Update on class actions in Australia

Friday 9 July 2021

Robert Johnston

Johnson Winter & Slattery, Sydney

Robert.Johnston@jws.com.au

Sara Gaertner

Johnson Winter & Slattery, Sydney

Sara.Gaertner@jws.com.au

Claudia Boccaccio

Johnson Winter & Slattery, Sydney

Claudia.Boccaccio@jws.com.au

Introduction

Australia’s class action regime has been in effect for over 25 years and is generally considered to be a balanced and very well-functioning system. However, over the last few years, some issues arising have caused disruptions, costly satellite disputes and some very strong partisan political interventions. These issues were mostly around the involvement of third-party litigation funders and multiple law firms vying for the ‘prize’ of running competing class actions.

The last 12 months have seen some more very significant developments in this space, with 2021 shaping-up as being at least as controversial, as courts continue to provide greater clarity surrounding the mechanisms providing returns to litigation funders and overlapping class actions; stakeholders await the first Group Costs Order under Victoria’s contingency fee scheme; and participants work their way through the consequences of recent legislation designed to restrict class actions in Australia.

Common fund order clarity

Litigation funders traditionally collected their ‘returns’ from group members who had entered into funding agreements. This led to enormous efforts in ‘book building’ or signing up as many group members as possible. The courts later grappled with orders effectively requiring all group members to contribute a percentage of their recoveries to funders even if they had not signed agreements with the funder – these were called ‘common fund orders’ (CFOs). They were applied for at an early stage of the case, in part to avoid expensive book building and to provide certainty of the percentage return. In October 2016, the Full Federal Court in Money Max[1] approved an application for an early-stage CFO. However, in December 2019, the High Court, in its decision in BMW Australia Ltd v Brewster [2019] HCA 45 (‘Brewster’), ruled that the Federal Court and NSW Supreme Court did not have power to make CFOs at an early stage of a class action. In doing so, the High Court threw into doubt the court’s power to make CFOs upon the conclusion of proceedings.

Since the High Court’s decision, the NSW Court of Appeal[2] and Full Court of the Federal Court[3] were asked to determine the issue but, ultimately, declined to do so given the hypothetical nature of the questions posed.

In December 2020, the issue came before Justice Lee of the Federal Court of Australia in a less hypothetical sense at the settlement approval hearing for the Swann Insurance class action (in which Johnson Winter and Slattery (JWS) acts for the applicant) where the funder, Balance Legal I UK Capital Ltd, had applied for a CFO.

In Swann,[4] Justice Lee held that, as a matter of principle, there was ample power to make a settlement CFO, and it was a question of discretion as to whether the proposed form of CFO should be made in all circumstances of the case. His Honour was satisfied that the CFO could have been made relying on the power conferred by subsections 33V(1) and 33V(2) of Federal Court Act 1976 and in the Court’s equitable jurisdiction. On consideration of a number of factors, Justice Lee made the proposed settlement CFO in the amount of 25 per cent.

Subsequently, in Davantage,[5] Justice Beach considered that Brewster is not authority for the proposition that there is no power to make a CFO under section 33V(2) of the Act, and the decision as to the making of a CFO was a matter of discretion.

Although Brewster certainly increased the risk to funders, there is no doubt these decisions offer some comfort that the grant of CFOs is available at settlement. As outlined below, should the Parliamentary Joint Committee on Corporations and Financial Services’ recommendations be adopted, legislative reform might further address the uncertainty surrounding CFOs following Brewster.

Competing class actions

The High Court’s hammer has fallen on the competing class action debate, ruling, by a 3:2 majority, that the ‘beauty parade’ process in selecting which of multiple competing class actions should proceed is appropriate and lawful.

On 10 March 2021, the High Court delivered its much-anticipated decision in Wigmans v AMP Ltd [2021] HCA 7 (‘Wigmans’) which followed the decision of the NSW Supreme Court cutting down four competing class actions, all brought against AMP, to one which had been brought by Maurice Blackburn. The applicant of the class action carried by Quinn Emanuel Urquhart & Sullivan, Wigmans, appealed the decision to the NSW Court of Appeal[6] and upon its dismissal, to the High Court.

The majority, comprising Gageler, Gordon and Edelman JJ, found numerous bases in the Court rules and legislation permitting the Court to deal with multiple class actions and to adopt a flexible approach in determining how to make any assessment.

As to the relevant factors, the majority held that there is no ‘one size fits all’ approach and that the representative proceeding commenced first in time is not guaranteed to prevail. In matters involving competing actions, where the interests of the defendants are not differentially affected, the majority said it is necessary for the Court to determine which proceeding going ahead would be in the best interests of group members. The relevant factors to consider will vary from case to case and cannot be exhaustively listed, with litigation funding arrangements to be treated as not irrelevant, but not a mandatory consideration.

The first case to consider the question of carriage post-Wigmans, was CJMcG Pty Ltd as trustee for CJMcG Superannuation Fund v Boral Ltd (No 2) [2021] FCA 350, which concerned three representative proceedings brought against Boral Limited by Quinn Emanuel Urquhart & Sullivan, Maurice Blackburn and Phi Finney McDonald respectively.

There, Justice Lee considered a non-exhaustive list of 11 factors to assess which proceeding should be awarded carriage and decided it was appropriate to allow the proceeding brought by Maurice Blackburn to progress. Whilst the action brought by Quinn Emanuel was permanently stayed, his Honour granted the alternative relief sought by Phi Finney McDonald in allowing their proceeding to continue as a closed class action.

A fourth government inquiry

In December 2020, the Parliamentary Joint Committee on Corporations and Financial Services (‘Committee’) completed the fourth government enquiry in class actions and released its report entitled Litigating funding and the regulation of the class action industry.

The enquiry certainly generated significant interest with the Committee receiving 101 submissions and conducting many public hearings seeing funders closely questioned about rates of return. The report recommends extensive changes to the litigation funding landscape and conduct of class actions by plaintiff firms. The Committee made 31 recommendations including:

  • legislative change to introduce an express power for the Federal Court to resolve competing and multiple class actions, and to make class closure orders;
  • legislative change to address the uncertainty relating to CFOs following Brewster;
  • introducing legislative and judicial requirements regarding litigation funding agreements expressly providing a complete indemnity in favour of the representative plaintiff against an adverse costs order, which must be approved by the court to be enforceable;
  • introduction of a statutory presumption that a litigation funder provide security for costs and a power allowing the court to make a costs order against a litigation funder (such as for costs of work undertaken by a litigation funding fees assessor);
  • further investigation into the feasibility of applying financial services regulation to plaintiff lawyers operating on a contingency fee basis; and
  • greater disclosure as to the obligations on litigation funders and representative plaintiff lawyers to disclose conflicts of interest to the Court and potential class members.

It remains to be seen what legislative action will be taken as a result of this further enquiry.

Increased regulation of litigation funding

We are now seeing the effects of the surprise regulation announced by the Federal Government on 22 May 2020. On that date, it was announced 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 and comply with a series of regulatory requirements including the issue of prospectuses.

We reasoned that this regulation could see funders 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 appears to have been the case, as there has been a marked slowdown in the commencement of new funded class actions in the last nine months as funders grapple with the licensing regime and requirements. As at the date of this article, only a handful of funders have been granted an AFSL, with two of those being very recent. It will become clearer in the coming months whether the new regulations will continue to have a chilling effect on funded class actions, or if the market will see a return to ‘business as usual’.

Contingency fees allowed in Victoria

Last year, Victoria became the first and only jurisdiction in Australia to allow lawyers to charge costs on a contingency fee basis. In class actions, the liability for payment of the contingency fee is shared between the plaintiff and all members of the group under a ‘group costs order’.

It has been some eight months since contingency fees were allowed in Victoria, yet the impact of the change is yet to be realised, but there are now a number of applications for group costs orders awaiting determination.

In all other Australian jurisdictions, lawyers are still prohibited from charging on a contingency fee basis and no other states or the Commonwealth have taken steps to follow suit. However, once we see the effect of group costs orders in Victorian class actions, there could be an uptake in forum shopping which may necessitate legislative change in other jurisdictions to even the playing field.

Looking forward

The Australia class action sphere remains a constantly dynamic, complex and fast evolving practice area so watch this space to see what the rest of 2021 brings.

 

Notes

[1]           Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148.

[2]           Brewster v BMW Australia Ltd [2020] NSWCA 272.

[3]           Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCAFC 183.

[4]           Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd [2020] FCA 1885.

[5]           Evans v Davantage Group Pty Ltd (No 3) [2021] FCA 70.

[6]           Wigmans v AMP Ltd [2019] NSWCA 243.