The Situation: The Australian Federal Government has released a draft exposure bill, the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation funders ("Draft Bill"), that proposes significant changes to Australia's class action regime. The Draft Bill adds to earlier class action regulatory reforms, including regulations which require litigation funded class actions to comply with the 'managed investment scheme' ("MIS") requirements in the Corporations Act 2001 (Cth) and litigation funders to hold an Australian financial services licence.
The Result: The Draft Bill aims to further regulate litigation funding in the class action context through the MIS regime. If passed by Federal Parliament, the Draft Bill would effectively cap the fees paid by class members to lawyers and litigation funders at 30% of any settlement or award of damages. The Draft Bill would also give courts the power to vary a proposed distribution to ensure it is 'fair and reasonable'. Further, payment of the funder's fee would be limited to class members who expressly sign up to the scheme, rather than all class members who fall within the class definition.
Looking Ahead: The proposed reforms, if passed, would constitute some of the most significant reforms to Australia's class action regime in recent history and have the potential to place downward pressure on the number of class actions commenced, by placing an upper limit on the returns litigation funders may achieve and restricting the payment of fees to members of the scheme.
The Draft Bill makes clear that 'a class action litigation funding scheme' is an MIS, in line with an earlier ruling of the Federal Court of Australia in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd  FCAFC 147. This express statutory recognition of such schemes as MISs seeks to render ineffective any attempts to overcome regulation of litigation funding through parties challenging that court decision in subsequent litigation.
The Draft Bill also adds requirements for a class action litigation funding scheme's constitution, including:
- Class members must agree in writing to be a member of the scheme, and be bound by the terms of the scheme's constitution;
- Each funding agreement for the scheme must include a 'claim proceeds distribution method' for determining the amount of any claim that is to be paid to the scheme's general members;
- The funding agreement must be subject to Australian law;
- The funder must pay for any court-appointed referee who examines the reasonableness of the funders fee and/or any contradictor as to whether to make any order to approve or vary the agreement's claim proceeds distribution method;
- The scheme's responsible entity must not be paid any amount in relation to the scheme that is greater than the entity's reasonable costs for managing the scheme.
The court may approve or vary the claim proceeds distribution method to ensure that the method is fair and reasonable in relation to the interests of the scheme's general members as a whole.
The Draft Bill sets out a range of factors that the court 'must only have regard to':
(a) in relation to the proceedings, the following: (i) the amount, or expected amount, of claim proceeds for the scheme; (ii) the legal costs for the proceedings incurred by the funder and the extent to which those legal costs are reasonable; (iii) whether the proceedings have been managed in the best interests of the general members to minimise the legal costs for the proceedings; (iv) the complexity and duration of the proceedings;
(b) the extent of the commercial return to the funder for the scheme in comparison to the costs incurred by the funder in relation to the scheme;
(c) the risks accepted by the parties to the agreement by becoming parties to the agreement;
(d) the sophistication and level of bargaining power of the general members in negotiating the agreement;
(e) any other compensation or remedies obtained by any of the scheme's general members in relation to the transactions or circumstances that are the subject of the class action litigation funding scheme;
(f) any other factors prescribed by regulations made for the purposes of this paragraph.
The court must also receive and consider the reports of the referee and contradictor referred to above 'unless it is not in the interests of justice to do so'.
The Draft Bill would also establish a rebuttable presumption that a return to the general members of a class action litigation funding scheme of less than 70% of their gross proceeds is not fair and reasonable. The Draft Bill follows the recommendations of a report by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding and the regulation of the class action industry released in December 2020 ("Report"). The Report referred to a finding by the Australian Law Reform Commission that the median return to class members, up to 2018, was 51% for funded claims, as opposed to 85% for claims where litigation funders were not involved. In announcing a consultation process on the proposed 30% cap to fees in May 2021, the Attorney-General said it was 'of particular importance to ensure successful applicants were adequately compensated in their cases as well as preventing litigation funders and law firms from taking disproportionate fees in the process'.
The Draft Bill also has the effect, through specifying the condition for the enforceability of a litigation funding agreement, that a court would not make orders which extend the funder's fee or commission to class members who are not members of the class action litigation funding scheme (i.e., who have not agreed in writing to become a member of the scheme).
Three Key Takeaways
1. The Draft Bill provides the courts with express power to obtain expert assistance (through the independent referee and contradictor) in the review of litigation funding fees and to ensure that the fees charged by a funder are fair and reasonable. The Draft Bill also creates a rebuttable presumption that a fee that results in the class members receiving less than 70% of gross proceeds from a class action is not fair and reasonable.
2. The Draft Bill would appear to end the practice of making of orders for nonfunded class members (i.e., class members who have not signed an agreement with a litigation funder but who fall within the class definition) to contribute to the costs of the litigation, such as through a common fund order. It would also mean that class actions with litigation funding would most likely be brought using a closed class definition which would necessitate reliance on 'book building' to sign up class members to the scheme. However, this may precipitate an increase in competing class actions as not all class members may be included in one class action.
3. The Draft Bill constitutes one of the most significant proposed changes to Australia's class action scheme in recent history. It has the potential to place downward pressure on the number and size of class actions commenced by placing an upper limit on the returns litigation funders may achieve and restricting the recovery of fees to members of the scheme. We will continue to monitor the progress of the Draft Bill and provide updates to clients in future publications.