IN LIMBO: Recent court decisions have halted the wave of enthusiasm for litigation funding

The pendulum has swung away from entrepreneurial involvements in the law such as litigation funding following three unrelated events in October: a Federal Court ruling on the practice, a clarion call against it by an appellate judge, and an increased jitteriness within many big legal firms.

Simultaneously there have been calls for an alternative to litigation funding as it now operates, such as the creation of a publicly funded body, accountable to both the legal system and the public interest.

The Federal Court ruled on October 20, in the case of Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147 (Brookfield Multiplex), that private entities involved in litigation were participating in an unregistered managed investment scheme and thereby in breach of the Corporations Act 2001.

This ruling, which put into question the 2006 High Court ruling known briefly as Fostif, suggested that litigation funders would be required to hold Australian Financial Services licences which are acquired only after a tortuous and rigorous process.

Brookfield Multiplex effectively threatened all current litigations involving more than 20 potential claimants and which include litigation funding agreements, as it was thought they may have to be stayed.

ASIC came to the rescue a week later - at least for the short term - announcing that it would grant transitional relief to lawyers and litigation funders whose litigation funding arrangements would otherwise fall foul of the Corporations Act, as a result of the Brookfield Multiplex ruling.

However, this relief only applies until 30 June 2010, and beyond that, the future of litigation funding is still uncertain.

Brookfield Multiplex is already a far cry from the Fostif ruling, which in its essentials decreed that a controlling involvement by a litigation funder in proceedings was not an abuse of process.

Fostif resulted in a flurry of cases funded by third-party commercial entities, but it also unleashed controversies and concerns which are still being played out.

Brookfield Multiplex is, therefore, a stake into the heart of the very nature of litigation funding as it has existed since 2006, according to Middletons partner Stephen Meade, who describes the latest developments as "a shockwave which throws doubt on class actions".

"The 2006 ruling legitimised a process which enabled class actions to go from strength to strength, but all this is now in doubt," Meade says.

Meade now speaks of "significant consequences" for class actions which had been proceeding apace as investors sought to recover losses from last year's global financial crisis.

"There had been a rapid rise in litigation funding, especially in class actions in Australia [since 2006], which has been pretty remarkable, even more so the relatively recent phenomenon of investor class actions," he says.

Even before Brookfield Multiplex there was a widespread desire throughout the legal community for greater regulation, says Meade, who expects much closer scrutiny from now on.

Also pointing to a period of transition is Wotton + Kearney partner Andrew Moore, who describes Brookfield Multiplex as having "important ramifications". "The ruling is expected to be the subject of a special leave application to the High Court, but that will take time and the outcome is uncertain," Moore comments.

"This all adds to the general uncertainty surrounding all those present class and representative actions involving funding arrangements and 'no win, no fee' solicitor retainers."

“The central idea is that the administrators of a contingent legal aid fund assess the prospects of success of a prospective plaintiff’s claim and agree to fund the claim if the likely prospects of success justify support”

Brookfield Multiplex came hot on the heels of a stirring clarion call to all those directly involved in legal actions to carefully consider the consequences and principles of litigation funding.

Ten days earlier, on October 10, Queensland Court of Appeal judge Patrick Keane told the Judicial Conference of Australia's colloquium in Melbourne that commercially run litigation funding was a deterrent to speedy resolutions or settlements being achieved.

"And why would that be surprising?" he asked. "What incentive is there for lawyers funded by traders in litigation to recommend settlement?"

There was added concern that private litigation funding had the potential to promote the pursuit of frivolous litigation, he said.

Litigation funding had the potential to promote rather than quell disputes, said Keane, who pointed to a core principle that "the lawyers who appear before the court in [a] litigation remain officers of the court, not traders in the court's function".

Litigation funding as a bulwark for providing justice to those otherwise unable to afford a lawsuit was defined by Justice Michael Kirby in the Fostif judgment as a mechanism which, in combination with a class action, serves the public interest by ensuring that economically powerful defendants can no longer cynically calculate that the harm they inflict on the mass of consumers will be so spread as not to warrant any individual consumer bringing an action.

"This view is animated by the spirit of the age in which every infringement of every right must be remedied," commented Keane while delivering his paper Access to Justice and Other Shibboleths.

But what was needed much more, according to Keane, was a model which "recognises the fundamental need to ensure that legal remedies are available to those who have been wronged, that harm done is recompensed and that obligations are honoured".

Keane, a former Queensland solicitor-general, called for a shift in values away from the notion that justice is a marketable commodity and recognition that litigation funding is a mechanism which "extracts a profit from the administration of justice which - apart from being unattractive in itself - is apt to inflate legal costs".

Even as Fostif seemingly set the tone to enshrine litigation funding, dissenting judges Ian Callinan and Dyson Heydon provided a spark for a later rethink by noting that "the purpose of court proceedings is not to provide a means for third parties to make money by creating, multiplying and stirring up disputes in which those third parties are not involved and which would not otherwise have flared into active controversy but for the efforts of third parties".

In opposing the mechanism, the justices added: "Public perceptions of the integrity of the legal system are damaged by litigation in which causes of action are treated merely as items to be dealt with commercially."

And all of the judges in the Fostif ruling, irrespective of their stance, held that litigation funding was vulnerable to the maxim "the greater the share of the spoils, the greater the temptation to stray from the path of rectitude" as well as creating a temptation towards excessive litigation.

A publicly funded scheme is among the reforms advocated by Keane, who cites reforms in the UK where "much work has been devoted to the study of a proposal establishing a Contingent Legal Aid Fund", including a discussion paper released by the Bar Council.

Keane sees merit in the British initiatives, especially because "those responsible for the public interest should have a say in the decision to pursue by litigation what is said to be the public interest".

"The central idea is that the administrators of a contingent legal aid fund assess the prospects of success of a prospective plaintiff's claim and agree to fund the claim if the likely prospects of success justify support," Keane says.

"If support is given, the plaintiff's lawyers run the case and are paid at ordinary rates. In return, the client pays a percentage of the money recovered - if the claim succeeds - back to the fund."

Keane envisages this scheme as an arrangement in perpetuity, whereby "the plaintiff's contribution back to the fund serves to fund ongoing assistance to other plaintiffs".

"A possible variation of this model would have the unsuccessful defendant obliged by legislation to meet the liability for the sum which would otherwise be deducted from the successful plaintiff's award," he adds.

To Keane, the establishment of a contingent legal aid fund "recycles resources deployed in the public interest rather than allowing them to be appropriated by entrepreneurs".

The fate of litigation funding is now in limbo because no final orders were made by the Federal Court in the Brookfield Multiplex ruling as the judges await file submissions.

The ruling as it now stands requires that all litigation funding schemes involving more than 20 potential claimants must now be registered with the Australian Securities and Investments Commission and satisfy all the requirements of the Act, including the appointment of a suitably qualified responsible entity.

- Michael Pollak

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