How are class actions funded?
As the use of class actions has become more sophisticated over time, the range of options used to fund these kind of cases has also grown. From a plaintiff or group member’s perspective, at present there are two main kinds of funding used in the kinds of class actions that we usually run:
- ‘No Win - No Fee*’ claims, and;
- litigation-funded claims.
Funding arrangements will almost always vary from case to case, and there are a lot of incorrect assumptions circulated about how such funding works and what it means for individual group members' compensation entitlements. It's always important to ensure you understand the arrangements that are being proposed in the specific case you are looking into.
What doesn’t vary from case to case, however, is that the legal costs and risk involved in a class action is taken on by the representative plaintiff, not the individual group members. If you are not a representative plaintiff, you will not face any risk of having to pay the defendants’ legal costs if the case is unsuccessful.
'No Win - No Fee*' class actions
A ‘No Win - No Fee*’ claim is also sometimes described as an ‘unfunded’ or ‘conditional-fee’ claim. Under this kind of arrangement, the lawyers acting for the representative plaintiff and the class will cover the cost of the litigation until it is complete, and will only be entitled to recover their legal costs if the claim is successful. There are a number of variants of this general concept, all of which are required to be set out fully in the Legal Costs Agreement between the lawyers involved and their clients.
Slater and Gordon pioneered the ‘No Win - No Fee*’ approach in the Australian legal landscape, and has been proud to offer to act for many clients on this basis over the course of decades. It was designed to be a way to ensure individuals who wouldn’t otherwise be able to afford to pursue claims had the opportunity to have their day in court, and has in many cases been the difference between a claim being pursued and a defendant getting away with its wrongdoing. Many of our most significant class actions, from the Wallis Lake Hepatitis A class action, to the Croydon Day Surgery claim, to the record-setting Manus Island class action, have been run on a No Win - No Fee* basis.
Third party litigation funding is where a company unrelated to the litigation provides financial resources to enable a claim to be run. Often this will be in the form of paying for a portion of the representative plaintiff’s legal costs each month. It may also be in the form of providing an agreement that the funder will pay for the costs orders that might be made in favour of the defendants if a claim is unsuccessful. In exchange for this financial support, litigation funders generally seek to recover a percentage of the damages or compensation awarded (net of legal costs) at the conclusion of a claim.
The introduction of third-party litigation funding in Australian class actions over the past decade in particular has been a significant development, as it enabled many claims to be pursued that otherwise might not have been able to be run. In the absence of third-party funding, plaintiff law firms would only have had so much capacity to cover the cost of running multiple class actions themselves. Because of this, it is inevitable that fewer claims with genuine merit would have been able to be run if not for the advent of third-party funding.
Third-party funding won’t be appropriate in every case. For example, it’s rarely used in cases involving personal injuries, medical expenses or property damage. The security and strategic advantages it provides can be of significant benefit in many securities and investor class actions, for example. Increasingly, third-party funding is also beneficial in other kinds of claims, such as environmental litigation.
What if I don't understand the funding arrangement?
When you make contact with lawyers about a class action, you’ll be provided with information about how the case is funded, and what this will mean for you. Usually, during the course of the litigation, the Court will also direct the lawyers to provide you with other information in a specific form from time to time. These kinds of information are provided because it’s important that you understand the funding arrangements involved in any class action, so that you are able to make decisions about your participation in the claim.
If anything about the funding arrangement is not clear to you, you can contact us to get more information at any time. As with any financial transaction or agreement, it’s best not to sign or agree to anything unless you are confident you understand it in full – and you can always obtain your own advice or a second opinion about the arrangements involved if you want to.
Legal costs in class actions remain closely supervised by the Court. Approval from the Court is required before costs can be paid to lawyers or third-party funders, and that approval is ordinarily required to be supported by evidence from an independent costs consultant expert. The Court will ordinarily only approve costs being paid if it is satisfied that the amounts being claimed were reasonably incurred. Claimants in class actions also still retain the protections available to them in individual proceedings in terms of legal costs, including the ability to challenge bills of costs and have them reviewed.
Lawyers and third-party litigation funders charge differently: third-party funders generally charge for the amounts they have outlaid, and then as a percentage of the total damages recovered in a claim, while lawyers do not. We charge only for the work we perform and the time we spend on the case. The funding arrangements, and the ultimate amount to be paid to a funder, will be considered by the Court in the course of any application for approval of a proposed settlement of a class action.
The funding arrangements in place in each claim will differ, so it’s important to consider the information available in any particular case in order to understand how the costs and funding in it will work.
We don't take a percentage of the settlement amount
Lawyers acting in class actions charge their fees on the basis of the work they perform and the time they spend on the case – they do not recover a percentage of the damages awarded. Such arrangements are known as ‘contingency fees’ or ‘damages-based fees’, and they are presently prohibited in Australia.
The time records of the lawyers involved will be assessed by an individual costs expert at the conclusion of a case (and increasingly, periodically throughout a case as well), and only the proportion of that time that was reasonably spent and the costs that were appropriately incurred (which includes ensuring that tasks were completed in a sufficiently efficient manner and that they were performed by staff of the appropriate seniority and expertise) will be recoverable in legal costs by lawyers.
Our aim as class action lawyers is to run claims in a way that provides the best possible outcomes for group members. We do this by running industry-leading cases more efficiently, and at lower cost, than other class action firms. Our track record in this regard speaks for itself – our recent analysis of class action settlement data identifies that after accounting for legal costs and litigation funders’ payments.
Slater and Gordon cases over the past decade have returned 75.3 cents on the dollar to group members from settlements, compared to an industry average of 68.5.