In brief – Promoting best practice in litigation funding
The recently released Code of Conduct for Litigation Funders in the UK and the anticipated Corporations Amendment Regulations in Australia demonstrate that both jurisdictions are striving to establish best practice in litigation funding.
Litigation funding in England and Wales
On 23 November 2011, the Civil Justice Council (CJC), which promotes the needs of civil justice in England and Wales and looks to continue a process of modernising the civil justice system, published a Code of Conduct for Litigation Funders.
The Master of the Rolls, Lord Neuberger of Abbotsbury who is also the Chair of the CJC, commented at the launch of the Code:
I welcome the publication of the Code of Conduct for Litigation Funders. It is an important development and will help to foster standards of best practice and to promote greater transparency among the providers of litigation funding services to the benefit of the consumers of these services.
It is now for the litigation funders themselves to make the Code, and their new Association, a success - I wish them well.
Association of Litigation Funders of England and Wales
The Association to which the Master of the Rolls referred is the Association of Litigation Funders of England and Wales (ALF), whose members will agree to abide by the Code of Conduct.
ALF is to promote best practice in litigation funding, including by seeking adherence to the Code and by improving the understanding of the uses and applications of litigation funding by providing education, training and information on such funding.
The Code sets out standards of practice and behaviour to be observed by funders who are members of ALF.
Immediate access to funds to meet costs of litigation
Such funders are representing to litigants that they have access to funds immediately within their control (or act as an exclusive investment advisor to an investment fund which has access to funds immediately within its control) to enable a litigant who enters into a Litigation Funding Agreement (LFA) to meet the costs of resolving disputes by litigation and arbitration, including pre-action costs.
This is in return for the funder receiving a share of the proceeds (which is defined in the LFA) if the claim is successful and not seeking any payment from the litigant in excess of the amount of the proceeds of the dispute that is being funded, unless the litigant is in material breach of the provisions of the LFA.
Litigation funder's obligations
The LFA is required to state whether (and if so to what extent), the funder is liable to the litigant to:
- meet any liability for adverse costs
- pay any premium (including insurance premium tax) to obtain costs insurance
- provide security for costs
- meet any other financial liability
The obligations upon the funder are set out in section 7 of the Code and include:
- not to take any steps that cause or are likely to cause the litigant's solicitor or barrister to act in breach of their professional duties
- not to seek to influence the litigant's solicitor or barrister to cede control or conduct of the dispute to the funder
The LFA must state whether and if so how the funder may provide input to the litigant's decisions in relation to settlements.
Obligation to continue with the funding
The Code also requires the LFA to state when the funder may terminate the agreement, although the funder is not to have a discretionary right to terminate the LFA in the absence of the circumstances specifically set out in the Code.
Brett Carron of Harbour Litigation Funding in commenting on the launch of the Code stated:
The Code gives transparency to claimants about the nature of their relationship with and the underlying obligations of, litigation funders.
The long term importance of the Code turns on the key principles that it neatly encapsulates - in particular the capital adequacy of the litigation funder, the non-interference by the litigation funder in the litigation process and the obligation of the litigation funder to continue with the funding and not to seek to terminate funding absent a material adverse development.
Whilst the Code is voluntary, as is membership of the ALF, market forces are likely to drive litigants desiring funding to seek out members of the ALF.
Litigation funding in Australia
The High Court of Australia's decision in Campbells Cash and Carry Pty Ltd v Fostif Pty Limited1 was a high point for litigation funding. The Court was not prepared to bar the prosecution of an action where an agreement was made to provide money to a party to institute or prosecute the litigation in return for a share of the proceeds of the litigation.
The Court believed that the existing doctrines of abuse of process or other procedural and substantive elements of the courts' processes provided sufficient protection to the way in which the litigation was to be conducted, including addressing any conflicting duties that may arise for lawyers involved.
Litigation funding agreement deemed to be a managed investment scheme
The green light given to litigation funders by the Fostif decision was then almost taken away three years later by the decision of the full Federal Court of Australia in the case of Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd.2
The court held that the arrangement between the litigation funder, the representative parties and the solicitors retained to pursue the action against Brookfield Multiplex constituted a managed investment scheme. As such, the provisions of the Corporations Act 2001 (Cth) applied and the scheme was required to be registered.
ASIC grants transitional relief to lawyers and funders
The Australian Securities and Investments Commission (ASIC), as Australia's corporate, markets and financial services regulator, announced on 4 November 2009 that it intended to grant transitional relief to lawyers and litigation funders involved in legal proceedings structured as funded class actions. Individual applications to ASIC were required.
ASIC then issued class order 10/333 on 5 May 2010, enabling the temporary operation of funded representative proceedings and funded proof of debt arrangements without compliance with the requirements of the Corporations Act. The instrument was originally to have effect until 30 September 2010.
That date has been extended on four subsequent occasions, with the current effective date being 29 February 2012. This postponement has been to give the Federal government and ASIC time to implement the new regulatory and policy regime for representative proceedings and proof of debt arrangements without impeding affected schemes before that regime is finalised.
Funding agreement is a financial product and can be rescinded
On 15 March 2011, the NSW Court of Appeal in the case of International Litigation Partners Pte Ltd v Chameleon Mining NL3 held that the LFA involved was prima facie a financial product under section 763A of the Corporations Act because it was a facility through which financial risk was managed.
As a financial product issued by a non licensee, the agreement could be rescinded. This decision meant litigation funders would have to hold an Australian Financial Services Licence (AFSL).
The licensing requirement did not adversely affect all litigation funders. For instance, IMF (Australia) Limited has held an AFSL since 2005.
Importance of litigation funding for access to justice
The Federal government released details of the proposed Corporations Amendment Regulations in July 2011 seeking to address the effect of the Brookfield Multiplex decision, as that decision would mean class actions would be subject to the regulatory requirements applying to managed investment schemes as defined in the Corporations Act.
As the government stated in its explanatory commentary:
This would have imposed a wide range of registration, licensing, conduct, disclosure and other requirements on litigation funders and their arrangements with their clients. The Government supports class actions and litigation funders as they provide access to justice for a large number of consumers who would otherwise have difficulties in having their claims heard and assessed. The Government's main objective is therefore to ensure that consumers do not lose this important means of obtaining access to the courts.
Corporations Amendment Regulations awaited
The proposed Corporations Amendment Regulations, which were to commence on 1 October 2011, (which date has been delayed), provided for:
- the carving out of litigation funding schemes from the definition of a managed investment scheme
- ensuring that anyone providing a financial service in relation to a litigation funding scheme did not need to obtain an AFSL from ASIC (thus addressing the issue arising from the decision in Chameleon) - with this exemption conditional on having adequate arrangements for managing conflicts of interest that may arise in relation to the operation of the litigation funding scheme
- exempting AFSL holders and authorised representatives from the requirement to comply with the requirements of part 7.7 of the Corporations Act when they offer a financial service in relation to a litigation funding scheme - thus a financial services guide or statement of advice need not be provided to a client before providing such financial service or personal advice
Funded litigation and class actions regulated by other legislation
The Federal Government maintains that funded litigation and class actions continue to be regulated under a range of other legislation eg funders are subject to the general consumer protection provisions in the Competition and Consumer Act 2010 and the Australian Securities and Investments Commission Act 2001 (in matters such as unconscionable or misleading conduct) and by court rules and regulations applying to representative proceedings and to the relationship between lawyers and their clients.
Submissions on the proposed regulations were invited and six submissions were received from interested parties, being a legal funder, two law firms, the Law Council of Australia, Australian Institute of Company Directors and Chartered Secretaries Australia Limited.
Whilst all submissions supported consumers being able to access the courts readily, a range of views have been expressed on the regulation of litigation funding.
We await with interest the government's final draft of the proposed regulations.
1  HCA 41
2 (2009) 180 FCR 11
3  NSWCA 50