Litigation Funding and Class Action Lawsuits: A Need for Reform
Introduction:
Class action lawsuits have become increasingly common in Australia, providing individuals with greater access to justice. However, a review by the Samuel Griffith Society highlights the need for significant reforms in the rules surrounding these lawsuits and the role of litigation funders. The report emphasizes that the current system disproportionately benefits litigation funders and law firms, rather than adequately compensating plaintiffs.
The Impact of Litigation Funding:
Litigation funding was initially developed to ensure that financial constraints would not hinder potential plaintiffs from seeking justice. However, the scales have tipped too far in favor of litigation funders and plaintiff law firms, according to the Samuel Griffith Society. The report points out that a significant portion of the $1 billion in settlement funds paid in the 2019/20 financial year went to private underwriters and law firms, rather than the plaintiffs themselves.
Diminished Compensation Sums:
Despite providing greater access to the courts, litigation funding often leads to smaller settlements for plaintiffs. In Australian class actions supported by third-party funding, plaintiffs face an average commission of 25 percent and 21 percent in costs, which are deducted from their winnings. Moreover, a 2019 inquiry by the Australian Law Reform Commission revealed that when litigation funders underwrite class actions, members receive less than 50 percent of the settlement amount in most cases. On the other hand, in cases without litigation funding, over 90 percent of plaintiffs receive more than 75 percent of the settlement.
The Victorian Surge:
The introduction of a law in 2020 that made it easier for class actions to receive litigation funding resulted in a surge of cases in Victoria. By the end of the 2022/23 financial year, nearly 36 percent of all class action litigation in Australia was filed in the Victorian Supreme Court, a significant increase from the 6.9 percent recorded in the 2018/19 financial year. The Federal Court also allows class actions to be underwritten by litigation funders, positioning Australia as one of the largest jurisdictions for class actions globally, alongside the United States.
Reforming the System:
The Samuel Griffith Society report recommends a series of reforms to address the issues surrounding litigation funding and class action lawsuits. Instead of relying on commercial litigation funders, the report suggests exploring the establishment of statutory funds at either a federal or state level. This alternative was initially proposed by the Australian Law Reform Commission in 1988. Additionally, the report calls for the complete removal of the contingency fee model in Victoria and a review of civil procedure rules allowing contingency fees in the Federal Court.
Regulating Litigation Funders:
To address the lack of transparency and oversight surrounding litigation funders, the report proposes a strict regulatory regime. It recommends the disclosure of the source of funding and the requirement for litigation funders to hold Australian Financial Services Licences, similar to other financial institutions. The report also suggests classifying litigation funding schemes as managed investment schemes within the Corporations Act. Furthermore, the authors advocate for the reinstatement of regulations that previously mandated litigation funders’ participation in anti-money laundering reporting.
Conclusion:
The current system surrounding litigation funding and class action lawsuits in Australia is in need of significant reform. The Samuel Griffith Society’s review highlights the disproportionate benefits received by litigation funders and law firms, leading to diminished compensation for plaintiffs. Implementing the recommended reforms, such as exploring statutory funds and regulating litigation funders, would ensure greater transparency, fairness, and accessibility to justice for all parties involved.
