In the ever-changing and continually expanding world of funding for class actions, the Federal Court is being asked to consider whether a litigation funder associated with the plaintiff law firm, Maurice Blackburn, can fund a class action being run by that firm.

Claims Funding Australia Pty Limited (CFA) recently sought approval from the Federal Court to co-fund an equine influenza class action against the Commonwealth Government which is being run by Maurice Blackburn. Relevantly:

  • Maurice Blackburn’s Chairman, Steve Walsh, is a CFA Director,
  • Maurice Blackburn’s Chief Executive and national head of employment and industrial law practice are CFA shareholders, and
  • all of the firm’s principals are beneficiaries of the discretionary trust formed to set up CFA.

The proposed funding arrangement between CFA and Maurice Blackburn raises a number of issues, with first directions before Chief Justice Allsop on 28 June 2013.

Professional Legal Obligations

One issue before the Federal Court is whether the relationship between Maurice Blackburn and CFA contravenes legal professional obligations regarding the charging of contingency fees in NSW, where the proceedings have been filed1. The Legal Profession Act 2004 (NSW) (LPA), and similar legislation in the other states and territories, prohibits solicitors from charging contingency fees. Section 325 LPA provides:

A law practice must not enter into a costs agreement under which the amount payable to the law practice, or any part of that amount, is calculated by reference to the amount of any award or settlement or the value of any property that may be recovered in any proceedings to which the agreement relates.

Maurice Blackburn maintains that its proposed funding arrangement with CFA does not breach the LPA. However, the Legal Services Commissioners of NSW, Queensland and Victoria have written a joint submission to the Federal Court raising issues of concern regarding CFA’s proposed funding arrangement with Maurice Blackburn.

A further issue might be whether Maurice Blackburn’s proposed arrangement with CFA gives rise to breaches of rule 10.1.2 of the NSW Solicitors’ Rules (Avoiding a Conflict between a client’s and a practitioner’s own interest). That rule provides:

A practitioner must not, in any dealings with a client exercise any undue influence intended to dispose the client to benefit the practitioner in excess of the practitioner's fair remuneration for the legal services provided to the client.

The rule serves to add another layer of complexity to the issue before the Federal Court.

Conflicts of Interest

The proposed funding arrangement with CFA also raises the question of potential conflicts of interest. New Regulations come into effect from 12 July 2013 in relation to the management of conflicts of interest by litigation funders and making failure to adopt adequate procedures for managing conflicts an offence under the Corporations Act 2001 (Cth) (see our earlier articles on the regulations here and here as well as the commentary in our 2012 Report on litigation funding).

ASIC also released Regulatory Guide 248 in April 2013 which is designed to assist litigation funders in managing their conflicts. The ASIC guide highlights the competing tensions between litigation funders, law firms and members of class actions and states that conflicts can arise because the funder wants to maximise profit, lawyers have an interest in receiving fees and members of a class action want to maximise their return and minimise their costs. Importantly, the ASIC guide states that “conflicts of interest between the funder, lawyers and members may arise in a litigation scheme where there is a pre-existing legal or commercial relationship between the funder, lawyers and/or members.”

Even if the Federal Court were to allow the funding arrangement, CFA will have to comply with ASIC Guide 248 and adopt appropriate arrangements to manage the various interests at play. CFA maintains that it has been structured in a way to maintain its independence from Maurice Blackburn and that its procedures conform to the ASIC guide on litigation funding.

In addition, Rule 10.1.1 of the NSW Solicitors’ Rules provides that “A practitioner must not, in any dealings with a client, allow the interests of the practitioner or an associate of the practitioner to conflict with those of the client”. Importantly, Rule 10.2 provides that conflicted solicitors should not accept instructions to act in a proceeding or continue to act in a proceeding where a conflict arises.

The practical operation of these requirements in circumstances like that involving Maurice Blackburn and CFA raise another issue to be considered.

A Final Word

The Federal Court’s decision regarding CFA’s funding arrangement with Maurice Blackburn is an important one and may have significant implications for the litigation funding market and the future growth of plaintiff law firms.

If the Federal Court allows the funding arrangement, it will be of particular interest to see whether the Court seeks to impose any limitations on the arrangement or imposes additional requirements on either CFA or Maurice Blackburn in relation to managing potential or actual conflicts of interest. It will also be interesting to see whether the Court makes any extrajudicial comment about whether the relevant legal professional obligations require or should be subject to any amendment.

Finally, it is intriguing to note that the proceedings, which essentially involve a trustee asking the court for judicial advice, have been commenced in the Federal Court. Such applications are usually made in the Supreme Court and the Federal Court will first have to determine whether it has the jurisdiction to hear the matter before considering any of the issues raised above.