12 Aug 2020

State of Play: Under the bonnet – how Australian class actions are funded

It turns out the High Court's recent decision to limit the use of common fund orders was just the first course in a banquet of changes to the Australian litigation funding and class action landscape.


Companies operating in Australia should be aware that in the short to medium term this rapidly changing landscape is likely to increase uncertainty.


Hear from Greg Williams as he provides a follow up to our earlier update in February 2020, and explains the recent developments and the impact on the Australian class action industry.


To learn more about the key market trends and latest legal developments in Australia, visit our Australian Market: the state of play page.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.


In our last Class Action State of Play video we talked about the big change to Australian litigation funding with the High Court's decision to limit the use of common fund orders.  It turns out that decision was just the first course in a banquet of changes to the Australian litigation funding landscape. 

Commercial litigation funding plays a huge part in the Australian class action industry, particularly shareholder class actions, although it is increasingly flowing into consumer product claims.  Government reluctance to regulate the industry and Australia's relatively plaintiff friendly class actions regime mean the barriers to entry for litigation funders in Australia have been very low. 

This laissez-faire approach is generally justified by the role of litigation funding and delivering access to justice, that is, enabling the bringing of legitimate claims which might not otherwise be able to be brought.  There is an ongoing policy challenge of litigation funding, it can assist legitimate claims to be advanced and resolved but it comes at the cost of allowing funders to profit, often handsomely, from the conduct of litigation. 

There is an obvious public interest in avoiding disproportionate profiteering from litigation.  In recent times the environment has started to shift against funders, first with the Brewster decision in which the High Court limited the use of common fund orders.  Further to that, in early 2020, the Federal Government announced that a Parliamentary Inquiry into litigation funding would proceed, then before the Inquiry had even commenced it announced that the decade old decision to exempt litigation funders from financial services regulation would be reversed.  The Government's decision to regulate litigation funders is a welcome one and reflects the fact that the industry has now reached a level of maturity which ought to be reflected in regulation at a similar level to financial services industries more generally given the inherent risks of conflict of interest and potential for abuse. 

However, even though there are relatively few voices speaking against increased regulation for the industry, the vigorous and politically charged nature of the submissions to the Inquiry to date shows just how polarised views about the desirability of litigation funding and the merits of the access to justice argument have become.  In truth, the questions of how to best regulate litigation funding are complex policy ones and it is to be hoped that the Parliamentary Inquiry will rise to them.  In Clayton Utz' submission to the Inquiry we supported the regulation of litigation funding but also argued for a number of other reforms designed to minimise procedural disputes and to introduce incentives against the commencement of spurious or speculative claims. 

In the midst of all of this there has been a further intriguing development in Victoria.  On 18 June the Victorian Parliament passed a Bill, which for the first time anywhere in Australia, permits lawyers to charge a contingency fee that is a commission on damages recovered in class actions.  This is breathtaking development but one which may result in significant disruption to the Australian litigation environment for years to come.  It goes to show that the commercialisation of litigation and the growth in the market for its funding is a trend which is unlikely to be reversed anytime soon. 

In the short to medium term the rapidly changing landscape for litigation funding is likely to increase uncertainty and the level of interlocutory dispute over funding arrangements.  However we hope that a move towards increased regulation of funding arrangements will help to ensure that funding in Australia is better directed to genuine access to justice.  In all of this the emergence of contingency fees for lawyers is a darkhorse, the ramifications of which are difficult to predict.