Omni Bridgeway CEO Andrew Saker
The role of litigation funders in the Australian class action system is currently under assault from a number of vocal pro-business advocates. Their motive is clear: remove the funders and you remove class actions against large companies.
Developments in the class action space this year have provided a platform for these wilfully ill-informed campaigns and, in the process, have obscured the benefits litigation funders can bring to businesses, particularly in this challenging economic environment.
As previously reported by the Global Legal Post, in March this year the Australian government announced a parliamentary inquiry into litigation funding and the class action system. Two months later, the Government expanded the scope of the inquiry and signalled important changes to the sector by introducing a requirement for litigation funders to hold an Australian Financial Services Licence (AFSL) and comply with the managed investment scheme (MIS) regime.
Omni Bridgeway welcomes improvements to the 30-year-old Australian class action system and appropriate regulation of the litigation funding industry. As the pioneer of litigation funding in Australia, we support the introduction of a licensing regime for funders that sets minimum onshore capital adequacy requirements, disclosure obligations and reporting standards. Having previously held an AFSL, we have reapplied for a licence in the context of these reforms.
We are also consulting with the Australian Securities and Investments Commission about appropriate modifications to the MIS regime to ensure it is fit for the purpose of applying to funded class actions.
However, any additional reform measures adopted must strike the right balance and must not have the consequence—unintended or otherwise—of pushing funders out of the market.
This would not only compromise the viability of the class actions regime, but it might also cut off a potential source of liquidity for Australian businesses struggling to survive and manage risks in a Covid-19 world.
Class actions are invariably complex, notoriously expensive and take years to resolve. They are usually brought against well-funded defendants—large corporates who are often insured—or governments. When a funder is involved in a class action, the funder pays the representative claimant’s costs on a non-recourse basis—that is, if the case is lost, the funder is owed nothing; the funder is only reimbursed its costs and receives a fee if the case is successful.
As Australia is a loser-pays jurisdiction, the funder usually also indemnifies the claimant for any adverse costs on an uncapped basis. Litigation funding therefore provides protection to defendants—usually large companies that know their costs will be paid in the event the action is unsuccessful.
In addition to the financial protection they provide to corporate defendants in class actions (if the case is lost), litigation funding can provide other benefits for companies.
In the difficult economic environment caused by the Covid-19 pandemic, almost all businesses, large or small, need to conserve cash and consider ways to access liquidity. And litigation funding is one potential source of capital. While businesses are likely to face a range of new commercial disputes, there will be little room in budgets to pursue legal claims and seek recoveries that may sustain them through the economic downturn.
Litigation outcomes lie in the future and are inherently uncertain. Funders such as Omni Bridgeway are run by highly experienced former dispute lawyers who undertake extensive due diligence to ensure that only meritorious cases are pursued. They also assess the estimated legal costs and strategies to ensure, as far as possible, that they are proportionate to the sums at stake. Litigation funding arrangements are flexible, depending on the circumstances, and use an ‘asset’ that may otherwise be overlooked.
How does it work? By using external funding to finance the costs of a dispute (including lawyer and expert fees, and court costs), legal claims are leveraged as assets. This means the funder pays some or all of these costs in return for a share of the outcome. In this way, businesses can improve liquidity, transfer all or a portion of the legal expenses to the funder, and maintain cash on the balance sheet.
Businesses are also able to leverage the value in their contingent litigation assets by seeking funding in the form of a capital advance, with no corresponding balance sheet liability. And some legal claims can also be monetised by selling them, in whole or in part, to a funder.
Any reforms made to the class action system in Australia as a result of the Federal parliamentary inquiry must be necessary and of clear benefit to all stakeholders. Reforms that stifle the litigation funding industry will not be in anyone’s best interests.
Andrew Saker is chief executive officer and managing director of Omni Bridgeway