The rapid growth of the litigation funding industry and a number of recent significant class action settlements has placed the spotlight on the funding of class actions in Australia.

CAN LAWYERS HAVE A FINANCIAL INTEREST IN THE ACTION?

In 2014, a number of securities class actions were commenced in the Supreme Court of Victoria by Melbourne City Investments Pty Limited (MCI) as lead plaintiff against, among others, Treasury Wine Estates Limited (TWE) and Leighton Holdings Limited (LHL).

On the day of its incorporation, MCI purchased 140 shares in TWE for $693. MCI also purchased 39 shares in LHL for $684.06 and small parcels of shares costing less than $700 in various other publicly listed companies. The sole director and shareholder of MCI (Mr Elliott) was also the legal representative for the plaintiffs and was funding the litigation on a no win-no fee basis.

In mid 2014, the Supreme Court ruled that Mr Elliott could not act for the plaintiffs at the same time as MCI was the lead plaintiff on the basis that an observer would consider that he is compromised in his role as a solicitor such that there would be a real risk that he could not give detached, independent and impartial advice taking into account not only the interests of MCI (and its potential exposure to an adverse costs order), but also the interests of group members.

However, the Court did not consider that the proceedings were an abuse of process. TWE appealed that aspect of the decision.

In late December 2014, the Court of Appeal allowed the appeal by a majority of 2:1 and permanently stayed the proceeding, finding that MCI’s sole purpose was to use any cause of action it may have “to create an income-generating vehicle for its solicitor”, which it did by buying a small parcel of TWE shares. The Court of Appeal stressed the importance of maintaining public confidence in the fairness of court processes.

Mr Elliott used a different funding model for the Banksia Securities Limited (BSL) class action, which was also commenced in 2013. In that proceeding, MCI was not the lead plaintiff. However, the matter was funded by BSL Litigation Partners Limited (BSL), of which Mr Elliott was secretary and one of its three directors. Mr Elliott was also the plaintiff’s solicitor.

The major investors in BSL were a self-managed superannuation fund, a company controlled by Mr Elliott (holding a 45% interest) and a company controlled by the wife of the plaintiff’s senior counsel, Mr Norman O’Bryan SC (holding a 45% interest).

In November 2014, the Supreme Court of Victoria restrained Mr Elliott and Mr O’Bryan SC from acting for the lead plaintiff due to conflicts of interest.

The Court considered that the main risk arising from the lawyers' pecuniary interest in the outcome of the class action was that they might not fulfil, or might not be seen to fulfil, their duties to the Court.

The Court considered that the arrangement was an attempt to skirt around the prohibition on contingency fees, which was “inimical to the appearance of justice”.

RELAXATION OF RULES REGARDING CONTINGENCY FEES AND CONDITIONAL BILLING

Lawyers in Australia can use conditional billing arrangements where their fees are only paid if a successful outcome is achieved. Lawyers can also charge an uplift fee which does not exceed 25% of the total fee. As noted by the Court in the Banksia Securities class action, lawyers cannot charge contingency fees (being fees calculated by reference to the amount recovered) due to concerns that it creates perverse incentives.

However, in December 2014, the Productivity Commission released a report which recommended sweeping reforms to promote access to justice and remedy a system that it says is “too slow, too expensive and too adversarial”. One of the key recommendations is to remove the ban on contingency fees. It is not yet clear whether the recommendation will be acted upon.

In 2015, Legal Profession Uniform Laws are expected to come into effect in NSW and Victoria which lift the current prohibition in NSW on conditional billing with an uplift in damages claims. The new laws will apply to almost three quarters of Australia’s lawyers. Given most if not all class actions are damages claims, the impact may be significant.