Key Points:

The recent first instance decision of the Victorian Supreme Court in Melbourne City Investments (MCI) v Leighton Holdings and MCI v Treasury Wine Estates serves as an ominous warning that some models are not serving the interests of either justice nor the claimants whom they are supposed to benefit.

In April this year the Productivity Commission published a range of draft recommendations concerning access to justice, including the funding of Australian civil litigation by third parties and by lawyers.  Amongst the Commission's recommendations were proposals to lift the present ban on contingency fees, and to hold third part litigation funders to modified financial services licences and associated prudential regulation.

These recommendations have been influenced by the rising tide of representative proceedings in Federal and State courts. Product and catastrophic event related actions aside, litigation funding is now a key driver in securities class actions, targeting the acts or omissions of publicly listed companies and others.

Courts administering class action regimes are increasingly being called upon to address the entrepreneurial models that underpin such actions. The recent first instance decision of the Victorian Supreme Court in Melbourne City Investments (MCI) v Leighton Holdings and MCI v Treasury Wine Estates serves as an ominous warning that some models are not serving the interests of either justice nor the claimants whom they are supposed to benefit.

The MCI model: An abuse of process?

MCI is a Victorian investment company managed and controlled by Mark Elliott, a Melbourne‑based solicitor. MCI holds a small parcel of shares in each of Treasury Wine Estates (TWE) and Leighton Holdings, having acquired each parcel for under $700.

MCI initiated separate securities class actions in the Victorian Supreme Court against TWE, Leighton and WorleyParsons Limited. Mr Elliott is the solicitor for MCI in each of the proceedings. The most that MCI could recover in each action would be less than $700.

TWE and Leighton each sought orders to effectively bring the actions to a halt. Justice Ferguson was not satisfied that the proceedings were either an abuse of process or contrary to public policy. Nevertheless her Honour was satisfied that "unless Mr Elliott ceases to act for MCI in the proceedings or MCI is replaced as the representative plaintiff, Mr Elliott should be restrained from acting as the solicitor for MCI and the proceedings should not be permitted to continue as group proceedings."

To test whether this was an instance where the solicitor/plaintiff ought be restrained, the Court considered the position of a hypothetical fair minded independent observer. As to Mr Elliott's position, her Honour was clear:

"…the Observer would consider that Mr Elliott 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."

Access to justice in a growing capital market

The MCI decision highlights that, in the absence of regulation, there is a justifiable concern about the proper separation between claimant, lawyer and funder. The Courts charged with administering class actions are plainly alive to the challenges that the entrepreneurial class action industry presents. If that line is pushed too hard, Courts, both federal and state, will intervene and may well decide that such issues ought be examined at a very early stage. Indeed, for defendants it is important that those boundaries are assessed at the outset rather than allowing class actions to proceed to trial or a Court approved settlement before the concern is tackled.

As to reform, the decision offers a mixed message. The need for such intervention adds to the concerns expressed by the Productivity Commission warranting the regulation of third party litigation funding. However, it offers very little, if any, support for the notion that the time for contingency fees by lawyers has arrived. A playing field that is not in the interests of justice nor the parties is not a competitive solution and cannot afford genuine access to justice.