Productivity Commission’s draft report on access to justice arrangements

On 8 April 2014, the Productivity Commission released its draft report on Access to Justice Arrangements. Further submissions and public hearings are planned before the publication of the final report in September this year.

The key recommendations in the draft report include:

  1. subject to comprehensive disclosure requirements, removing the restriction on calculating lawyers’ fees as an agreed share of the amount recovered through legal action (referred to as damages-based billing) for most civil matters, with the prohibition on such billing arrangements to remain for family and criminal matters, and
  2. the regulation of litigation funders as licensed financial services providers, who should be subject to ethical standards and monitored by the Australian Securities and Investment Commission and the courts.

Damages-based billing

The Productivity Commission proposes the lifting of the prohibition on damages-based billing because:

  1. there is no clear evidence that damages-based billing creates more perverse incentives for legal service providers when compared with conditional billing arrangements,
  2. provided that clients are fully informed about the merits of their claims, damages-based billing can align the interests of lawyers and clients with less risk of unnecessary work and charges, and
  3. damages-based fees are a ‘proportional’ payment for the client, compared with other forms of billing.

Further submissions are being sought on whether the share of damages claimed by legal service providers should be capped, or operate on a sliding scale depending on the size of the claim.

Litigation funding

The primary support for litigation funding is in the context of class actions, with arguments that litigation funding levels the playing field between individual litigants and well-resourced opponents such as major lenders or corporations.

The Productivity Commission has concluded that litigation funding can provide important benefits, as long as it is adequately regulated. The key challenges for regulation of litigation funding are:

  • ensuring fair agreements between consumers and litigation funders,
  • preventing funders exercising too much control over proceedings,
  • addressing potential conflicts of interest between funders, lawyers and plaintiffs, and
  • adequate prudential supervision to ensure that the funder has sufficient capital to meet its financial obligations.

The report’s recommendations would require future legislative changes to facilitate:

  1. regulation of the funders as licensed financial service providers, subject to the applicable ethical standards, and
  2. monitoring by the Australian Securities and Investment Commission and the courts.

Other findings relevant to class actions

The Productivity Commission has commented that:

  1. time and resources wasted on discovery for particular matters can create inequities in access to justice for all system users, and seeks further information about whether the access to justice implications of discovery require further consideration in respect of particular types of litigation such as class actions, and
  2. eligibility for grants of legal aid to individuals should take into account, amongst other things, whether there is scope for a class action, in which case the market, rather than public funding, would be able to meet the individual’s needs.

Timeline for final report

Submissions on the draft report were due by 21 May 2014, with public hearings in capital cities to be scheduled in June 2014. The final report is due to be published in September 2014.

A copy of an overview of the draft report can be accessed here.

Security for costs in the Willmott Forests class actions

In late February 2014 we released our Class Actions 2013/2014 Developments and Trends publication, which included a consideration of:

  • the decision of the Full Federal Court of Australia (Allsop CJ, Jessup and Middleton JJ) in Madgwick v Kelly,1 which overturned the first instance decision of Murphy J in Kelly v Willmott Forests Ltd (in liquidation),2 and
  • the subsequent reconsideration of quantum and staging of security by Murphy J in Kelly v Willmott Forests Ltd (in liquidation) (No 2).3

See page 14 - Security for Costs: A Turning Point – Willmott Forests class action article in the Class Actions 2013/2014 Developments and Trends publication.

On 14 February 2014, His Honour ordered that, initially, security of approximately $1.73 million be provided by the applicants and that if security is not provided the proceedings continue to be stayed without further order.

The security of $1.73 million has now been raised by the applicants.

Justice Murphy has also made opt-out and class closure orders fixing 2 June 2014 as the date before which a class member may opt-out of the proceedings and has made orders programming the proceedings to a trial commencing on 23 February 2015.

Update on challenge to ‘fraud on the market’ theory of causation in the US Supreme Court

In our last update, we noted that the US Supreme Court agreed to hear a challenge to the validity of the ‘fraud on the market’ theory.4

Arguments were heard on 5 March 2014 on whether to overrule or significantly limit the plaintiffs’ ability to rely on a 26-year legal presumption that each class member in a securities fraud class action relied on the alleged material misstatement or misrepresentation. Without this legal presumption, plaintiffs face substantial barriers in commencing and maintaining such a securities fraud class action in the US.

The oral arguments have been the subject of considerable legal commentary from academics and practitioners alike, with varying opinions ventured on the likely outcome based on the remarks and ideological split of the nine Justices of the US Supreme Court. Whilst such opinions are speculative, the majority of commentators suggests it is likely that the ‘fraud on the market’ doctrine will remain good law in the US. Either way, the outcome is likely to prove instructive to the emerging Australian jurisprudence on shareholder class actions.

The US Supreme Court decision is expected later this month.

Update on Claims Funding Australia

In our last update, an application on the legality of Maurice Blackburn’s proposed funding vehicle (Claims Funding Australia Pty Ltd (CFA)) was due to be heard on 24-25 February 2014 before the Full Federal Court.5

Prior to the hearing, on 29 January 2014, CFA withdrew its application, explaining that:

“The new Commonwealth Attorney-General has plainly stated that he is proposing to introduce further regulation of litigation funding and that he is strongly opposed to litigation funding companies, that are owned by the principals of law firms, funding lawsuits in which that law firm represents the claimants.

In these circumstances it seems likely that even if Court approval were obtained the co-funding arrangement will be prohibited by regulation. This situation has led Claims Funding Australia to withdraw its application to the Court for approval of the co-funding model.”

Implications

As a result of the withdrawal, Claims Funding Australia is no longer co-funding the equine influenza class action with Argentum Centaur EI Funding Private Limited. Notably, in May 2014, Maurice Blackburn removed Argentum as the funder in the midst of allegations of a ponzi scheme against various companies and persons connected to Argentum. Maurice Blackburn has found, but not yet disclosed, a replacement funder for that action.

Currently, in Australia, lawyers are forbidden to undertake litigation on a contingency fee basis (see, for example, section 325 of the Legal Profession Act 2004 (NSW)). The advent of the special case application reinvigorated the debate on contingency fees. While that debate will no longer be ventilated in the context of the CFA structure, the issue remains topical given that last year the UK legalised its equivalent of contingency fees.

For more details, please see our Class Actions 2013/2014 Developments and Trends publication.