What connections between a lawyer and a litigation funder are appropriate in class actions and other litigation

Submitted by Anna Robertson

Laurence John Bolitho v Banksia Securities Limited (ACN 004 736 458) & Ors [2014] VSC 582

Circumstances in which lawyers who are connected with litigation funders and stand to benefit from a contingency fee arrangement (either directly or indirectly) – will be restrained from continuing to act in order to protect the integrity of the judicial process and the due administration of justice.

Background

  1. In Banksia,[1] one of several Defendants sought to restrain the plaintiff’s solicitor (the Solicitor) and senior counsel (Senior Counsel) from continuing to act for the plaintiff (Mr Bolitho).
  2. The basis of the application was that the litigation funding agreement (Funding Agreement) entered into by Mr Bolitho with a litigation funder (Litigation Funder) put the Solicitor and Senior Counsel in a position of conflict of interest and duty.
  3. The majority shareholders in the Litigation Funder included:
    • the Solicitor’s superannuation fund and another company controlled by him (which held a 45% interest) and
    • a company controlled by the wife of the Senior Counsel (which also held a 45% interest).
  4. The Solicitor was also a director and secretary of the Litigation Funder.
  5. Under the Funding Agreement, the Litigation Funder was entitled to 30% of the amount received by way or an award or settlement of the proceeding. It also had an ability to exercise control over the conduct of the proceeding.
  6. The Solicitor had agreed to act on a “no win no fee” basis with a 25% uplift fee on success. He had also agreed to indemnify Mr Bolitho against any liability arising out of the proceeding subject to Mr Bolitho agreeing to accept the advice of the Solicitor and Senior Counsel.
  7. Senior Counsel was not acting on a ‘no win no fee’ basis.

Issue

The primary issue in the application was whether the Solicitor and Senior Counsel ought to be restrained from continuing to act on behalf of Mr Bolitho.

Decision

Ferguson JA identified the relevant principle as being that a lawyer will be restrained from acting where a fair-minded, reasonably informed member of the public would conclude that restraint is necessary in order to protect the proper administration of justice. The jurisdiction will be exercised in exceptional circumstances.

After taking into account a lawyer’s common law and statutory duties, including the paramount duty to the court to further the administration of justice,[2] her Honour held that there was a real risk to the proper administration of justice if the Solicitor and Senior Counsel continued to act.[3] They stood to benefit from a contingency fee (either directly or indirectly)[4] and a reasonable observer would likely conclude that on balance they should be restrained.

Why were the Solicitor and Senior Counsel restrained from acting?

In relation to the Solicitor, there were several reasons why this was so.

First, although the litigation funding success fee would not be payable to the Solicitor in his capacity as a solicitor, it was nevertheless a contingency fee that would benefit him. Her Honour observed that “it would be inimical to the appearance of justice for lawyers to skirt around the prohibition on contingency fees by this means; particularly where the legal practitioner’s interest in the funder is sizeable”.[5] The situation may perhaps have been different if the Solicitor’s interest in the Litigation Funder had been less than 45 %, but the size of the Solicitor’s interest and the quantum of the claim were potentially more than something that might otherwise have been regarded as “insufficiently significant to give rise to concern.”[6]

Second, the Solicitor wore a number of “hats”. He was Mr Bolitho’s solicitor; he was a director and secretary of the Litigation Funder; and he also had an indirect shareholding in the Litigation Funder. These factors gave rise to a concern that his role as solicitor and officer of the court may be compromised.

Third, there was an additional risk that objectivity might be compromised to some degree because there was a ‘no win no fee’ arrangement in place, so the fees of the practitioner were at stake. This risk was even greater in this case because of the Solicitor’s financial interest in the Litigation Funder’s exposure.[7]

Ferguson JA considered that these difficulties for the Solicitor were compounded because Senior Counsel (through his wife) also had a connection to the Litigation Funder. Her Honour considered that this further tarnished the appearance of justice, because there was no senior lawyer representing Mr Bolitho who was independent of the Litigation Funder.[8]

Her Honour observed that the considerations set out above weighed more heavily than the desire of Mr Bolitho to continue to engage the Solicitor, or the public interest in not depriving a party of their chosen lawyer. This was not a case where restraint of the Solicitor would stultify or delay the litigation (having regard to the fact that the application was brought early in the proceeding). There was no access to justice issue. Her Honour made the order restraining the Solicitor from continuing to act.

Similarly, in relation to the question whether Senior Counsel should continue to act, Ferguson JA concluded that Senior Counsel ought to be restrained. There was a real risk to the proper administration of justice if Senior Counsel continued to act because:

  • if the case was settled favourably or succeeded, Senior Counsel stood to indirectly benefit from the contingency fee payable to the Litigation Funder; and
  • there was a perception that interest may colour Senior Counsel’s ability to perform his obligations; including his overriding duty to the Court. This was so not withstanding that:
    • Senior Counsel was not himself acting on a ‘no win no fee’ basis (hence had no interest in ensuing receipt of his fees);
    • Mr Bolitho was prepared to provide undertakings to obtain independent advice in relation to settlement; and that
    • there were legislative protections in place and the Court would play a role in supervision of the group proceedings.

ASIC Regulatory Guide 248

A further issue which Ferguson JA considered, without deciding, was whether under the regulatory framework for litigation funding schemes, a lawyer acting as a litigation funder constituted an unregistered managed investment scheme.

Her Honour noted that the Australian Securities and Investments Commission Regulatory Guide 248 seemed to accept that lawyers could take on dual roles as lawyers and also funders, provided that adequate measures were put in place to address any conflicts that arose. Her Honour did opine, obiter, that in her view, a lawyer acting as a litigation funder was operating an unregistered managed investment scheme.[9]

Implications of Decision

The decision makes clear that where the lawyer for a Plaintiff in a class action (or, presumably, any other form of action) has a connection or interest in the litigation funder supporting the action, and is likely to benefit either directly or indirectly from the funding commission (contingency fee) payable to the funder, the Court can and may restrain the lawyer from continuing to act as the lawyers in the proceeding.

Defendants need to be alert to what funding arrangements are in place to fund a class action. They need to consider who the ultimate funders are; whether any of the lawyers have an interest in the litigation funder; and move promptly to make any applications to restrain the legal practitioners from acting.

The Banksia decision is an important ruling on the relatively untested question of what connections between a lawyer and a litigation funder are appropriate, in class actions and presumably other litigation. The question whether a lawyer utilising a Banksia-type funding arrangement is operating an unregistered managed investment scheme remains to be fully tested.

 


 

[1] Laurence John Bolitho v Banksia Securities Limited (ACN 004 736 458) & Ors [2014] VSC 582 is a group proceeding commenced by the Plaintiff against numerous defendants including auditors, directors and others. The proceeding arises out of the collapse of Banksia Securities Limited following the appointment of receivers. The Plaintiff represents a group of debenture holders who suffered loss and damage of more than $100 million when the company collapsed.

[2] Ibid at [31]

[3] Ibid [67]

[4] Ferguson JA referred to the decision in Clyne v NSW Bar Association (1960) 104 CLR 186 at 203 and to the circumstances in which restraint of a legal practitioner may be warranted including where the practitioner has a financial interest in the litigation such as an interest in the subject-matter of the litigation or remuneration proportionate to the amount which might be recovered by the client.

[5] Ibid [51]

[6] Ibid [52]

[7] Ibid [53]

[8] Ibid [54]

[9] Ibid [34] – [39]

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