Class actions in Australia

October 2013 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

Class actions have now been a part of the Australian legal landscape for over 20 years. In recent years, Australia has become the most likely jurisdiction outside of the United States in which a corporation will face significant class action litigation. The growing number of class actions in Australia is the result of several factors, including Australia’s liberal and plaintiff-friendly class action regime, and a predominantly unregulated litigation funding sector.

The most common class actions in the early years of the Australian regime were product liability claims. The largest was the class action commenced by Nixon against the tobacco companies, which had a class that included every person then living in Australia. These claims became less common following changes to Australian tort laws in the early 2000s, but have recently resurfaced, particularly in the pharmaceutical sector.

The first shareholder class action was filed in Australia in 1999. Since then, at least 30 shareholder class actions have been commenced in Australia, but only three have proceeded to trial and none to final judgment. In recent years, financial products class actions have been particularly common, and ‘mergers and acquisitions’ class actions have begun to emerge. In the United States, it has been estimated that almost 92 percent of merger and acquisition deals in 2012 with a value greater than $100m attracted one or more class actions (Cain and Davidoff, 2013).

Although the Federal Court of Australia and the Supreme Courts of New South Wales and Victoria all have similar statutory class action regimes, the majority of class actions in Australia are filed in the Federal Court. A class action can be commenced in the Federal Court wherever seven or more people have claims which arise out of the same, similar or related circumstances and give rise to a substantial common issue of fact or law.

Unlike the federal class action regime in the United States, class actions in Australia do not require certification of a class in order to proceed, and do not require that the common issues for the class predominate over other issues.

The key features of the Australian legal landscape which discourage or provide a constraint on class actions are the ‘loser pays’ rule (which holds that an unsuccessful party to litigation will usually bear the costs of the successful party), and the fact that Australian lawyers are prohibited from charging contingency fees (that is, fees charged on a ‘no win, no fee’ basis and calculated by reference to the value of the claim). However, these features have been undermined in recent years by the increasing availability of third party litigation funding.

Litigation funding in Australia

Until relatively recently, and subject to limited exceptions in insurance and insolvency contexts, third party litigation funding was prohibited in Australia on the basis that it amounted to maintenance and champerty.

This position changed in August 2006 with the decision of the High Court of Australia in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386. In that case, the High Court ruled that third party non-lawyer litigation funding was not contrary to public policy or an abuse of process. Subject to the terms of individual funding agreements (which may give rise to questions as to enforceability and whether the related class action should be stayed or struck out), litigation funding is now permissible in Australia. Significantly, third party non-lawyer litigation funders are able to agree and secure contingency fees.

It has become clear since 2006 that the High Court’s ruling in Fostif represented a significant change in the Australian litigation environment. Academics such as Professor Vince Morabito have reported that, in the three years following the High Court’s decision, the number of shareholder class actions in Australia trebled (Morabito, 2010). As a result of this change, the focus of attention has shifted from whether litigation funding is permissible to how it might be appropriately regulated.

To date, efforts to secure appropriate regulation of litigation funders have proved to be unsuccessful. In 2012, following decisions of the Federal Court and the High Court in relation to the regulation of litigation funding in Australia, the Australian government passed regulations exempting litigation funders from most Australian financial services legislation, including requirements to register as a managed investment scheme and to hold an Australian financial services licence. At present, the only requirement imposed on third party non-lawyer litigation funders is to have in place adequate procedures to deal with conflicts of interest (ASIC Regulatory Guide 248).

The growing acceptance of third party litigation funding in Australia has had some interesting results. In June, the Full Court of the Federal Court considered applications for security for costs made by the defendants in a series of class actions related to failed forestry plantation schemes. The Court found that, in the circumstances of the case, it was necessary for the claimants to provide evidence as to why they had not obtained third party commercial litigation funding. In the absence of this evidence, the Court could not conclude that an order for security for costs would stultify the litigation.

In May, the trustee of litigation funder Claims Funding Australia (CFA) sought an order that it would be justified in funding a class action run by the plaintiff law firm Maurice Blackburn, with which CFA has close links: the firm has provided financial support to CFA, two of the firm’s senior principals are shareholders in CFA, another principal is a director of CFA, and all of the firm’s principals are beneficiaries of the trust formed to establish CFA. When it comes to determine the application, the Federal Court will consider whether allowing CFA to fund the class action would breach the prohibition on lawyers charging contingency fees in Australia or involve a conflict of interest contrary to Maurice Blackburn’s professional legal obligations.

Defendants and settlement

In the past, class action claimants in Australia usually targeted the defendant that had the closest connection to the alleged loss and damage. More recently, a trend has emerged of joining all those connected with the loss, including auditors, advisers, brokers, rating agencies and directors. Notably, in 2012, the Federal Court found for the claimants in a class action against ratings agency Standard and Poor’s in relation to a AAA rating given to certain constant proportion debt obligations. This was the first ruling in the world against a ratings agency in relation to its rating of financial products.

Most class actions in Australia do not proceed to judgment but instead settle. However, in this context, appropriate and effective risk management of class actions by defendants is challenging because there is usually significant information asymmetry. A class action defendant will often have limited information as to the size of the class (particularly in Australia where classes can be defined by reference to criteria), limited particulars as to the loss and damage suffered by the class and individual class members, and few documents concerning those claims.

Courts in Australia have generally been reluctant to address this issue. This position is supported by the fact that the Australian class action regime does not require class members to take positive steps in the proceeding, and requires common questions to be addressed first, before the individual position of the class members.

More recently, certain Australian courts have evidenced a change in approach, particularly the Supreme Court of Victoria. Conscious of statutory obligations to ensure the just, efficient, timely and cost effective resolution of the real issues in litigation, the Supreme Court of Victoria has been willing to order the provision of material which will assist defendants in assessing and managing their exposure to class action claims. In this context, courts have been willing to order closure of a class (so that it comprises a defined number of claimants), the provision of particulars as to at least the loss and damage of some members of the class, and discovery of relevant documents connected to the above issues. However, to date, such a course has only been ordered where a class action is close to trial or a mediation and there are thought to be reasonable prospects that the provision of material of this type will promote settlement.

Conclusion

Recent developments in the Australian legal landscape, including the increasing acceptance of third party non-lawyer litigation funding, have facilitated a growing number of class action claims in Australia. At least in part, these developments are the direct result of the Australian government’s support for class actions, and non-lawyer private sector funding of class actions, as an important means of facilitating access to the civil justice system. However, to some extent, the checks and balances in the Australian system have helped to prevent what was predicted in the mid-2000s to be an explosion of class action activity.

Peter O’Donahoo is a partner and Mark Hosking is a lawyer at Allens. Mr O’Donahoo can be contacted on+61 3 9613 8742 or by email: Peter.O’Donahoo@allens.com.au.

Peter O’Donahoo and Mark Hosking

Allens