On 19 January 2017, the Victorian Government asked the Victorian Law Reform Commission (“VLRC”) to review litigation funding practices in Victoria and report on potential areas for reform and regulation of the now common practice. The announcement followed negative publicity generated by matters such as the Huon workers compensation litigation, which resulted in the litigation funder and lawyers receiving almost all of the settlement proceeds.

Background: Why have an inquiry?

Over the last decade litigation funding has become firmly entrenched in the class actions landscape in Australia, particularly following the High Court’s decision in the Fostif case.[1] In the 2015/2016 financial year, 16 of the 35 class actions filed had the support of a third party litigation funder at the time of filing. Litigation funding has proved to be a profitable enterprise, with reports of one funder receiving a return on investment of 144% since listing in 2001.

Supporters of the litigation funding of class actions argue that it facilitates access to justice by ensuring group members have adequate resources to pursue meritorious claims. It is not however without controversy. Opponents consider that litigation funding may increase the overall volume of litigation, may create conflicts of interest and increase the scope for abuses of process to occur, may lead to the pursuit of unmeritorious claims, and may unduly erode a plaintiff’s award. They point to the recent Huon litigation in which an entire $4.5m settlement was split between lawyers and the litigation funder (LCM Litigation Funding), as supporting their criticism of the practice.

The Huon litigation concerned the 2006 collapse of the Bendigo-based Huon-owned Empire Rubber business. The dispute centred on a $7 million indemnity clause under which CBL Insurance indemnified employee entitlements in the event that the company could not meet its redundancy obligations. The matter was set down for hearing in the Court of Appeal for February 2017 but a $4.5 million settlement was reached beforehand. Of this sum, 45% went to LCM Litigation Funding and the rest was distributed in legal fees. This quickly caught the attention of Victorian Attorney-General Martin Pakula, who was formerly the state secretary of the National Union of Workers.

Regulation of the litigation funding industry has been under active consideration for some time at the federal level. In its 2014 report on Access to Justice Arrangements, the Productivity Commission found that litigation funding was not appropriately regulated in Australia and recommended that the Australian Government establish a licensing system for funders to ensure that they hold adequate capital relative to their financial obligations and properly inform clients of relevant obligations and the systems in place for managing conflicts of interest.[2]

It appears as though the Huon litigation was the straw that broke the camel’s back to motivate the Victorian government to ask the VLRC to review the rules concerning litigation funding. Commenting on the Huon litigation, Attorney-General Pakula said that it was:

"staggering that any plaintiff could be awarded close to $5 million and have every last penny soaked up by fees from litigation funders, lawyers and administrators” and that this “suggests a system with some real potential deficiencies."

What are the terms of reference?

In broad terms, the purpose of the VLRC inquiry is to ensure that litigants who are seeking to enforce their rights using the services of litigation funders (including in group proceedings) are not exposed to unfair risks or disproportionate cost burdens.

Specifically the Commission has been asked to report on:

  • whether disclosure requirements for litigation funders could be improved;
  • whether any limits should be placed on the success fees a litigation funder can charge;
  • whether removing the existing prohibition on law firms charging contingency fees would mitigate the issues presented by the practice of litigation funding;
  • for class actions, whether a certification requirement before such proceedings can progress is appropriate; and
  • whether it would be useful to have specified criteria for the Court’s approval of class action settlements under s 33V of the Supreme Court Act 1986.

The terms of reference can be found here.

Any one of these changes, if implemented, could change the way that class actions are formed, litigated and resolved.

What are the next steps for the inquiry?

The inquiry is currently in the reference stage. Next the Commission will begin consultation and then open up for submissions, although it has not yet announced when either of these steps will occur.

The Commission expects to report by 30 March 2018.