Following a request by the Commonwealth Attorney General in December 2017 to consider whether and to what extent class actions and litigation funders should be subject to Commonwealth regulation, the Australian Law Reform Commission (ALRC) has recently published its discussion paper, and has invited public submissions on an initial set of proposals.
The ALRC's discussion paper does exactly what it needs to do – provoke discussion about particular issues in the direction and practice of class actions in Australia. But that is only the first step – and there is detail that needs to be carefully worked out.
In this article, we look at four of the key proposals the ALRC has set out in the paper, and consider how class action reform might affect plaintiffs, defendants and litigation funders.
THE ALRC'S FOUR KEY PROPOSALS
Proposal: Setting the cat amongst the pigeons - a review of the 'legal and economic impact' that Australia's continuous disclosure regime and misleading or deceptive prohibitions have on listed entities.
The ALRC suggests that class actions and these legal regimes have combined in an unintended way to affect the value of shareholders' investments and put pressure on the availability of directors and officers insurance (D&O insurance).
The effect of these regimes on the availability of D&O insurance is not clear cut.
As the ALRC notes in its discussion paper, there is evidence of large recent increases in premiums, but that follows a period of 'chronic under-pricing of D&O business by insurers' since 2011.
Further, as class action academic Professor Michael Legg has recently observed, insurance structures may not have responded to the risks of class actions. With most continuous disclosure or misleading or deceptive conduct claims being made against the company (or against the company and directors), it is the company's insurance ('Side C insurance') that gets the greatest workout. But Side C insurance is not often offered or priced separately in a way that might better address and account for class action risk.
Given it is beyond the scope of the ALRC's terms of reference to review the underlying merit of Australia's continuous disclosure and misleading or deceptive conduct laws, it is clear that the ALRC's proposal is directed to instigating a broader debate about reform – a debate many would argue cannot come soon enough.
Proposal: Allowing solicitors acting for plaintiffs in class actions to charge contingency fees.
Currently, lawyers across Australia are prohibited from charging fees on contingency – that is, fees calculated as a percentage of the amount successfully recovered by a plaintiff. Litigation funders can do this.
The ALRC proposes to allow lawyers acting for plaintiffs in class action proceedings to charge contingency fees in the event the class action is successful.
Contingency fees are a divisive issue. While the ALRC does not purport to settle any debates, it does seek to address concerns held by some that the introduction of contingency fees will lead to lawyers bringing speculative or poorly prepared litigation in order to share in settlements extracted from defendants. The ALRC has done so by proposing that three strict conditions be imposed when contingency fees are charged:
- An action funded under a contingency fee arrangement cannot also be funded by a litigation funder – that is, the funded litigation has to be entirely run by solicitors on a contingency fee basis, or entirely funded by a litigation funder.
- Contingency fees cannot be charged as a 'bonus' – that is, they cannot be recovered in addition to legal fees charged on a time-costs basis.
- Under any contingency fee agreement, solicitors must pay for all disbursements (such as counsel's fees) and indemnify the representative plaintiff against an adverse costs order.
These conditions closely resemble conditions that would be included in a litigation funding agreement, meaning that the ALRC's proposal to permit contingency fees is unlikely to fundamentally alter the structure of class actions in Australia. Further, because contingency fees would be limited only to lawyers acting for plaintiffs in class action proceedings, the ALRC's proposal would not affect the wider non-class action litigation landscape.
However, the proposal is likely to encourage competition between litigation funders and the law firms they currently fund, and may see lawyers taking a larger commercial role as players within the Australian class action industry.
Proposal: Preventing competing class actions by consolidating claims into a single class action.
Both plaintiffs and defendants suffer when a defendant is subject to competing class actions.
For plaintiffs, competing proceedings mean uncertainty and delay. For defendants, they mean cost duplication (or multiplication) for every stage of the process.
The five competing actions commenced against AMP are a recent high profile example. But the problem is longer standing – the 513 class actions commenced across all class action jurisdictions in Australia up to June 2017 concerned only 335 legal disputes.1
The ALRC proposes a three-step strategy to deal with competing class actions:
- Open classes and common fund orders: All class actions would need to be 'open class' actions, as opposed to 'closed class' actions where the plaintiff group is limited to those signed up with a particular funder. 'Common fund orders' would become the default method for funding agreements, so the costs of running a proceeding are paid evenly by the group members who benefit.2
- Selection hearings or 'beauty
parades': Once one claimant and their legal team
commences a class action, potential claimants (and their
lawyers/funders) would be required to commence any competing action
within a certain period after that.
If a competing class action is commenced within that period, the Court will hold a 'selection hearing' to decide which representative plaintiff, legal team and funder will run the action. The process—colloquially called a 'beauty parade'—involves the Court assessing differences between legal teams and the competing actions, such as:- differences in scope and case theory between the competing actions;
- the comparable state of the teams' preparation;
- difference in the experience or competence of legal practitioners; and
- the terms of the respective funding arrangements, including the commission fees payable and the structure of legal fees.
To minimise the risk of a 'race to the court', the court would not give any precedence to the legal team that first filed their class action. - Exclusive jurisdiction for the Federal Court: The Federal Court would become the exclusive forum for most investor class actions, by granting the Federal Court exclusive jurisdiction to hear class action claims brought under the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth).
Proposal: Light-touch licensing requirements for litigation funders overseen by ASIC
To date, there has not been public evidence of poorly-funded or poorly-behaved litigation funders. It appears that the ALRC wants to ensure that litigation funding's clean record remains that way, by proposing that litigation funders be required to obtain and maintain a bespoke 'litigation funding licence' to operate in Australia.
The proposed licence would require third-party litigation funders to:
- ensure their services are provided efficiently, honestly and fairly;
- be clear, honest and accurate in their communication;
- have arrangements for conflicts of interest, risk management and dispute resolution; and
- be audited.
The ALRC now seeks input on whether litigation funders should also be subject to capital adequacy or cash flow rules, or character tests or qualifications requirements as part of the licensing regime.
INCREASED COURT SUPERVISION OF CLASS ACTION PROCEEDINGS
A common theme throughout the ALRC's proposals is an expansion of the Court's role in proactively managing and supervising the business-side of class action proceedings.
Examples of that expansion include:
- charging of contingency fees only with the permission of the Court;
- a statutory power for the Court to reject vary or set the commission rage in litigation funding agreements; and
- the introduction of Court-appointed costs assessors to examine whether work was completed most efficiently.
This supervisory role is consistent with the existing class action regimes. For example, currently, all class action settlements must be approved by the Court. But it is important to note that the ALRC appears particularly concerned to protect the interests of group members by keeping a tight leash on the costs, fees and commissions charged by law firms and litigation funders.
WHAT'S NEXT?
The ALRC's discussion paper does exactly what it needs to do – provoke discussion about particular issues in the direction and practice of class actions in Australia.
But there are difficulties in the detail that the ALRC must resolve in preparing its final report. For instance:
- The consolidation processes to deal with competing actions may still create a race to the Court because the clock starts to tick once the first proceeding is filed. This might lower the standard of pre-commencement investigations and pleadings, leading to delay and inefficiency later.
- Granting the Federal Court exclusive jurisdiction for most investor class actions may make it the specialised venue for all investor class actions, while state courts develop jurisdictions suited to a broader types of claim for large scale personal injury, property damage or government liability. Whether a two-stream system like this is desirable needs to be considered carefully.
The Victorian Law Reform Commission (VLRC) has recently released its own final report into litigation funding and access to justice. The ALRC's final report, having the benefit of the VLRC's work, must also include a view on how to coordinate reform across state and federal jurisdictions.
Given the complexity of the issues at hand, the ALRC will need to urgently clarify both the direction and the detail of proposed reform before it gives its final report by 21 December 2018.
Corrs Class Action Reform Panel Event – Melbourne, Thursday 26 July 2018
On Thursday 26 July, Corrs is hosting a special Class Action Reform Panel Event in Melbourne, which will feature a keynote address by The Hon. Justice John Dixon of the Supreme Court of Victoria. Following His Honour's address, Corrs Partners Daniel Marquet and Matthew Critchley will moderate a panel discussion featuring Justice Dixon, Hugh McLernon (Executive Director - IMF Bentham), Lisa Nichols QC (Senior Counsel - Victorian Bar) and Tim Finney (Director - Phi, Finney McDonald). The panel will be discussing their views on how class action reforms are likely to affect plaintiffs, defendants and the legal profession.
To register to attend, please email events.melbourne@corrs.com.au
Footnotes
1 Vince Morabito, "The First Twenty-Five Years of Class Actions in Australia: An Empirical Study of Australia's Class Action Regimes, Fifth Report" (July 2017) quoted in ALRC's Discussion Paper 85 at [6.4].
2 Common fund orders have only been ordered in a handful of cases, and only since 2016: see, eg, Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148 and Blairgowrie Trading Ltd v Allco Finance Group Ltd (in liq) (No 3) [2017] FCA 330.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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