On 17 December 2017, the then Attorney-General of Australia, Senator the Honourable George Brandis QC, asked the Australian Law Reform Commission (ALRC) to consider whether and to what extent class action proceedings and third-party litigation funders should be subject to Commonwealth regulation. This month, the ALRC released its Discussion Paper (June 2018), inviting submissions and outlining its key proposals and questions. The President of the ALRC, the Honourable Justice Sarah Derrington, identifies some of the ALRC’s early findings and emphasises the need to look to counterpart jurisdictions to ensure a global approach in developing the class actions regime in Australia.*
* This article will be published in the forthcoming June issue of The Australian Law Journal.
The Inquiry is set against the background of the increased prevalence of class action proceedings in courts throughout Australia, and the important role that litigation funders of class actions and other legal proceedings, including arbitral proceedings, play in securing access to justice.
The ALRC’s terms of reference direct the ALRC to consider two overarching issues of the class action regime: the integrity of third-party funded class actions, and the efficacy of the class action system. They require the ALRC to consider:
- whether there is adequate regulation of conflicts of interest between litigation funder and plaintiffs and between lawyer and litigation funder, including in the relationship between a litigation funder and a legal practice;
- the desirability of imposing prudential requirements, including relating to capital adequacy, and also requirements relating to the character and suitability of litigation funders; and
- the adequacy of regulation around the costs charged by solicitors in funded litigation and, in particular, whether there is adequate regulation of the distribution of proceeds of litigation, including a consideration of the desirability of statutory caps on the proportion of settlements or damages awards that may be retained by lawyers and litigation funders.
In broad terms, the ALRC is asked to inquire into the extent to which the social utility of the class action regime has been achieved through the vindication of just claims through a process characterised by fairness and efficiency to both parties that gives primacy to the interests of litigants.
When Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) introduced the federal class action regime to Australia, the then Attorney-General, the Honourable Michael Duffy said in the Second Reading Speech (14 November 1991):
The new procedure will enhance access to justice, reduce the costs of proceedings and promote efficiency in the use of court resources … Such a procedure is needed for two purposes. The first is to provide a real remedy where, although many people are affected and the total amount at issue is significant, each person’s loss is small and not economically viable to recover in individual actions. It will thus give access to the courts to those in the community who have been effectively denied justice because of the high cost of taking action. The second purpose of the Bill is to deal with the situation where the damages sought by each claimant are large enough to justify individual actions and a large number of persons wish to sue the respondent. The new procedure will mean that groups of persons, whether they be shareholders or investors, or people pursuing consumer claims, will be able to obtain redress and so more cheaply and efficiently than would be the case with individual actions.
The legislation did not, however, enjoy bipartisan support. There were four principal concerns about the regime: first, it was said to be an attack on the traditional method of exercising legal rights; secondly, there were fears it would foster a litigious culture in Australia; thirdly, it was thought it would change the nature of legal practice by the creation of an entrepreneurial class of lawyer promoting proceedings; fourthly, it was seen to be a misdirected overreaction to the problem of the cost of litigation. Former Attorney-General Senator Durack remarked in the Parliamentary Debates, “a number of people would even go so far as to say that [this Bill] is a monstrosity … It really is one of those rather loopy proposals that come up from time to time from commissions like the Law Reform Commission”.
These fears have, in large measure, not materialised. As was intended, the regime has enabled claims to be brought by people with small claims whose number may be such as to make the total amount at issue significant, and to deal efficiently with similar individual claims that are large enough to justify individual actions. To date, the cases that have been brought under the regime reflect a broad range of both commercial and non-commercial causes of action, including shareholder and investor claims, anti-cartel claims, mass tort claims, consumer claims for contravention of consumer protection law, environmental claims, trade union actions, claims under the Migration Act 1958 (Cth), and human rights claims. One of the more recent examples of the type of matter that, under the Pt IVA regime was expected to enhance access to justice, is the formal apology and settlement award of $30 million to 447 residents of Palm Island in their action against the Queensland Government following riots in 2004.
Similarly, despite the concerns that the floodgates of litigation would open as a consequence of Pt IVA, the number of class actions has grown steadily, but not exponentially since the introduction of the legislation. As Professor Vince Morabito’s empirical research has revealed, in the first 12 months of its operation, eight class actions were filed; seven were filed in the following 12 months; and a further 14 in the subsequent 12 months. Twenty-five class actions were filed in the Federal Court in 2016–2017. This represents 0.53% of the total number of causes of action filed in the Federal Court over the same period. To date, approximately 15.4 class actions have, on average, been filed annually in the Federal Court of Australia since the regime commenced in 1992.
Nevertheless, and at the risk of being accused of coming up with yet more “loopy” proposals, the ALRC has been tasked with stepping into the fray once more. In particular, it is revisiting the extent to which the second purpose of the initiating Bill (the ability to obtain redress more cheaply and efficiently) continues to be achieved. The ALRC considers that this question is particularly important in the context of investor and shareholder claims, having regard to the expressed aim of reducing the costs of proceedings and promoting efficiency in the use of court resources.
Shareholder claims are the most commonly filed class actions in the Federal Court, representing 34% (37) of all class actions filed in the last five years. Such claims are usually based on breach of the continuous disclosure and misleading and deceptive conduct provisions of the Corporations Act 2001 (Cth), which were introduced in 2002. Since the introduction of these provisions, 66 shareholder class actions have been filed in the Federal Court. None has proceeded to judgment and there has been relatively little judicial consideration of the provisions, including the validity of the “market-based causation” theory in the context of those provisions, beyond the class action context. It is also noteworthy that, in the last five years, all shareholder class actions were funded by third-party litigation funders, as compared with only 30.7% of consumer protection claims brought by class action.
In the particular context of these types of actions, where Chapter III judicial power is being invoked regularly without the controversy, in respect of which jurisdiction is invoked, ever being resolved by final determination of contested common issues between the parties, attention has been drawn to the role of the Court to safeguard its processes. The Court is concerned to ensure that the practices and procedures of the Court are informed by considerations, including the statutory mandate in s 37M(3) of the FCA Act to facilitate the just resolution of disputes (including representative proceedings) according to law, and as quickly, inexpensively, and efficiently as possible, and the furtherance of the Court’s supervisory and protective role in relation to group members.
Although not indicative of the outcomes in all shareholder class actions, two recent settlements serve to illustrate why concerns have been expressed about the extent to which this form of class action is truly reflective of the concept of “access to justice” as was anticipated by the drafters of the original legislation. In Clarke v Sandhurst Trustees Ltd (No 2)  FCA 511, the Court was asked to approve a settlement sum of $16.85 million, against the starting point for the “best case” recovery for the plaintiffs and group members of $29.8 million and with legal costs of approximately $4.9 million and the funder’s commission amounting to $5.055 million. Only 39% or $6.6 million was returned to the class. Lee J expressed his concerns about the structural difficulty occasioned by litigation of this complexity and cost when the damages sought to be recovered, on a best-case scenario, were relatively modest. In Caason Investments Pty Ltd v Cao (No 2)  FCA 527, the Court approved a settlement where the solicitors received 43% of the $19.25 million settlement sum and the funder received a 30% commission, leaving the group members with 27% of the final amount.
When assessing these two outcomes in light of the original objectives of Pt IVA, there is no doubt that some will say that it is better that class members, who would otherwise have been unable to afford to bring proceedings, received something rather than nothing at all. Others might argue that a system where the transaction costs result in more than 50% of a settlement sum (or a judgment) being paid to lawyers and funders is neither efficient, either in terms of the costs of proceedings or the use of court resources, nor does it promote access to justice – it merely facilitates access to the legal system.
The ALRC has suggested that further work needs to be undertaken to understand why it is that Australia is leading the world in the growth of third-party funded shareholder class actions, none of which proceed to judgment, and a number of which seem to suffer from similar “structural” difficulties to those identified in Clarke v Sandhurst Trustees Ltd (No 2). The ALRC has also identified some broader consequences of the growth in shareholder class actions, including the impact on the value of the investments of shareholders (including the investments of the class members themselves) of the company at the time the company is the subject of the class action, and the impact on the availability of directors and officers (D&O) insurance within the Australian market. The ALRC has suggested that one reason could be the peculiar characteristics of the Australian statutory provisions concerning continuous disclosure obligations under the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commissions Act 2001 (Cth), noting that they differ from those in the United Kingdom where corporate behaviour is not self-evidently worse than in this country. The ALRC will not be making recommendations to change any aspect of the continuous disclosure obligations, or those relating to misleading and deceptive conduct, in the course of its current Inquiry.
At a more fundamental level, the ALRC has invited discussion of whether there might be a means, alternative to class action litigation, of securing collective redress. There is no doubt that the class action regime has enabled many people to pursue claims as a member of a group that they would otherwise have been unable to pursue. Nevertheless, as illustrated by the two cases discussed above, it is also true that class action litigation is expensive and the transaction costs involved in securing relatively modest returns to individual class members, even when the overall sum recovered is relatively large, remain of concern to many. The ALRC considers that the potential benefits of an enhanced regulatory redress mechanism within Australia warrant the consideration of the establishment of a federal collective redress scheme that would enable corporations to provide appropriate redress to those who may be entitled to a remedy, whether under the general law or pursuant to statute, by reason of the conduct of the corporation. Such a scheme would nevertheless permit an individual person or business to remain outside the scheme and to litigate the claim should they so choose.
The relatively new collective redress mechanisms that have been implemented in the United Kingdom by the Financial Services and Markets Act 2000 (UK) and the Consumer Rights Act 2015 (UK) are indicative of the type of redress scheme that could be considered and foreshadow a number of benefits.
The implementation of a public restorative power, or powers, affords an opportunity to deliver compensation and other forms of redress without the need to litigate. Such an approach might lead to a more efficient and effective way for consumers and businesses to obtain compensation and reduce the burden on the civil justice system. It would be a recognition that alternative methods of redress often have very high transaction costs.
This will require a shift by regulators away from an enforcement mindset to one that is focused on providing appropriate redress. A collective redress scheme, which includes a power to include agreements on damages in any settlement procedure, would be a better, more cost-effective, alternative to running the case again as follow-on litigation. Where regulators do not have such a power, and in the absence of a voluntary scheme, compensatory remedies must be pursued through follow-on litigation. This results in duplication of enforcement efforts and consequent delay and expense. Suitably empowered regulators are likely to be able to deliver compensation swiftly and cost-effectively through the ability to resolve the combination of public and private consequences.
A collective redress scheme is likely to be advantageous to consumers who typically have small individual claims. In cases where a class action is likely to yield a very small return to affected class members, even though the overall damage to the aggregate is large, the motivation of individuals to come forward to claim a share of the fund is likely to be very weak. In such circumstances, a compensatory collective redress scheme, in addition to any fine, would likely achieve greater access to justice and at a fraction of the cost of a class action.
A collective redress scheme is also likely to be advantageous to defendants who can avoid, or at least minimise, reputational loss and costs involved in litigation, and allow the company to present the scheme as indicative of a new culture of compliance within the organisation. The potential of incurring a lower penalty in recognition of the company’s willingness to enter into a voluntary redress scheme is also a powerful incentive.
Of course, challenges remain. A single federal collective redress scheme that can be adapted to a wide variety of industries will involve reconfiguring the current industry-based structure of regulators and their role (redress-focused rather than enforcement-focused). This will be a complex reform requiring the regulator, and those who are regulated, to support it. Of particular importance is how such a regulator would be funded, as industry-based regulators are usually funded by the industry not the taxpayer. There is a risk that the regulator’s limited resources might be seen to be diverted from its principal role.
There are also risks for potential defendants. An application for a redress scheme crystallises the company’s liability in circumstances where there is a chance that no claim will be brought. There is a risk that not all potential claims would be captured within the particular redress scheme, exposing the company to litigation in any event. Further, claimants must choose to opt in to the settlement scheme. Those who do not do so may choose instead to issue follow-on proceedings.
It is noteworthy that comparable jurisdictions are currently involved in similar reviews. In March 2018, the Law Commission of Ontario (LCO) initiated a class actions project to consider Ontario’s experience with class actions since the Class Proceedings Act came into force in 1993. Like Australia, Canada has had 25 years’ experience with a statutory class action regime. Unlike Australia, however, no third-party litigation funding industry has as yet developed alongside the class action regime in Canada. The LCO’s mandate is “to conduct an independent, evidence-based, and practical analysis of class actions from the perspective of their three objectives: access to justice, judicial economy, and deterrence”. On 15 March 2018, the President of the New Zealand Law Commission (NZLC) announced that the NZLC had received a reference to review class actions and litigation funding.
The ALRC considers it important to work closely with our counterparts in Canada and New Zealand, and to take heed of relevant developments elsewhere in the common law world, given the global reach of litigation funding and the increasing trend of “class action tourism”.
– The Hon Justice S C Derrington, President, Australian Law Reform Commission