The Australian Litigation Funding Association warned yesterday that a High Court decision reining in activities of litigation funders in Australia would stymie class actions and drive up costs borne by consumers.
The High Court yesterday ruled in a majority judgment that common fund orders, which are used by many litigation funders to formalise their payment arrangements, can longer be granted by the Federal Court or the Supreme Court of New South Wales.
Common fund orders require consumers who stand to gain from a class action settlement to contribute to a litigation funder's fees, regardless of whether they have signed a funding agreement.
However, the High Court ruled that recent decisions in the Federal Court and the NSW Supreme Court upholding common fund orders were invalid.
The judgments of the lower courts were appealed to the High Court by Westpac and carmaker, BMW.
Westpac currently faces a class action brought against its financial advisers for alleged mis-selling of insurance policies.
ALFA chairman John Walker said the judgment would make it harder for consumer class actions to make it to court.
"The decision is likely to diminish access to justice and force litigation funders to adopt the more expensive book building approach that will put pressure on fees," he said.
Walker said litigation funders were now focusing on proposed legislative changes in Victoria that would open a path for legal firms such as Maurice Blackburn and Slater & Gordon to self-fund class actions without having to rely on specialist litigation funders such as IMF Bentham.
However, he said large litigation funders with deep experience in the sector such as IMF would continue to support cases.
While recent entrants to the sector were heavily dependent on common fund orders to make their cases viable, he said established funders still had sufficient expertise and community networks to undertake book builds.
Book building refers to the process of funders and litigation firms signing up members to a class action before a case is brought before the courts.
In the absence of common fund orders only those consumers signed up for a case are eligible to secure compensation.
Book builds might involve advertising for expressions of interest from people to join potential class actions and then making a commercial assessment on whether there is a sound business case for a case to proceed.
Book building favors litigation funding providers that have a national footprint and are able to maintain regular contact with investors, consumer groups and other community organisations likely to be involved in class actions.
An immediate implication of the High Court's judgment is that the value of compensation claims made through future class actions will decline because many consumers are unlikely to sign up to cases.
While that might erode the strategic position of consumers, it's positive news for the banking sector which has become highly exposed to litigation activity in recent years. Each of the major banks are facing class actions relating to matters flowing from the Hayne Royal Commission.
According to a report issued to clients last night by King & Wood Mallesons partners Moira Saville and Alex Morris, many class actions on foot in the Federal Court and the Supreme Court of NSW, will have to be set aside.
"To the extent that common fund orders remain on foot in ongoing class actions, those orders have been shown by the High Court to be beyond power - at least in the Federal Court and the Supreme Court of New South Wales," KWM partners wrote in their report.
"Those orders can be of no effect and should, as a formality, be set aside without disputation by representative applicants."