Opinion Class actions at the mercy of funders

The problem with class actions that are backed by litigation funders is that a lawyer in such a case may give preference to the wishes of the funder, writes Associate Professor Michael Legg .

Michael Legg 2011 1

OPINION: The problem with class actions that are backed by litigation funders is that a lawyer in such a case may give preference to the wishes of the funder in structuring the proceedings.

A breach of the lawyer's fiduciary duty would be difficult to prove as the arguments for and against the various forms of class action allow for positions to be taken that are arguably in the interests of funder and client.

But there is significant room for a divergence of interests as well.

The use of alternative dispute resolution or settlement offers may give rise to a conflict for the lawyer when the client and funder have different litigation goals.

The funder's aim is to maximise claim value subject to minimising the risk of losing the litigation and being liable for the funded entities' costs and the opponents' costs.

It would be sensible for the funder to accept a lower settlement as the price of removing the uncertainty and risk that accompanies litigation. The funder also has two characteristics that may influence its decision-making. The funder will almost always be incorporated and will have investors or shareholders.

Like other corporations or investments it will need to generate returns, perhaps even with a short-run focus, to avoid investors or shareholders going elsewhere.

The funder will have a portfolio of cases so it needs to make decisions not just based on an individual piece of litigation but in relation to its entire portfolio.

If a case is settled, the revenue from the case can be used to invest in another case. If the return on investment in the instant litigation is lower than that forecast for a planned proceeding, the correct business decision may be to settle promptly.

By comparison, the client has no risk of exposure due to the funding agreement as its costs are being paid by the funder. So the client may wish to press on.

Alternatively, the client may not be concerned solely with recovering damages. The client may want the day in court so as to obtain the imprimatur of the state through a judicial finding of a breach of the law. Similarly, the client may want to achieve non-monetary remedies, such as an apology or a change in conduct, which could include variations to contractual terms or corporate governance changes. The desirability of employing alternative dispute resolution or seeking a settlement, as well as the terms of that settlement, may differ between the funder and the client.

The lawyer caught in the middle of this situation may be placed in a conflict because it has its fiduciary duty to act in the client's best interests and a business relationship with the funder.

The lawyer is paid by the funder regardless of the outcome of the litigation which may discourage settlement.

Some funding agreements provide for the lawyer to receive an uplift on their hourly rate or to be reimbursed a discount if there is a successful resolution. The additional payments may make it in the lawyer's interest to promote a settlement that is acceptable to the funder even if not desired by the client.

These funding agreements seek to address conflicts of interest in relation to settlement by providing various mechanisms whereby an independent barrister is briefed to advise on whether the settlement is reasonable.

The client fetters their right to instruct their lawyer as to whether or not to settle by allowing a disagreement between the client and funder to be resolved by an independent barrister. As a result, the lawyer's conflict as to how to act or advise when there is a disagreement between the client and funder as to settlement is avoided.

But the terms of the mechanism for resolving disagreement are therefore important, emphasising the significance of the advice to be given on the terms of the funding agreement.

The influence and incentives created by litigation funding arrangements create an array of conflicts of interest for the lawyer.

Lawyers have sought to address conflicts of interest through seeking informed consent in the funding arrangements or by recommending the obtaining of independent legal advice.

Australian law accepts a lawyer's fiduciary duty can be attenuated. But there must be a public policy concern that the overuse of fiduciary duty carve-outs undermines public confidence in the legal profession.

On the issues where clients need a loyal lawyer -- such as understanding the fundamental precepts of the funding agreements -- their lawyer goes missing because the conflict of interest is so stark their lawyer cannot advise.

Michael Legg is an associate professor of law at the University of NSW. This is an edited extract of his report, Litigation Funding in Australia, which was produced for the Institute for Litigation Reform of the US Chamber of Commerce.

This article first appeared in The Australian.