters—including the details of the submission of the National Farmers’ Federation—to the attention of the Attorney-General.
While the overall outcomes of the bill are contested, at this juncture it is not possible to state with any certainty what the overall impact of the bill will be, or how the litigation funding market will adjust to the provisions, most particularly with respect to the rebuttable presumption.
In the committee’s view, the proposed amendment to the bill which would allow courts discretion over the matters able to be considered when forming a view as to the suitability of the 70–30 rebuttable presumption in a particular case, should increase the confidence of stakeholders. It is intended to do so. The courts will have the discretion they should have to consider the particular circumstances of a case. At the same time, the interests of class members are advanced through the provision of the rebuttable presumption—especially when combined with the role of referees and contradictors. Over time, a body of practice and precedent is likely to be established which will provide stakeholders the basis for future funding decisions and arrangements within the class action industry.
Given the widely divergent views from credible stakeholders regarding the impact of the proposed reforms, the complicated nature of the reforms, and the importance of litigation funding to enable access to justice, the committee considers that there needs to be a review of the impacts of the bill. The committee notes that both the Productivity Commission and the Australian Law Reform Commission have considerable expertise in this area and have conducted extensive inquiries regarding access to justice, the class action system, and litigation funding. In the committee’s view, given the legal nature of the reforms, the Australian Law Reform Commission would be best placed to conduct such a review. A period of three years post implementation should provide the relevant experience to enable an informed assessment of the impact of the bill. To the extent that the bill has unintended consequences, then there will be a process for those to be identified, assessed, and any necessary modifications considered. Such a review may also provide an opportunity to consider the impact of any other relevant matters, for example, the application of the managed investment scheme regime to class action litigation funding. Therefore, the committee recommends the government commission a full review of the impacts of the bill by the Australian Law Reform Commission after the provisions of the bill have been in effect for three years.
The committee considers that the proposed amendments to the bill in relation to the exercise of the court’s discretion and a commitment to review the impact of the bill after three years would work in combination to address many of the concerns of stakeholders. In this regard, the recommendations complement each other and should provide comfort that the bill will achieve its objective to improve outcomes for litigation funding participants and that there is a process to address any unintended consequences.
The committee recommends the Australian Government (through the Attorney-General) refer to the Australian Law Reform Commission a review on the impacts of the bill (and any other related matters) to be conducted after the provisions of the bill have been in effect for three years. The review should be tabled in Parliament as soon as reasonably practicable.