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Allens Arthur Robinson

Focus: Commercial Litigation – August 2006

Regulation of litigation funding

In brief: The practice of third-party litigation funding, whereby litigation funding companies agree to pay plaintiffs' costs in return for a share of the proceeds if the case is successful, has provoked considerable debate in Australia. A discussion paper released recently by the Standing Committee of Attorneys-General highlights some of the issues and concerns raised by third-party litigation funding and seeks comment on whether, and if so how, third-party litigation funding should be regulated. Partner Peter O'Donahoo(view CV) and Lawyer Susie Downie report.

Background

Historically, Australian courts have held that third-party litigation funding is impermissible, on the basis of the prohibition on maintenance (supporting litigation, regardless of the reason) and champerty (supporting litigation in exchange for a share of the proceeds of that litigation). While maintenance and champerty have now been abolished as crimes and torts in most Australian jurisdictions, the policy arguments underlying those doctrines have, until recently, continued to influence the courts in determining whether litigation funding arrangements should be allowed or whether the existence of an arrangement may result in the particular proceedings being an abuse of process. Accordingly, the courts have traditionally been slow to allow litigation funding.

However, recent Australian decisions1 have indicated a greater judicial acceptance of litigation funded by third parties, with courts seemingly concerned that the high costs of running an action may otherwise result in the denial of access to justice. This concern reflects the increasing focus on access to justice in various common law jurisdictions.2  

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The discussion paper

The Standing Committee of Attorneys-General discussion paper, Litigation funding in Australia, sets out the 'benefits and challenges' associated with litigation funding, both within the insolvency context, where litigation funding is relatively common, and outside the insolvency area. Access to justice is stated to be the primary benefit of litigation funding, in that it enables plaintiffs with meritorious claims that would otherwise be abandoned to pursue those claims. The discussion paper also points out some of the concerns raised by litigation funding, including the lack of consumer protection for vulnerable plaintiffs and the fact that supervision by the courts is not guaranteed. In these circumstances, funding agreements are only considered by the court if they are challenged by the defendant as an abuse of process or contrary to the administration of justice.

The discussion paper raises a number of issues for comment in relation to third-party litigation funding, including:

  • whether the laws against maintenance and champerty should be repealed in those jurisdictions where the tort or crime continues to exist;
  • whether the criteria for legally acceptable funding agreements be formalised, and if so, in what form;
  • what sort of requirements (for example, a cap on the proportion of an award that a litigation funding company (LFC) can claim) should be imposed on LFCs when they enter into litigation funding agreements; and
  • whether LFCs should be subject to prudential regulation and mandatory disclosure requirements.

The discussion paper also deals with the need to ensure the independence of lawyers from LFCs, noting that a law firm could establish an associated funding company that directs business to the firm. This would allow the firm to circumvent the prohibition on lawyers charging contingency fees. Another issue identified in the discussion paper is the possibility that lawyers might contract for uplift fees from LFCs in funded matters, resulting in a conflict of interest for the lawyer. Accordingly, the discussion paper queries whether explicit measures to ensure the independence of lawyers from LFCs should be introduced.

The discussion paper then deals with not-for-profit litigation funding, noting that schemes such as Law Aid in Victoria also improve access to justice. The discussion paper asks what measures should be taken to encourage more organisations to provide not-for-profit funding. It also queries whether any other similar schemes operate and, if so, how they work and how effective they are.

Finally, the discussion paper addresses litigation insurance. It notes that some insurers offer insurance against adverse costs orders, legal expenses insurance or 'after-the-event insurance', although such insurance is not as established in Australia as it is overseas. The discussion paper queries whether litigation insurance products are desirable in Australia and, if so, what steps should be taken to ensure that the availability of litigation insurance is not discouraged or prevented.

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Conclusion

The discussion paper highlights the difficulties of balancing the improved access to justice that litigation funding may afford against the risk that funding agreements might undermine the administration of justice and amount to an abuse of process. 

Any regulation that results from SCAG's consideration of this issue may have a significant impact on the conduct of litigation in Australia. Accordingly, it is important that submissions from a wide range of stakeholders are taken into account in determining the content of that regulation.

Submissions to SCAG are due by 14 September 2006.  

Footnotes
  1. See, eg, Clairs Keeley (a firm) (No 3) v Treacy [2005] WASCA 86 and Fostif Pty Ltd v Campbells Cash and Carry Pty Ltd [2005] NSWCA 83.
  2. See, eg, the UK Civil Justice Council's Report entitled Improved Access to Justice – Funding Options and Proportionate Costs (August 2005).

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