The principles that underpin the class action regime in Australia.
In March 1992, Part IVA of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) introduced a federal class action regime within Australia. In the Second Reading Speech, then Attorney-General, the Honourable Michael Duffy said:
“The new procedure will enhance access to justice, reduce the costs of proceedings and promote efficiency in the use of court resources … Such a procedure is needed for two purposes. The first is to provide a real remedy where, although many people are affected and the total amount at issue is significant, each person’s loss is small and not economically viable to recover in individual actions. It will thus give access to the courts to those in the community who have been effectively denied justice because of the high cost of taking action. The second purpose of the Bill is to deal with the situation where the damages sought by each claimant are large enough to justify individual actions and a large number of persons wish to sue the respondent. The new procedure will mean that groups of persons, whether they be shareholders or investors, or people pursuing consumer claims, will be able to obtain redress and so more cheaply and efficiently than would be the case with individual actions.”(1)
It is beyond doubt the regime has provided access to justice for:
- A group of people with small claims whose number may be such as to make the total amount at issue significant
- To deal efficiently with similar individual claims that are large enough to justify individual actions.
From a consumer and small business perspective, there are significant advantages in collective redress both in terms of availability, costs and speed of obtaining a remedy when compared to private litigation.
Moreover, the current enforcement settings in Australia have been shown to be deficient. The Banking Royal Commission has highlighted the need for systemic reform of law enforcement in the financial sector. There is no doubt that business as usual is not an option
Enter, litigation funders.
LITIGATION FUNDING: AN INVESTMENT WITH A POSITIVE SOCIAL IMPACT
Litigation funders are an entrenched element of class action proceedings, and that the class action sector is growing and diversifying.
“It is the legitimate use of the Court’s processes in a common enterprise of a commercial character to obtain mutual benefits for each of the group members, the funder and the solicitors should not be undermined by proceedings that disproportionately benefit the funder and solicitors, rather than the litigants.”
Litigation funding is effectively “high risk, unsecured lending”, which is why Litigation Funders receive a percentage of the financial benefit payable to group members.
LITIGATION FUNDING AS AN INDUSTRY:
Growth forecast at an annualised 7.8% over the five years through to 2022-2023.
September 2013 – September 2016: funded actions were 49 % of all filed class actions.
2013 – 2018: Funded class actions were 63.9% of all filed class actions.
Funded actions in 2018 period constitute 77.7% of all filed class actions.
Number of domestic and international funders operating in the Australian market has grown steadily with approximately 25 funders active in the Australian market.
From a consumer and small business perspective, there are significant advantages in collective redress both in terms of availability, costs and speed of obtaining a remedy when compared to private litigation. Moreover, the current enforcement settings in Australia have been shown to be deficient.
The Banking Royal Commission has highlighted the need for systemic reform of law enforcement in the financial sector. There is no doubt that business as usual is not an option.
REGULATION OF LITIGATION FUNDERS
Corporations Regulation stipulates that that terms of the are consistent with Division 2 of the Corporations Regulation.
1. If funders do not wish to comply with Division 2 of the Corporation Regulation, they must hold an Australian Financial Services Licence (“AFSL”).
2. ASIC has supplemented the Corporations Regulations with a regulatory guide to the processes that a litigation funder must implement in order to prevent conflicts of interest.
– This is why you will receive a Conflicts Disclosure Statement as part of your pack of funding documents.
3. Group members’ interests are given primacy – proceedings must not disproportionately benefit the funder and solicitors, rather than the litigants.
- Greater Court oversight of litigation funding agreements
- Requiring third-party litigation funders should be required to join the Australian Financial Complaints Authority Scheme.
- Court must ensure efficiency, control expense and delay, without compromising fairness. Courts can appoint a referee to assess the reasonableness of costs.
- Limited introduction of contingency fees (no win/no fee) for solicitors (no win/no fee)
- Amending the Corporations Act (2001) (Cth) to require third- party litigation funders (who are funding class actions) to obtain and maintain a ‘litigation funding’ AFSL, with associated minimum capital adequacy requirements
- Exempting charitable/pro bono funders from the requirement to hold an AFSL.
- Ensuring existing mutual recognition of appropriately regulated foreign funders continues.
- Requiring third-party litigation funders to join the Australian Financial Complaints Authority Scheme.
THE ECONOMICS OF CLASS ACTIONS: ‘BOOK BUILDING’, FREE RIDERS, COMMON FUND ORDERS AND FUNDING EQUALISATION ORDERS.
A snapshot of the evolution of class action proceedings in recent times – from Money Max to Brewster and beyond.
MONEY MAX (2016) – THE BIRTH OF THE COMMON FUND ORDER.
Decision of Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016) held that Common Fund Orders (CFOs) could be made at the beginning of proceedings under Federal Court of Australia Act (s 33ZF) and its State-based equivalents.
Common fund orders required group members to contribute to the litigation funder a percentage of their entitlement under any settlement or judgment, whether or not the group member had entered into a funding agreement with the funder, to ensure the economic viability of class actions.
BREWSTER 2019 – THE DEATH OF THE COMMON FUND ORDER?
High Court decision in Australia BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall  HCA 45, 2019 held that courts can no-longer rely on Federal Court of Australia Act (s 33ZF) and its State-based equivalents to make common fund orders at the outset of class action proceedings.
Central to the case was whether section 33ZF of the Federal Court Act and section 183 of the Civil Procedure Act (NSW) empower the court, in representative proceedings, to make a common fund order. The court, by a 5:2 majority, said that the sections do not.
In the lead judgment, Chief Justice Susan Kiefel, Justice Virginia Bell, and Justice Patrick Keane said that both section empower the courts to make any appropriate or necessary order “to ensure that justice is done,” but the power does not extend to making common fund orders.
“These sections empower the making of orders as to how an action should proceed in order to do justice. They are not concerned with the radically different question as to whether an action can proceed at all,” the justices said. “It is not appropriate or necessary to ensure that justice is done in a representative proceeding for a court to promote the prosecution of the proceeding in order to enable it to be heard and determined by that court. The making of an order at the outset of a representative proceeding, in order to assure a potential funder of the litigation of a sufficient level of return upon its investment to secure its support for the proceeding, is beyond the purpose of the legislation.”
Consequently, absent any statutory intervention, common fund orders of this kind will no longer feature in the Australian class action landscape.
It remains to be seen whether the government will take the ALRC’s recommendation to pass legislation giving courts the express statutory power to make common fund orders.
Even if such legislation is introduced, it remains susceptible to the constitutional challenges which were not determined by the High Court in Brewster.
CONSEQUENCES OF BREWSTER, A RETURN TO A 2016, PRE-MONEY MAX ENVIRONMENT.
1. Bookbuilding is back
The prior practice of seeking to sign individual funding agreements with as many group members as possible (a process known as “book-building”). Group members are asked to sign a funding agreement which lists the percentage commission payable to the funder if the action succeeds.
2. Consequence of insufficient group participation
- Funders reconsider the economic viability of any class actions currently on foot
- Funders are deterred from from funding (and therefore lawyers from seeking to run) proceedings where the anticipated judgment amount per group member is low.
3. Funders likely to prefer ‘Opt In’ rather than ‘Opt Out’ class actions:
Opt-In class actions with “closed classes” that excludes group members who do not sign a funding agreement.
- “Funded cases will not be filed unless or until they have built a sufficiently strong book, which means that litigation will not be commenced as quickly,” he said. “It will be far more expensive to get cases off the ground due to the high costs associated with building a book, creating real challenges for less well-resourced funders.”
4. Funding Equalisation Orders
Made at the end of an action, a funding equalisation order spreads the commission the funder is contractually entitled to receive across all participating group members (so that the funded group members are not worse-off from their decision to help fund the claim).