On 3 December 2014, the federal government released the Productivity Commission’s final report on access to justice arrangements in Australia, following a broad-ranging, 15-month inquiry by the Commission into Australia’s civil dispute resolution system. A draft of this Report, released in April 2014, was discussed in our 2013/14 Class Action Year in Review.

From a class actions perspective, the most relevant of the Report’s recommendations are to:

  1. Remove the existing ban on charging of “damages-based” or contingency fees by lawyers (other than in relation to criminal and family law matters), subject to the introduction of additional consumer protection measures;1
  2. Introduce a licensing system for litigation funders, aimed at ensuring that funders hold adequate capital to manage their financial obligations and meet client disclosure requirements; and
  3. Subject lawyers that charge contingency fees to potential adverse costs at the discretion of courts, to facilitate consistent treatment with litigation funders and other third parties.

The Report also makes a range of broader recommendations relating to discovery, court fees and national regulation of the legal profession.

Ultimately, the Report’s main focus is on the ability of individuals and small businesses to access Australia’s justice system more easily and with adequate consumer protection. As such, the Report’s “one size fits all” recommendations, including those described above, are directed at removing (mostly financial) barriers to small-scale litigation.

In the realm of large-scale litigation or class actions, however, the reforms may not necessarily translate as well. If adopted, they may have ramifications for Australia’s class action and litigation funding market, which we consider below.

The Report also raises a number of questions specifically relevant to class actions which would need to be addressed before the recommendations could be implemented.

The ban on contingency or “damages-based” fees should be lifted

At present, lawyers in all Australian jurisdictions are prohibited from charging clients a percentage of any amounts recovered in litigation, although litigation funders are free to do so. This form of contingency fee billing can be distinguished from conditional or “no win, no fee” arrangements, which are currently permitted in most civil matters,2 and the ability for lawyers in certain circumstances to then charge an “uplift” upon a successful outcome to compensate for the risk of not being paid at all if the legal action is unsuccessful.3

The Report concludes that there is no doubt that the rise of litigation funders in Australia has been aided by lawyers’ inability to compete with funders in offering fee structures of this kind.4

Noting that upfront legal fees can act as a barrier to the justice system for individuals and small businesses, the Report recommends that these restrictions should be lifted, subject to adequate protections being established to protect those consumers, namely:

  1. comprehensive disclosure of such fee arrangements;
  2. “sliding scale” caps limiting the percentage of amounts recovered that a lawyer may charge by way of contingency fees to “retail clients” (but with no such caps applicable to “sophisticated clients”); and
  3. prohibiting the use of contingency fees in conjunction with other fees, such as time-based fees.

It is unclear from the Report how a “sliding scale” cap for retail clients would work in the class action context. While the Commission concludes that introducing contingency fees will likely lead to “excessive remuneration” of lawyers for higher value claims,5 such as class actions, it only recommends fee caps for retail clients and explicitly recommends that there should be no caps for sophisticated clients.6

This creates a number of issues to be addressed: Where a class contains both retail and sophisticated claimants (such as institutional shareholders), is it proposed that caps would apply only in relation to the retail component of the class? Would the proposed cap be applied separately to the amount recovered by each individual class member or to the aggregate amount recovered by the retail component of the class (which, on a sliding scale, would materially change the size of the fee)?

The Report states that the Commission does not believe that introducing contingency fees will cause an increase in the number of unmeritorious or speculative claims seen in the Australian market. The Commission’s reasoning is that there should be an inherent disincentive to bringing such claims given the high risk that they will be unsuccessful, in which case lawyers would not be paid and claimants would face the prospect of adverse costs.7

This rationale fails to acknowledge the possibility that “speculative” claims could be commenced on the basis of minimal information in the hope of improving or supplementing a claim at the discovery stage, or obtaining an early settlement (as most class actions do in fact settle). Also, as a commercial reality, plaintiff firms may be willing to take on a much higher degree of risk (i.e. the likelihood of receiving no fee at all) if there is a possibility of a very substantial potential fee in the event of a favourable settlement or judgment.

The Commission was also not convinced by submissions arguing that introducing contingency fee arrangements would increase the risk of unacceptable conflicts of interest on the part of lawyers, for example, where lawyers may be incentivised to settle a claim prematurely or pursue outcomes other than those in the client’s best interests.8 This is a complex issue which is far from settled.

Regulation of litigation funders should be increased

The Report recommends that Government should establish a licensing system for litigation funders to ensure that funders hold adequate capital relative to their financial obligations and properly inform clients of relevant obligations and systems for managing risks and conflicts of interest.9 Again, this is driven by consumer protection concerns.

The precise form of the licensing regime is not specified in the Report, and the Commission has chosen not to recommend a particular regulator to oversee this system,10 although it seems likely the choice would be between APRA or ASIC. It is clear that the licensing system would form one of three tiers of regulation of funders. Specifically, the Productivity Commission proposed that:

  1. regulation of the ethical conduct of funders would remain a function of the courts;
  2. funders would be licensed, and the new licensing regime would, at least, require funders to be members of the Financial Ombudsman Scheme so as to provide clients with an independent avenue for complaint; and
  3. other concerns relating to categories of funded action (with securities class actions identified in particular) should be addressed by amending existing problems in underlying laws rather than by imposing new or further restrictions on funders.11

The Commission’s stated intent in recommending a licensing regime is to ensure consumers are adequately protected, so as to mitigate the risk of funding agreements being struck unfairly (i.e. where consumers have limited experience and capacity compared to funders), funders exercising excessive control over proceedings or excessive pressure on the court system, the potential for conflicts of interest between funders, lawyers and plaintiffs, and concerns that funders should hold adequate capital relative to their financial obligations.12

The measures do not address the concerns about the broader impact of litigation funding on the Australian market. In fact, the Commission considers it “unlikely” that Australia will follow the path of the United States in developing an “excessively litigious culture,13 noting that there are “strong incentives” for parties to bring only meritorious claims.14 The Commission dismissed the concern that litigation funders take advantage of plaintiffs for their own gain,15 noting that “litigation funding can play an important role in promoting corporate accountability”.16

Costs issues

Finally, the Report recommends that court rules be amended to ensure that courts have the power to treat lawyers charging contingency fees and litigation funders in the same way for the purposes of ordering security for costs or adverse costs.17 This recommendation, if implemented, is likely to ultimately determine whether contingency fee billing is an attractive or commercial viable option for plaintiff lawyers.

The Commission’s view appears to be that both contingency fee billing by lawyers and funding by litigation funders present similar risks to consumers, particularly in relation to higher value claims such as class actions, and as such they should be subject to the same costs-consequences and disclosure requirements.18 However, while funders typically provide security for costs in class actions (thus removing a substantial financial barrier to such claims), the Commission fell short of recommending any requirement for either lawyers or funders to provide upfront indemnity to lead applicants for adverse costs.19

It remains to be seen whether, and to what extent, plaintiff firms will be permitted to reallocate the risk of a potential adverse costs order if this recommendation is implemented.