Originally published on Australian Business Executive

Access to Justice should be optimized, not compromised.

However, that access is under serious threat from the Government’s proposed amendments to the Corporations Act, now before Parliament.

The Government has been playing against type, at least as a “Liberal” Government, in propounding extensive regulation and the fettering of the free market, particularly where there is already in place under the Federal Court Act and Rules, and also under State Legislation, an effective supervisory regime for the Courts to ensure fair and equitable Class Action outcomes.

The Government wants to constrain the Courts’ ability to reward Litigation Funders and their lawyers for achieving successful Class Action outcomes. Its premise seems to be that Litigation Funders and Class Action lawyers are pernicious pariahs and bloodsuckers, a different species from other money lenders and lawyers; conversely, Group Members in Class Actions are worthy victims who need protection from predatory Litigation Lenders and the Plaintiffs’ lawyers, who are the Litigation Lenders’ facilitators.

Risk and reward

The truth is that there are (at least) two (2) types of lenders and (at least) two (2) types of loans. There are the lenders and loans where, if things go wrong, it is only the borrower who could lose, which includes traditional lending involving banks or finance companies, advancing money secured against domestic and/or commercial assets (including businesses), when the lender is fully protected at the borrower’s expense.

Then there is the second class of lending, which is higher risk, where if things go wrong, only the lender could lose, because the borrower is fully protected at the lender’s expense. That is the position with Litigation Lending.

Conventional lending

With a home or business loan, the lender will obtain valuations for which the borrower pays, and the lender will only advance money if there is adequate security and enough of a cushion to protect the lender if things go wrong. The lender can demand mortgage insurance with the borrower paying the premium and, if the borrower falls on hard times and defaults, the lender can charge the borrower a default interest rate which may be compounded and can border on the extortionate.

Even if the borrowers just borrowed $500,000.00 against a $2,000,000.00 asset on default, even on a technical default, the lender can take possession of the asset itself or appoint a receiver to do so – especially if it is a business – and can continue to run and operate it, and charge huge expenses for doing so. It will load up the borrower with all of the expenses of the receivership and of the receiver’s lawyers; if there is a company involved, a liquidator may be appointed too – and there will then be the liquidator’s fees, the liquidator’s lawyers’ costs and default interest charged on all of these fees and expenses, until that $500,000.00 debt against a $2,000,000.00 property has become a $1,000,000.00 – $2,000,000.00 liability, still owed by the borrower, even after his security property has been sold.

These kinds of situations are not unusual. They are entirely legal. The Government does next to nothing to stop them and the banks and the insolvency profession, supported by the Courts (because that is the current state of the law) 1 , continue to countenance these sad and grossly unfair outcomes.

Ask the farmers who were victims of Landmark, and then of the ANZ Bank – or the Commonwealth Bank’s victims, after CBA took over the BankWest debtors book and you will know that I am right.

Litigation lending

Contrast this with Litigation Lending. A few aggrieved persons with sound legal claims against a well-resourced defendant approach a lawyer. They tell him that there are hundreds of other people like them but none of them has enough money to run a case because they have been financially crippled by the prospective defendant. The lawyer finds them a Litigation Funder. The Funder has its lawyers assess their claims and the prospects for recovery and weighs the risk that its funds may be tied-up for a long time; it will have to stump-up security for the defendant’s costs; there will be an opportunity cost in the meantime and the Funder alone will have to bear the expense of having millions of dollars invested with no current or assured return, at the mercy of the legal system. There is also the possibility that the case may be lost, with the Litigation Funder’s investment lost along with it. The Litigation Lender may also have to pay the defendant’s costs which could almost double the Litigation Lender’s downside.

The Litigation Lender is advancing money solely in order to enable the class of aggrieved persons to access justice., which would otherwise elude them – and to profit itself, only if they are successful. If things go wrong in the case, unlike with a traditional lender, only the Litigation Funder will bear the loss. The borrower does not commit or risk any funds through the litigation being funded.

The borrowers, being the Class Members who have signed up to a Funding Agreement and to be represented by the lawyers acting for the Class, are fully indemnified against any adverse costs order(s) and have to pay nothing if the Litigation Lender loses all of its own investment.

Free riders

If a member of a representative group (“Group Member”) decides not to opt-out of the litigation and has also decided not to retain the Plaintiff’s lawyers to act in the proceedings, then the Group Members would not be liable for the legal fees of the Plaintiff’s lawyers. That creates the potential for division within a representative group, with some Group Members paying for legal representation, with other Group Members declining to do so and thereby obtaining a “free ride” (2). (That is when the need for Common Fund Orders or Funding Equalisation Orders arises)

Say there is a settlement for $100,000.00: The Group Members, many of whom ran for cover during the heat of the battle while the litigation was underway, emerge from their caves with their hands out and their palms outstretched. They want their piece of the action now. These are not the aggrieved persons who approached the lawyers and signed a deal with the Litigation Funder, initiated the action and committed themselves to supporting it.

The free rider Group Members whom the Government’s Bill is primarily portrayed as supporting, are essentially the passive opportunists who contributed nothing and took no risk of even a non-financial kind. So let the Courts appoint a Contradictor, by all means, to ensure that any settlement which binds Class Members is fair and reasonable and that the lawyers and Litigation Funders are fully accountable. There would be no substantial settlement for the Court to consider, whether fair or unfair, if there were no reasonable legal basis for the Plaintiffs’ lawyers and the Litigation Funder to have brought the action. They had pursued justice and gained an outcome for the Class entirely at the Litigation Funder’s expense and risk. The Group Members who did not enter into a retainer with the lawyers or sign-up to the terms offered by the Litigation Funder have acted apathetically – even parasitically – but still stand to reap a considerable benefit from the Class Action settlement or verdict.

However, the reason why they are entitled to a slice of the cake which has been backed by the Class Action lawyers, with eggs and flour provided by the Litigation Funder, is because they too were victims of the wrong which has been vindicated through the Class Action. Their interests do indeed need protection.

The Bill before Parliament wrongly treats Litigation Funders and Class Action lawyers as suspect malefactors when, by and large, the Litigation Funder Funder is the only risk taker, whereas in traditional borrowing, the borrowers are the only risk takers.

The Government is acting with gross unfairness towards Litigation Lenders where the Litigation Lender will only ever receive a return in circumstances where the borrowers receive substantial compensation for avenging a legal wrong, only made possible with the Litigation Funders’ money and the Plaintiffs’ lawyers’ work.

Traditional lenders undergo very little scrutiny because when they go about enforcing their rights, they often impoverish the borrower in the process, to the point where the borrower can offer no resistance.

By handicapping only Plaintiffs’ lawyers, the legislation is effectuating a massive legal “gerrymander” in favour of Defendants. Defendants with deep pockets, particularly big business, the Banks and Government, will be empowered like never before, to thwart just claims by their victims, deploying the tools of litigation to drag out cases for years, to push up claimants’ fees. The Government Bill will destroy the business case for Litigation Funders to make a cost-benefit assessment to support deserving Plaintiffs and their claims

If it ain’t broke, don’t fix it.

Judicial supervision works. No new legislation or regulations are needed.

Stewart A Levitt is Senior Partner with Levitt Robinson Solicitors, specialising in corporate law, banking & finance, and class action law, www.levittrobinson.com.

(In this article, the terms, “Litigation Funder” and “Litigation Lender” are used interchangeably. The terms “Class Members” and “Group Members” are also interchangeable)

1 Inglis v Commonwealth Trading Bank of Australia [1972] 126 CLR 161

2 Paul O’Brien, Alexandra Bartlett and Harriet Price, “A Beginner’s Guide to Class Actions in Australia”, YPOL Insurance Update, Yeldham Price O’Brien Lusk 2017