As previously reported in our Q2 2013 Class Action update, Claims Funding Australia Pty Limited (“CFA”) was seeking approval from the Federal Court to co-fund an equine influenza class action against the Commonwealth Government which is being run by Maurice Blackburn. CFA was effectively established by the principals of Maurice Blackburn and operated for the benefit of those principals as trustee. There were real concerns that having CFA fund a class action in which Maurice Blackburn was acting:
- created a backdoor to allow Maurice Blackburn to obtain contingency fees, which are otherwise prohibited; and
- gave rise to potential conflicts between Maurice Blackburn’s pecuniary interest, on the one hand, and its duty to clients, on the other.
On 29 January 2014, CFA discontinued its application in the Federal Court. Maurice Blackburn has explained the discontinuance as follows:
“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.”
Even though CFA has now abandoned its attempts to fund actions in which Maurice Blackburn is acting, the case highlights the need for funding regulation, as without the clarity which legislation will provide, it is entirely possible that other plaintiff firms will seek out novel ways to circumvent the prohibition on contingency fees and to share in the substantial returns enjoyed by third party funders.
A Court Appointed Funder?
An equally novel application has been made by Maurice Blackburn in Inabu Pty Ltd v Leighton Holdings Limited (“Leighton Class Action”), namely that a third-party funder be formally “appointed” by the Court as the funder of the proceeding. Ordinarily, funders pay the expenses related to running a class action and agree to meet any costs order made against the representative applicant. They do this in return for a percentage (usually in the range of 20% to 45%) of any settlement payment or judgment obtained by the applicant and the group members with whom they have entered into individual funding agreements. Thus, the basis of the funder’s right to a percentage is contractual in nature and is not dependent on any Court order. To prevent unfunded group members getting the benefit of the funding, closed classes are sometimes used, with a necessary element of the class being that group members have signed up with a particular funder.
The Leighton Class Action is an open class, but an application has been brought seeking a Court order (pursuant to ss 23 and 33ZF of the Federal Court of Australia Act 1976 (“FCA”) and r 1.32 of the Federal Court Rules 2011 (“FCR”)):
- appointing International Litigation Funding Partners Pte Ltd (“ILFP”) as the funder of the proceeding; and
- entitling ILFP to be paid its costs, expenses and remuneration.
If such an order is made, ILFP’s costs, expenses and remuneration will presumably be drawn from any settlement or judgment sum group member are entitled to, irrespective of whether those group members have entered into a funding agreement with ILFP. Thus, ILFP’s right to those costs, expenses and remuneration will not be contractual in nature, but will be pursuant to a court order. Ordinarily a court has no role in appointing a funder and there is a serious question as to whether the Court’s coercive powers should ever be employed in order to impose a commercial relationship with a non-party funder on absent group members. In those circumstances it is perhaps surprising that no order has been made in the present case (under s 33X of the FCA) that group members be given notice of the application and an opportunity to be heard, given the potentially profound effect on their legal rights.
The application is due to be heard on 20 February 2014.