The Third Party Litigation Funding Law Review 8th edition: Australia

01 November 2024 BY JASON GEISKER, DIRK LUFF & SAMUEL SHERIDAN

Introduction

Australia is home to one of the world's most sophisticated third party litigation funding markets. Initially, litigation funding was used by insolvency practitioners to pursue insolvency-related legal claims, but since the turn of the millennium litigation funding has been utilised in a far broader range of civil and commercial disputes and arbitrations. Even so, third party litigation funding services remain relatively underutilised in Australia.¹ In 2023, the addressable market for third party litigation funding in Australia and New Zealand was estimated at A$4 billion.² In contrast, the Australian litigation funding market had an estimated revenue of only A$199.3 million in 2023–2024.³ The litigation funding market is estimated to have grown by 9.6 per cent per annum between 2019 and 2024. That trend is predicted to continue, albeit at a significantly slower rate of 1.8 per cent per annum, over the next five years.⁴

In 2019, the Australian Law Reform Commission (ALRC) estimated there were approximately 33 litigation funders active in the Australian market,⁵ a number that has since remained stable.⁶ The use of litigation funding for a broad range of class actions⁷ is a well-known aspect of the Australian market. Around five years ago, class actions represented just under half of the litigation funding market, and although this dropped to less than 36 per cent during 2023, class actions continue to represent just under 50 per cent of the market in 2024.⁸ The balance of the market comprises small to large businesses and individuals.⁹ Similarly, in the 12 months ending 3 March 2018, approximately 72.5 per cent of the class actions filed in Australia were supported by third party litigation funders.¹⁰ However, since that time there has been a steady decline in funded class actions as a proportion of the overall class actions commenced in Australia, such that they now represent less than half of all class actions filed.¹¹ Indeed, in 2022, total class action filings themselves (funded and unfunded) were at the lowest level since 2016–2017, reflecting the broader slowdown of this market segment.¹² In 2023, that overall class action filing slowdown was temporarily reversed, although that appears to have been primarily due to an unusually high number of competing class actions commenced. In recent years funded class actions have remained well under 50 per cent of all class action filings¹³ and at the half way mark in 2024 class action filings have again dropped away to decade-low levels.¹⁴

In terms of non-class action and insolvency related litigation funding, despite the biggest economic downturn since the great depression, covid-19 did not produce the tsunami of corporate insolvencies and litigation that the Australian business community expected. Due largely to unprecedented levels of government assistance and intervention, external administrations during the 2020 and 2021 covid period were kept at record lows,¹⁵ resulting in a reduced demand for litigation funding in the insolvency market segment. In the 2022–2023 financial year this trend was reversed, with corporate insolvency appointments returning to pre-covid-19, long-term average levels.¹⁶ In the 2023–2024 financial year, the number of external administrations grew again by 39 per cent, with construction (27 per cent), accommodation and food services (15 per cent) and other services (9 per cent) representing over half of total external administrations for 2023–2024.¹⁷ Restructuring appointments also grew by over 200 per cent in 2023–2024, representing 12 per cent of all external administrations, again reflecting the headwinds experienced as government assistance and interventions tailed off.¹⁸

The year in review

Corporations Amendment (Litigation Funding) Regulations 2022

On 16 December 2022, changes to the regulation of litigation funding schemes under the Corporations Act 2001 (Cth) (the Corporations Act) were introduced by the commencement of the Corporations Amendment (Litigation Funding) Regulations 2022 (the Funding Regulations). The broad effect of the Funding Regulations is to return the regulatory position back to that which existed immediately prior to the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (the 2020 Regulations). The Funding Regulations once again provide litigation funding schemes with an explicit exemption from the managed investment scheme (MIS), Australian financial services licence (AFSL), product disclosure and anti-hawking provisions of the Corporations Act.¹⁹ In part, this is to ensure that the Corporations Regulations 2001 (Cth) (the Corporations Regulations) reflect the status of the law following the Full Court of the Federal Court's decision in LCM Funding Pty Ltd v. Stanwell Corporation Limited (Stanwell).²⁰

The explanatory statement, issued by the authority of the Assistant Treasurer and Minister for Financial Services, notes that the MIS and AFSL regimes were not designed or intended to regulate the litigation funding industry.²¹ The Funding Regulations bring arrangements for litigation funding schemes in line with arrangements for other types of funding schemes (i.e., insolvency funding schemes) and litigation funding arrangements.

Australian Securities & Investments Commission (ASIC) amends relief for litigation funding schemes

On 19 December 2022, following the commencement of the Funding Regulations, ASIC announced amendments to existing legislative instruments that provided relief not covered by the Funding Regulations. Two critical instruments due to expire on 31 January 2023 were extended for three years until 31 January 2026, being:

1. ASIC Credit (Litigation Funding-Exclusion) Instrument 2020/37, which exempts litigation funding arrangements and proof of debt arrangements from the application of the National Credit Code; and
2. ASIC Credit (Litigation Funding-Exclusion) Instrument 2020/38, which exempts litigation funding arrangements funded by conditional costs arrangements (no-win no-fee retainers) from MIS obligations, AFSL requirements, product disclosure and anti-hawking requirements.

In extending these instruments ASIC noted that the purpose of the extension of the relief was 'to provide certainty for litigation funders, lawyers and members of litigation funding and proof of debt funding arrangements while the Government considers further its policy position for these types of arrangements'.²²

Common fund orders

A significant evolutionary step in the Australian legal system has been the judicial consideration of common fund orders (CFOs) in class actions. CFOs can provide for the legal costs of a proceeding and the commission charge of a litigation funder to be pro-rata shared by all members of a class who succeed, or achieve a settlement, in a class action, irrespective of whether they have agreed to any legal retainer or funding contract. However, the court's ability to make a CFO at an early stage of a class action proceeding was successfully challenged in the High Court (by a 5:2 majority) in the Lenthall and Brewster class actions on 4 December 2019.²³

The first CFO in a class action was made by the Full Court of the Federal Court on 26 October 2016 in the QBE class action.²⁴ The order was made at an early stage of the proceedings to assist group members in making an informed decision as to their participation in the class action prior to opting out. In approving the order, Murphy, Gleeson and Beach JJ stated that upon any successful settlement or judgment in the proceeding, the applicant and class members must pay a reasonable, court-approved funding commission from any monies received, prior to distribution of those monies.²⁵ The Full Court declined to set the funding commission rate, preferring to determine that issue at a later stage, 'when more probative and more complete information will be available to the Court, probably at the stage of settlement approval or the distribution of damages'.²⁶

Following the QBE class action, a number of CFOs were made in a range of class actions, including Blairgowrie Trading Ltd v. Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No. 3),²⁷ Camping Warehouse v. Downer EDI (Approval of Settlement),²⁸ Lenthall v. Westpac Life Insurance Services Limited²⁹ (the Lenthall class action) and Catherine Duck v. Airservices Australia.³⁰

In 2019, the judicial power enabling CFOs at an early stage of the proceeding was challenged in a landmark series of cases involving the Lenthall class action and Brewster v. BMW Australia Ltd (the Brewster class action),³¹ where a separate question for determination as to the power to make CFOs was referred directly to the NSW Court of Appeal. In a historic first joint sitting of the Full Federal Court of Australia (via Lenthall ) and the NSW Court of Appeal (via Brewster), the courts heard these challenges. On 1 March 2019, both courts concluded that there is sufficient statutory power enabling CFOs to be made. Allsop CJ, Middleton and Robertson JJ were unanimous in dismissing the Lenthall appeal, finding that Section 33ZF of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) (the basis for the general power of the courts to make orders appropriate or necessary to ensure that justice is done in the proceedings) enabled the courts to make such orders.³² Likewise, Meagher JA, Ward JA and Leeming JA agreed that CFOs were authorised pursuant to Section 183 of the Civil Procedure Act 2005 (NSW) (CPA).³³ It was held that the making of CFOs was a proper exercise of judicial power and in no way contravened Chapter III of the Commonwealth Constitution.³⁴

However, the High Court subsequently granted special leave to hear appeals in both Lenthall and Brewster as to whether the courts had erred in concluding that Section 33ZF of the FCA Act and Section 183 of the CPA validly enabled the making of CFOs. On 4 December 2019, a majority of the High Court of Australia (Kiefel CJ, Bell, Keane, Nettle and Gordon JJ) held that neither Section 33ZF of the FCA Act nor Section 183 of the CPA empowers a court to make a CFO.³⁵ In a joint judgment, Kiefel CJ, Bell and Keane JJ held that although the power conferred on the court by those sections is broad, considerations of text, context and purpose all point to the conclusion that it does not extend to the making of a CFO.³⁶ Nevertheless, the High Court's judgment left two questions unresolved:

1. whether the court has power to make a CFO at the conclusion of a representative proceeding, pursuant to Section 33ZF of the FCA Act and Section 183 of the CPA (following a judgment) or Section 33V(2) of the FCA Act and Section 173(2) of the CPA (following a settlement); and
2. whether the making of a CFO would be unconstitutional.

On 20 December 2019, following the High Court's decision in the Brewster and Lenthall class actions, the Federal Court issued a new class actions practice note (GPN-CA) to confirm that the Court will still consider appropriate applications for orders sharing the costs of class actions at the conclusion of proceedings of this kind.³⁷

Different approaches have been taken by judges in interpreting the scope of the High Court's decision in Brewster and Lenthall.

Justice Beach, Justice Murphy and Justice Lee of the Federal Court have expressed the view that the court has the power to make CFOs (sometimes referred to as 'expense sharing orders') at the time of settlement under Section 33V(2) of the FCA Act,³⁸ with those Justices making such orders in subsequent cases.³⁹ Other Federal Court judges have taken a different view,⁴⁰ with some considering that the majority of the High Court gave strong reasons favouring a funding equalisation order over a CFO.⁴¹ The question of whether the court has the power to make CFOs at the time of settlement under Section 33V(2) was ultimately referred for consideration by the Full Court of the Federal Court of Australia in the McDonald's employment class action.⁴² The Full Court, comprised of Justice Lee, Justice Beach and Justice Colvin, unanimously affirmed this proposition. Justice Beach noted the wide judicial discretion conferred by Section 33V(2), finding that 'none of the terms used in Section 33V(2) would, as a matter of natural meaning, be read as precluding a settlement CFO'.⁴³ His Honour also considered the context and purpose of 33V(2), in that it is a provision addressing the settlement of proceedings⁴⁴ and, while there is no specific guidance on 33V(2) from extrinsic materials, the purpose of Part IVA is not in doubt.⁴⁵ Justices Lee and Colvin made similar assessments of Section 33V(2), in that it confers a broad discretion⁴⁶ and that its purpose is obvious.⁴⁷ Submissions made by the court-appointed contradictor included that making a settlement CFO would not constitute an exercise of judicial power, principally because it would involve the creation of rights and obligations for which the FCA Act does not provide, and that it also involves the weighing of policy considerations in quantifying the amount of commission to be paid. The Court rejected these propositions, finding that the making of a settlement CFO was simply an exercise of a discretionary power (in accordance with the requirements of Section 33V(2)), and noting that courts very commonly 'set rates of return of interest, calculate economic loss, and fix the remuneration of executors, trustees, liquidators and salvors, which tasks can involve commercial assessments and considerations of risk'.⁴⁸ Importantly, the Court gave careful consideration to the decision in Brewster, and distinguished it as being confined to the question of whether a CFO could be made early in a proceeding under the 'gap-filling' power in Section 33ZF(1).⁴⁹

Separately, the question of whether CFOs can be made at settlement under Section 173 of the CPA was referred to the Court of Appeal of the Supreme Court of NSW in Brewster,⁵⁰ although the Court of Appeal promptly declined to decide the issue because no settlement had been reached at that time and therefore the Court was effectively being asked to deal with the issue in a factual vacuum.⁵¹ This issue was subsequently considered in the case of Haselhurst v. Toyota Motor Corporation Australia Ltd, where Justice Rees confirmed that the court had the power to make a CFO at settlement under Section 173(2) of the CPA.⁵²

Given these decisions and practice notes, the Federal Court of Australia and Supreme Court of NSW seem to have endorsed the view that both courts have the power to make a CFO at the time of settlement, and that the High Court's earlier decision in Brewster is limited to commencement CFOs. However, this issue may ultimately be referred to the High Court of Australia for determination.⁵³

In Pearson⁵⁴ (the stolen wages class action), Murphy J of the Federal Court also considered whether a CFO made pre-Brewster had continuing effect. His Honour found that although it is apparent, as a result of the decision in Brewster, that the extant CFO made earlier in the proceeding was beyond power, as an order of a superior court, the CFO remained valid until and unless set aside,⁵⁵ and as no party had sought to have the CFO set aside, it continues in effect.⁵⁶

Most recently, in Blue Sky, the Full Court of the Federal Court considered an application, in the form of a reserved question, as to whether the Federal Court has the power to make a CFO at the time of settlement or judgment in favour of a solicitor (a Solicitors' CFO). The practical effect of such an order would be to allow a contingency fee. The Full Court confirmed that, under section 33V or 33Z of the FCA Act, it has the requisite power to make a Solicitors’ CFO at the time of settlement, discontinuance or judgment, provided it is ‘just’ to do so in all of the circumstances. The Full Court addressed several contentions against the finding of the power – principally that a Solicitors' CFO would not contravene the prohibition against contingency fees⁵⁷ on the basis that there was no promise to pay an amount, but rather a promise to apply for an order directing remuneration on a specific basis. The Full Court also acknowledged that while conflicts of interest can and do arise in this context, they can be appropriately managed with the supervision of the Court. It should be noted that the Full Court emphasised that the question of whether a Solicitors' CFO should be made would need to be assessed at the time the order is sought, having regard to the outcome of the proceeding, the total costs incurred by the plaintiffs, the percentage of the proceeds sought by the solicitor and any other matters that go to the question of whether the order would be just in all of the circumstances. While a Solicitors' CFO order has yet to be made in the Federal Court, the Blue Sky decision may provide an alternative jurisdiction for class action plaintiffs looking to operate outside of Victoria.⁵⁸

Notwithstanding these subsequent developments, the High Court's decisions in the Brewster and Lenthall class actions have, to some extent, constrained the courts' ability to adopt CFOs and to deal with commission rates. The decisions have also been viewed as being likely to substantially reduce the interest of litigation funders in the Australian class action market.⁵⁹ With some judges now calling for legislative intervention on the issue,⁶⁰ there appears to be a strong basis for regulatory intervention to clarify this area and allow for financial certainty for claimants, litigation funders and defendants.

Contingency fees in the Supreme Court of Victoria (class actions)

Another evolutionary step in the Australian system occurred on 18 June 2020 with the introduction of damages-based contingency fees in class actions applicable in the Supreme Court of Victoria. These changes were introduced via a new Section 33ZDA of the Supreme Court Act 1986 (Vic) allowing for group costs orders in class actions. Group costs orders can now be made where it is 'appropriate or necessary to ensure that justice is done'. This is a first in Australia and, consistent with recommendations from academics,⁶¹ the Productivity Commission, Victorian Law Reform Commission (VLRC) and ALRC, permits the court to make orders allowing a plaintiff law firm to charge its fees as a percentage of the amount recovered rather than on a time or scale fee basis. Fundamental to the making of a group costs order is that the plaintiff law firm must assume liability for adverse costs risks as a condition of the order and be prepared to satisfy any security for costs orders.⁶² Consequently, comparisons with no-win no-fee contingency fee arrangements (which do not require the plaintiff's lawyers to provide security or cover adverse costs exposure) are not apt.

At an early stage in the proceeding, the court will determine the percentage to be allocated to the plaintiff law firm that can be charged as a contingency. It may revisit this percentage at a later stage.⁶³ Guidance as to procedural matters is set out in the Supreme Court's practice note,⁶⁴ (the Practice Note), which came into operation on 1 July 2020 with the commencement of Section 33ZDA.

Since the introduction of Section 33ZDA, the Supreme Court has considered numerous applications for group costs orders made in varying circumstances, including where law firms were self-funded, funded by a litigation funder and where multiple firms were acting jointly under differing funding arrangements:

1. in September 2021, in the matter of Fox v. Westpac Banking Corporation (Fox);⁶⁵
2. in February 2022, in the matter of Allen v. G8 Education Ltd (G8 Education);⁶⁶
3. in April 2022, in the matter of Bogan v. The Estate of Peter John Smedley (Deceased) (Bogan);⁶⁷
4. in August 2022, in the matters of Nelson v. Beach Energy and Sanders v. Beach Energy (Beach Energy);⁶⁸
5. in August 2022, in the matters of Lay v. Nuix Ltd, Batchelor v. Nuix Ltd and Bahtiyar v. Nuix Ltd (Nuix);⁶⁹
6. in November 2022, in the matter of Gerhke v. Noumi Ltd (Gerhke);⁷⁰
7. in December 2022, in the matter of Mumford v. EML Payments;⁷¹
8. in December 2022, in the matter of Liberman v. Crown Resorts Ltd;⁷²
9. in March 2023, in the matter of Fox v. Westpac Banking Corporation (No. 2);⁷³
10. in August 2023, in the matter of Anderson-Vaughan v. AAI Ltd [2023] VSC 465;⁷⁴
11. in September 2023, in the matter of DA Lynch v. Star Entertainment Group; Drake v. Star Entertainment Group; Huang v. Star Entertainment Group; and Jowene v. Star Entertainment Group (Star);⁷⁵
12. in September 2023, in the matter of Lidgett v. Downer EDI Ltd;
13. in November 2023, in the matter of Five Boroughs NY Pty Ltd v. State of Victoria & Ors;⁷⁶
14. in December 2023, in the matter of Maglio v. Hino Motor Sales Australia; McCoy v. Hino Motors;⁷⁷
15. in March 2024, in the matter of Kilah & Anor v. Medibank Private Limited;⁷⁸
16. in April 2024, in the matter of Raeken Pty Ltd v. James Hardie Industries;⁷⁹
17. in August 2024, in the matter of Warner v. Ansell Limited.⁸⁰

Whether the making of a group costs order is appropriate or necessary to ensure that justice is done (the criterion for the exercise of the discretion) will depend upon a broad evaluative assessment of the relevant facts and evidence before the Court. The price, or the costs that group members are likely to pay, is relevant but not the only consideration.⁸¹ A review of the decisions to date provides several key takeaways, as given below.

First, the Court has approached the question of whether to make an order in a similar manner as when asked to approve a settlement and deductions for legal and funding costs under Section 33V of the FCA Act. The decisions (and the Practice Note) acknowledge that disclosing matters relevant to an application for a group costs order involves a similar degree of transparency as a Section 33V application. Absent a confidentiality regime, this is prejudicial to the interests of the plaintiff, therefore the Practice Note (Section 14.2) allows for the plaintiff to approach the Court regarding confidentiality arrangements. The court has often delivered its decisions in a public version of the judgment with a separate and further confidential schedule provided only to the plaintiff. Similarly, the Court developed a practice, in the early applications (though also utilised in Star), of appointing a contradictor, which allowed the Court to consider arguments independently made in the interest of group members.

Secondly, while Section 33ZDA specifically refers to the setting of a percentage, the Court has emphasised that there is no set range. This reflects the fact that each circumstance presented to the Court is unique. A survey of the decisions where an order has been made shows that the range, so far, has varied from a low of 14 per cent in Star, to a high of 40 per cent in Bogan. At the time of writing, only one of the decisions in which an order has been made have proceeded to settlement approval – see G8 Education discussed below. The factors considered relevant by the Court in determining whether a percentage is fair and reasonable have included:

1. the risks that the proceeding will not progress without an order. In Bogan, Justice Dixon approved a percentage of 40 per cent, on the basis that there was evidence before the Court from the funder that they would cease to fund the proceeding if a group costs order was not made (either via the existing funding agreement or via a proposed cost-sharing agreement). His Honour considered it highly relevant to assess the risk that if the application were refused the funder would terminate the funding agreement;
2. the costs to group members under alternative funding arrangements. The counterfactual where alternative funding arrangements would be available to group members has been a key feature of submissions and evidence in support of funding applications. In Fox, Nuix, G8 Education, Beach Energy and Gerhke, predictive modelling under alternative funding arrangements and different recovery scenarios were utilised in favour of the proposed orders. Since Fox, the Court has consistently cautioned about the inherent uncertainty in predictive modelling. Indeed, as was emphasised in Gerhke,⁸² while it remains a relevant consideration, a comparison of potential financial outcomes of alternative funding models should not 'subsume the place of the evaluative inquiry required by section 33ZDA', which must consider the effects of the order holistically; and
3. the investment evaluation principles relevant to law firms. In Bogan, Justice Dixon compiled a list of the risks he considered would inform a lawyer's investment evaluation.⁸³ These included the prospect of the claims failing at trial, the responsibility for the payment of legal costs disbursements (of either side) falling to the law practice, the capital requirement of security for costs and the expectations as to the net return on the investment sum as well as the timing of the receipt of any resolution sum. These types of matters, to be addressed in confidential materials filed by the applicants, are all relevant to the Court's consideration of what is fair and reasonable in the circumstances.

Thirdly, and further to the above observation regarding the relevance of investment principles, the Court expects a high degree of candour in the provision of supporting evidence for it to be satisfied that an order is fair and reasonable. In Nuix, the evidence provided in support of the application failed to satisfy Justice Nichols that the plaintiffs' lawyers had sufficient financial resources to fund the proceedings. Critical evidence, such as financial statements from the funder and precise details of the relevant insurance policy, was not forthcoming.

Finally, and further to the above observation regarding the relevance of predictive alternative outcome modelling, the return to group members is not the sole determining factor in group costs order applications. This was emphasised in Fox, and has been reinforced in subsequent decisions, as follows (at [8(a)]):

Whether the making of a group costs order (at all or at a particular percentage rate) is appropriate or necessary to ensure that justice is done in the proceeding (the statutory criterion for the exercise of the discretion), will depend upon a broad, evaluative assessment of the relevant facts and the evidence before the court. In making that assessment the interests of group members must be given primacy. In that assessment price, or the costs that group members are likely to pay, is a relevant consideration, but not the only consideration.

In terms of general data on GCOs made since the June 2020 introduction of the regime, in his report into 'Group Costs Orders and Funding Commissions' published in January 2024, Professor Vince Morabito concluded that the median GCO rate was 24.5 per cent, with a range of between 14 per cent and 40 per cent. Interestingly, this median closely compared with the 24 per cent median rate for third party litigation funding commissions, which had been considered by the Court during the seven-year period following the Money Max decision in October 2016 up until 31 December 2023.⁸⁴ Pertinently, in considering the statistical data applicable to the Victorian GCO regime, Prof Morabito notes that:

In order to fully understand the practical significance of the statistics...it is important to understand that the sum payable to the class representative's solicitor, pursuant to the percentage prescribed in the GCO, is the only deduction that will be made from the damages or settlement proceeds procured in the litigation. Thus, where the GCO rate is equal to 24.5 per cent, unless that rate is subsequently altered by the court, the class members will receive 75.5 per cent of the monetary compensation in question.⁸⁵

The first word on how the Supreme Court of Victoria would approach the confirmation of GCOs at the time of settlement occurred on 28 August 2024. In approving a proposed settlement, Justice Watson of the Supreme Court of Victoria, determined that the group costs order previously made on 26 November 2021 in G8 Education should not be amended.⁸⁶ This decision represented the first time the Court has considered the exercise of any power under section 33ZDA(3) in the context of a settlement approval. In this context, Watson J set out the following guiding principles:⁸⁷

(a) The power to amend a group costs order only arises in circumstances where the court was satisfied that it was ‘appropriate or necessary to ensure that justice is done in the proceeding’ to make the original order. 

(b) The consideration of whether to exercise the power under s33ZDA is not an occasion for a hearing de novo regarding the appropriateness of the group costs order. 

(c) Rather, the power to amend should only be exercised if the court is satisfied that circumstances now mean that an amendment is appropriate or necessary to ensure that justice is done in the proceeding. Whilst the language of s 33ZDA(3) contains no express limitation, such a limitation arises by necessary implication from the structure of s 33ZDA and the conditions on the original exercise of power under s 33ZDA(1).

(d) Close attention should be paid to the reasons for the original group costs order. 

(e) The court should ensure that costs payable to the lawyer under the group costs order remain proportionate in that they continue to represent an appropriate reward in the context of the effort and investment of the legal practice, the duration of the proceedings and the risks which were undertaken under the group costs order.

Watson J emphasised while the Court has an opportunity to consider whether the GCO is proportionate in light of all the known facts, this exercise ought not be an 'occasion of itself' to amend a GCO:

As has been repeatedly emphasised in the context of common fund orders, a court needs to avoid a hindsight bias in this regard [...] Where the outcome of a proceeding falls within the range of estimates relied upon by the legal practice in support of its application for the original group costs order or where the outcome falls outside those estimates but not substantially so, this will weigh against amending the group costs order percentage on account of a lack of proportionality.

It is also worth noting that Watson J provided observations regarding the utility of evidence regarding 'internal rate of return' (IRR) and 'return on investment' (ROI), emphasising that IRR and ROI calculations provide quantitative metrics that can assist the court in assessing proportionality, and that notwithstanding the limitations, over time, comparisons of the ROI and IRR between comparable proceedings may provide a useful check for the court.

Abolition of torts of maintenance and champerty and new class action regime in Western Australia

A further development towards aligning the states with the federal jurisdiction occurred in September 2022, when the Western Australian parliament followed the Victorian, NSW and Queensland jurisdictions by establishing a legislative framework for class actions for the Supreme Court of Western Australia.⁸⁸ In an effort to seek uniformity, the Western Australian government chose to model its own class action regime on the federal system as detailed in Part IVA of the FCA Act, although with some minor variations. Additionally, as part of the same reforms in September 2022, the Western Australian parliament also abolished the torts of maintenance and champerty in that state as part of the government's civil procedure reforms.⁸⁹ This legislation was careful not to interfere with the common law restrictions on contracts that might be found to be contrary to public policy or otherwise treated by the courts as illegal.⁹⁰ These statutory abolitions followed the path taken in other Australian jurisdictions, such as NSW, Victoria, South Australia and the Australian Capital Territory, and adopted earlier recommendations of the Western Australia Law Reform Commission.⁹¹

Since its introduction, the Supreme Court of Western Australia has seen its first class action commenced in the matter of Buck & Ors v. BGC Residential Pty Ltd & Ors, a third party funded class action in relation to alleged breaches of the Australian Consumer Law concerning residential building and construction work for thousands of home owners.⁹²

Legal and regulatory framework

The legal basis and limits of third party funding

Prior to 2006, encouraging litigation and funding another's claim for profit were prohibited in Australia by the common law doctrines of maintenance and champerty.⁹³ These doctrines prevented the courts from being used for speculative business ventures. Maintenance and champerty were the foundation for numerous challenges to the legitimacy of litigation funding before being progressively abolished as crimes and torts in most Australian states.⁹⁴ More than 20 challenges to funding agreements were mounted⁹⁵ in the eight years leading up to the 2006 landmark decision of the High Court in Campbells Cash and Carry Pty Ltd v. Fostif Pty Limited (Fostif).⁹⁶

In a pivotal moment in the development of Australian jurisprudence, the High Court held in Fostif that third party litigation funding of a class action was not an abuse of process or contrary to public policy.⁹⁷ The Court stated that notions of maintenance and champerty could not be used to challenge proceedings simply because they were funded by a litigation funder.⁹⁸ Following Fostif, litigation funding has become an entrenched part of the Australian legal system, playing a crucial role in providing greater access to the courts and bringing equality of arms to claims often against well-resourced respondents.

Even so, courts may still intervene in funded litigation where funding arrangements are contrary to the public policy considerations upon which the previous prohibitions were based at common law.⁹⁹ Fostif reserved the question as to what those public policy considerations might be in the Australian states that have not abolished the torts of maintenance and champerty by statute. Hence, challenges to litigation funding agreements still arise from time to time.¹⁰⁰ A more recent example arose in the Queensland Court of Appeal decision in Gladstone Ports Corp Ltd v. Murphy Operator Pty Ltd¹⁰¹ (Gladstone). That case involved a challenge to the adequacy of security for costs provided by way of a deed of indemnity from the funder. The defendant joined the funder to the proceeding and sought a declaration that its funding arrangements supporting the class action were unenforceable by reason of public policy. Gladstone argued the funder had been given an impermissible level of control, particularly in relation to settlement and other decision-making, in the litigation.

The Court of Appeal rejected these arguments. To the extent that 'maintenance offends against the law', the Court considered this can be adequately dealt with through the doctrine of abuse of process and should be subsumed into that body of law, rather than dealt with as a separate tort of maintenance.¹⁰² The Court said a litigation funder was not in any substantially different position from 'an insurer defending a claim or suing to recover under a right of subrogation'.¹⁰³ An application for special leave to appeal was subsequently dismissed, with the High Court concluding Gladstone's arguments had insufficient prospects of success.¹⁰⁴

Likewise, the extent of a lawyer's ability to fund claims, in the same way that third party funders might, has been reviewed by the Court too. Apart from Victoria, legal practitioners in all other Australian states and territories are presently prohibited from entering into any arrangement for payment of damages-based contingency fees (where fees are calculated by reference to a percentage of the amount recovered).¹⁰⁵ Unsurprisingly, practitioners in all states are still entitled to enter into conditional billing arrangements whereby their ordinary fees are payable upon a successful outcome.¹⁰⁶ These arrangements, known as no-win no-fee agreements, sometimes permit an uplift of up to 25 per cent of the lawyer's ordinary fees where a successful outcome is achieved.¹⁰⁷ For obvious reasons, such arrangements are often not commercially viable for practitioners, particularly for larger or more complex claims, such as class actions. Victoria has been the only state to address this issue. Victorian practitioners have been permitted to enter into damages-based contingency fee arrangements for class actions since 1 July 2020.¹⁰⁸

Over the last decade the extent to which a lawyer may be associated with a litigation funder was extensively tested by a Melbourne-based solicitor, Mark Elliott (now deceased), who was formerly a sole director and shareholder of Melbourne City Investments Pty Ltd (MCI). In 2014, two securities class actions were commenced by MCI, as the representative plaintiff, against ASX listed Treasury Wine Estates (TWE) and Leighton Holdings (LEI). MCI had acquired shares in TWE and LEI. Mr Elliott also appointed himself as the legal representative for MCI, which was receiving litigation funding to conduct the claims. In December 2014, the Victorian Court of Appeal stayed the proceedings as an abuse of process. The stay was granted because the proceedings had been commenced with the predominant purpose of earning legal fees for Mr Elliot, rather than the fees being an incident or by-product of the vindication of legal rights. In their majority judgment, Maxwell P and Nettle JA emphasised the importance of maintaining public confidence in the fairness of court processes; confidence that 'would undoubtedly be shaken' if the enrichment of a solicitor were held to be a legitimate purpose for bringing proceedings.¹⁰⁹

Separately, Mr Elliott trialled a different funding model for a class action brought against Banksia Securities.¹¹⁰ He again sought to act as the lead plaintiff's solicitor, while also being a director and secretary of the litigation funder and holding an indirect shareholding in the funder. The litigation funding agreement entitled the funder to a 30 per cent commission and to exercise control over the conduct of the proceeding. The Supreme Court of Victoria restrained Mr Elliott from acting in the Banksia Securities class action owing to conflicts of interest. Justice Ferguson considered that the main risk arising from Mr Elliott's pecuniary interest in the outcome of the class action was that he might not fulfil, or might not be perceived to fulfil, his duties to the court or be independent and objective.¹¹¹ Her Honour found 'it would be inimical to the appearance of justice for lawyers to skirt around the prohibition on contingency fees by this means; particularly where the legal practitioner's interest in the funder is sizeable'.¹¹²

In February 2018, a A$64 million settlement of the Banksia Securities class action was approved but then made subject to judicial review following an appeal from a disgruntled group member. The review involved the appointment of a contradictor to assist the Court to consider the amounts to be paid for legal costs and funding commission. In the dramatic developments that followed, allegations were presented to the Court suggesting the plaintiff's solicitor and counsel had engaged in serious misconduct in connection with their billing practices. In response, both the plaintiff's senior and junior counsel elected not to dispute the allegations and offered to have their names removed from the roll. The review hearing before Supreme Court Justice Dixon, which examined the funder's and lawyers' conduct, including whether they should be ordered to forego all costs and commission and pay additional damages to the 16,000 class members, concluded on 18 March 2021, with judgment delivered on 11 October 2021.¹¹³ In his judgment, Justice Dixon found that the litigation funder and five lawyers involved engaged in egregious conduct in connection with a fraudulent scheme, intending to claim more than A$19 million in purported legal costs and funding commission from the settlement sum. Justice Dixon noted that their conduct had shattered confidence in, and expectations of, lawyers as an honourable profession, and corrupted the proper administration of justice. The Court concluded that the lawyers' and funder's actions were appalling breaches of their respective duties to the court, particularly the paramount duty and overarching obligations imposed on them by the Civil Procedure Act 2010 (Vic). As well as removing some of the lawyers involved from the roll of admitted practitioners, Justice Dixon also referred the matter on to the Director of Public Prosecutions for further investigation and appropriate action.¹¹⁴

Post-Fostif developments in litigation funding regulation

As providers of financial services and credit facilities, litigation funders are subject to the consumer provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), which contains protections against unfair contract terms, unconscionable conduct, and misleading and deceptive conduct.¹¹⁵ These provisions provide avenues for redress against unfair or false and misleading terms or omissions in funding agreements. Funders are also subject to the general regulatory requirements under the Corporations Act and the general law, including equity.¹¹⁶

In 2009, litigation funding regulation prompted national debate following the landmark decision in Brookfield Multiplex Funds Management Pty Ltd v. International Litigation Funding Partners Pte Ltd (Multiplex), which determined that litigation funding agreements and the lawyer's retainer in a funded class action constituted managed investment schemes within the meaning of Section 9 of the Corporations Act.¹¹⁷ Managed investment schemes are required to be registered¹¹⁸ and managed by a public company holding an AFSL.¹¹⁹ Failure to comply is an offence.¹²⁰

A second landmark case involving a dispute between a funder and client raised similar questions at the time regarding the nature and regulation of funding arrangements. In Chameleon Mining NL (Receivers and Managers Appointed) (Chameleon) the funded client sought to rescind a funding agreement under Section 925A of the Corporations Act and thereby avoid payment of the funder's commission.¹²¹ The client argued that the funding agreement was a financial product and that the funder did not hold an AFSL. The High Court concluded that the funding agreement constituted a credit facility rather than a financial product and, while it did not need an AFSL, the funder did require an Australian credit licence.

In the aftermath of these two landmark decisions the federal government intervened, announcing that it would protect funded class actions from too heavy a regulatory burden.¹²² In 2010, ASIC issued class orders granting transitional relief to the lawyers and litigation funders involved in funded class actions, exempting them from the managed investment regulatory obligations. ASIC subsequently granted transitional relief from the financial product regulatory requirements of the Corporations Act. In August 2020, those protections were significantly scaled back for a period but subsequently reinstated in December 2022, as discussed below.

Initially the Multiplex and Chameleon cases led to the introduction of a conflict management regime. In 2012, regulations were enacted exempting litigation funders from the managed investment scheme provisions of the Corporations Act, subject to compliance with certain conflict management requirements.¹²³ During this time litigation funders providing both single-party funding¹²⁴ (litigation funding arrangements) and multiparty funding¹²⁵ (litigation funding schemes) were required to conduct reviews and maintain written procedures identifying and managing conflicts of interest.¹²⁶ In April 2013, ASIC released a regulatory guide detailing how litigation funders may satisfy these obligations.¹²⁷

However, in a dramatic policy change on 22 May 2020, the then Federal Treasurer, the Honourable Josh Frydenberg, announced significantly expanded regulatory requirements were to be imposed on litigation funding via the 2020 Regulations. The stated effect of the 2020 Regulations was twofold: to require third party litigation funders to hold an AFSL, and to require funders to comply with the managed investment scheme regime under Chapter 5C of the Corporations Act. The 2020 Regulations were published on 23 July 2020 under a cloud of controversy,¹²⁸ and took effect on 22 August 2020.¹²⁹ The 2020 Regulations rejected the detailed recommendations of the ALRC report 'Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders' (ALRC report) delivered to the Federal Attorney-General on 21 December 2018.¹³⁰ A number of applications were made in connection with funded class actions to determine if they contravened the 2020 Regulations or were protected by the transitional provisions.¹³¹ At the time, some funded class actions also experienced delays due to significant additional compliance obligations associated with the managed investment scheme regime.¹³²

Subsequently, in Stanwell Corporation Ltd v. LCM Funding Limited,¹³³ one of the respondents to the class action, Stanwell, alleged that the funding arrangements for the class action were unlawful, in that they constituted a managed investment scheme that failed to comply with the 2020 Regulations. In response, the litigation funder (LCM) filed a cross-claim seeking a declaration that the funding arrangements did not constitute a managed investment scheme, and contended that the earlier Full Court decision of Multiplex was wrong. Justice Beach dismissed Stanwell's claims, holding that the litigation funding arrangements were grandfathered by reason of the transitional provisions in the 2020 Regulations.¹³⁴ As such, his Honour found that it was not necessary to deal with the litigation funder's cross-claim and dismissed the cross-claim.¹³⁵ Justice Beach did, however, state that there is a strong case for arguing that it is appropriate for a Full Court to reconsider the majority decision in Multiplex.¹³⁶ His Honour then went on to identify (in some detail) the problematic aspects of the reasoning in Multiplex, including the 'unresolved conceptual incoherence in applying Chapter 5C [of the Corporations Act] to litigation funding schemes'.¹³⁷ On 13 December 2021, the litigation funder appealed from the dismissal of its cross-claim.

In 2022 in the landmark decision of Stanwell,¹³⁸ the Full Court of the Federal Court of Australia unanimously held that the decision in Multiplex was plainly wrong, and that a litigation funding scheme did not constitute a managed investment scheme.¹³⁹ The Court agreed with Justice Beach's analysis of the deficiencies in the reasoning in Multiplex.¹⁴⁰ Justice Lee found that the 'characterisation of litigation funding arrangements as managed investment schemes is a case of placing a square peg into a round hole'.¹⁴¹ His Honour also dismissed the idea that litigation funding schemes are unregulated, citing the Court's close protective and supervisory role '... to ensure that any class action is conducted in a way which best facilitates the just resolution of the disputes according to law and as quickly, inexpensively and efficiently as possible. Relatedly, the Court is also obliged to protect group members and manage the class action recognising that conflicts of interest, or conflicts of duty and interest, between and among representatives, group members, funders and solicitors can arise.'¹⁴²

Following the Stanwell decision, the federal government has clarified the regulatory position to align with Stanwell by introducing amendments to the Corporations Regulations. This has been implemented via the Funding Regulations, which commenced on 10 December 2022. The Funding Regulations (among other things) exempt litigation funding schemes from the managed investment scheme provisions of the Corporations Act, effectively bringing the arrangements for litigation funding schemes in line with the regime prior to 22 August 2020 and the law following Stanwell.

Reviews into the regulation of litigation funding

The regulation of litigation funding in Australia has evolved through a long history of reviews and reports.

Productivity Commission report

Just over a decade ago, in September 2014, the Productivity Commission delivered a comprehensive report regarding access to justice, which favoured two major reforms which, if implemented, would greatly impact litigation funding.¹⁴³ The two proposed reforms were the introduction of a licensing regime for litigation funders¹⁴⁴ and the removal of the ban on lawyers charging damages-based contingency fees, thereby introducing another funding option for clients.¹⁴⁵ Both reforms (and an array of other proposals) received further independent consideration at state and federal level by the VLRC and the ALRC.¹⁴⁶

VLRC

On 16 December 2016, the Victorian Attorney-General commissioned the VLRC to report on litigation funding and the conduct of class actions and to consider how regulators might better protect litigants from unfair risks or disproportionate costs burdens.¹⁴⁷ The VLRC report, 'Access to Justice: Litigation Funding and Group Proceedings', tabled in the Victorian parliament on 19 June 2018 (VLRC report), recommended that, subject to careful regulation, legal practitioners be permitted to charge contingency fees so as to provide another funding option for clients who are unable to bring proceedings without financial assistance in appropriate cases. The VLRC report also supported industry-wide national regulation of litigation funders and recommended that Victoria advocate for stronger national regulation through the Council of Australian Governments.¹⁴⁸

ALRC

On 11 December 2017, the federal government announced that the ALRC would conduct a similar federal review into litigation funding and the conduct of class actions. The ALRC Inquiry, led by the Honourable Justice Sarah Derrington QC, consulted broadly with judicial and expert panels, regulators, stakeholders and interested parties in the United Kingdom and Canada. A discussion paper released on 1 June 2018 (ALRC paper)¹⁴⁹ attracted more than 70 formal submissions from a broad range of industry stakeholders, including funders, law firms, insurers, industry super funds, non-government organisations, business lobby groups, and regulatory bodies and professional associations.

The ALRC report was delivered to the Attorney-General on 21 December 2018 and makes 24 recommendations, predominantly relating to the reform of class action law and procedure.

Consistent with the earlier recommendations of the VLRC and the Productivity Commission, the ALRC report recommends that percentage-based fee arrangements or contingency fee arrangements for solicitors be permitted in Australian class action proceedings with some limitations.¹⁵⁰ This would allow solicitors to receive a proportion of the sum recovered at settlement, subject to court approval, to ensure arrangements are reasonable and proportionate. The four key arguments advanced in favour of contingency fee arrangements are that they will:

1. increase access to justice for prospective group members of medium-sized class actions (between A$30 million and A$60 million);
2. promote competition;
3. increase returns for group members; and
4. provide clarity and certainty for group members.¹⁵¹

The recommended limitations to be placed on contingency fee arrangements include that the contingency fee be the one and only form of funding; the solicitors are precluded from also recovering any professional fees on a time-cost basis; and the solicitors bear the onus of paying for the disbursements and must account for these within the contingency fee.¹⁵²

Notably, in relation to the regulation of litigation funders, the ALRC report recommends against the introduction of a licensing regime (contrary to the initial proposal in the ALRC paper). It suggests improved court oversight of litigation funders on a case-by-case basis.¹⁵³ The ALRC considers this will 'achieve at least the same level of consumer protection without the regulatory burden of a licensing regime'.¹⁵⁴ The ALRC report suggests a suite of amendments to the FCA Act aimed at strengthening the Federal Court's supervision of litigation funders, including to provide that litigation funding agreements for class action proceedings are enforceable only with the approval of the court; expressly empowering the court to award costs against litigation funders (and insurers) who fail to comply with the overarching purposes of the FCA Act (to facilitate the just resolution of disputed claims according to law and as quickly, inexpensively and efficiently as possible); and a statutory presumption that litigation funders who fund class action proceedings will provide security for costs in a form that is enforceable in Australia.¹⁵⁵

The ALRC report also recommends that the ASIC Guide 248 be strengthened to require that litigation funders who fund class action proceedings report annually to ASIC on their compliance with the requirement to implement adequate practices and procedures to manage conflicts of interest.¹⁵⁶ In recognition of the wide range of funding models emerging since the 2012 conflict management procedures were introduced, the ALRC also recommends that the scope of Regulation 5C.11.01 of the Corporations Regulations be amended to include law firm financing and portfolio financing within the definition of a litigation funding scheme, so that litigation funders who provide such funding are also required to implement conflict management procedures.¹⁵⁷

PJC review

In May 2020, the former federal government announced yet another review of 'litigation funding and the regulation of the class action industry' – this time via a referral to the Parliamentary Joint Committee on Corporations and Financial Services (PJC).¹⁵⁸ A four-week period was allowed for short submissions followed by a series of short hearings in July and August 2020. The stated terms of reference of the inquiry were to consider whether the current level of regulation applying to Australia's growing class action industry is impacting fair and equitable outcomes for plaintiffs.¹⁵⁹ In mid-2020, the hastily convened PJC review¹⁶⁰ considered the regulation of 'litigation funding and the class action industry' prior to the federal government responding to the 24 detailed recommendations contained in the ALRC report.¹⁶¹

On 21 December 2020, precisely two years after the ALRC report was completed, the PJC delivered its own, far briefer report (PJC report). In it, the PJC recognised that litigation funders close the considerable gap in financial resources between the two sides of a class action, reducing the defendant's ability to defeat the case through superior economic power. The PJC recognised that, in many instances, a class action in Australia may not proceed without a litigation funder. However, in many respects, the PJC report took a major departure from many of the comprehensive recommendations contained in the ALRC report.

The PJC report proposed a series of additional legislative, regulatory and practice requirements be introduced with the stated objective of constraining litigation funders and class actions more generally. These recommendations include:

1. that a new concept of 'procedural proportionality' be legislated for class actions to require that the potential costs and drawbacks of proceedings be balanced against the benefits to class members, as well as the impact on court resources, regulatory outcomes and public interest;
2. a presumption that litigation funders provide security for costs and fully indemnify representative plaintiffs;
3. enhanced Federal Court legislative powers to oversee and reject, vary or amend any term of a litigation funding contract in the interests of justice, including commissions and fees, and to require Federal Court approval orders as a condition of the funding agreement being enforceable;
4. permitting the appointment of court-appointed referees with market capital or finance expertise to act as litigation funding fee assessors;
5. legislating to guarantee a minimum return of at least 70 per cent of the gross proceeds to class action members;¹⁶²
6. enhanced use of contradictors to appear at class action settlement approval hearings;
7. a review of the ability of lawyers to obtain an uplift fee of 25 per cent of their costs on no-win no-fee retainers;
8. subjecting lawyers to financial services regulation (including AFSL and managed investment scheme compliance obligations) where they conduct class actions on a contingency basis;
9. requiring litigation funders and lawyers to make disclosures to the Federal Court as to any potential conflicts of interest (on an ongoing basis) and to provide their conflict management policy to the court when applying for approval of funding agreements;
10. imposing on litigation funders the same standards and duties that are owed by lawyers to their clients;
11. limiting the forum for claims brought under the Corporations Act to the Federal Court; and
12. working with state and territory governments to achieve consistent class action regimes across jurisdictions.

In contrast to the ALRC report, the PJC report adopts a far more aggressive stance on what the PJC report authors consider to be the appropriate level of regulatory intervention. The authors cite evidence of a 'systemic and inappropriate' skewing of successful class action proceeds in favour of litigation funders at the expense of class members' share of the proceeds.¹⁶³ The PJC's conclusion appears to be based on a selected extract from the earlier ALRC report, which noted that the median return to class members in funded claims was 51 per cent, compared to 85 per cent in unfunded claims.¹⁶⁴ The PJC's somewhat simplistic comparison appears to have informed its rationale for some of its more hard-line reform recommendations, without recognising the fundamental differences between funded claims and claims pursued without third party funding (TPF) support. For instance, claims pursued without TPF offer no litigation expense assistance, no adverse costs protection and no security for costs support to class representatives. These benefits come with a cost, generally in the form of a funding commission. Hence, it is unsurprising that funded claims tend to result in lower median percentage net returns to class members than unfunded claims (once commissions are factored in). However, can the median percentage returns be looked at in isolation or used as a proper comparator without regard to the other benefits litigation funding might provide? The PJC report authors do acknowledge that in many instances a class action in Australia may not proceed at all without a litigation funder.¹⁶⁵

To date the federal government is yet to respond in full to aspects of the PJC report and has not responded to the previous comprehensive recommendations set out in the ALRC report.¹⁶⁶

Structuring the agreement

Typical structure

Funded litigation can involve a contractual relationship between the litigation funder, the lawyer and the funded client, whereby the funder agrees to provide for some or all of the client's legal costs and disbursements in return for receiving a percentage of any damages recovered. The remuneration can take any form, although more common forms include a multiple of the funding, a percentage of the proceeds, a fixed amount, or a combination of these.¹⁶⁷ Percentages typically range between 20 and 45 per cent of the settlement proceeds depending on the risks and time involved and the type of funding required.¹⁶⁸ The ALRC report noted that the median commission rate for third party litigation funding of Federal Court class actions between March 2017 and March 2018 was 30 per cent.¹⁶⁹ However, in the context of insolvency litigation funding, commission rates can be considerably higher.¹⁷⁰ In contrast, the median rate for 'common fund' orders in class actions during the period October 2016 to December 2019 was 21.9 per cent.¹⁷¹

In class actions, the funder may also assist with project management, administration and pre-claim investigation and may charge a project management fee. Litigation funders routinely agree to provide security for costs and an indemnity to cover the risk of adverse costs orders if the proceeding is unsuccessful.

As litigation funders do not act as the legal representatives for the funded litigant, clients generally enter into two agreements: a standard retainer agreement with their lawyer recording the scope and terms under which the legal services are to be provided; and a litigation funding agreement with their funder recording the terms on which litigation funding is to be provided. Commonly, the funder and lawyers have no direct contractual relationship, although clients often authorise their lawyers to report directly to the funder and agree to funder-approved standard lawyer terms. Funders may agree to pay a proportion, or all, of a lawyer's fees during the claim. Where legal fees are partially deferred, they are generally recovered from any resolution sum if a successful outcome is achieved. The client usually authorises the lawyer to receive any resolution sum on the client's behalf to be applied in accordance with an agreed priority.¹⁷²

Funding agreements often allocate project management responsibilities and day-to-day administrative control over the litigation to the funder, allowing the funder the right to provide instructions and administrative support to the lawyers, subject to the client's overriding instructions. In theory, the ultimate level of control given to the funder might be seen to give rise to potential conflicts between the interests of the client, in achieving the best possible outcome, and the interests of the funder, in resolving the claim for an acceptable return on its investment. In Fostif, the Court of Appeal recognised that a high level of control by the funder is expected and permissible but cautioned that it would be contrary to public policy for the lawyers to fully abdicate to the funder the obligation to act for the representative party.¹⁷³ Therefore, while it is permissible for a funder to maintain day-to-day control of a claim, the legal representatives are expected to consult with the client on key issues. Hence, funding agreements often preserve the client's right to override the funder's instructions and commonly include dispute resolution mechanisms.

In the recent decision of Mitchell v Roads and Maritime Services (now known as Transport for NSW) (No 2)¹⁷⁴ the court was asked to intervene in a dispute that had arisen between a funder, on the one hand, and the funded representative plaintiffs and their lawyers, on the other. The dispute centred on the ongoing conduct of the claim and how certain funds paid by the funder into the solicitor's trust account should be dealt with. The funder sought to have the dispute referred for expert determination administered by the Australian Commercial Disputes Centre, relying on certain dispute resolution provisions of the funding agreement, whereas the funded plaintiffs sought to join the funder as a party to the funded class action and have the dispute determined by the court. As a preliminary point, the court determined, on public policy grounds, that the funder should be joined as a party to the class action proceeding.¹⁷⁵ As to the question of whether the dispute should be referred to a private determination, given the representative nature of the class action proceeding, McGrath J rejected the funder's attempts and observed:

... I consider that it is apparent from the protective and supervisory nature of the statutory provisions in Part 10 of the CPA that it is appropriate for disputes over the funding of class actions to be determined by this court rather than by way of private agreement between the parties through arbitration.¹⁷⁶

In accordance with the overarching purpose,¹⁷⁷ Justice McGrath also considered the dispute (between the funder and the client/lawyers) should be determined without the need for any separate proceeding. McGrath J proceeded to exercise the power in s 183 of the Civil Procedure Act 2005 (NSW) to determine the funding dispute, permitting the trust funds to be used for payment of legal fees incurred, with any remainder to be returned to the funder.

An agreement to purchase or assign a claim to a funder is also possible in certain circumstances. It may be structured in a number of ways, including providing for the funder to pay an upfront payment, a back-end payment contingent on success (such as a percentage of any damages recovered), or a combination of both. In more recent times, some litigation funders have purchased claims as an alternative to traditional litigation funding.¹⁷⁸ This has largely occurred in the context of insolvency litigation as a result of amendments to the Corporations Act allowing external administrators (including liquidators) to assign rights to sue.¹⁷⁹

Judicial intervention

Over the past decade, Australian courts have shown a willingness to scrutinise the commercial terms of litigation funding agreements and, in some instances (somewhat controversially), intervene if they consider funding commissions to be excessive. In Earglow Pty Ltd v. Newcrest Mining Ltd (Newcrest), Justice Murphy considered that the court had power to reduce a litigation funder's commission rate in the context of a class action when approving the settlement.¹⁸⁰ His Honour held that the court was not limited to the binary choice of either approving or rejecting the settlement – instead, the court had power to approve the settlement, while at the same time varying, of its own motion, the amount payable to the funder (thus, in effect, overriding the contractual arrangements between the funder and group members).¹⁸¹ Justice Murphy considered that this power derived from a combination of Sections 23, 33V, 33Z and 33ZF of the FCA Act, and was analogous to the court's power to fix the amount of costs payable to the lawyers.

In deciding whether to exercise that power in the context of a class action settlement approval, Australian courts have also shown a willingness to review and consider legal costs, the amount that funded litigants will receive 'in hand', the risks assumed by the funder, the amount of adverse costs exposure, and the sophistication and experience of funded litigants. Applying these principles to the Newcrest settlement approval application, Justice Murphy concluded that the aggregate funding commission of A$6.78 million, at rates of between 26 and 30 per cent, was fair and reasonable. His Honour considered the published empirical research into the funding commission rates paid in Australian class actions, and previous settlement approval decisions, before concluding that those rates were at the lower end of the range. His Honour also emphasised the need for transparency about matters relating to funding in settlement approval judgments to allow proper benchmarking.

In contrast, in Mitic v. OZ Minerals Ltd (No. 2), Justice Middleton agreed that the court had power to vary the amount payable to a litigation funder out of a settlement in a class action,¹⁸² but preferred to base that view on Section 33V(2) of the FCA Act, rather than on the other provisions referred to by Justice Murphy.¹⁸³

This issue appears not to be settled. In Liverpool City Council v. McGraw-Hill Financial Inc (now known as S&P Global Inc),¹⁸⁴ Justice Lee approved a comparatively large funding commission of A$92 million out of a total settlement of A$215 million (about 43 per cent) through a funding equalisation order, but, in doing so, considered that Section 33V(2) of the FCA Act did not give the court the power to interfere with the amount of a funding commission to make a settlement reasonable, or to alter a valid contract between parties (including a funding agreement).¹⁸⁵ In doing so, Justice Lee noted that there were no objections or applications to set aside the agreement and that a large portion of the class were sophisticated institutional investors. Although his Honour did not ultimately decide on whether the court has an inherent power to alter a funding agreement,¹⁸⁶ he did express significant doubt about the existence of such a power, which would allow the court to interfere and vary funding agreements in the context of a settlement by altering the contractual promises of group members to pay a commission.¹⁸⁷

Consequently, the question (and extent) of judicial power to vary terms of litigation funding agreements remains somewhat controversial and unresolved in Australia.¹⁸⁸ The courts have since considered this question in a number of cases and have either declined to vary the commission rate,¹⁸⁹ or, in some cases, varied the commission rate.¹⁹⁰ On 30 September 2021, the former federal government responded to the specific recommendations of the ALRC report and PJC report that the Federal Court be given an express statutory power to reject, vary or amend the terms (such as the commission rate) of such litigation funding agreements, and that litigation funding agreements (for class action proceedings) be enforceable only with the approval of the Federal Court, via the new Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation Funders (Funders Bill), which, among other things, aimed to provide the court with express statutory power to do so.¹⁹¹ The Funders Bill was introduced into Parliament on 27 October 2021 but did not pass the Senate.

A more recent decision gives an example of the overriding consideration of whether a proposed order is reasonable and just in all of the circumstances. In Gill v. Ethicon Sarl (No. 12),¹⁹² the Federal Court rejected an application under Section 33V(2) by solicitors (being a wholly owned subsidiary of an ASX listed entity) acting for a group of plaintiffs affected by serious and chronic complications caused by pelvic mesh implantations. The solicitors sought approval for a deduction of well over A$32 million out of a $300 million settlement amount, representing the accrued interest payable on two disbursement loan facilities taken out by the solicitors, which carried interest charges initially calculated at rates between 22.4 per cent and 31.8 per cent per annum. Evidence was led as to the circumstances that led to the solicitors having to resort to sourcing disbursement funding at such exorbitant rates. In a judgment that raised a range of concerns, including as to the potential for a conflict of interest for the solicitors, the calculations as to the net proceeds for the plaintiffs, whether the proposed arrangements were properly notified to the plaintiffs and the reasonableness of the settlement itself (even before the proposed deduction of the interest), Justice Lee dismissed the application in its entirety and discouraged the solicitors from making a further application.¹⁹³

Scrutiny of the commercial terms of litigation funding agreements has also arisen in the insolvency context. In Re Jabiru Satellite Limited (in liq) and NewSat Limited (in liq),¹⁹⁴ the Supreme Court of New South Wales (NSW) dismissed an application for the appointment of a special purpose liquidator seeking to pursue claims available to the companies against secured lenders. The Court determined that the appointment was not beneficial to creditors of the companies, placing considerable weight on the onerous proposed funding terms. In particular, Justice Black was concerned with the size of the potential funding fee (of at least 70 per cent of the net resolution sum), which the Court found would be 'wholly disproportionate' to the costs the funder would likely incur.¹⁹⁵

Disclosure

The Federal Court's Class Action Practice Note requires the disclosure of legal costs and any litigation funding charges to current and potential clients in class actions, in clear terms, as soon as is possible.¹⁹⁶ Broader disclosure to the court and other parties is also required in any class action.¹⁹⁷ Funded applicants are entitled to redact these materials to conceal information that might confer a tactical advantage on another party.¹⁹⁸ Commercial terms, such as the litigation budget, the commission and the costs structure, are generally redacted, whereas the court is given a complete version.¹⁹⁹ On occasion, the Federal Court has been prepared to order production of unredacted litigation funding agreements where relevant, for example, where funding rates were relevant to the respondent's application to set aside the proceeding as an abuse of process,²⁰⁰ or where an application to de-class the proceeding on the ground that a closed class was said to be an abuse of process.²⁰¹ Similar requirements as to the disclosure of funding arrangements in class actions are in place in the Supreme Courts of New South Wales, Victoria, Queensland and Western Australia.²⁰²

Conversely, outside the class action realm, there are few mandatory requirements for disclosure of funding agreements, with the notable exceptions of arbitration conducted under the Arbitration Rules of the Australian Centre for International Commercial Arbitration²⁰³ and proceedings advanced in the insolvency context.²⁰⁴ Under Section 477(2B) of the Corporations Act, a liquidator must obtain the approval of the court, the committee of inspection or a resolution of creditors before entering into any agreement that has a term (or obligations which may be discharged) beyond three months. The approval process requires an assessment by the court that entry into the agreement is a proper exercise of power and not ill-advised or improper, rather than involving the exercise of commercial judgment.²⁰⁵ Applications for approval to enter into funding agreements are often made together with further requests for that material to remain confidential and for the application to be heard in camera. This is because liquidators in Section 477(2B) applications may need to disclose commercially sensitive details, such as the terms and conditions of funding, including, for instance:

1. any limit of funding, the terms of repayment to the funder and the funder's success fee and the terms of the provision of security for costs;
2. privileged legal advice;
3. confidential details of insurance policies; and
4. confidential investigations and the liquidator's proposed strategy for future investigations.

As explained by Justice Barrett in McGrath & Anor re HIH Insurance Ltd,²⁰⁶ it is often the case that liquidators are in the unenviable position of needing approval from the court to fund claims against third parties where disclosing the details of that funding and the terms on which it is to be provided is an incidental part of obtaining approval. This sets their case apart in such a way that justice will best be served by an examination of the matters the liquidators are bound to raise with the court, in an atmosphere where they can lay them before the court fully and frankly and without any apprehension that the interests they are bound to serve will thereby be prejudiced. In considering whether to grant suppression orders, the court will consider what is necessary to prevent prejudice to the proper administration of justice²⁰⁷ and the authorities show that where the liquidators can demonstrate that the proposed proceeding would be undermined by the publication of the materials, then the entirety²⁰⁸ or the sensitive parts of the material²⁰⁹ will be suppressed.

Parties have successfully resisted production of funding agreements and documents associated with the funding relationship, such as investigative reports and correspondence between the funder and a funded party, on the ground of legal professional privilege under Section 119 of the Evidence Act 1995 (NSW) (the Evidence Act). In Hastie Group Ltd (in liq) v. Moore, the respondent successfully obtained orders at first instance for production of an expert report that had been provided to the prospective litigation funder.²¹⁰ However, the NSW Court of Appeal overturned that decision and upheld a claim of legal professional privilege. It did so on the ground that the report was prepared for the dominant purpose of the provision of professional legal services in relation to proceedings or anticipated proceedings under Section 119 of the Evidence Act, having regard to the engagement letter attached. Importantly, the Court of Appeal also held that the disclosure of the report to a litigation funder was not sufficient to waive privilege in circumstances where it was clear that the report was being provided on a confidential basis.²¹¹

The extent of the disclosure of a funding agreement was a factor in Mitchell v Roads and Maritime Services (now known as Transport for  NSW), a case which involved a third party funded class action in respect of the compulsory acquisition of land for the constructions of a tunnel as pat of the WestConnex M4-M5 Link Project. A dispute arose as to whether security for costs should be ordered in circumstances where the funder had only provided a redacted copy of the funding agreement, including redactions preventing the identity of the funder from being disclosed. The respondent made an application for an order for security for costs and sought an unredacted version of the funding agreement and details of the funder's financial position,²¹² which was refused by the funder. Justice Ball concluded there were strong reasons in support of the court exercising its inherent power, and power under s.67 of the Civil Procedure Act 2005 (NSW), to order that security for costs be provided. His Honour noted that because the litigation funder had not been named there was an inability for the respondent to determine whether the indemnity in respect of costs offered by the funder would be honoured, nor was it possible to determine how easy or difficult it would be to enforce any costs order against the funder.²¹³

Costs

Superior Australian courts generally have power to order costs against a non-party, including a third party funder. In Knight v. FP Special Assets Ltd, the High Court held that the relevant provisions of the Supreme Court Act 1867 (Qld) empowered the court to award costs against a non-party where the party to the litigation is an insolvent person or 'man of straw', and the non-party has played an active part in the conduct of the litigation and has (or some person on whose behalf that non-party has been appointed has) an interest in the subject of the litigation.²¹⁴

This principle was applied in Jin Lian Group Pty Ltd (in liq) v. ACapital Finance Pty Ltd (No. 2),²¹⁵ where the Court held a third party funder jointly and severally liable for the defendant's costs from the date security for costs was provided.²¹⁶ In this case, security for costs was ordered in the sum of A$149,000. As the plaintiff was an insolvent company and the liquidators were without funds to pay the security, the liquidators entered into a funding agreement pursuant to which the funder provided funding for the security and an adverse costs indemnity up to A$150,000. The plaintiff was ultimately unsuccessful at trial, and the defendant's costs exceeded the amount of security provided. The Court considered the matters relevant in determining whether it is appropriate to make a non-party costs order, including that the funder provided funds for the litigation, had a direct interest in the fruits of the litigation and had agreed to provide an adverse costs indemnity, and determined that each of the matters were present in this case.²¹⁷ The Court formed the view that 'but for the intervention of the Funder ... the proceeding would not have continued',²¹⁸ and stated that 'Litigation funders should be aware that if they involve themselves in pending court proceedings in circumstances where their intervention is the factor that causes those proceedings to continue and go to trial, they risk an adverse costs order'.²¹⁹

More recently, the Federal Court, in Hardingham v. RP Data Pty Limited (Third Party Costs),²²⁰ made a third party costs order against a funder in circumstances where the funding agreement expressly excluded the funding of an adverse costs order. Again, the Court emphasised that 'one obvious risk for any commercial litigation funder is that, if the funded litigation is unsuccessful, the funder might face an application that it pay the successful parties' costs. That risk arises whether or not it has agreed to indemnify the applicant against an adverse costs order.'²²¹

The limits of this principle have been tested on the related question of whether security for costs can, and should, be ordered against third party litigation funders in 'no costs' jurisdictions.²²² In Augusta Ventures Ltd v. Mt Arthur Coal Pty Ltd (Augusta),²²³ the Full Court of the Federal Court was asked to consider whether the court has power to make a security for costs order against a third party funder in a no costs jurisdiction²²⁴ and, if so, whether the order should be made on discretionary grounds.²²⁵ The Court reiterated that it retains power to stay proceedings (including by reference to considerations concerning the exposure of a litigation funder to costs) as part of its power to control its own processes.²²⁶ However, the focus is different when exercising discretion to make security for costs orders against third party funders in no costs jurisdictions. It was said the prejudice the claimants themselves would suffer from not being able to vindicate their rights, should the funder not provide such security, is inappropriate where such claimants are not ordinarily liable for costs.²²⁷ Accordingly, the Court upheld the appeal and set aside the order for security for costs originally made against the third party funder.

Similarly, in Duck v. Airservices Australia (No. 3),²²⁸ the Court considered an application for an order that the third party litigation funder pay the respondent's costs of the proceeding in a no costs jurisdiction. The Court held that the no costs jurisdiction did not prevent a costs order being made against the third party funder, but declined to exercise the discretion to make the costs order sought because it was not in the interests of justice to do so in the particular circumstances of the conduct of the proceedings.²²⁹ The Court concluded that the no costs jurisdiction is but one factor to consider in the exercise of the court's broad costs discretion, and that the conduct of the litigation is always likely to be an important consideration.²³⁰ The Court attached considerable weight to the efficient determination of the proceedings, especially by way of a separate question, which saved substantial costs and court time, and stated that it was very much in the interests of justice to encourage this sort of conduct, especially by the potent exercise of the costs discretion.²³¹ However, the Court recognised that a costs order might be warranted against a funder in certain circumstances, for example, if the proceeding was instituted vexatiously or without reasonable cause, or if there was an unreasonable act or omission in the conduct of the proceedings that caused the respondent to incur costs.²³²

However, examples exist where a litigation funder did not provide any contractual indemnity against adverse costs and where the court subsequently refused to order that third party funder to pay adverse costs. In Jeffery & Katauskas Pty Ltd v. SST Consulting Pty Ltd (SST), the High Court held that it was not an abuse of process where a plaintiff was unable to meet an adverse costs order simply because the funder had not assumed any liability for adverse costs.²³³ In that case, the defendant had not sought adequate security for costs during the proceeding. The High Court clarified that a litigation funder does not always have to put the funded party in a position to meet any adverse costs order.²³⁴

At the time, the High Court's SST decision generated apprehension from some quarters, suggesting that funders might refuse to provide indemnities for adverse costs to the detriment of successful respondents. Perhaps as a result of commercial realities and market competition, these fears have not materialised.²³⁵ In practice, litigation funders routinely agree to indemnify clients against adverse costs exposure and provide security for costs that may be ordered. Representative applicants in funded class action claims will often not be prepared to assume personal liability for costs without such indemnities.²³⁶

Where security for costs has been sought in funded litigation, the adequacy and form of security proposed by some funders has also given rise to disputes. In Domino's Pizza Enterprises Limited v. Precision Tracking Pty Ltd (No. 2), the funded party opposed a security for costs order being made on the grounds that there was no risk that a costs order would not be satisfied because of the combined effect of the litigation funding indemnity, an adverse costs insurance policy and proposed undertakings by Precision Tracking Pty Ltd to notify the parties of any relevant change of funding circumstances.²³⁷ The Court ordered security for costs to be lodged, concluding that Precision Tracking did not have the capacity to meet an adverse costs order; the funding agreement restricted the indemnity to a counterclaim in the proceedings; and the adverse costs insurance was taken out for the primary claim. Additionally, the funder had absolute discretion to terminate its funding arrangements with Precision Tracking at any time, including the adverse costs indemnity and the adverse costs insurance.

The adequacy of adverse costs insurance as a form of security was again tested in Petersen Superannuation Fund Pty Ltd v. Bank of Queensland Ltd (Petersen)²³⁸ and Equititrust Limited v. Tucker.²³⁹ In the Petersen case, Justice Yates accepted that, depending on the circumstances, 'an appropriately worded ATE policy might be capable of providing sufficient security for an opponent's costs'; but on the facts of Petersen concluded that the specific policy offered was not sufficient, noting the beneficiary of the policy was the applicant, not the respondents.²⁴⁰ His Honour also found that there was no mechanism by which the respondents could compel the applicant to sue on the policy if it were breached. Although this could potentially be overcome by direct proceedings against the insurer under the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), there were other potential difficulties, including numerous policy exclusions that might be relied on, and a lack of evidence in relation to procurement of the policy that might have an impact on non-disclosure and avoidance rights.

The costs of providing security, including the costs of obtaining an after the event (ATE) policy, will typically be borne by funded clients either indirectly in the sense that they are absorbed in the funding commission, or directly in that they are recovered through a payment made to the funder of an amount in addition to the funding commission.²⁴¹ The ability of a funder to recoup the costs of obtaining an ATE policy in a funded class action was recently considered in Asirifi-Otchere v. Swann Insurance (Aust) Pty Ltd (No. 3).²⁴² In approving a settlement by way of a common fund order, the Court decided that the costs of obtaining an ATE policy should not be passed on separately to group members when the court controls the remuneration, but should be incorporated into the commission paid to the funder. The Court noted that it is a matter for the funder whether to obtain an ATE policy to defray the risk of providing an adverse costs indemnity.²⁴³ A similar approach was adopted in Equity Financial Planners Pty Ltd v AMP Financial Planning Pty Ltd,²⁴⁴ where the Court did not allow a separate deduction for ATE policy costs, not only because it compensated the funder for a cost of defraying a component of the very risk which it contracted to accept, but also because allowing the funding commission plus the proposed deduction for ATE costs produced an overall commission which was excessive and outside of the range of what is fair and reasonable. These two cases can be distinguished from Ewok Pty Ltd v Wellard Limited, where the Court allowed the deduction for ATE costs in addition to the funding commission on the basis that all 23 group members in the closed class proceeding, each of whom were institutional investors, had entered into funding agreements and agreed to the funder being reimbursed for such costs.²⁴⁵

Outlook and conclusions

The litigation funding landscape in Australia continues to grow and evolve into a more sophisticated market. In the past 18 years, the common law has steadily refined and clarified the regime's requirements since the High Court's seminal decision in Fostif. Increased competition, coupled with the availability of group costs orders in Victoria, have driven innovation, and while the first part of the 2020s saw a dramatic hardening of the regulatory environment, particularly in relation to class action and multiparty litigation funding, that trend is now reversing under the current federal government.

Clearly, some important steps in the evolution of litigation funding in Australia have been the progressive abolition of the torts of maintenance and champerty across various states of Australia. Comity and uniformity would hopefully see the remaining few states and territories follow suit in this respect. The introduction of damages-based contingency fees for lawyers in Victoria has also been significant, with numerous group costs orders now made since the commencement of Section 33ZDA of the Supreme Court Act 1986 (Vic) in July 2020 and the first group costs order approval made in August 2024. The likelihood, given the clarity of the procedural framework, is that further group costs orders will be sought for class action matters, further entrenching the Supreme Court of Victoria as a jurisdiction of choice. The recent Full Federal Court decision to approve a Solicitors' CFO in the Blue Sky matter and changes to harmonise the damages-based contingency fee provisions for class actions in other states and territories, and federally, present an opportunity for lawmakers and regulators to adopt a key ALRC report recommendation, enhance consumer choice and provide new pathways for access to justice.

Key issues for determination in the year ahead will be the federal parliament's long awaited response to the ALRC report. The extent of judicial power available to make CFOs at settlement by reference to Section 33V of the FCA Act is also likely to be considered by the High Court of Australia. Irrespective of the outcome, the adoption of the common fund doctrine in class actions since the QBE decision has no doubt improved fairness and equity between class members and enabled funders to better consider the commercial viability of multiparty claims, while decreasing the need to engage in costly and time-consuming client book-building. Should the High Court further constrain CFOs in class actions, there will be a stronger case for regulatory intervention, as recommended by the ALRC report. As Justice Beach lamented in McKay Super Solutions Pty Ltd (Trustee) v. Bellamy's Australia Ltd:²⁴⁶

'Trial judges need flexible tools to regulate these funding arrangements and to tailor solutions to each individual case. And preferably that regulation should take place closer to the outset of proceedings rather than at the other end, particularly where competing class actions are in play.'

In considering the regulatory pathway ahead it is worth reflecting on the objectives outlined in the second reading speech for the introduction of Australia's class actions regime made back in 1992. During that period, the (then) Attorney General, the Honourable Michael Duffy, said:

'[t]he new procedure will enhance access to justice, reduce the cost of proceedings, and promote efficiency in the use of court resources'.²⁴⁷

Despite these noble objectives, espoused by parliament over 30 years ago, the ever-swinging compliance pendulum regulating litigation funding in Australia has seen the market taken to the crossroads. Fortunately, over the last two years positive signs have emerged. The evidence to date suggests that the current federal government will continue to embrace a more pragmatic, evidence-based and feasible regulatory environment, which should enhance access to justice.