There is no legislation or regulation in Australia that limits the fees that funders can charge.
The High Court in Fostif held that contract law considerations such as illegality, unconscionability and public policy may still arise in relation to a litigation funding agreement, but there is no objective standard against which the fairness of the agreement may be measured. Accordingly, whether a particular clause in a litigation funding agreement may contravene public policy will be answered having regard to the circumstances of each particular case.
Theoretically, Australian courts could set aside a litigation funding agreement where the funder’s interest constituted an equitable fraud in the sense that it involved capturing a bargain by taking surreptitious advantage of a person’s inability to judge for him or herself, by reason of weakness, necessity or ignorance.
Australian courts exercising equitable jurisdiction can set aside bargains where terms are harsh or unfair. The High Court in Commercial Bank of Australia v Amadio (1983) 151 CLR 447 restated the principles relating to unconscionable conduct. A court may set aside a bargain as unconscionable if one party, by reason of some condition or circumstance, is placed at a special disadvantage compared to another and the other party takes unfair or unconscientious advantage of that special disadvantage. In those circumstances, the innocent party may be relieved of the consequences of the unconscionable conduct. In Kakavas v Crown Melbourne Limited (2013) 250 CLR 392 HCA 25, a gambling addict sought to avoid losses with a casino, arguing that the casino had taken unconscionable advantage of his vulnerability. The court, in rejecting his claim, ruled that inequality of bargaining power was relevant, but not essential to establish unconscionability and that a party must rely upon standards of personal conduct known as ‘the conscience of equity’. The High Court drew a clear distinction between the equitable principles of unconscionable conduct and undue influence.
Prohibitions against unconscionable and misleading or deceptive conduct that may apply to dealings between litigation funders and funded litigants are also reflected in general consumer protection provisions in the Competition and Consumer Act 2010 (Cth) and provisions in the Australian Securities and Investment Commission Act 2001 (Cth).
The Federal Court Class Actions Practice Note (GPN-CA) requires disclosure to group members which are clients or potential clients of the applicant’s lawyers regarding applicable legal costs or litigation funding charges in class action matters, and sets out the manner in which these arrangements should be communicated. The court must also be provided with a copy of any litigation funding agreement. Disclosure of a litigation funding agreement to other parties to the litigation is also required, with the disclosure being redacted to conceal information that might reasonably be expected to confer a tactical advantage.
While not a means of formally limiting litigation funding charges, settlements in funded class actions (including the amounts allocated for the payment of a funder’s fee) are subject to approval by the court.
In a number of recent cases the courts have made common fund orders, both as part of a class action settlement and also at an early stage of proceedings. A common fund order has the effect of binding all members of the represented group to the terms of a funding agreement, not just those who have executed the agreement. Common fund orders are made pursuant to the statutory protective and supervisory role that the courts are required to assume to do what is appropriate and necessary to ensure justice is done in the class action proceedings. As the common fund order involves the court imposing on unfunded class members an obligation to contribute to the payment of costs of the litigation without their consent, the courts are concerned that the terms imposed, insofar as is possible, deliver certainty and do not result in any group members being worse off. The purpose of the common fund order is to equalise the distribution of damages so that unfunded claimants must also contribute to the costs of the claim, including the funder’s fee. It was observed in Money Max Int Pty Ltd (trustee) v QBE Insurance Group Limited (2016) 245 FCR 191 FCAFC 148 at :
We expect that the courts will approve funding commission rates that avoid excessive or disproportionate charges to class members but which recognise the important role of litigation funding in providing access to justice, are commercially realistic and properly reflect the costs and risks taken by the funder, and which avoid hindsight bias.
While there are trends emerging in the common fund orders that are being made, there is as yet no uniformity and there is no certainty of outcomes for funders or class members. Points of distinction in the common fund orders made in the year in review are whether the order is net or gross of the funder’s costs, capped to the lesser of a percentage of the funder’s capital deployed or involve a minimum recovery guarantee.
A trend in the year in review has been the increased prevalence of competing overlapping class actions and how the courts have sought to manage multiplicity through the application of case management principles. A feature of these multiplicity disputes has been the courts evaluating the hypothetical returns to class members from the competing funding proposals. This increased competition has placed downward pressure on pricing.
In respect of common fund orders Lee J in Lenthall v Westpac Life Insurance Services Limited[ 2018] FCA 1422 said that a percentage cap on a funder’s commission under a common fund order may lead to a ‘spurious air of authority to the figure, in the sense [of] communicating a default position’. In Lenthall, Lee J proposed a funding rate of the lesser of three times the total amount spent on legal costs, disbursements and adverse costs orders, or 25 per cent of the gross recovery upon resolution of the proceedings. Lee J’s exercise of discretion in Lenthall was upheld on appeal.
In Brewster v BMW Australia Ltd  NSWCA 35, the Supreme Court of New South Wales Court of Appeal upheld an order capping the funder’s share of the proceeds of litigation to an amount based upon a multiple of the total amount paid by the funder so as to prevent the order from yielding a benefit which is out of all proportion to the capital deployed and the risk assumed by the funder. The court doubted that an interlocutory order:
[W]hereby a funder becomes contingently entitled to a return which might be out of all proportion to the capital deployed and put at risk, is one which is appropriate or necessary to ensure that justice is done.
The decision of the Full Court of the Federal Court in Lenthall and the Court of Appeal in Brewster upholding the validity of common fund orders are on appeal to the High Court of Australia. Issues on appeal to the High Court involve constitutional questions, including whether making a common fund order involves the court acting in a manner that is inimical to the judicial function in breach of the doctrine of the separation of powers, and whether a common fund order involves the acquisition of property on other than just terms. At the time of publication the appeals have been heard and judgment is reserved.
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