Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill

Senator VAN: I was just going to ask some questions about the Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill, and put a question. I understand that this bill was technically a Treasury bill but its work is practically shared between both departments. Is that correct?

Dr Smrdel: That's correct.

Senator VAN: What is the division of responsibilities?

Dr Smrdel: In terms of division of responsibilities, I think issues that relate to the cap, the rebuttable presumption and similar things around the construct of the model are Treasury's responsibility, but we certainly have a few things to say if there are some questions on that, but we defer to Treasury. There has been an issue around the constitutionality of the bills and also open-class actions versus closed-class actions and the applicability of common fund orders; that's the Attorney-General's Department's responsibility.

Senator VAN: Thank you. Can you please explain the bill in broad terms?

Dr Smrdel: In broad terms the bill is about increasing access to justice and fair and reasonable returns to claimants in class action matters. Previous inquiries by the Australian Law Reform Commission and the Parliamentary Joint Committee on Corporations and Financial Services found that the returns trending over a period of time to litigation funders were potentially disproportionate, and the government was keen to ensure that the class action claimants were given primacy and that their returns would be returned to them. So, in essence, the bill increases the court's discretion to look at returns to class actions claimants. It's now a rebuttable presumption that no more than 30 per cent could go to the litigation funders, including lawyers involved in litigation—

Senator VAN: The ambulance-chasing firms?

Dr Smrdel: Sorry, it's not my place to comment on that. But it is a rebuttable presumption so not in every circumstance will it be the case that more than 30 per cent is unreasonable. It's for the courts to decide. So there's a discretion built in there for the courts to work through a range of prescribed factors. But clearly the onus is on the returns going to claimants—primacy being given to the claimants themselves—that they should at least get 70 per cent. I think the ALRC found that, over a period of time, if litigation funders were involved, only around 50 per cent of returns would go to claimants and, if they weren't involved, 85 per cent would return to claimants. So looking at the figure of 70 percent is seen as ensuring primacy to the claimants, a fair and reasonable return to them.

Senator VAN: That's much better. I understand that the bill has several key objectives, one of which is to ensure that members of a class action litigation funding scheme are only persons who have agreed in writing to be members and are bound by the terms and conditions of the scheme's constitution. Why is that the case?

Dr Smrdel: It's fundamentally about observing the common law rule of privity of contract, in that the courts over a period of time have developed things called common fund orders, which basically means that a class action could be commenced. I think there's a minimum of seven people that need to be members to be involved and then the class action can be commenced. But, when it's time for settlement or for a decision, if the court orders a common fund order, then the litigation fund is commissioned, can be multiplied out against basically the whole class, even those that haven't signed up to the litigation funding agreement to start with. So that's seen by government as not particularly desirable, because of the privity of contract principle that people can be held to pay the litigation funders' commission despite not ever having signed up to the agreement itself. Clearly, there's a problem there with potentially free-riding occurring as well. If a class commences, people come in and then aren't subject to any sort of fee impost, then they're seen as free-riders. So there are other mechanisms there that have been approved, like funding equalisation orders, which the High Court has commented favourably on. Certainly, this bill at least allows that all the costs that people have signed up to in a litigation funding agreement can be spread out across the entire class if other members come on board. So common fund orders are potentially problematic because of that effect of multiplying out funding commissions across the whole class without people actually having turned their mind to it and signed on to the litigation funding agreement.

Senator VAN: In effect it's just a financial product used in a litigation setting. That's correct, isn't it?

Dr Smrdel: I'm not a financial person. But it's an order that has been approved by the Federal Court and other courts. Certainly from the government's perspective, it really needs a privity of contract; people should actually turn their mind to it, sign on to it and fully understand the terms of something they're signing on to, before they're subject to the agreement.

Senator VAN: Like we would insist on with any other financial product, and that's why informed financial consent to funders fees is important. Is that correct?

Dr Smrdel: Correct.

Senator VAN: I understand that the bill provides that non-members of such schemes should not be paid any amount of claimed proceeds unless, firstly, that amount is permitted under claims distribution methods set out in the funding agreement and, secondly, that the method has been approved by the court as fair and reasonable. Is that correct?

Dr Smrdel: That's correct. It's clearly an important mechanism that the government has put into the bill. There is a discretion there for the court and it ultimately approves the agreements that are put forward. The court itself needs to determine that it is fair and reasonable and the court also has the power to vary an agreement if it finds that the agreement is not fair and reasonable. So the court orders that and then, if the court approves the agreement, then the agreement is applicable and members can be paid out. At some point, the class has to be opened to allow other members that weren't part of the initial agreement to come in, and that's what I was talking about with the funding equalisation orders which avoids the free-riding problem and allows the funds distribution and the fees to be shared across the whole class, without the multiplier effect of the commission for litigation funders which common fund orders provide.

Senator VAN: Thank you. I also understand that the bill requires that if a court makes a common fund order the funding agreement is not enforceable?

CHAIR: Last question, Senator Van.

Dr Smrdel: That's correct. And that's the problem that I've been adverting to. The common fund orders allow the legal litigation funders commission to be multiplied out across the entire class, even those that have not actually signed up to the litigation funding agreement, so the government thinks that's not a proper way to approach things, that people need to be aware of the commissions and other fees they're up for. So common fund orders aren't prevented but they're not going to get the seal of approval from the court to enforce the agreement.

Senator VAN: Thank you.