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  • Writer's pictureDaniel Meyerowitz-Katz

The ALRC, Class Actions, and Litigation Funders: the Good, the Bad, and the (arguably) Unconstitutio

This is my second post in a series on the The Australian Law Reform Commission's Report 134, "Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders". The first post addressed the proposed amendment to s 33C of the Federal Court of Australia Act 1976 (Cth) ("FCA Act") in order to prevent "closed class" actions. This post focuses on the new provision that the ALRC is proposing to insert into the FCA Act in order to regulate litigation funding in representative proceedings. I start with the parts that I have no objection to, before going into the ones that I find a little more... objectionable, and then the one that may not agree with the Constitution.

The Proposal

The ALRC's proposal is to insert a new s 33WA into the FCA Act, in the following terms:

"(1) In any proceeding (including an appeal) conducted under this Part, a Litigation funding agreement in respect of that proceeding

(a) is enforceable only if approved by the Court;

(b) must provide expressly for a complete indemnity in favour of the representative plaintiff against an adverse costs order;

(c) must be governed by Australian law; and

(d) must provide that the funder submits irrevocably to the jurisdiction of the Court.

(5) Without limiting the operation of section 33ZF, the Court may reject, vary or amend the terms of any Litigation funding agreement referred to in subsection (1).

(6) Unless the Court otherwise orders, a litigation funder who is funding any proceeding (including an appeal) conducted under this Part, will be required to give security for costs in a form that is enforceable in Australia.

(7) A solicitor, who is acting for a representative plaintiff whose action is funded in accordance with a Litigation funding agreement that has been approved by the Court, may not seek to recover any unpaid legal fees from the representative plaintiff or from any group member."

The ALRC also proposes to insert a new definition of "litigation funding agreement" into Part IVA of the FCA Act as follows:

"Litigation funding agreement means any agreement by which a litigation funder is to pay or contribute to the costs of the proceedings, any security for costs or any adverse costs order and/or to receive payment of commission, costs or charges of any type in relation to the proceedings, whether by way of third-party or commercial litigation funding or by way of litigation funding provided by some of the class members."

I note that there are related proposed amendments regarding solicitors charging contingency fees, but that is another post for another time.

(And before you ask, I have no idea what happened to subsections (2) to (4).)

The Good

I should probably start with the parts that I like, or at least that I am not opposed to, before anyone starts accusing me of universally panning the ALRC Report.

First, these measures (and some others) are being introduced instead of a statutory licensing regime for litigation funders. As I predicted a few months ago, the ALRC abandoned that suggestion after the regulator, ASIC, made it clear that it had no interest in regulating any such scheme. As I have also mentioned, I was/am opposed to the idea of licensing litigation funders, for a variety of reasons—so I am glad that this is no longer a realistic prospect.

Second, subsections (1)(b), (c) and (d) effectively just codify existing practice. I cannot recall ever seeing a funding agreement that did not indemnify the lead applicant and was not governed by Australian law and subject to the irrevocable jurisdiction of the courts of Australia. In fact, as someone who has signed lead applicants up to funding agreements in the past, in my experience they would be extremely unlikely to agree to a funding agreement that did not contain a complete indemnity from the funder. It is normally the first thing they ask about.

Third, subsection (7) also effectively codifies existing practice, although this is a little more complicated. Solicitors do not normally include a provision in costs agreements that the lead applicant is not liable for costs, as it could have an impact on costs recoverability. However, it is extremely unlikely that any solicitor would actually pursue a lead applicant for costs if the funder failed to pay up. Inserting a statutory provision preventing this from occurring would therefore make very little difference in practice, but would protect lead applicants against that unlikely scenario.

With that having been said, I can conceive of circumstances where a solicitor should be able to pursue a lead applicant for unpaid costs—namely, where the applicant has caused the costs to be incurred by, for example, breaching the terms of the funding agreement. Accordingly, perhaps subsection (7) should be prefaced with "unless it is appropriate or necessary to do justice in the proceeding", or something to that effect.

The Bad

Having addressed the aspects of s 33WA that weren't bad, I'll now address the recommendations that, at least in my respectful opinion, should perhaps be reconsidered.

Proposed Subsection (6)

My first issue is with proposed subsection (6). There are two components to the provision: first, litigation funders are required to give security for costs "unless the Court otherwise orders", which reverses the normal onus on respondents to apply for security for costs. Second, the security is required to be "in a form that is enforceable in Australia".

Regarding the first component, the ALRC states at [6.49] of the Report that this "in part, responds to submissions that raised concerns that security for costs will be given only when sought by respondents and is at the discretion of the courts." In other words, respondents have a concern that they will not just automatically be awarded security for costs, so we should amend the legislation to say that they are just automatically awarded security for costs, notwithstanding that this would be a radical departure from a centuries of established law.

The long-standing position is that if a respondent wants an applicant to put up millions of dollars in cash to protect the respondent from not being able to recover its costs, then the respondent has to ask for it and to justify the amount it's asking for. To my mind, that makes sense. Also, it works.

Further, at present, where a matter is commercially funded, the applicant more or less does automatically have to put up security for costs. But the respondent still has to ask first, and justify the amount of money that it's asking for.

Reversing this onus will create all sorts of difficult questions, like: at what stage of the proceedings should this automatic security be awarded, and in what amount? If the respondent doesn't agitate the issue, then is the Court obliged to raise it of its own motion? And what about the long-standing rule that penalises respondents for delay in applying for security. Does the recommendation effectively mean that this is abolished and delay is now acceptable and/or encouraged?

With these things in mind, it appears to me that the proposed amendment, which is a very radical reversal of existing practice, would introduce a lot of uncertainty and potential expense, without any obvious benefit to anyone except respondents who don't want to be penalised for delay in their security for costs applications.

As for the second component of subsection (6), regarding the security being enforceable in Australia, the impetus appears to be, as the ALRC recognises at [6.50], that in some cases, such as Capic v Ford Motor Company of Australia Ltd, security for costs has been awarded in the form of a deed of indemnity from a UK insurer, together with the payment into Court of $20,000 to cover the enforcement costs of the deed in the UK. That is: the respondent has been indemnified by a major international insurer and has been given $20,000 in cash to pay for its costs of enforcing the indemnity in the insurer's home country, in the unlikely event that the insurer decides not to honour it.

But the ALRC "does not consider it reasonable, as a matter of public policy, that a respondent may be required to litigate in a foreign jurisdiction in order to recover against the security for costs provided." That is notwithstanding that the arrangement was sufficient for the Court in Capic, and in a number of other cases, to approve as adequate security. The ALRC does not go so far as to say that the Court in Capic was wrong, but this certainly seems implied—which is surprising, considering that Capic has been so uncontroversial that there are not even published reasons for the decision, let alone any appeal.

Respectfully, I struggle to understand why the respondent is so severely prejudiced by the arrangement just described that such arrangements should be banned by legislation from representative proceedings. Further, if this form of security is so unsatisfactory, why only ban it in class action matters? Why should respondents to class actions be advantaged over respondents in ordinary cases?

The only obvious impact that I can see from the proposal is to benefit Australian insurers and Australia-based funders from their overseas competitors—and I wasn't aware that this was a policy goal that we were pursuing.

Definition of "litigation funding agreement"

My next observation before I start getting into constitutionality issues is the final clause in the definition of "litigation funding agreement": "whether by way of third-party or commercial litigation funding or by way of litigation funding provided by some of the class members."

This is the only reference I could find in the Report to a situation where class members contribute to the funding of the action—which is disappointing for me personally (and not just because for some unexplained reason the ALRC has referred to "class members", rather than using the "group members" terminology used everywhere else in Part IVA of the FCA Act).

The Levitt Robinson submission, of which I was a co-author, addressed the issue of "self-funded" class actions (ie where the legal fees are paid by the group members) at some length: see part 5 of the submission. As we pointed out, there are significant regulatory obstacles to running a class action that is self-funded, rather than the more conventional arrangements where the funding is from a third party funder or a law firm acting on a "no win, no fee" basis. That is despite the obvious benefits to this model—such as that no funding commission is required to be paid, and actions can be viably run even if the damages claim is not sufficient to make commercial funding a realistic option or the claim is not sufficiently strong that a law firm will agree to assume the entire cost of running it.

However, self-funded class actions are only legal at present because of an exemption to the managed investment scheme provisions in the Corporations Act 2001 (Cth) created by ASIC Class Order [CO 13/898]. That is undesirable for a number of reasons, not least of which is that the Class Order has a sunset date and has to be renewed every year or two.

The ALRC appears not to have engaged with these submissions at all, other than making sure that the proposed amendments applying to litigation funding agreements also apply to agreements whereby group members agree to provide funding for the action. In my respectful opinion, and if you forgive the cliché, this approach seems like trying to fit a square peg into a round hole.

For example, as noted above, the ALRC wants litigation funders to completely indemnify the applicant. If group members are considered to be funders, then the ALRC is proposing to prohibit any arrangement whereby the applicant and other group members share the costs of the proceeding.

With respect, I cannot see any sense in that proposal. The applicant is acting for the group members' benefit, and the applicant's fees will ultimately shared by the group members anyway, so why should it be so exceptional for the group members to contribute upfront? This would mean that they are effectively funding their own claims, which is very different from a third party agreeing to fund a claim in return for a portion of the winnings. Why the policy should be to make such arrangements illegal is beyond me.

The (Arguably) Unconstitutional

Now for the part that may not be constitutional: subsection (5). That is, the provision that "the Court may reject, vary or amend the terms of any Litigation funding agreement". The scope of the proposed power is illustrated at [6.91] of the Report, where the ALRC suggests:

"that the discretion of the Court to vary, set or amend funding agreements should extend to reviewing other terms [than the funding commission] when justice requires it, such as: the funder’s right of exit; the funder’s capacity to instruct an acting solicitor; and proposed project management fees."

It seems to me to be arguable that this falls foul of Chapter III of the Constitution, in that it arguably may not be an exercise of a judicial function.

The proposal is that the Court should be able to place the litigation funder under a contractual obligation to fund the proceeding on terms that it has not agreed to.

Recall that the ALRC proposes that the power should include an ability to vary "the funder’s right of exit" and "the funder’s capacity to instruct an acting solicitor". So the proposal is that the Court should be able, potentially, to compel a funder to continue to pay a solicitor it is unable to instruct, pursuant to an agreement it is unable to exit from. Effectively, the Court is deciding what sort of commercial arrangement the funder should be agreeing to, and then compelling the funder to go along with it anyway whether the funder agrees or not. This seems like it may be straying a little too far from the exercise of the Chapter III judicial function.

Now, I should say, it is not unprecedented for a Court to have the power to "reject" the terms of an agreement. In fact, there are many statutory, common law, and equitable bases on which an agreement or parts of an agreement can be set aside. It also is not unheard of for the Court to be able to create new obligations on parties. The leading decision on this is the judgment of Williams J way back in Peacock v Newtown Marrickville and General Co-operative Building Society No 4 Limited [1943] HCA 13; 67 CLR 25 at 54-55:

"existing rights include rights and obligations compulsorily added by legislation to legal relationships. A right to vary an existing obligation is an existing enforceable right which can become the subject matter of a controversy relating to property just as much as any other right relating to property. Parties can provide by contract for the suspension, variation or destruction of existing rights upon the occurrence of particular circumstances, or such a right of suspension, variation or destruction can be compulsorily imposed upon parties by legislation."

His Honour then gave various examples of this, such as the court modifying or extinguishing an easement, providing relief against forfeiture of leases, sanctioning trustees to administer trust in a way not authorised by the trust deed, altering the provisions of a will, and altering marriage settlements.

The issue of marriage settlements was considered in Cominos v Cominos (1972) 127 CLR 588, which concerned a provision that, inter alia, allowed the court to vary a prenuptial or postnuptial agreement. The provision was upheld because, as Stephen J said at 605:

"It is well established that functions, which, if viewed independently, might be thought administrative in character, may nevertheless be committed to a court when forming incidents in the exercise of strictly judicial powers."

It was on this basis that the making of a common fund order in a class action was found in Money Max Int Pty Ltd v QBE Insurance Group Ltd [2016] FCAFC 148; 245 FCR 191 to be constitutional: at [171].

However, in my respectful opinion the ALRC's recommendation here goes a little further than varying a marriage settlement as an incident to granting a divorce. It is an open question of course, but if a funder were briefing me on the issue I know what argument I would probably be running.

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