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Client Update: Litigation funders and law firms — how close is too close?

27 May 2013

In brief: With important implications for the expansion of litigation funding in Australia, the Full Court of the Federal Court is being asked to determine whether a litigation funder which has financial connections with a plaintiff law firm would be justified in providing funding for a class action run by that law firm. Partner Duncan Travis (view CV), Senior Associate Tim Maxwell and Lawyer Mark Hosking report.

Introduction

In an application heard in the Federal Court on Wednesday, 15 May 2013, the trustee of litigation funder Claims Funding Australia (CFA) sought an order under the Trustee Act 1925 (NSW) and/or the general law that it would be justified in funding a class action run by plaintiff law firm Maurice Blackburn. According to the Australian Financial Review,1 Maurice Blackburn has close links to CFA: the firm has provided financial support to CFA, two of the firm's senior principals are shareholders in CFA, another principal is a director of CFA, and all of the firm's principals are beneficiaries of the trust formed to establish CFA.

Justice Cowdroy referred the application, which raises constitutional issues and questions regarding Maurice Blackburn's obligations under the Legal Profession Act 2004 (NSW), to the Full Court of the Federal Court. The Full Court's decision may have significant implications for the financial backing of litigation funders by law firms.

Discussion

Conflicts of interest between litigation funders, lawyers and members of litigation funding schemes have recently been a topical issue. Under the Corporations Amendment Regulation 2012 (No 6) (Cth) (the Regulation), introduced in December 2012, litigation funders are required to adopt procedures for managing conflicts of interest. Failure to adopt adequate procedures for managing conflicts of interest will constitute an offence. In April 2013, the Australian Securities and Investments Commission released a regulatory guide intended to assist litigation funders to comply with this requirement. (See Client Update: ASIC guidance on litigation funders' obligation to manage conflicts.)

The Regulation also clarified litigation funders' obligations in relation to financial services licensing and registration of managed investment schemes under the Corporations Act 2001 (Cth). (See Client Update: Regulations clear the way for litigation funding (again).) While these issues may be raised in the application before the Full Court, it is not clear what the court will be able to add to the Regulation's provisions.

The Full Court's decision may have important implications for lawyers' professional obligations. Like equivalent legislation in other jurisdictions, the Legal Profession Act 2004 (NSW) prohibits a law firm from entering into an agreement for the payment of a contingency fee — that is, an agreement under which the amount of costs payable to the law firm, or any part of that amount, is calculated by reference to the amount of any award or settlement, or the value of any property, that may be recovered in any proceedings to which the agreement relates. Litigation funders commonly enter into agreements of this nature.

Provided that it concludes it has jurisdiction to do so, the Full Court will consider whether, by reason of its relationship with Maurice Blackburn, CFA would not be justified in funding the class action the firm is running, because such approval may, among other things, breach the prohibition on contingency fee agreements.

There is a constitutional issue for the Full Court to address, concerning whether a federal court has jurisdiction to provide judicial advice to a trustee. Historically, this jurisdiction has been exercised by State Supreme Courts.

Notably, the Legal Services Commissioners for Victoria, New South Wales and Queensland have provided a submission to the Federal Court, expressing concern about CFA funding the class action run by Maurice Blackburn.

Class action litigants, practitioners and observers will await the Full Court's decision with interest, to see whether the court imposes limitations on law firm-related litigation funders.

Footnotes
  1. Alex Boxsell, 'Full Federal Court invoked on law firm's class action funding', Australian Financial Review (17 May 2013).

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