Despite recent court rulings favouring and encouraging the settlement of disputes outside of court, Justin Whealing discovers that litigation funders and law firms are still running plenty of class actions.

Litigation funding has been one of the most hotly debated areas of the law from both the view of legal professionals and the public for many years now. On one side, there is the argument that litigation funding arrangements need to be more accountable and transparent. On the other, there is the argument that those defending class actions need to be more open to the early resolution of disputes.

Earlier this year, litigation funders were given a lifeline with the decision of the Federal Government to give certainty to funders and plaintiff law firms by reversing a Federal Court ruling that threatened the very existence of litigation funders. But such a lifeline is somewhat tattered by factors including the introduction of the Civil Dispute Resolution Bill 2010 - that seeks to encourage the settlement of disputes before matters reach court - alongside increasing media scrutiny of the actions of litigation funders and plaintiff law firms, as well as calls from the bench for greater transparency with regard to contingency fees and the costs involved in using litigation funders.

Funders fought the law and won

In October 2009, a full-bench Federal Court ruled in the case of Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd that private entities involved in litigation were participating in an unregistered managed investment scheme and were therefore in breach of the Corporations Act.

This ruling meant that litigation funders would be required to hold Australian Financial Services Licenses, threatening the conduct of current and future class actions.

Shortly afterwards, ASIC put in place transitional arrangements that guaranteed the litigation funding arrangements of class actions threatened by the Federal Court ruling until 30 June. Chris Bowen, the Minister for Corporate Law, bailed the litigation funders out in May by announcing that he would reverse the decision of the full bench of the Federal Court, carving out class actions and proof of debt arrangements from the definition of a managed investment scheme in the Corporations Act.

"Imposing the managed investment regulatory regime on class actions would have the unintended consequence of restricting consumer access to funded class action arrangements -- either due to the increased costs, or because of the withdrawal of litigation funders and class action lawyers from the market due to the increased compliance burden," Bowen said at the time.

Sections of the legal fraternity expressed disquiet that by not properly regulating litigation funding arrangements, there remained a risk that the instigation of class action proceedings would be more about money than justice.

Stuart Clark, the chief operating officer at Clayton Utz, told the ABC at the time that "more and more players are coming into the industry; it is an extraordinarily profitable one and unfortunately that has a tendency, as we've seen in the past, to introduce some more marginal players".

Not surprisingly, that view is countered by the litigation funders.

"We did welcome the finding that we [litigation funders] are not a managed investment scheme," says John Walker, the executive director of IMF, the largest litigation funders in Australia. "However, this decision didn't lead to a rush of new class action cases."

Ken Adams, a Melbourne based commercial litigator and partner with Freehills, is one of the leading lawyers on the defendant side of class actions. He is comfortable with Bowen's decision, but would like to see more regulation in the industry. "The Corporations Act is not really an appropriate model for the regulation of litigation funding, so I am inclined to think this is the correct view," he says. "However, the Minster's statement has removed what might have been a permanent natural barrier towards prospective actions."

This is a view echoed by Belinda Thompson, a commercial litigation partner with Allens Arthur Robinson.

"Bowen's announcement highlighted that litigation funders were participating in an unregistered managed investment scheme, but they would not be managed like a managed investment scheme, with the associated rules of disclosure and transparency," she says.

"What was not addressed was how are we going to regulate this? We would like to see the parameters of the arrangements funders have with clients - such as the risk position of funders, in order for our clients to know what their chances are of recouping costs."

In the long-term, the head of Slater & Gordon's Victorian project and commercial litigation team, James Higgins, acknowledges that reform is needed, and probably inevitable. He believes that the current system, which sees lawyers not able to take contingency fees, which is a percentage of the recovery available to litigation funders, does not make sense from a public policy perspective.

"In effect, it is a doubling of costs, as you have two businesses, two overheads and two sets of employees both trying to achieve a reasonable return from an act of litigation."

Higgins can see a future where the law firms and the litigation funders are competitors, not partners, something that John Walker from IMF also envisages.

"While it is a horrific thing to say for some members of the community, contingency fees make sense," he says. "What will happen is that lawyers will become funders, which is what we are in effect when we run no win no fee cases, and funders will become lawyers, and I would welcome such changes."

Litigation funders and law firms

Australian litigation funders typically pay the cost of litigation, including the legal fees, and bear the risk if the case fails. Their cut of any particular settlement or court victory varies from client to client, but usually ranges from 20 per cent to up to 70 per cent.

IMF is Australia's largest litigation funding firm. A publicly listed company, it funds legal claims in excess of $2 million. It hops into bed with plaintiff firms such as Slater & Gordon and Maurice Blackburn when it launches a class action or seeks a financial settlement on behalf of aggrieved individuals or companies, often after conducting preliminary investigations and asset tracing.

IMF's commission is usually in the vicinity of 20 to 45 per cent of any payment.

"Every claim we look at individually, but there are ones that have genetic factors, like market protection issues or shareholder claims," Walker says. "Our initial process is to test these claims against five or six investment protocols, and if it fits, we will look to take it on."

Those protocols include whether the alleged victims have the capacity to pay, the strength of the case and whether the matter is at what Walker calls the "heinous end" of behaviour scale.

"We look at whether there is anger out there, whether it fits in to the heinous end of the spectrum of behaviour," he says. "We are not in the business of pinging people for negligence, such as if a forecast to shareholders is incorrect, but the intent was to be accurate, we are in the business of taking claims on if they have made people angry."

Once the decision is taken by funders such as IMF to take a matter on, the law firms are contacted. Walker says his company doesn't have formal links with any firms, and that IMF has referred work to 20 or more firms in the past.

Bernard Murphy, the chair of the board of Maurice Blackburn, says that they don't have any formal links with any of the funders, and that work comes in through a variety of ways.

"We approached Omni Bridgeway to run a case on the abalone virus on behalf of a large number of clients, but for the Multiplex case, we approached ILF Pte," Murphy says. "Because we are the largest law firm in this space doing class actions, if a major civil wrong occurs somewhere, such as a major shareholder disaster, the release of an abalone virus into the abalone stock or bushfires, there is a fair chance someone will bring it to us via some route."

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