Learning from Australia's CFA lessons

Mark Simpson considers the implications of the House of Lords' decision on barristers' immunity in Hall v Simons.

As in many other countries, the need for better and cheaper access to justice has forced governments in every Australian jurisdiction to look at new ways of funding litigation. The idea of lawyers funding litigation "on spec"- which for so long constituted champerty at common law – suddenly became the perfect solution.

Australia has had conditional fee agreements (CFAs) for almost five years and these agreements, coupled with the country's particular brand of class actions, have resulted in what many consider an alarming trend towards US-style speculative multi-plaintiff litigation. Whether the introduction of collective conditional fee agreements (CCFAs), either alone or in combination with the new group litigation orders (GLOs), will send the UK down a similar path, remains to be seen.

Lawyers are permitted to charge clients on a speculative fee basis in every Australian jurisdiction. If successful, they can recover the usual fee or the usual fee plus a percentage of that fee on top to compensate for the risk of funding the litigation in the first place. This is distinct from the US-style contingency fee agreements where lawyers charge clients on the basis that, if successful, they recover a percentage of the amount awarded to their client.

Not all Australian jurisdictions permit uplifts on fees in the event of a win. In those jurisdictions that do, the percentage ranges from 25 per cent to 100 per cent. In all cases individual litigants are still responsible for paying disbursements and remain liable for paying the other parties' costs in the event that their claim fails. CFAs are available in respect of all civil matters, with the exception of family law matters.

There seems little doubt that the advent of CFAs in Australia has improved access to justice for those who may have previously been unable to pursue their claim because of the cost involved.

When they were first introduced, it was feared that CFAs would lead to a flood of litigation and the prosecution of unmeritorious claims. While the flood of claims has not eventuated, there is evidence to suggest that one of the adverse effects of CFAs has been the proliferation of marginal claims commenced to encourage "nuisance value" settlements.

Unlike the situation which exists in the UK, in Australia there is no requirement for lawyers to provide clients with individual risk assessments. It would seem to be counter-intuitive for lawyers to speculatively finance claims which they realise have little prospect of success. However, it is sometimes the case that the mere prospect of expensive and protracted litigation (particularly with multiple litigants) will force a settlement offer at a very early stage. Thus, even when confronted with a weak case, the rewards which may flow from comparatively little investment will justify the risk.

Unlike the current proposal in the UK, there is no provision in Australia for CCFAs. A lawyer must enter into a separate CFA with each client. But this has in no way deterred lawyers from using CFAs in grouped proceedings such as class actions, which are permissible in some Australian jurisdictions.

The procedure governing class actions in the Federal Court of Australia (where they are most prevalent) provides that a successful defendant can only recover their costs against the often single-named plaintiff, as opposed to the entire class. This, coupled with the absence of any requirement for a risk assessment, has led to some entrepreneurial lawyers using class actions to initiate claims on behalf of plaintiffs of little or no means in the hope of generating large profits. In the event that they are not successful, it is unlikely that the usually large corporate defendants would go to the trouble of bankrupting an individual to recover a fraction of its actual costs.

CFAs in class actions are so prevalent that it is common for judges to ask to view CFAs on a confidential basis to ensure that the arrangements, particularly the uplift, are fair and reasonable.

Many saw the introduction of CFAs as the beginning of Australia's descent towards US-style speculative mass tort litigation. And five years down the track, there seems no reason to doubt their predictions. But fortunately there is some disparity between the number of proceedings being commenced and those ending in a settlement or verdict favourable to the plaintiffs.

It remains to be seen whether the UK's experience will be any different with either CFAs or CCFAs – it is perhaps too soon to tell. However, the thing which has so far set the UK apart from both the US and Australia, is the preparedness of plaintiffs' firms to take on the risk of funding mass tort litigation. It is hard to imagine that CCFAs as they are currently envisaged will change this. What may well open the floodgates is the introduction of a genuine class action procedure. This obviously entails changes well beyond those contemplated by the new GLOs.

Stuart Clark is a partner at Clayton Utz in Sydney.