A submission from the Litigation Lawyers Section of the Law Institute of Victoria (LIT.13)

Transcription

1 Submission Litigation Lawyers Section Review of Litigation Funding in Australia To: Standing Committee of Attorneys-General A submission from the Litigation Lawyers Section of the Law Institute of Victoria (LIT.13) Date: 4 October 2006 Queries regarding this submission should be directed to: Contact person Elissa Campbell Ph (03) ecampbell@liv.asn.aul Law Institute of Victoria (LIV). No part of this submission may be reproduced for any purpose without the prior permission of the LIV. The LIV makes most of its submissions available on its website at

2 Contents 1. Introduction Executive Summary Response to discussion questions

3 1. Introduction In September 2005, the Standing Committee of Attorneys General (SCAG) agreed that further consultation and research should be undertaken into regulating the litigation funding industry. In May 2006, SCAG issued a discussion paper entitled Litigation Funding in Australia, which sets out the legal context of litigation funding and litigation funding companies (LFCs). The Law Institute of Victoria (LIV) welcomes the opportunity to comment on the issues raised in the discussion paper. 2 Executive Summary In summary, the LIV supports a litigation funding regulatory regime that involves: (a) (b) (c) (d) (e) (f) a retainer between the solicitor and the plaintiff; a prohibition on that same solicitor acting for the LFC; disclosure by solicitors and LFCs to plaintiffs; prudential regulation of LFCs; the imposition of restrictions on LFC initiated termination after the commencement of proceedings to ensure that plaintiffs receive the benefit of litigation funding agreements; and allowing solicitors to regard the risks of litigation borne by a LFC as that of the client. The LIV considers that such a regulatory regime would provide protection for the plaintiffs in a funded matter without imposing obligations that would stifle the ability of either a LFC to conduct its business commercially or a solicitor to run cases efficiently. 3 Response to discussion questions The LIV notes that the use of litigation funding was initially met with caution by policymakers and the judiciary. Richardson and O'Brien succinctly outlined their primary concerns: The perceived problems with [litigation] funding are essentially twofold. First, the plaintiff s interests will be subordinated to those of the funder, with a concomitant incentive for improper interference in the proceeding (the subordination argument) and second, the fear that profit-motivated litigation funding will lead to an increase in speculative litigation (the floodgates argument). 1 Despite these initial concerns, the involvement of a third party litigation funding company is now widely regarded as a means of increasing access to justice. It is further acknowledged that a well-resourced LFC can help level a playing field on which insured defendants can often overwhelm small plaintiffs. In the recent High Court case of Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd 2 (Fostif s case) Justice Kirby stated: In considering the accusations that the funding arrangements introduced by [the LFC] into the present proceedings amounted to an abuse of process, it is necessary to keep in mind the particular demands inherent in representative proceedings: the need to marshal effectively substantial resources; to gather voluminous evidence; to retain and pay competent counsel over a significant period; often to provide in advance for security for 1 Jamie Richardson and Michael O Brien, Men in Tight Financial Situations: Litigation Funding in the 21 st Century (2005) 79(12), p [2006] HCA 41. 3

4 costs; to attend both to the general issues and to those particular to identified subcategories and individual cases; and to prove consequential losses usually with the evidence of several experts. In proceedings such as the present, faced with such daunting requirements, the ordinary tobacco retailers [the plaintiffs in the action] would commonly give up Individually, for most or all of them, enforcement of legal rights would not be worth the cost, risk or effort. 3 In its discussion paper, SCAG has outlined issues that are essentially concerned with consumer protections for funded plaintiffs. The LIV considers that these proposals can be broken down into the following two categories: (1) Regulation of: (a) (b) (c) (d) the terms of the litigation funding agreements; what mandatory disclosures ought to be made in respect of the terms of such agreements; the relationship between the plaintiffs, LFCs, and solicitors on record; and what third parties (other than the courts) should have oversight of litigation funding (such as prudential regulation by APRA and/or financial services licensing by ASIC); and (2) Increasing competition: in the litigation funding market (including the creation of a litigation insurance market) to ensure that terms are commercial. In keeping with the general tenor of the issues raised, the LIV s submission concentrates on responding to discussion questions that involve litigation funding of multi-party actions in a noninsolvency context. 3.1 Should laws against maintenance and champerty be repealed in those jurisdictions where the tort or crime continues to exist (Western Australia, Queensland, Tasmania and the Northern Territory)? The LIV considers that the increasing costs of litigation and the difficulty in achieving equality in access to justice mean that the rights of plaintiffs to access the legal system ought to be prioritised over historical concerns about the capacity of third parties who fund litigation to obtain a return on their investment for doing so. The LIV also agrees with the majority of the High Court in Fostif s case that the key question is whether or not a particular litigation funding arrangement gives rise to an abusive process. Therefore, the LIV supports the response of IMF (Australia) Limited (IMF) to the SCAG discussion paper, which states that the legislation should assign the relevance of the common law concerning maintenance and champerty exclusively to consumer protection and in particular the enforceability or otherwise of litigation funding agreements. This would prevent defendants advancing their own interests via satellite litigation while taking up the cudgels ostensibly on behalf of funded litigants Should a direct contractual agreement between the solicitor and the plaintiff be required in all funded actions? The LIV considers that the plaintiff ought to directly retain the solicitor on record in all funded actions. An important distinction between the obligations and duties of legal practitioners and litigation funders is that the conduct of legal practitioners and the extent 3 Ibid at para IMF (Australia) Ltd, Discussion Paper: Litigation Funding in Australia, 11 August p. 7. 4

5 and nature of their duties to clients are well articulated in the legislation and common law governing professional conduct. In particular, the LIV notes that legal practitioners have a well defined duty to their clients and the court which they cannot subordinate to any conflicting personal or financial interest. Even in the absence of a direct contractual relationship between a plaintiff and the solicitor on record, the plaintiff will be owed fiduciary obligations in the same manner as duties are owed to an unidentified member of a represented class. However, in the interests of avoiding potential conflicts of interest from the outset (rather than creating remedies in the event of any subsequent breach), it is vital that any legislative scheme leaves no doubt as to the identity of the solicitor s client. Following a decision to fund proceedings, it is clear that the LFC will have a strong interest in ensuring that the plaintiff s proceedings are successful. For the most part, there will be a community rather than a conflict of interest between the two contracting parties. Nevertheless, there should not be any doubt that the LFC is a third party to the proceedings and that its commercial interests cannot take precedence over those of the plaintiff. There are a number of situations where a lawyer s advice might vary depending on whether the primary duties are owed to a plaintiff or funder, including: (1) Settlement: a proposed settlement in a multi-party action might be commercially attractive to a LFC (due to the size of a global resolution sum) even though a solicitor regarded that the damages payable to the majority or even particular subgroups of class members were insufficient; and (2) Pleadings / Conduct: although a LFC shares the plaintiff s interest in the success of the proceeding, the company will also seek to reduce the costs of the proceeding along the way. Such measures will generally be in the interests of the plaintiff. However, for instance, a solicitor must be in no doubt as to whom their duties are owed when a LFC argues that certain viable causes of action ought not to be pleaded in an effort to reduce costs. Further, a direct retainer with the plaintiff will ensure that the solicitor complies with the disclosure requirements mandated by professional standards legislation, including the provision of a costs estimate, outlining complaints procedures and informing clients of their right to independent advice. This is necessary in order to ensure that often vulnerable clients are kept informed about, and given the right to instruct in relation to, the prosecution of their claims. 3.3 Should the criteria for legally acceptable funding agreements be formalised? 3.4 If so, should this be in the form of either or both of a list of relevant criteria, a set of required terms or disclosure requirements in the agreement, or should this be in some other form? The LIV generally supports the submissions of IMF in respect of this issue but notes the following. The LIV is concerned by the ability of LFCs to retain an absolute right of termination in respect of litigation funding agreements. 5 While the LIV appreciates the commercial sense that such a termination represents to LFCs, one of the main benefits offered to a potential plaintiff by a LFC is an indemnity against any order for adverse costs. 5 See, for example, Claires Keeley (a firm) v Treacy & Ors [2003] WASCA 299 at para 53. 5

6 The LIV considers that there would be a considerable injustice inflicted upon the plaintiff if a LFC were to unilaterally terminate a funding agreement after a trial had commenced and it had become apparent that there was a strong prospect of defeat. In such a case, the lead plaintiff(s) in a multi-party action would bear the adverse costs risk alone with little prospect of extricating themselves from the proceedings. Similarly, it would be unfortunate for a LFC to abandon litigation after the commencement of proceedings only because it had failed to recruit a sufficient number of clients to make the action commercially viable. This could leave the lead plaintiff(s) with a choice between seeking a discontinuance (and the associated costs orders) or paying the costs of the solicitors and bearing the risks of litigation thereafter. The LIV does not believe that the LFCs would willingly choose to exercise a termination right in the manner described due to the impact upon their reputations. Nevertheless, there is an inherent conflict faced by a publicly-listed LFC whose shareholders might question why the directors chose not to use an unfettered contractual escape clause and instead face a potentially crippling loss. The LIV believes that plaintiffs commit to the payment of relatively high commissions in reliance on the fact that they will receive the benefits promised by LFCs, not only in funding the claims, but also in the event of defeat. For this reason, the LIV submits that following the commencement of proceedings, a LFC s right to terminate the agreement should be qualified. The LIV also considers that the solicitor ought to be mandated to regard the risk of any adverse costs order which would be borne by the LFC pursuant to any funding arrangement as though it was a risk to be borne by the plaintiff (its client). The LIV does not believe that the proposed regulations will impede the ability of a LFC to fund viable claims. Instead, it would ask that LFCs ensure the commercial viability of an action and are satisfied in relation to prospects of success prior to the commencement of proceedings. Given the apparent focus of any proposed legislation on consumer protection, the LIV would urge that further submissions be sought from affected parties about this matter. One proposal is that any such right of termination without cause could only be exercised prior to the commencement of proceedings with more qualified rights thereafter. 3.5 Should disclosure and other requirements be imposed on LFCs when they enter into non-insolvency funding agreements? 3.6 If so, what should the requirements be? The importance of disclosure will vary greatly depending on the experience and background of the plaintiff(s) concerned. As a general rule, multi-party litigation will often involve individuals with limited litigation experience and without the means to protect their own legal interests. While there are obvious exceptions, there is less harm visited by giving too much disclosure to a wellinformed plaintiff than insufficient disclosure to an inexperienced plaintiff. The LIV notes that many inexperienced plaintiffs will not seek independent counsel despite being encouraged to do so. Given this, the LIV submits that LFCs ought to be required to provide a brief guide written in simple language that outlines the central terms of the agreement, including the: (a) (b) (c) cooling off period; definitions of success; fees and/or commissions payable and the priority order of payments; 6

7 (d) (e) scope of indemnities and/or other benefits offered; and circumstances in which the agreement could be terminated by either party and the consequences of such termination. The provision of such guides (in a common format and containing common information) will become of particular benefit to clients who would be able to use the information to make comparisons between different litigation funding options as the market grows. The LIV notes that there is some apparent resistance on the part of certain LFCs as to whether they ought to be regarded as financial service providers and therefore obliged to operate pursuant to an Australian Financial Services Licence (AFSL). Irrespective of whether this is the case, the LIV does not believe that the provisions of a Financial Services Guide or Product Disclosure Statement provide a suitably accessible and therefore meaningful disclosure to prospective clients of the fundamental terms and conditions of the agreement. 3.7 Should LFCs be subject to prudential regulation? The LIV generally supports the submissions of IMF in respect of this issue. 3.8 Should LFCs be subject to mandatory disclosure requirements? See responses to questions 3.5 and Should explicit measures to ensure independence of lawyers from LFCs be introduced? In response to issue 3.2, the LIV expressed its support for the requirement that there be a direct contractual relationship between plaintiffs and the solicitor on record. The LIV further believes that the solicitor on record for the plaintiff should not also be permitted to act as the solicitor for the LFC. This is vital in order to ensure that no conflicts of interest arise. It will be necessary, however, to ensure that any such regulation is drafted so as to protect the communications that will necessarily occur between the solicitor and the LFC in the conduct of a funded matter. In a funded action, the LIV submits that the interests of the LFC are subservient in the mind of the solicitor to his or her duty to the court and duty to the client. By ensuring that the client is the plaintiff, the LIV believes that the potential for any abuse of process or conflict of interest to the detriment of the plaintiff is minimised. In response to issue 3.4, the LIV submitted that solicitors ought to be able to treat the risks borne by a LFC under a funding agreement as if it were a risk to the client. Confining the scope of a lawyer s professional duties to the interests of the plaintiff could require a lawyer to pursue doomed litigation on behalf of a plaintiff who was not exposed to any risk. Seeking to discontinue the proceedings in such circumstances would be in the interests of justice, the interests of the LFC and ultimately, the LIV submits, is what a reasonable solicitor would be likely to advise his or her client to do in the absence of an indemnity. The LIV does not believe that there are any additional requirements that would be workable in practice. This is because the most beneficial arrangement to all parties will depend greatly on the nature of the particular matter Should these be in the form of prohibitions on certain dealings between LFCs and lawyers, standard terms in contracts between LFCs, lawyers and plaintiffs, or some other form? See response to question