The rapid growth of the litigation funding industry and
a number of recent significant class action settlements has placed
the spotlight on the funding of class actions in
CAN LAWYERS HAVE A FINANCIAL INTEREST IN THE ACTION?
In 2014, a number of securities class actions were commenced in
the Supreme Court of Victoria by Melbourne City Investments Pty
Limited (MCI) as lead plaintiff against, among others, Treasury
Wine Estates Limited (TWE) and Leighton Holdings Limited (LHL).
On the day of its incorporation, MCI purchased 140 shares in TWE
for $693. MCI also purchased 39 shares in LHL for $684.06 and small
parcels of shares costing less than $700 in various other publicly
listed companies. The sole director and shareholder of MCI (Mr
Elliott) was also the legal representative for the plaintiffs and
was funding the litigation on a no win-no fee basis.
In mid 2014, the Supreme Court ruled that Mr Elliott could not
act for the plaintiffs at the same time as MCI was the lead
plaintiff on the basis that an observer would consider that he is
compromised in his role as a solicitor such that there would be a
real risk that he could not give detached, independent and
impartial advice taking into account not only the interests of MCI
(and its potential exposure to an adverse costs order), but also
the interests of group members.
However, the Court did not consider that the proceedings were an
abuse of process. TWE appealed that aspect of the decision.
In late December 2014, the Court of Appeal allowed the appeal by
a majority of 2:1 and permanently stayed the proceeding, finding
that MCI's sole purpose was to use any cause of action it may
have "to create an income-generating vehicle for its
solicitor", which it did by buying a small parcel of TWE
shares. The Court of Appeal stressed the importance of maintaining
public confidence in the fairness of court processes.
Mr Elliott used a different funding model for the Banksia
Securities Limited (BSL) class action, which was also commenced in
2013. In that proceeding, MCI was not the lead plaintiff. However,
the matter was funded by BSL Litigation Partners Limited (BSL), of
which Mr Elliott was secretary and one of its three directors. Mr
Elliott was also the plaintiff's solicitor.
The major investors in BSL were a self-managed superannuation
fund, a company controlled by Mr Elliott (holding a 45% interest)
and a company controlled by the wife of the plaintiff's senior
counsel, Mr Norman O'Bryan SC (holding a 45% interest).
In November 2014, the Supreme Court of Victoria restrained Mr
Elliott and Mr O'Bryan SC from acting for the lead plaintiff
due to conflicts of interest.
The Court considered that the main risk arising from the
lawyers' pecuniary interest in the outcome of the class action
was that they might not fulfil, or might not be seen to fulfil,
their duties to the Court.
The Court considered that the arrangement was an attempt to
skirt around the prohibition on contingency fees, which was
"inimical to the appearance of justice".
RELAXATION OF RULES REGARDING CONTINGENCY FEES AND CONDITIONAL
Lawyers in Australia can use conditional billing arrangements
where their fees are only paid if a successful outcome is achieved.
Lawyers can also charge an uplift fee which does not exceed 25% of
the total fee. As noted by the Court in the Banksia Securities
class action, lawyers cannot charge contingency fees (being fees
calculated by reference to the amount recovered) due to concerns
that it creates perverse incentives.
However, in December 2014, the Productivity Commission released
a report which recommended sweeping reforms to promote access to
justice and remedy a system that it says is "too slow, too
expensive and too adversarial". One of the key recommendations
is to remove the ban on contingency fees. It is not yet clear
whether the recommendation will be acted upon.
In 2015, Legal Profession Uniform Laws are expected to come into
effect in NSW and Victoria which lift the current prohibition in
NSW on conditional billing with an uplift in damages claims. The
new laws will apply to almost three quarters of Australia's
lawyers. Given most if not all class actions are damages claims,
the impact may be significant.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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This was an interlocutory decision about the appointment of a tutor for the child appellant, to carry on his proceedings.
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