On 24 January 2019, the Attorney-General for Australia tabled in Parliament the Australian Law Reform Commission (ALRC) report, Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (Report 134, 2018) (ALRC Report).
The Report proposes a new age for class actions and litigation funding in Australia. The Report is released against the backdrop of the Victorian Law Reform Commission's Access to Justice - Litigation Funding and Group Proceedings Report (March 2018) (VLRC Report), which calls for similar change.
The ALRC's Inquiry into Class Action Proceedings and Third-Party Litigation Funders was precipitated by the increased prevalence of class action proceedings throughout Australia and by the key role third-party litigation funders play in securing access to justice.
Since the federal class actions regime was first introduced in 1992, litigation funders have come to dominate the market and, for the main part, drive the class actions that come before Australian courts. In a landscape where litigation funders are neither bound by industry-wide professional ethical obligations nor subject to any character, prudential or other requirements, the ALRC considered whether and to what extent class action proceedings and third-party litigation funders should be subject to further Commonwealth regulation.
After extensive consultation with courts and tribunals, the legal profession, litigation funders, investors and the academic community, the ALRC has made 24 recommendations designed to 'promote fairness and efficiency in class action proceedings, protect litigants and assure the integrity of the civil justice system.'
Clarifying the powers of the Federal CourtThe ALRC makes recommendations to assist the Federal Court of Australia (FCA) case manage class action proceedings effectively, efficiently and fairly.
Constitution of class actions
The ALRC recommends amendments to the Federal Court of Australia Act 1976 (Cth) (FCA Act) to provide that class actions must be initiated as 'open class' (that is, all affected are included in the one proceedings and bound by the result unless they opt out) rather than a 'closed class' (e.g. limited to those who have signed a litigation funding agreement). This is to improve access to justice by enabling all victims of a civil wrong to participate in the class action and not just those who take active steps to join it. This amendment would be supported by amendments to the FCA's Class Actions Practice Note to:
- set out the circumstances in which it may be necessary to close the class to facilitate early settlement; and
- identify the criteria for circumstances in which a class action that has been closed may be reopened.
To support an open class regime, the ALRC recommends amendment to the FCA Act to provide an express statutory power for the Court to order a 'common fund'. A common fund typically requires all members of a class to contribute equally to the legal and litigation funding costs of the proceedings regardless of whether the class member signed a litigation funding agreement.
Competing class actions
The ALRC also recommends amendments to the FCA Act to address the rising incidence of competing or multiple class actions, which increase uncertainty, cost and delays for participants and the burden on the Court. Where possible, the amendments seek to ensure that only one class action with respect to a dispute proceeds, subject to the overriding discretion of the Court.
Exclusive Federal jurisdiction for securities class actions
Against most submissions, the ALRC recommends amendments to Part 9.6A of the Corporations Act 2001 (Cth) (Corporations Act) and s12GJ of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) to confer exclusive jurisdiction on the FCA with respect to representative proceedings arising under that legislation, noting that:
- so far, the vast majority of those cases have been initiated in the FCA; and
- state courts have not yet developed the 'case management jurisprudence to manage those cases efficiently and effectively' which 'raises the spectre of litigants (and their funders) choosing their forum with an eye to obtaining a procedural advantage.'
The ALRC makes recommendations to assist the FCA in its settlement approval decision-making, including that it may appoint a referee to assess the reasonableness of legal costs charged prior to settlement approval.
To increase the accountability of administrators of settlements, support 'open justice' and enable the FCA to design and maintain a database of settlement of Part IVA proceedings, the ALRC also recommends that settlement administrators be required to provide a report to group members and the FCA outlining the distribution of settlement funds.
Regulation of third-party litigation funders
The ALRC acknowledges the key role third-party litigation funders play in providing access to justice for group members, while also recognising the risk that third-party litigation funders may fail to meet their obligations under funding agreements, use the FCA for improper purposes or exercise undue influence over the conduct of proceedings to the detriment of group members.
A raft of recommendations to improve the regulation of litigation funders and support the role of the FCA in protecting the interests of all group members is recommended in lieu of a licensing regime for litigation funders, including:
- providing for greater Court oversight of the third-party litigation funding agreement, including that such agreements are only enforceable with the approval of the Court and that the Court has the power to reject, vary or amend the terms of such agreements;
- requiring that the funder must indemnify the lead plaintiff against an adverse costs order; and
- creating a presumption in favour of security for costs.
Given their obvious financial motivations and imperatives, third-party litigation funders tend to focus upon large cases which appear to have good prospects of strong financial returns, rather than smaller and/or riskier cases. Also, where a litigation funder is involved, group members usually pay two sets of fees: legal costs and disbursements, and third-party litigation funding commissions.
With a view to providing a greater return to group members and to further enable medium-sized class actions to attract funding and proceed, the ALRC recommends the limited introduction of percentage-based (or contingency) fees in Australia which would allow lawyers to charge for legal services by reference to a percentage of the amount recovered by the litigation, provided that:
an action funded through a percentage-based fee agreement could not also be directly funded by a litigation funder or other funding entity which is also charging on a contingent basis;
- percentage-based fees would be required to absorb all legal costs and disbursements (including any premium for an After-The-Event insurance policy);
- there would be a statutory presumption that solicitors utilising percentage-based fee agreements would be required to provide security for costs;
- percentage-based fee agreements would only be enforceable with leave of the Court; and
- the Court would have the power to reject, vary or amend the terms of these agreements.
Conflicts of interestThe ALRC acknowledges actual and perceived conflicts of interest can arise in class actions, particularly with the tripartite arrangement of third-party litigation funder, solicitor and representative plaintiff/group member.
The ALRC recommends that third-party litigation funders be required to report to the Australian Securities Investments Commission to demonstrate compliance with the requirements to meet certain obligations to avoid or mitigate conflicts of interest. The ALRC also recommends the development of a voluntary accreditation program for solicitors who act in class action proceedings, prohibiting arrangements where a solicitor may have an interest in the third-party funder with whom the solicitor is working, and requiring clear and concise communication with group members regarding conflicts of interest.
Areas for further inquiryThe ALRC also recommends two areas for further inquiry:
- a review by Government of the statutory enforcement regimes for regulators so as to facilitate effective, efficient and consistent statutory redress schemes; and
- a broader review of the substantive law which supports shareholder class actions (including continuous disclosure).
Where to now?The ALRC's Report joins the VLRC's Report in calling for stronger regulation of class actions and the litigation funding industry.
We regard most of the ALRC’s recommendations as more ‘fine-tuning’ than radical overhaul and would expect them to be implemented in due course without any particular controversy.
At the same time, we expect continuing resistance, in many quarters, to the recommendation that solicitors be allowed to use percentage-fee based billing arrangements, which opponents have suggested:
- ‘could foster an environment of greed that could result in the bringing of unmeritorious claims’;
- may see ‘vulnerable plaintiffs… agree to contingency fees that do not reflect the amount of work actually required to resolve the claim nor the risk that it is unsuccessful’;
- (according to the NSW Bar Association) may ‘seriously undermine the identity of the legal profession as a profession’ and ‘runs a serious risk of compromising the legal practitioner’s duty to the court, the overriding duty of candour and potentially also the duty to the client’; and
- will not increase the hoped-for access to justice because solicitors charging on a contingency fee basis will not take on difficult or risky cases because (like litigation funders) they will ‘only back cases they can win’, while few law firms have the capacity to take on the risk of an adverse costs order.
We also expect continuing strong opposition to the recommendation that the FCA be given exclusive jurisdiction with respect to representative proceedings arising under the Corporations Act or ASIC Act.
While opponents were ‘concerned that it… [would undermine]… the cooperative approach underpinning the cross-vesting regime and ‘unnecessarily… [restrict]… litigant choice as to forum’ (demonstrating, if nothing else, that one person’s forum shopping can be another person’s freedom of choice), opposition can also be expected from at least some key states and territories as a matter of principle.