This article appeared in The Australian on 27 December 2017 (subscription may be required).
Our strong desire to preserve access to justice does not take away from the need for appropriate regulation and oversight of this growing sector of our legal ecosystem.
Third party litigation funders now play a central role in class action proceedings, and they are currently not bound by a professional ethical code or a comprehensive regulatory framework. Instead the court system provides some oversight, which is simply inadequate to protect plaintiffs and defendants, and to preserve the integrity of the court system. The burden on the courts will only become greater as class actions increase in number.
As well as being a burden, this approach assumes that the courts will be informed of the existence of a litigation funding arrangement. That may not always be the case.
Court-based supervision also cannot provide parties to a dispute with meaningful protection prior to the commencement of proceedings, when group members are arguably most vulnerable to misinformation or pressure, or exposed to conflicts.
Checks and balances are needed given the power of third-party litigation funders, who may exercise significant control, including recommending certain tactics, receiving confidential and privileged client information and directing proceedings. They are not bound by the ethical and professional rules or regulations which apply to lawyers.
Furthermore, unlike other entities which regularly make financial promises (such as general insurers), litigation funders are not subject to meaningful prudential supervision.
Given that litigation funders are involved in extensive, time-consuming and costly litigation against corporations and directors for the purpose of obtaining profit, it follows that they should be subject to prudential requirements to ensure that they have sufficient assets to meet any costs orders made against them. This is not an alarmist concern – NSW Chief Justice Tom Bathurst has previously drawn attention to a 2007 incident in which a foreign funder withdrew its funding midway through trial and refused to make a security for costs payment. Also, as the Productivity Commission has pointed out, court oversight is undertaken on a case-by-case basis and thus cannot verify whether a funder is in a sound position to meet all of its concurrent financial obligations, particularly given that funders tend to operate across multiple jurisdictions.
The Australian Institute of Company Directors has long advocated for regulation and supervision of third party litigation funders and we are not alone. Appropriate licensing was a recommendation of the Productivity Commission in 2014 and is supported by numerous academics and legal professionals.
After little action since the Productivity Commission’s Access to Justice report, reform may be on the horizon. The Australian Law Reform Commission was this week asked by former Attorney General, Senator the Hon George Brandis QC, to inquire into class action proceedings and third party litigation funding, particularly whether there is adequate regulation of costs charged, conflicts of interests and the capital adequacy of funders. The Commission has been given a year to explore the issues and report to Government.
Given the role of litigation funders in enabling and controlling civil litigation, it is essential that appropriate checks and balances are in place in order to safeguard the integrity of our justice system. The continued absence of meaningful regulation and prudential supervision of litigation funders is not in the best interest of the community or the economy.
Third-party litigation funders can play an important role in facilitating access to justice. However, we should not ignore that they are funding a proceeding in which that have no direct interest for the purpose of monetary gain. Facilitating access to justice is an important policy objective but it can and should incorporate appropriate checks and balances.