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Australia – Developments In Litigation Funding.

10 September, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

New litigation funder linked to plaintiff law firm

 

Claims Funding Australia Pty Ltd (CFA) is a new litigation funder which is closely linked to plaintiff law firm Maurice Blackburn (MB). One director and two shareholders of CFA are lawyers at MB, and the beneficiaries of the CFA trust are also associated with MB.

 

CFA is proposing to co-fund the equine influenza class action with litigation funder, Argentum Centaur El Funding Private Limited, pursuant to a co-funding agreement. The equine influenza class action is being run by MB. 

 

CFA has made an application to the Federal Court of Australia for orders as to whether the CFA would be justified in providing funding to the applicant and some or all of the group members in the equine influenza class action. This proposed arrangement raises a number of novel questions. It appears that one of the most important issues is whether MB will be placed in a position of intractable conflict between its duty to its clients and to the court on the one hand, and its business interests in co-funding the case on the other. There is also an issue of whether the funding arrangement would breach the prohibition on lawyers obtaining contingency fees as MB (through CFA) may receive commissions as a funder. 

 

At this stage the Court is considering a preliminary question of whether to refer the matter to the Full Federal Court. Amici curiae (ie ‘friends of the court’, who are lawyers not acting for any party in the matter) have been appointed to assist the Court with the legal issues raised. A decision is expected later this year. If CFA is allowed to fund the class action, it is possible that other plaintiff law firms may also seek to enter the litigation funding space.

 

New exemptions for litigation funders

 

As of 12 July 2013, litigation funders are not required to hold an Australian Financial Services Licence (AFSL). The Corporations Regulations 2001 (Cth) (Corporations Regulations) now exempt funders from the licensing, conduct and disclosure requirements in Chapter 7 of the Corporations Act 2001 (Cth). In order to rely on these exemptions, however, a funder has an obligation to maintain adequate arrangements, and follow certain procedures, for managing any conflicts of interest which may arise between the funder, lawyers and the funded parties (for instance, group members in a class action).

 

ASIC guidance

 

ASIC Regulatory Guide 248, entitled ‘Litigation schemes and proof of debt schemes: Managing conflicts of interest’, released on 22 April 2013, provides some guidance for funders as to how to comply with their obligation to maintain adequate arrangements and follow certain procedures for managing conflicts of interest. In order to satisfy the obligation, Regulatory Guide 248 indicates that a funder ought to be able to show, amongst other things, that it has written procedures for identifying and managing conflicts of interest and that those procedures are effectively implemented and regularly reviewed. Regulatory Guide 248 provides that funders ought to have written procedures dealing with matters such as:

 

  1. how to effectively disclose conflicts of interest to members and prospective members, 
  2. how to deal with situations in which the lawyer acts for both the funder and members, and
  3. how to deal with situations in which there is a pre-existing relationship between any of the funders, lawyers and members. 

 

Policy of limited regulation of litigation funding

 

There has been limited regulation of litigation funding in Australia to date and the amendments to the Corporations Regulations outlined above confirm the reluctance of the federal government to impose restrictions on litigation funding. This approach is reflective of the federal government’s apparent desire not to stifle the growth of litigation funding in Australia and thereby potentially limit access to justice for those who benefit from class actions.

 

It should also be noted that, consistent with this approach, the Corporations Regulations contain no capital adequacy requirements. This means that there is no obligation for litigation funders to have sufficient resources to meet, amongst other things, adverse costs orders imposed by courts. The Corporations Regulations therefore provide no prudential protection to defendants in class actions funded by litigation funders in recovering legal costs incurred in defending claims. This can be particularly problematic for defendants faced with class actions funded by foreign litigation funders with no meaningful asset presence in Australia.

 

We note that it has recently been reported that litigation funding faces the prospect of increased regulation under a Coalition government.

 

 

 

For further information, please contact: 

 

Damian Grave, Partner, Herbert Smith Freehills
damian.grave@hsf.com

 

Jason Betts, Partner, Herbert Smith Freehills
jason.betts@hsf.com     

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