Class Actions Update: Law reform recommendations for an evolving class actions landscape

What you need to know

The Australian Law Reform Commission has published its 339 page Final Report making 24 recommendations to reform the Australian Class Actions regime.

The key recommendations include:

• enhanced case management powers;
• increased court supervision of litigation funders; and
• court-supervised percentage-based contingency fees.

The ALRC does not support a licensing regime for litigation funders.

What you need to do

The government is open to receiving comments on the recommendations while it considers the report.

What does the report recommend?

On 11 December 2017 the then Attorney-General asked the Australian Law Reform Commission (ALCR) to consider whether and to what extent class action proceedings and third-party litigation funders should be subject to Commonwealth regulation. In particular, the ALRC would review whether there is adequate regulation of conflicts of interest between litigation funders, plaintiffs and lawyers, whether prudential requirements should be imposed on litigation funders and whether the costs charged by solicitors in funded litigation were adequately regulated.

The ALRC published a discussion paper on 31 May 2018, summarised in our earlier update here, and submissions were invited by 31 July 2018. A copy of Ashurst's submission is available here.

The following table provides an overview of the ALRC's 24 recommendations tabled in Parliament on 24 January 2019:

How will litigation funders be regulated?

In its 2018 discussion paper, the ALRC proposed that a licensing regime be introduced for litigation funders, to be modelled on the financial services licensing regime and administered by the Australian Securities and Investments Commission.

However, following consultation, the ALRC noted that the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry had uncovered manifest limitations and is likely to recommend significant reform to the financial services licensing regime. Further, ASIC noted in its submission that given ASIC's risk-based approach to regulation, it seems unlikely such an area would be a main focus of its work even if it had jurisdiction for it. Accordingly, the ALRC formed the view that the same level of consumer protection could be achieved by increased court supervision without the regulatory burden of a licensing regime.

The ALRC has recommended a number of measures to increase court supervision of litigation funders. These include the requirement for court approval of litigation funding agreements and that there be a presumption in favour of security for costs. In addition, the court should be empowered to make costs orders against litigation funders who fail to comply with the overarching purposes of the Federal Court of Australia Act 1976.

Will contingency fees be introduced?

Australian solicitors are not permitted to bill clients for a percentage of the amount recovered by litigation. This is a blanket prohibition contained in the State and Territory legislation regulating the legal profession and covering all types of legal services for all legal actions.

Despite this long standing prohibition, the Productivity Commission and the Victorian Law Reform Commission have recommended in recent years that contingency fees be permitted.

The ALRC has now recommended that percentage-based fee agreements should be permitted in class actions proceedings filed in Australian courts, but only with leave of the court to be obtained at the beginning of the proceeding and reviewed as part of the settlement approval process.

However the ALRC's report does not deal with the mechanism by which this change would be introduced. This would likely require the cooperation of governments in all States and Territories to amend the relevant legislation.

How should competing class actions be managed?

The ALRC considered the problem of competing class actions. For a discussion of the recent caselaw on carriage motions in Australia.

The ALRC put forward a process whereby, after an initial interlocutory hearing, other potential claimants would be notified that a class action had been commenced and given 90 days to consider and lodge a competing claim. Representative applicants would be required to disclose their costs agreements and funding agreements to the court on a confidential basis. Then, if there were no competing class actions, the court would approve any funding agreement or legal fees. If there were competing class actions, there would be a selection hearing.

The ALRC supported a principles-based approach to awarding carriage in competing class actions. This would involve identifying the proceeding that best advances the claims and interests of group members in an efficient and cost effective manner having regard to the stated preferences of group members, rather than the current approach of using a long multi-factorial list.

The ALRC noted that on 1 November 2018, the Chief Justices of the Federal Court and Supreme Court of NSW entered into a protocol whereby representative judges may convene a joint case management hearing to deal with competing class actions commenced in different courts. The ALRC recommended that other States with class action regimes, Victoria and Queensland, sign up to the protocol.

Common fund orders

Common fund orders typically require 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 funding agreement.

The ALRC considered that common fund orders should be supported by an express statutory power, as the availability of such orders was said to be consistent with, and supportive of, a number of the other recommendations in the report.

The ALRC however noted that two potential constitutional issues have been raised in Lenthall v Westpac Banking Corporation (Federal Court proceedings) and Brewster v BMW Australia (NSW Supreme Court proceedings):

• First, whether a common fund order is an exercise of judicial power for the purpose of Chapter III of the Constitution; and
• Secondly, whether a common fund order may constitute an acquisition of property other than on just terms.

These appeals will be heard in a joint sitting of the Full Federal Court and the New South Wales Court of Appeal on 4 and 5 February 2019. If there are constitutional issues with common fund orders, it seems unlikely that these could be overcome simply through statutory reform.

Our thoughts

A review of the regulation of class actions and litigation funding has been a worthwhile and timely exercise given the significance of class actions to the litigation landscape and the number of important issues which still need to be resolved by the courts.

The recommendation that the Federal Court have exclusive jurisdiction for shareholder class actions is likely to be controversial. As noted in the report, many will feel that this would unnecessarily restrict litigant choice as to their dispute resolution forum. The recently agreed Protocol for Communication and Cooperation Between Supreme Court of New South Wales and Federal Court of Australia in Class Action Proceedings seeks to address competing class actions across these jurisdictions (with similar arrangements likely to be considered by other states and territories with class action regimes). Conferral of exclusive jurisdiction to the Federal Court for actions brought under Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) is unlikely to be implemented.

The recommendation that only open class actions should be commenced is also likely to be seen as an unnecessary restriction on litigant choice, particularly as closed classes enable group members to maintain control over the size and scope of the class action.

Finally, we welcome the proposal that the parliament commission a review of the legal and economic impacts of continuous disclosure obligations and those relating to misleading and deceptive conduct. We agree with the ALRC that a thorough understanding of the "double-edged" nature of these substantive provisions contained in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) and how they underpin shareholder class actions is needed in order to consider whether their objectives are being achieved and whether reform is necessary.

What happens next?

Many of the ALRC recommendations would require legislation, with limited time available before the upcoming federal election. The Government has said that it will consult further on the ALRC's recommendations before they are considered by Cabinet.

Some proposals, such as the introduction of contingency fees, may require a co-ordinated approach by multiple governments, which can take time and be difficult to achieve.

Other changes, such as amendments to the Federal Court's class actions practice note and the extension of the existing protocol for case management of competing class actions, may be adopted by the courts whether or not the ALRC's recommendations are implemented in legislation.