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Legal questions over litigation funding

US-STYLE litigation is here. Despite legal concerns regarding the legality of funding arrangements, the recent finance broking scandal has thrown the whole issue into the public arena.

While victims of the finance brokers’ scandal see their salvation in the highly publicised litigation funding by Hugh McLernon’s Insolvency Management Fund Pty Ltd (IMF), more traditional legal circles are concerned by the growth of this industry and its implications for justice. Balancing the needs of the public and the integrity of the justice is an area ripe for review.

Access to justice for the public is limited by its enormous cost.

“The courts, like the Ritz Hotel, are open to both rich and poor” noted Justice Barry, in his forward to a textbook on costs.

In other common law countries and in decades past in Australia, plaintiffs would look to assistance from government-funded legal aid. The only recipients of legal aid in recent years have been criminals and children in family law matters. Without the litigation funding arrangements being offered by entities such as IMF, many plaintiffs, such as the finance broking victims, would simply have no options.

At first glance litigation funding, or “champerty”, like contingency fees, offers a practical solution to the costing issue. However, there has been longstanding condemnation

of champerty because of the

abuses to which it may give rise.

“The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even suborn witnesses,” Wrote Lord Justice Scrutton in an English case in 1933.

Why is this different to any normal litigant? Parties to an action are expected to be cross examined on their behaviour, whereas a third party’s conduct, if left unchallenged, would not be subject to the scrutiny of the court.

The erosion of the prohibition of champerty and maintenance in recent years is mainly by statutory regulation. Liquidators, receivers, administrators and insurance companies all conduct litigation on behalf of others. However, they do not derive their profit from a percentage of the damages won. In 1993 in New South Wales, the government enacted the Main-tenance and Champerty Abolition Act 1993.

Mr McLernon has been operating as a litigation funder for the past 10 years, since he left the partnership of Robinson Cox (now Clayton Utz). IMF is licensed by the State Government to collect debts under the Debt Collectors Licensing Act.

“Of the 300-400 cases IMF has funded, none has been successfully challenged on the grounds of champerty and maintenance,” Mr McLernon said.

“It is the case that the English common law rules are now outmoded. Public policy no longer questions champerty in favour of giving the public access to the courts rather than preventing such access.”

The robust view taken by Mr McLernon is not shared by legal identities such as Ken Martin QC, president of the WA Law Society. Mr Martin was of the view that, while debt collectors have always been entitled to collect a debt on behalf of another, historically they were entitled to a fee for services and not “a slice of the action”.

“Trafficking in litigation is a crime. It is also an actionable tort. If a court exposes champerty and maintenance of its own volition, it can permanently stay the action. In the last 10 years, liberality has crept in, but it remains a crime,” he said.

“Recent disputes that have involved such allegations have only been of an interlocutory nature. No one has challenged them at a full hearing. No green light has been given for litigation funding arrangements. They remain the subject of doubt. If enough dollars are involved, someone will take them on.”

As a barrister, Mr Martin said that, “in the past, issues of champerty and maintenance used to be very infrequent. Now, cases seem raise these issues on a monthly basis. It is a national phenomenon.”

Success fees based on percentages can lead to remuneration out of all proportion to effort and risk involved. In the finance broking litigation the fees have been negotiated at 35 per cent. Mr McLernon said fees were usually more in the 40 per cent to 50 per cent range.

For defendants, the benefits of litigation funding are one sided in its ambit. If the defendant successfully defends the claim, there is usually little prospect of recovering the costs from an impecunious plaintiff.

The litigation funder is usually protected from costs orders, leaving the successful defendant empty handed.

“There is a case for the Law Reform commission to grasp the nettle and reform this area. The WA Government could consider passing legislation that specifically deals with the matter, along the lines of the New South Wales statute. It does not create open slather,” Mr Martin said.

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