Update on class actions in Australia
Johnson Winter & Slattery, Sydney
After smooth sailing for a number of years, in the last 12 months the robust and well-functioning class action landscape in Australia has been thrown into turmoil by a number of significant developments concerning commissions for funders, choosing a ‘winner’ in multiple, overlapping class actions, new regulations designed to reign-in funders and, for the first time in Australia, lawyers being able to charge contingency fees in Victoria.
Common fund order chaos
In December 2019, the High Court in BMW Australia Ltd v Brewster  HCA 45 (‘Brewster’) struck down the Court’s power to make common fund orders (CFO) at an early stage of the proceedings.
Until this decision, courts had made common fund orders at the early stages of matters which, in open class cases, meant all group members had to pay a percentage commission to the funder in return for the compensation they received, that is, not just those who signed funding agreements. This approach encouraged class actions as it gave the funder early financial certainty that it could collect its commission from all group members and not just those it had signed up as part of any book build.
With CFOs now not able to be made at an early stage, the funders’ risks are increased. They either have to spend time and money on an expensive book build or run the risk that they may not be able to get a CFO at the end of the matter, which means they may not get a sufficient return on their capital risked.
Efforts have recently been made to seek to have the courts determine that it is within power to make a CFO at the end of proceedings, either at settlement or judgement. Various interlocutory judgments have suggested that such orders at the end of matters are within power and that the High Court in Brewster did not directly deal with this or mean that such orders are beyond power.
But in the last month, both the New South Wales (NSW) Court of Appeal and the Full Court of the Federal Court were asked to consider this issue. However, each Court declined to do so essentially because the questions were posed as hypotheticals and so were not appropriate to be dealt with at this stage. There were, however, comments made in both judgments to the effect that first, it could not be said with certainty that the plurality in the High Court expressly said that CFOs were beyond power at the end of proceedings and, secondly, that there were probably a number of other specific powers or means by which CFOs could be made at the end of proceedings.
All eyes will be on the Swann class action (in which JWS acts for the Applicant), which has a settlement approval hearing scheduled for 17 December 2020. At that hearing, the application by funder, Balance Legal I UK Capital Ltd, for a CFO will be determined by Justice Lee.
Competing class actions
In the last 12 months we have seen turmoil with multiple, duplicate or overlapping class actions being brought by different funders and different law firms all seeking to profit from the same cases. That resulted in a number of uncomfortable ‘beauty parades’ in which the court was forced to pick a ‘winner’. Not an edifying process.
In December 2018, the NSW Supreme Court undertook the task of cutting down four competing class actions, all brought against AMP, to one. There were initially five competing class actions, however, the proceeding brought by Slater & Gordon was consolidated with that brought by Maurice Blackburn shortly before the hearing. The Maurice Blackburn proceeding came out on top, with the Supreme Court deciding that that proceeding should proceed.
The Applicant of the class action carried by Quinn Emanuel Urquhart & Sullivan, Wigmans, appealed the decision to the NSW Court of Appeal, which was dismissed. The issue has now come before the High Court.
Wigmans agitated the following issues before the High Court:
whether it is prima facie vexatious and oppressive to commence another class action that is duplicative of a class action that is already on foot. The Supreme Court found that it was not an abuse of process to bring a competing class action after one had already been commenced and found that no weight should be given to the first mover advantage;
whether the Supreme Court was empowered to make a forward-looking assessment as to which of the competing class actions is likely to result in the highest net return to group members and to stay one or more of the class actions on that basis. The Supreme Court had selected the Maurice Blackburn proceeding largely on the basis that, in the circumstances, the proposed funding model was likely to provide the best return for group members; and
if the answer to question (2) is yes, whether the Supreme Court was permitted to assume that each class action will achieve the same settlement or judgment sum, where there is no evidence in support of such an assumption.
The High Court heard the appeal on 10 and 11 November 2020. Those in the class action space will be eager for the release of the High Court’s judgment, which will shed light on the approach that is to be taken by the Courts in resolving the issue of competing class actions.
More trials and less settlements?
Historically, class actions in Australia have for the most part settled prior to trial such that the allegations the subject of the proceedings and the evidence in support of the allegations were not tested before the Court.
In October 2020, the shareholder class action against engineering company Worley was dismissed by the Federal Court, making this one of very few shareholder class actions in Australia that has reached judgment and the first shareholder class action to be dismissed after a trial. The Court held that the applicant failed to demonstrate that Worley breached its continuous disclosure obligations and/or engaged in misleading and deceptive conduct when preparing its forecast for the 2014 financial year.
This will prove an important decision, particularly in the context of shareholder class actions, and may kick off a period of respondents being more inclined to proceed to trial as opposed to reaching settlements.
A fourth government inquiry
On 13 May 2020, the Federal Government announced a fourth enquiry into litigation funding. There have been three previous, comprehensive government reviews (the Productivity Commission’s 2014 report on Access to Justice Arrangements, the Victorian Law Reform Commission’s 2018 report on Access to Justice: Litigation Funding and Group Proceedings, and the Australian Law Reform Commission’s 2019 report on Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders). Each has made extensive recommendations. Many have not been implemented. The government instead announced an Australian Parliamentary Joint Committee on Corporations and Financial Services Parliamentary enquiry into ‘litigation funding and the regulation of the class action industry’. This was said to be against the background of a purported ‘explosion’ of class actions in Australia, the outrageous profits made by unregulated litigation funders and the poor returns going to class members compared to lawyers and funders.
The terms of reference for the inquiry are focused on whether the present level of regulation applying to Australia’s growing class action industry is impacting fair and equitable outcomes for plaintiffs, with particular reference to 14 listed matters including:
evidence available regarding the quantum of fees, costs and commissions earned by litigation funders and the treatment of that income;
regulation and oversight of the litigation funding industry and litigation funding agreements; and
the consequences of allowing Australian lawyers to enter into contingency fee agreements or a court to make a costs order based on the percentage of any judgment or settlement.
That enquiry played out in open Senate sessions, which became very partisan and quite heated with the stakeholders pitted against each other in full public gaze. It has certainly generated significant interest, with 93 submissions received and many public hearings. These hearings have seen funders closely questioned about their rates of return, as well as discussion of the new regulations affecting litigation funders (discussed below).
The committee is due to report by 7 December 2020, a very tight time frame.
It is very much ‘watch this space’ and the recommendations and subsequent government action could have far reaching consequences for class actions and, in particular, shareholder class actions, in Australia.
Surprise regulation: litigation funders will require an AFSL
Notwithstanding this further enquiry, and before its report and recommendations are delivered, including about what steps may be necessary to better oversee litigation funders, the Federal Government announced on 22 May 2020 that by 22 August 2020 litigation funders would need to have an Australian Financial Services Licence (AFSL) and class actions would need to be registered under the Managed Investment schemes rules and regulations. Few details have been provided as to exactly what this means and requires, although the changes do not apply to litigation funding schemes for class actions entered before 22 August 2020 and the Australian Securities and Investments Commission (ASIC) has published some materials to assist litigation funders in complying with the new rules.
However, many say the corporate regulator is not best placed to supervise funders on a case-by-case basis, nor do they have the resources to do so (indeed in its submission to the last few enquiries, the regulator argued against this form of regulation and many prefer the Court’s more directed and targeted approach on a case-by-case basis). Some commentators are saying this uncertainty will mean funders will pull back, for up to 12 months, to wait and see the detail and impact of the new regulatory environment before funding further class actions. This will be a negative for potential claimants whose rights may expire in this period and so will not be able to bring actions at a later date. Most commentators agree with appropriate regulation of litigation funders, better protection of consumers and greater transparency, but after a properly considered and consultative process.
Contingency fees allowed in Victoria
Lastly, and probably at least as controversial as the Federal Government’s announcement of regulations for litigation funders, the Victorian state Labour government passed legislation, effective 30 June 2020, allowing lawyers to charge contingency fees in Victorian class actions. Contingency fees are where a lawyer charges a percentage of the damages awarded to their client, instead of hourly professional fees.
This development is a first for Australia. Until this legislation, lawyers across Australia have been prohibited from entering into these contingency fee arrangements. We are one of the only advanced common law countries in the world which has not let lawyers charge contingency fees.
Liability for payment of the contingency fee is shared between the plaintiff and all members of the group under what is termed a ‘Group Costs Order’. But in return for allowing lawyers to charge a contingency fee, the lawyers face increased risk in that they are liable to pay any costs payable to the defendant in the proceeding (we have a loser pays costs system in all cases) and they must provide any security for the costs of the defendant as ordered by the court. As is the case in the United States, and now also in Australia, where litigation funder’s commissions and lawyer’s fees in any settlement are supervised by the court, the lawyer’s contingency fee will also be reviewed and will need to be approved by the court.
This highly contentious situation means that there are real differences between Victoria and every other state and the Commonwealth. It will be very interesting to see if forum shopping increases as lawyers seek to bring class actions in Victoria for the supposed contingency fee benefits and whether the other states or the Commonwealth will follow suit.
The first Group Costs Order has yet to be made. However an application for a Group Costs Order in the Allianz class action (in which JWS acts for the plaintiff) will be before the Supreme Court of Victoria on 14 and 15 December 2020.
The year 2020 has not only been extraordinary because of the disruption caused by Covid-19, but also because of the many significant developments in Australia’s class action landscape. It remains a constantly dynamic, complex and fast-evolving space in which lawyers have to operate.
So (continue to) watch this space!
 Tracy-Ann Fuller v Allianz Australia Insurance Ltd (ACN 000 122 850) & Anor proceeding No S ECI2020 02853.