Exposure Draft - Corporations Amendment Regulations 2011 Funded Class Actions

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1 Exposure Draft - Corporations Amendment Regulations 2011 Funded Class Actions Maurice Blackburn s Submission Introduction 1 Maurice Blackburn has an unrivalled record in successful class actions in Australia having successfully brought cases for many tens of thousands of claimants in more than twenty class or group actions. Examples include claims for people injured by faulty pacemakers and other medical devices, 1 consumer victims of sharp selling practices, 2 misled shareholders 3 and victims of price fixing and market rigging. 4 2 These actions benefit the wider community by giving effect to the law where the consequences of misconduct have caused widespread losses. The high cost of modern litigation make many claims economically untenable without the use of a class action procedure. 3 It has become common for class actions to be funded by litigation funding companies. Litigation funders pay the legal fees and disbursements for the applicant and group members and take on the risk of an order to pay the respondent s costs if the litigation is unsuccessful. In return, they charge a commission proportionate to the sum of the settlement or award. 4 In the absence of litigation funding support, lawyers may agree to act in a class action on a conditional (or no win no charge ) basis. In these cases, the law firm will not charge fees or pass on the cost of disbursements unless the litigation is successfully resolved. Lawyers are prohibited from charging fees proportionate to the amount recovered, so under conditional fee agreements the clients potential liability is capped at the amount of fees and disbursements actually incurred. 5 For example, the Bushfires Class Action, in which Maurice Blackburn acts for over 1,000 victims of the Kilmore-Kinglake bushfire on Black Saturday 2009, is being conducted on a conditional fee basis. 5 Maurice Blackburn supports the Government s intention to exempt funded class actions from the operations Part 5C and various parts of Chapter 7 of the Corporations Act 2001 (CA). 6 However, we are concerned that the proposal to make some of the exemptions contingent on having adequate arrangements for managing conflicts of interests would introduce uncertainty into the application of those exemptions. That uncertainty would give rise to additional risk and costs for class action claimants and provide opportunities for expensive and obstructive interlocutory applications and satellite litigation. 7 Given existing protections of the interests of class action participants, we do not consider it necessary to prescribe procedures for managing conflicts. 8 If the Government is minded to prescribe those procedures, the proposed penalty for the breach is a more effective enforcement mechanism than removal of the exemptions. Having the exemptions contingent on compliance risks punishing the very group members the Government aims to protect.

2 9 Lawyers acting under conditional fee agreements should not be caught by the licensing requirements in the CA and this should be made in clear in the proposed regulations. MIS and Chapter 7 Exemptions are welcome 10 Maurice Blackburn welcomes the proposal to exclude funded class actions from the relevant managed investment scheme (MIS) and financial services provisions of the CA. This proposal will bring much needed certainty to the regulatory environment surrounding litigation funding, remedying the concerns which have arisen since the decisions in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (Brookfield) and International Litigation Partners Pte Ltd v Chameleon Mining NL (Chameleon). 11 In summary the proposed regulations exclude litigation funding for class actions from: a) the definition of managed investment scheme (MIS) for the purposes of the CA)(proposed r 5C the MIS Exemption), and b) the requirements to: i) obtain an Australian Financial Services Licence (AFSL)under section 911A of the CA (proposed r (1)(x)(i)); ii) iii) iv) comply with Part 7.7 of the CA relating to financial services disclosure (proposed r ); comply with section 992A of the CA relating to the prohibition on hawking financial products (proposed r ); comply with Part 7.9 of the CA relating to product disclosure statements (proposed r A); and v) comply with Part 7.10 of the CA relating to market misconduct and other prohibited conduct (the Chapter 7 Exemptions). 12 Class actions are closely regulated by the Federal Court 6 under Part IVA of the Federal Court of Australia Act 1974 (Cth) (FCA) and by state courts under equivalent state statutes. The conduct of litigation funders and lawyers are also governed by the general law in relation to misleading and deceptive conduct, fiduciary responsibilities and professional standards. 13 Unlike other schemes and financial products regulated as MIS or financial services, litigation funding agreements require no upfront investment of money or other assets by participants. The only consideration given by participants is a promise of payment of a commission or fee on successful resolution of a claim. Under section 33V of the FCA, and similar provisions in the states, any resolution must be approved by the court and the fairness and reasonableness of any settlement are already closely scrutinised. This process ensures that interests of participants in litigation funding arrangements are protected. 2

3 14 Without the proposed regulations, litigation funders would be required to obtain an AFSL as a consequence of Chameleon. This would create a barrier to entry to prospective litigation funders as the process of obtaining an AFSL deters or delays new entrants to the market. To our knowledge, only one company currently providing litigation funding in Australia has an AFSL. Given the raft of protections already available to consumers under the present law and the oversight role played by the courts in connection with settlement approval of class actions, the interests of consumers of litigation funding services are best served if there is a diverse and competitive market. 15 In this context, it is unnecessary to subject funded class action claims to further regulation under the Corporations Act. Conflict of interest procedures are unnecessary 16 Maurice Blackburn considers that litigation funders and lawyers should adequately manage any conflicts of interests that may arise in the course of funded class actions. These obligations already exist under current law. 17 The proposed amendments would make no change to the substantive obligations of litigation funders and lawyers to manage conflicts of interests. The amendments are merely procedural in nature, requiring litigation funders (and lawyers with conditional fee arrangements) to conduct certain reviews and maintain written procedures relating to managing conflicts. 18 This would be unnecessarily prescriptive. The general law, professional standards legislation and the close judicial scrutiny of class actions already ensure that litigation funders and lawyers must adequately manage conflicts of interests. Maurice Blackburn is not aware of any case in which it has been alleged that a litigation funder or lawyer mismanaged a conflict of interest in relation to a representative proceeding. We see no benefit in prescribing the manner in which litigation funders and lawyers review and document their compliance with their obligations. 19 In his statement announcing the Government s intention to make the proposed amendments, the then Minister for Corporate Law said: There may be some situations in which conflicts of interest may arise, such as where the class action lawyer and funder are assessing proposed awards or settlements. In such instances, it is important to ensure that appropriate arrangements are in place to protect consumers and ensure that their interests are paramount To the extent that the proposed amendments are intended to deal with conflicts that might arise in relation to the assessment of awards or settlements, it is worth noting that close court supervision already provides an effective safeguard. Under section 33V of the FCA, all class action settlements must be approved by the court. The court may make such orders as are just in relation to the distribution of a settlement. Under section 33X(4), unless it determines that it is just to so, the court must not determine an application to approve a settlement unless group members have been notified of the proposed settlement. Similar provisions apply in state jurisdictions. 21 In practice, the Federal Court has taken its responsibility to approve settlements seriously. Representative applicants seeking approval of a settlement provide the court with voluminous material explaining the settlement. This includes opinions from senior counsel on the quantum of the settlement in light of the merits of the 3

4 claim and from independent costs consultants on the quantum of costs recovered by the litigation funders or lawyers. Group members are notified of the date of the settlement approval hearing and advised of their right to oppose the settlement in writing, by counsel or in person. 22 In approving a class action settlement this year, Jacobson J outlined the principle and factors the Court considers in determining a settlement approval: The underlying principle stated in all of the authorities is that the essential question is whether the settlement is fair and reasonable having regard to the claims made by Group Members who will be bound by it. However, this question is usually considered by reference to a number of relevant factors. The factors which are usually taken into account are the amount offered to each Group Member, the likelihood of Group Members obtaining judgment for an amount significantly in excess of the settlement offer, the terms of any advice by counsel and any independent expert, the likely duration and cost of the proceeding and the attitude of Group Members The requirement to prove in the Federal Court that a settlement is in the best interests of group members exerts a rigorous discipline against placing the interests of funders or lawyers above those of the group members. In that context, the proposed amendments requiring conflict reviews and the maintenance of written procedures are unlikely to provide any additional protection of group members interests. 24 Any regulatory regime governing the activities of litigation funders should not impose further regulations on Australian lawyers who are already overburdened by legislative controls and who will be subject to comprehensive national profession laws in due course. 25 In the initial statement announcing the Government s intention to make these exemptions, it was suggested that regulation for managing conflicts of interests would be through guidance issued by ASIC. 9 It is not clear why this originally announced intention has transmogrified into a more prescriptive approach but in light of: a) the absence of any evidence of consumer complaint regarding conflicts of interest; and b) the already extensive regulation of lawyers, litigation funders and class action settlements Maurice Blackburn supports an approach that involves guidance without prescription. Exemption should not be contingent on compliance with procedure 26 If, contrary to the views expressed above, the Government is minded to require litigation funders and lawyers to comply with the requirements of proposed r (6B), the application of the Chapter 7 Exemptions should not be contingent on compliance. 27 As currently drafted, the Chapter 7 Exemptions 10 would only apply if the funder has adequate arrangements for managing conflicts of interests (for example proposed r (1)(x)(ii)). This would create ongoing uncertainty as to whether and when an exemption applies. 4

5 28 The language of the proposed amendment would amplify this uncertainty. For example, proposed r (6B) (b) (ii) requires that the funder be able to show through documentation that it has effectively implemented procedures for identifying and managing conflicts of interests. Whether a procedure has been effectively implemented will always involve a degree of subjectivity and uncertainty. The Chapter 7 Exemptions should not turn on such vague criteria. 29 Further, the uncertainty of the Chapter 7 Exemptions can be expected to give rise to obstructive interlocutory applications and satellite litigation. Class actions often involve multimillion dollar disputes against well resourced and represented respondents. It is frequently a strategy of respondents to use time-consuming and expensive procedural disputes to delay or frustrate the resolution of substantive disputes. In this context it is important to note that the Brookfield decision was not brought by any aggrieved group member but was initiated by the defendant in a class action for the express purpose of bringing the class action to an end. 30 If the Chapter 7 Exemptions can be dislodged by evidence that a funder or lawyer has not complied with the regulation, respondents will likely take advantage of this uncertainty and make applications for the express purpose of defeating or delaying class actions against them even in circumstances where no group member has any complaint with the alleged failure to effectively implement procedures. This will increase the costs of litigation to claimants and the courts, with no benefit to consumers. 31 Lastly, the uncertainty created by the proposed amendments would risk punishing the group members whose interests the amendments are intended to protect. It is group members that will bear the cost of satellite litigation over the applicability of the Chapter 7 Exemptions. In the event that a funding agreement is held to be invalid by reason that the Chapter 7 Exemptions do not apply, group members will lose the benefit of the litigation funding for which they had contracted. 32 It is a matter of some concern that the regulations as currently drafted will enable a respondent to derail representative proceedings in the manner suggested above. At the very least, respondents to such funded actions should be denied standing to complain that a management of conflict requirement has not been met by a funder. 33 The proposed r AB would provide that a failure to maintain adequate conflict of interest arrangement is an offence attracting 50 penalty units. This would be a sufficiently effective deterrent and would have no adverse effect on group members. A revised version of the proposed regulation is provided in appendix to this submission (in the event that, contrary to our primary submission, the government continues with a prescriptive approach to conflicts of interest). All conditional fee agreements should be exempt 34 The proposed regulations would apply the MIS and Chapter 7 exemptions to funded multi-party claims whether they are funded by a litigation funder or conditional fee arrangement with lawyers. 35 Maurice Blackburn is concerned that the Chapter 7 exemptions will not apply to conditional fee agreements that involve only one client. 36 In the aftermath of Chameleon, this is an issue that should be dealt with as a matter of urgency. The consequences of a finding that conditional fee arrangements are financial products would be extremely serious. A substantial proportion of litigation 5

6 in Australia would simply not proceed if conditional fee arrangements were not permitted. For instance, the vast majority of all personal injury matters proceed on a conditional fee basis and the majority of clients would not qualify for governmentfunded or community legal assistance to pursue their legal rights. 37 Maurice Blackburn notes that this issue has arisen as a potential by-product of the decision of the NSW Court of Appeal in Chameleon. In that decision lawyers, who acted on a conditional fee basis, may have been providing a financial service in the same way as the litigation funder was found to have done in that case. Maurice Blackburn contends that it was never intended that lawyers acting in litigation on a conditional fee basis would be caught within the financial services regulatory framework in providing such services. 38 In Chameleon, the NSW Court of Appeal held by a majority of two to one that a litigation funding agreement is an arrangement under which the funder manages financial risk under s763a (1) of the CA. The Court did not consider what other forms of fee agreements might be characterised as financial products according to the same reasoning. 39 Although the decision of the NSW Court of Appeal in Chameleon is now the subject of an application for special leave to appeal to the High Court, the present state of the law leaves open the possibility that conditional fee agreements entered into by legal practitioners with their clients may fall within the definition of s 763A to the extent that such agreements manage financial risk. 40 Maurice Blackburn believes that there is strong force in the proposition that the risk management component in a conditional fee agreement is incidental under s 763E and that such an agreement is therefore not a financial product. However, given the uncertainty which now exists and the significant barriers to access to justice that would arise if this issue remained in doubt, Maurice Blackburn proposes that the draft regulations be amended to clarify that conditional fee arrangements are not financial products and are not subject to the requirements and obligations imposed under Chapter 7 of the CA. Miscellaneous amendments 41 In addition to the issues addressed above, Maurice Blackburn makes some general comments regarding the current form of proposed regulation as follows: a) Item 1, 5C.11.01(1)(b)(ii)(A) uses terminology from s 33C(1)(b) of the FCA to capture the concept of the class action. This unnecessarily restricts the ambit of the provision. It is not uncommon for actions to be brought where a funder and lawyer might seek a collective resolution for a group of persons whose claims may not satisfy the legislative requirement of s 33C but for whom a collective resolution is a sensible thing and for whom the courts would also be accessible if their claim was funded. An example may be where investors in a number of different projects were misled by different project managers in different ways. Their complaints may not be able to be heard as a Part IVA representative proceeding as many facts will be distinct. But if the projects were overseen by the same trustee who failed in a myriad of different ways to perform its duties, they may be able to bring various group proceedings and have them consolidated and heard together. The court has the power to allow this to happen but if the regime, as drafted, was to stand, a funder of these investors would not get the benefit of the exemption. This criteria for an exemption should be removed; 6

7 b) Similarly, item 1, 5C.11.01(1)(b)(ii)(B) would provide that the entitlement of the scheme members to remedies must relate to circumstances that occurred before any issue of interests. In funded class actions, this would effectively nullify s 33K(2) of the FCA, which specifically provides for the alteration of the description of the class to include those whose causes of action accrue after the commencement of the class action proceeding. This restriction denies group membership to those would otherwise be included in the group but whose cause of action accrued after the funder received the first completed contract for funding. This restriction will allow wrongdoers to benefit from ongoing offensive conduct. This criteria for an exemption should also be removed; c) Finally, item 1, 5C.11.01(1)(b)(iv) makes the provision of funds mandatory if the "scheme" is to get the desired exemption yet there are funded class actions where funds are not provided either initially or, in some cases, at all. In some actions the funder provides only an indemnity for costs rather than any funds as such. If costs are not ordered to be paid and security for costs is not agreed or ordered, the litigation funder may never provide funds. MAURICE BLACKBURN 15 August

8 Appendix: Proposed Redrafting Below we set out Maurice Blackburn s proposed re-drafting of the proposed regulations to ensure that the Chapter 7 exemptions are not contingent on adequately managing conflicts of interests, while maintaining the requirement to have adequate measures in place. A. Item 5 After paragraph (1) (w) insert B. Delete item 6 C. Item 7 (x) a financial service provided by a person in the following circumstances the financial service is provided in relation to a scheme mentioned in paragraph 5C (1) (b) or (c); After regulation AA insert AB Obligation on persons providing exempt financial service (1) For paragraph 926B (1) (c), Part 7.6 of the Act applies as if section 911A of the Act were modified to insert the following subsection after subsection (5A). (2) (5B) If the regulations prescribe an exemption that covers the provision of a service by a person under paragraph (2) (k), the regulations may impose obligations on the person. (3) For subsection 911A (5B) of the Act, if a person is providing, or has provided, a financial service covered by the exemption mentioned in paragraph (1) (x), the person must maintain the adequate arrangements for managing a conflict of interests that may arise. (4) For the purposes of paragraph AB (a) (3) person has adequate arrangements for managing a conflict of interest that may arise if the person can show through documentation that: (a) (b) (c) (d) the person has conducted a review of the person s business operations that relate to the scheme to identify and assess potential conflicting interests; and the person: (i) (ii) has written procedures for identifying and managing conflicts of interest; and has effectively implemented the procedures; and the written procedures are regularly reviewed; and the written procedures include procedures about the following: (i) (ii) monitoring the person s operations to identify potential conflicting interests; how to effectively disclose conflicts of interest to: 8

9 (iii) (A) (B) for a scheme mentioned in paragraph 5C (1) (b) members and prospective members of the scheme; and for a scheme mentioned in paragraph 5C (1) (c) the creditors or members of the body corporate who provided funds or indemnities, and any other entity that provided indemnities, to the body corporate or external administrator; and managing situations in which interests may conflict; and (e) (f) (iv) (v) protecting the interests of: (A) (B) for a scheme mentioned in paragraph 5C (1) (b) members of the scheme; and for a scheme mentioned in paragraph 5C (1) (c) the creditors of the body corporate; and for a scheme mentioned in paragraph 5C (1) (b): (A) (B) (C) (D) how to deal with situations in which the lawyer acts for both the funder and other members; and how to deal with situations in which there is a preexisting relationship between any of the funder, lawyer and other members; and reviewing the terms of the funding agreement to ensure the terms are consistent with the Competition and Consumer Act 2010; and recruiting prospective members; and (vi) for a scheme mentioned in paragraph 5C (1) (c) asking creditors of the body corporate to provide funds or indemnities; and for a scheme mentioned in paragraph 5C (1) (b) the terms of the funding agreement are regularly reviewed to ensure the terms are consistent with the Competition and Consumer Act 2010; and the matters mentioned in paragraphs (a) to (e) are implemented, monitored and managed by: (i) (ii) if the person is an entity other than an individual the senior management or partners of the person; or if the person is an individual that represents an entity the senior management or partners of the entity. (5) A person commits an offence if the person contravenes subregulation (2). D. Items 9, 10 and 11 Penalty: 50 penalty units. Amend to delete proposed r (b), A (b), (b) respectively. 9

10 Notes 1 Spice v Pacific Dunlop Limited (Federal Court of Australia, Wilcox J, 7 August 1998); Darcy v Medtel Pty Ltd (No 3) [2004] FCA 807, Courtney v Medtel Pty Ltd (No 5) [2004] FCA 1406; Davies v Smith & Nephew Surgical Pty Ltd (unreported, Federal Court of Australia, Tamberlin J, 29 April 2005). 2 Williams v FAI Home Security Pty Ltd (No 5) [2001] FCA King v AG Australia Holdings Ltd [2003] FCA 1420 (which settled for $112 million); Dorajay Pty Ltd v Aristocrat Leisure Ltd (Federal Court of Australia, 2008, which settled for $144.5 million), P Dawson Nominees Pty Ltd v Multiplex Ltd (Federal Court of Australia, 2010 in which settled for $110 million); Watson v AWB Limited (Federal Court of Australia, 2010 which settled for $39.5 million); 4 Darwalla Milling Co Pty Ltd v F Hoffman - LA Roche Ltd (No 2) [2006] FCA Subject to a possible uplift. For example, in Victoria, lawyers are entitled to charge up to 25% uplift on their fees if a conditional fee agreement has been entered: s of the Legal Profession Act 2004 (Vic). 6 See also Federal Court of Australia Practice Note CM-17, which states: "At or prior to the initial case management conference each party will be expected to disclose any agreement by which a litigation funder is to pay or contribute to the costs of the proceeding, any security for costs or any adverse costs order. Any funding agreement disclosed may be redacted to conceal information which might reasonably be expected to confer a tactical advantage on the other party." 7 The Hon Chris Bowen MP, Minister for Financial Services, Superannuation and Corporate Law, Government acts to ensure access to justice for class action members, Media Release, No 039, 4 May &DocType=0 8 Jarra Creek Central Packing Shed Pty Ltd v Amcor Limited [2011] FCA 671, Para 70 to 71 9 The Hon Chris Bowen MP, Minister for Financial Services, Superannuation and Corporate Law, Op. Cit. 10 Except for the exemption from the application of Part 7.7 in proposed Reg