Reforming Australia's litigation funding and class actions 04: managing conflicts of interest

In the fourth instalment of our series on the Parliamentary Joint Committee on Corporations and Financial Services' report, Litigation funding and the regulation of the class action industry, we take a closer look at the recommendations aimed at improving transparency and management of conflicts of interest in class actions, and their likely implications for case management, efficiency, and costs.

These include:

• more specific guidance on what constitutes a "conflict of interest", accompanied by enhanced and ongoing reporting to the Court and group members of information about any potential or actual conflicts of interest which may arise in the proceedings (Recommendations 18, 24 and 25);
• increased use of "independent contradictors", being an independent barrister appointed by the Court to represent the interests of group members by arguing the other side of an otherwise uncontested application (Recommendations 18, 19);
• a prohibition on solicitors, law firms and barristers from having a financial or other interest in a third-party litigation funder that is funding the same matters in which the solicitor, law firm or barrister is acting (Recommendation 26); and
• better transparency regarding the fees and commissions paid to plaintiff lawyers and funders, by standard reporting the resolution of a class action (Recommendations 17, 22 and 23).

Class actions and conflicts of interest

Class actions have inherent potential to affect and extinguish the rights of people who may not even be aware that they are "group members" in litigation. This risk can be amplified by the size and complexity of the proceedings.

In recent years, Australia has experienced significant growth in its class action industry, which includes substantial interest from overseas-based litigation funders. Australia has long been seen as an attractive jurisdiction for litigation funders due to our well-established and sophisticated Court system, and (comparatively) less-proscriptive and less-developed class action regulation.

To a certain degree, plaintiff lawyers and funders must be interested in the outcome of a case to encourage them to take part, with their interests, in part, taking the form of fees and litigation funding commissions. Without this interest, and the associated financial backing of funders, pursuit of genuine class actions would not be possible. However, this tension between commercial drivers and the purpose of class action litigation as a means for cost-efficient group redress gives rise to real risk of conflicts of interest.

We have seen, in recent times, a number of well publicised instances where the Courts have been forced to intervene to avoid misuse of the class action mechanism: Bolitho v Banksia Securities Ltd [2014] VSC 582; Treasury Wine Estates Ltd v Melbourne City Investments Pty Ltd (2014) 45 VR 585 and Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd (2016) 243 FCR 474.

Accordingly, it is no surprise that the Committee has recommended that the risk of conflicts associated with these interests be subject to more specific regulation, in the form of procedures designed to enhance reporting requirements and overall transparency of funding and fee-paying arrangements. In keeping with the overall theme of the Report, there is a renewed focus on class actions remaining a system for the just, quick and cheap resolution of mass claims and not becoming a vehicle for profit.

This includes, tellingly, a specific recommendation that the Federal Court's Class Action Practice Note include "guidance" on scenarios where a conflict of interest is likely to arise – for example "where the proposed return to the class members does not appear to be in accordance with the possible prospects of success".

Independent contradictors

Use of independent contradictors in class actions has become more common in recent years, particularly in complex or large proceedings. The appointment of an independent contradictor usually occurs in circumstances where the in-principle settlement reached represents a genuine compromise by all parties to the litigation. Because of that fact, there may not be a party before the court to argue against aspects of the settlement even though there is a question as to whether that part of the settlement is in the best interests of group members. This commonly occurs, for example, where the settlement includes a right for a litigation funder to seek a common fund order and a defendant has agreed to either support or not oppose that order.

As contemplated by the Report, which recommends the formalisation of this practice, the costs of an independent contradictor are generally borne by the party making the application (in this instance, the litigation funder) and are not otherwise recoverable against the defendant.

Closer observation and regulation of litigation funders and lawyers

The Report also recommends that litigation funders should be required to act in accordance with the overarching purpose of the class action legislation, that is, to facilitate the resolution of disputes in a "just, quick and cheap manner". This has long been a mandate for lawyers, but in an effort to increase accountability of litigation funders, the Committee suggest that the relevant legislation should be amended to bring the operation of funders in line with the same expectations.

While certainly a positive development at a conceptual level, enforcement of this obligation would likely be very difficult. In particular, it is unclear who would be responsible for monitoring and reporting of non-compliance: a regulator, the Court, group members or defendants. Unrepresented group members are the most directly affected, but they are the least likely to be in a position to identify or pursue action in the event of non-compliance. Similarly, while defendants are likely best placed to observe non-compliance by a funder, placing the burden (both financial and practical) on this group is arguably inappropriate.

Another of the Committee's recommendations would see the legislation governing the professional conduct of solicitors and barristers amended to expressly prohibit legal practitioners from holding any interest in a third-party litigation funder that is funding any matters on which they are working. This would represent a form of direct regulation over conflicts of interest in class actions.

We explored the Report's recommendations in relation to regulation of litigation funding more generally in Part 2 of this series.

Transparency across all stages of a proceeding

As noted above, class actions carry an inherent risk where many group members affected by the outcome are not active participants in the litigation. As a result, much of Australia's class action procedure is directed at ensuring that information is out there and accessible to group members. For example, recommendations 23 and 24 of the Report propose that the first notice given to group members clearly describes the obligations of their legal representatives and litigation funder (including as a holder of an AFSL) to avoid and manage conflicts of interest, and discloses the details of any conflicts that exist in the present case.

Further, the Report recommends an ongoing requirement on both lawyers and litigation funders to disclose to the Court any potential conflicts of interest they anticipate, as well as any conflicts that arise throughout the proceeding. It also recommends that when applying to the court for approval of a litigation funding agreement, the parties must include a written conflict management policy.

In keeping with the theme of increased transparency, the Committee has also recommended that at the time of approving a settlement, the Court should require a list of information relating to the class action. Included in the list are items such as:

• the funding commissions payable under litigation funding agreements;
• the total amount of the funding commission, including as a percentage of the gross settlement sum;
• the total costs broken down into legal fees, counsel's fees etc;
• the average payment to all class members, funded and unfunded class members; and
• the amount of corporate tax paid in recent years by the litigation funder.

This recommendation would ensure the court and group members receive a clear picture of the return to legal representatives and litigation funders as a result of the class action. This increases the accountability of funders and lawyers, and is another measure aimed at ensuring costs are kept down, and the parties, especially the class members, receive a reasonable proportion of the proceeds. This goal is also contributed to by the separate recommendation for the government to consider whether solicitors should be permitted to charge uplift fees, ie. fees payable upon success. In particular, the Committee questions whether such a fee should be permitted to be calculated as a percentage of total costs.

If introduced, such a requirement would have the added benefit of increasing awareness across the industry of outcomes achieved in Australian class action settlements. Standardised reporting would enable all parties (as well as the Court) to better identify what constitutes a "fair" return to funders taking the financial risk of litigation, as well as provide a realistic indication of what group members should expect to recover from class action litigation (once the costs of pursuing the claim have been factored in).

In this regard, it is notable that the Report recommends further consultation (by the Australian Government) on whether a statutory minimum for return to group members should be introduced, and if so, whether 70% is the appropriate starting point – in circumstances where current data indicates a median return of 51% where a funder is involved and 85% where no funder is involved.

Conclusion

The recommendations by the Committee pertaining to transparency and controlling conflicts of interest could have significant impacts on the way that class actions are pursued in Australia. In addition to controlling improprieties by those who may seek to misuse the system, increased clarity in practice and procedure will improve overall efficiency (through avoiding lengthy interlocutory disputes over case management issues), which results in reduced costs for all parties. All parties, as well as the Courts benefit from efficient management of proceedings: minimising the need to investigate and contest conflicts of interest in Court contributes to this.

Related Insights

• Reforming Australia's litigation funding and class actions 03: continuous disclosure laws
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• Reforming Australia's litigation funding and class actions 01: multiple and competing class actions