Australia: Top 10 Developments In Commercial Litigation In 2008

Key Point

  • Economic conditions, court decisions, and a new Federal Government all will generate changes.

1. Economic downturn triggers a rise in litigation

As the economy slowed in 2008, litigation departments became increasingly busy. Demand for litigation has traditionally been counter-cyclical. The conventional wisdom is that in boom times, failed deals are simply put down to the cost of doing business but when the economy comes off the boil, companies are more likely to litigate. With deals scarce on the ground, companies are more inclined to take action to recover their losses.

In addition to advising on failed deals, litigation teams have been kept busy by insolvency-related litigation and actions mounted by aggrieved investors, unaccustomed to margin calls and investment losses.

2. The rise and rise of litigation funding

2008 was a bumper year for litigation funders. The Aristocrat class action was settled for a record $145 million and agreements were signed to fund class actions against Centro, ABC Learning, Octaviar and Pan Pharmaceuticals, just to name a few.

Those companies, which fund class actions in exchange for a share of any settlement or damages award, are having a dramatic impact on commercial litigation. Working with plaintiff lawyers, they have essentially developed a new type of litigation: the financial sector class action. Boardrooms are now on notice that it is not just the regulators who are scrutinising their company announcements, financial statements and share price movements. Litigation funders are constantly on the look out for their next class action.

3. Last year of the Gleeson-led High Court

August 29 marked the end of the Gleeson era, as the 11th Chief Justice of the High Court reached the constitutional retirement age. The Gleeson court will be fondly remembered by the business community. Gleeson promoted consensus on the bench which resulted in over a decade of stability and certainty in the law affecting commercial relations.

Gleeson's legacy also includes returning the principle of personal responsibility to the law of negligence and confirming the expanded jurisdiction of the Commonwealth through the Workchoices decision.

4. Sub-prime litigation

The fallout from the sub-prime crisis triggered an explosion of litigation in the USA in 2008. We saw a similar spike in litigation after the dot com bust in 2000. What is different this time around is the range of parties that are being sued. Actions have been brought against essentially every participant in the securitisation process from mortgage originators and real estate agents, to ratings agencies, issuers of sub-prime backed bonds and accounting firms.

Sub-prime litigation in Australia has been more confined. Actions have been brought against companies caught out by the liquidity freeze and at least one arranger of structured finance products. Recently, there has also been talk of actions being launched against ratings agencies.

5. Spotlight on the cost of litigation

How to keep litigation costs under control was again a key issue in 2008. In the shadow of the C7 appeal, various proposals were mooted to discourage mega-litigation including abolishing the tax deductibility of legal costs. The review of the Victorian civil justice system recommended a range of measures to reduce the cost of litigation such as narrowing the scope of discovery. Such a proposal would be welcomed by clients and lawyers alike. The forensic benefit of complex discovery processes rarely justifies the costs involved and unless this process can be streamlined, parties will be increasingly reluctant to litigate.

We would not be surprised if the courts take action on this issue. We predict that over the next twelve months we will see a trend towards more active case management by the courts including an increase in orders for compulsory mediation prior to discovery.

6. A new government

Faced with a severe financial crisis in its first full year on the job, the Rudd government resisted the temptation to over regulate. It will however, be interesting to see what flows from the government's review of credit ratings agencies and its survey of company directors. With many in the media calling for greater regulation of the financial services industry, we could see the development of new laws and causes of action in 2009. In terms of its broader legislative agenda, significant amendments were made to the Trade Practices Act and the Attorney General, Robert McClelland, took steps towards a uniform national approach to proportionate liability.

7. Push for an action for invasion of privacy gathers pace

The debate about personal privacy was brought to a head in 2008, with the Australian Law Reform Commission recommending the introduction of a statutory cause of action for a serious invasion of privacy. Calls for greater protection of individuals' privacy have grown louder since defamation laws were watered down in 2005. Under the national defamation laws, the media are free to publish anything that is true, no matter how personal. It will be interesting to see whether the government will be prepared to adopt the ALRC's recommendation and risk upsetting powerful media lobbies. If the government does not act, we predict that a common law action will be developed by the courts.

8. Protecting privilege

The protection of client legal privilege was the sleeper issue of 2008. Since the decision in the Federal Court case of Rich v Harrington was handed down at the end of last year, claims for privilege over communications with in-house lawyers are being far more closely scrutinised by the courts. There is a plain risk for companies that commercial strategy will be revealed through the loss of privilege over internal communications.

In this environment, the time is right for businesses to conduct a privilege audit. To reduce their exposure to litigation risk, companies now need to review their internal structures and processes to ensure in-house lawyers have sufficient independence to maintain claims for privilege.

9. Criminalising cartels

The headline issue in trade practices law in 2008 was the release of draft laws to criminalise serious cartel conduct. If the draft legislation is ultimately enacted, offenders will risk gaol sentences of up to 5 years and fines of up to $220,000 for individuals and $10 million for corporations. The expansion of white collar crime provisions into the trade practices field will bring Australia in to line with many overseas jurisdictions, including Germany, the US and the UK.

10. An emboldened regulator?

After enduring accusations over the years of being too conservative in its approach to prosecuting corporate misfeasance, the Australian Securities and Investments Commission took the bold move of launching a $200 million action against KPMG over its auditing of various Westpoint entities. Some commentators have suggested that this marks the emergence of a more emboldened regulator. On the whole, 2008 was a litigious year for ASIC. The corporate regulator's prosecution of former directors of James Hardie went to trial in September and it has 16 actions relating to the Westpoint collapse on foot.

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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