Key Points:

The Victorian Court of Appeal has held that bringing a class action with the predominant purpose of generating legal fees is an abuse of process – but this might not be the last word on the matter.

The rapid growth of the Australian litigation funding industry has, thus far, avoided any corresponding growth in regulation, and while most litigation funders have developed sophisticated and indisputably legal models, entrepreneurial drive is leading some to advance "vehicles" which plainly test the boundaries. Challenges to the various class actions being run by Melbourne City Investments and its omnibus owner/lawyer/funder, Mr Mark Elliott, are providing valuable guidance in this regard, one of which, Treasury Wine Estates Ltd v Melbourne City Investments Pty Ltd [2014] VSCA 351, has evoked strident judicial criticism of the funding model and resulting litigation which, in the Court's view, amounts to an abuse of process.

The Melbourne City Investments model of running securities class action

Melbourne City Investments (MCI) bought small parcels of shares in various companies. It then launched securities class actions in the Victorian Supreme Court against those companies, alleging that it and other class members had lost share value as a result of misleading and deceptive conduct. MCI's sole director and shareholder, Mr Elliott is a Victorian lawyer wo was acting in the proceedings on a "no win, no fee" basis. The evident expectation is that such a claim will be settled for value without a trial.

Treasury Wines was one company that found itself at the wrong end of the MCI model. It applied to have the action against it stayed as an abuse of process or, in the alternative, to prevent Mr Elliott from continuing as MCI's legal representative.

Was this an abuse of process?

The only legitimate purpose for bringing a proceeding is to vindicate legal rights or immunities by judgment or settlement. If the predominant purpose is something else, then the proceedings are an abuse of process. What about this case?

At most, each class member could be awarded $700. At first instance, Justice Ferguson, who is dealing with many of Mr Elliott's claims, concluded that this made it unlikely that the proceedings had been commenced for the purpose of recovering compensation. Why then had they been commenced?

"I have formed the view that MCI commenced the proceeding for the purpose of generating legal fees for Mr Elliott. I agree with the Defendants that that purpose is not a purpose of earning legal fees as a desired by-product of the litigation. It is the predominant purpose."

However, obtaining an order for the payment of legal costs, she said, was not a collateral advantage; to get an order for costs MCI had to win the substantive issue, which was compensation for the class members. As this was its immediate purpose in commencing proceedings, there was thus no abuse of process. Instead, Justice Ferguson concluded that MCI's sole shareholder and director could not also act as its legal representative and would have to be replaced.

A majority in the Victorian Court of Appeal (President Maxwell and Justice Nettle (since appointed to the High Court)) disagreed with Justice Ferguson's original conclusion. MCI’s purpose of "generating legal fees for Mr Elliott" could not be a legitimate one, as it would not vindicate legal rights or immunities. As they vehemently observed,

"its sole purpose has only ever been to create for itself — in this case, by acquiring a small parcel of shares — a cause of action of sufficient merit to induce the defendant company to pay Mr Elliott’s fees. It seems to us that this is a clear example of an abuse of process. The processes of the Court do not exist — and are not to be used — merely to enable income to be generated for solicitors. On the contrary, they exist to enable legal rights and immunities to be asserted and defended."

Where to now?

Although the majority expressed trenchant views as to the propriety of the MCI proceedings, it is notable that the dissenting member, Justice Kyrou, agreed with Justice Ferguson: an order of costs can only be made once the plaintiff has won. Even if a costs order is the predominant purpose in bringing the proceedings, it cannot be made as primary relief. It is only a consequence of victory on the substantive point.

As one might expect, Mr Elliott publicly endorses this contrary view. He contends that the effect of the decision will be to push class action litigants towards more expensive litigation funders, and MCI will be seeking special leave to appeal to the High Court. We will be watching this case and the fortune of his other models with great interest. Similarly, in the wake of the recently published Final Report of the Productivity Commission on Access to Justice, we are also interested to detect any merging political will to regulate ongoing develop of this capital market.