03 Nov 2009
Prudential regulation catches up with litigation funding
Litigation funders must now be very cautious in proceeding with any funding schemes they currently are operating.
Potential defendants may have some breathing space after the Full Federal Court's decision in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd  FCAFC 147.
The Court held that the litigation funding scheme and solicitors' retainers involving International Litigation Funding Partners and Maurice Blackburn was a managed investment scheme which required either registration with, or an exemption from, ASIC. A critical feature of the proceedings (as is common to the funding schemes used by litigation funders in the last few years) is that the class of claimants is limited to those who have signed up to the litigation funding scheme and solicitors' retainer.
Litigation funding in Australia involves calculated investments in uncertain legal outcomes. There is a balance struck between risk and return with an acknowledged risk of failure but, equally, the prospect of rewards for the funder and funded alike. Sounds a lot like an investment scheme. Yet, to date, Australian governments have not specifically regulated this market. This Federal Court decision has now brought the industry within the jurisdiction of the Corporations Act and ASIC.
What does this mean for the future of class actions and litigation funding?
It's premature to declare litigation funding dead and buried in Australia.
In the short term, the decision does cause some difficulties for litigation funders and solicitors for class members using them. Penalties under the Corporations Act for operating an unregistered managed investment scheme can potentially be very grave, and so anyone who continues operating a litigation funding scheme from this point on is risking a lot.
In the long term, however, it is likely that litigation funding will continue to play a significant role in the maintaining Australia's reputation as one of the most class-action friendly countries in the world. The lawyers for the class members, Maurice Blackburn, have stated that they are currently considering whether to seek special leave to appeal to the High Court, and are also considering restructuring the current arrangements.
Either way, this problem for litigation funders will ultimately be resolved, whether that be by a successful appeal to the High Court, restructuring their arrangements, or seeking registration or an exemption.
So what happens now?
For International Litigation Funding Partners and other funders, this decision means that they must now be very cautious in proceeding with any funding schemes they currently are operating.
For defendants, this decision means they should carefully consider pursuing a similar strategy to that of Brookfield Multiplex. The provisions relating to managed investment schemes in the Corporations Act are technical and litigation funding arrangements are evolving all the time, so this may require careful analysis of the funding arrangements.
From a broader perspective, if nothing else this decision should reignite a healthy debate about the need for regulated litigation funding in this country and the form which any regulation of such an industry should take.