The Australian Law Reform Commission’s (ALRC) report ‘Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders’[1], was released on 25 January 2019. The report makes 24 recommendations in an effort to ‘shake up’ a now-booming sector.  The ALRC received over 75 submissions in response to their initial Discussion Paper[2], including a submission by Norton Rose Fulbright partners, Nicole Wearne, Matthew Ellis and Andrew Riordan, drawing on their experience in class actions.

1.      Recommendations

1.1    Reducing competing class actions

The report contains recommendations aimed at reducing the incidence of competing class actions. The first of the recommendations proposes amending the Federal Court of Australia Act 1976 (Cth) (the Act) to return the class action regime to its original design of open class actions. The decision in Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd[3] saw closed class actions become the norm in the Australian class action landscape.

As noted by the ALRC in its 1988 report “Grouped Proceedings in the Federal Court”[4] the aim of open class actions is to ensure that a single binding decision can be achieved by including all related claims within the class action and not just the claims of individuals who have taken steps to join the class action.[5]  An ‘opt-out’ scheme was considered the preferable option from an ‘access to justice perspective’ as it meant that all people, not just those who were able to take active steps to join, would be able to enjoy the benefit of the class action if it were successful.

The ALRC notes that the recommendation that class actions be “open class and opt out” is aimed at ensuring potential group members do not need to sign up with a lawyer or funder to participate in a class action.   The ALRC has also recommended that the Federal Court’s Class Actions Practice Note be amended to set out criteria for when it would appropriate to close or reopen a class.[6]

Recommendation 4 proposes giving the Federal Court an express statutory power to resolve competing class actions.   As proposed in the ALRC’s Discussion Paper 86, if there are two or more competing class actions, the Court would be required to determine which one of those proceedings would progress and must stay the competing proceeding(s).[7]

The ALRC report remarks that “[w]hen designing the class actions regime, it is clear that the ALRC did not envisage that competing class actions may arise, and yet, since 1992 there have been 513 class actions commenced in relation to 335 legal disputes…”[8] and “[n]early all competing class actions in the Federal Court involve shareholder and investor disputes or product liability.”[9]

The report states:

[a]s a matter of public policy only one class action with respect to a dispute should proceed, subject to the overriding discretion of the Court where it would be inefficient or otherwise antithetical to the interest of justice to allow only one class action to proceed.[10]

The report notes that this recommendation is “…intended to be evolutionary rather than revolutionary”, and draws on existing jurisprudence of the Federal Court designed at addressing the adverse consequences arising from competing class actions.[11]

The ALRC also recommends changing the Class Actions Practice Note (GPN-CA) to provide a case management process for competing class actions.[12] This would include identifying potential competing class actions as soon as practicable; and if there are competing class actions, holding a selection hearing or carriage motion to determine the shape of the action going forward, the representative applicant, lawyer and funder, and approve any funding agreement and costs agreement on a common fund basis.[13]

The report also recommends amending Part 9.6A of the Corporations Act 2001 (Cth) and s 12GJ of the Australian Securities and Investments Commission Act 2001 (Cth) to confer exclusive jurisdiction on the Federal Court of Australia with respect to civil matters, commenced as representative proceedings, arising under that legislation.[14]

The proposal to confer exclusive jurisdiction on the Federal Court is aimed at reducing the incidence of multi-jurisdictional competing class actions and address potential forum shopping.  The report also notes that the vast majority of securities class actions have been initiated in the Federal Court and certain case management jurisprudence has developed in the Federal Court which has not yet developed in the state courts.[15]

1.2    Contingency fee model

Recommendations 17 to 19 are aimed at introducing a percentage based fee model (contingency fee) which can be charged by plaintiff lawyers in class actions.  This new fee model has the potential to result in an increase in class actions not attractive to litigation funders.  Specifically, this recommendation “may further enable medium-sized class action matters to proceed.”[16]  Interestingly, the report highlights that “[a]ll shareholder actions filed in the period between 2013–2018 were funded whilst only an average of 34% of consumer protection claims and mass torts claims attracted third-party litigation funding.”[17]

1.3    Awarding costs for non-compliance

Recommendation 13 is focused on empowering the Court to award costs against third-party litigation funders and insurers who fail to comply with the overarching purposes of the Act prescribed by s 37M.[18]

1.4    Continuous disclosure obligations

In the Discussion Paper, and now through Recommendation 24, the ALRC proposes that the Australian Government should commission a review of the legal and economic impact of the operation, enforcement, and effects of continuous disclosure obligations and those relating to misleading and deceptive conduct contained in the Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth).[19] Notably, Attorney-General, Christian Porter has stated that “change in that area is just not a high priority,”[20] consistent with the views expressed in NRFA’s submission.[21]

2.   To License or not to license?

In the ALRC’s discussion paper, they had originally proposed a bespoke licensing regime for litigation funders overseen by a statutory regulator.   Their report acknowledged that an appropriate framework by which to regulate litigation funders has been a ‘point of contention’.[22]

The ALRC has instead recommended giving the Federal Court greater powers in respect of funders, such as including a statutory presumption that third party funders will provide security for costs in a form enforceable in Australia.[23]  However, in taking into consideration the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry the ALRC stated:

“In this context, if the ALRC were to recommend financial services licensing it would be    doing so in circumstances where the existing licensing regime has been revealed to have      manifest limitations and is likely to be subject to a protracted process of reform.”[24]

The timing of the Final Report of the Banking Royal Commission and the uncertainty regarding the stability of the financial services regulatory regime has therefore weighed against what many commentators assumed would be the imposition of further regulation on funders. This is unfortunate because in the Interim Report, Commissioner Hayne seemed to suggest that a wholesale re-writing of the financial services regulatory regime was unnecessary when it was non-compliance with existing laws and the lack of enforcement of those laws that was principally in issue.

A copy of the ALRC final report can be accessed here.

[1] Australian Law Reform Commission Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (Report No 134, December 2018).

[2] Australian Law Reform Commission Inquiry into Class Action Proceedings and Third-Party Litigation Funders, Discussion Paper (Report No 85, 2018).

[3] (2007) 164 FCR 275.

[4] Australian Law Reform Commission Grouped Proceedings in the Federal Court (Report No 46, December 1988).

[5] An Inquiry into Class Action Proceedings (n 1) 90 [4.5]..

[6] Ibid 94.

[7] Ibid 107,[4.66]

[8] Ibid 102 [4.51].

[9] Ibid 103 [4.51].

[10] Ibid 107 [4.63].

[11] Ibid 107 [4.64]

[12] Ibid 114.

[13] Ibid 114-115 [4.97].

[14] Ibid 126.

[15] Ibid 127-128 [4.152]

[16] Ibid 185 [7.3].

[17] Ibid 66 [2.67].

[18] Ibid 13.

[19] Ibid 259.

[20] Nicola Berkovic, ‘ALRC Calls for Class Action Overhaul’, the Australian (Australia, 25 January 2019).

[21] Nicole Wearne, Matthew Ellis, Andrew Riordan, Submission No 40 to ALRC, An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (July 2018) 5.

[22] An Inquiry into Class Action Proceedings (n 1) 154 [6.7].

[23] Ibid 163.

[24] Ibid 162 [6.40].