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AUSTRALIA: An Introduction to Dispute Resolution: Class Action (Plaintiff)

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Australia: Dispute Resolution: Class Action (Plaintiff)

By Phi Finney McDonald

The Australian class action landscape has changed markedly during 2021, with significant regulatory developments impacting class actions across Federal and State jurisdictions. In particular:

1. Contingency Fees: From mid-2020, plaintiff law firms have been permitted to apply for a Group Costs Order (GCO) in class action proceedings commenced in the Supreme Court of Victoria. If granted by the Court, a GCO would entitle the firm to a percentage of any amount recovered in the class action.

2. Litigation Funder Licensing: From August 2020, litigation funders have been required to hold Australian Financial Services Licences and register funded class actions as Managed Investment Schemes under the Corporations Act 2001 (Cth).

3. Continuous Disclosure Reforms: Corporations Act amendments require shareholder class action plaintiffs to establish a ‘mental element’ in continuous disclosure and related misleading conduct claims, whereas previously the contraventions were strict liability.

4. Statutory Price Presumptions and Funding Reform: Further legislation is proposed that would introduce a rebuttable presumption on the minimum amount that a class action funded under a litigation funding agreement must return to claimants. The legislation also seeks to promote ‘book building’ and potentially poses difficulties for common fund orders and funded open class actions.

This period of intensive regulatory reform will create significant uncertainty for funded class actions in the short to medium term, particularly as Courts are asked to interpret the new provisions. There will certainly be much for Australian class action participants and stakeholders to monitor in the year ahead.

Contingency Fees 

In July 2020, the State of Victoria became the only jurisdiction in Australia to permit a plaintiff to apply to the Court for a GCO. Such an order would allow the lawyers for the plaintiff to be remunerated by a contingency fee (that is, a percentage of any damages recovered).

The Court will make a GCO only if it is appropriate or necessary to ensure that justice is done in the litigation. There is no automatic right to a contingency fee. Indeed, the first ever GCO application was rejected by the Court (see Fox v Westpac; Crawford v ANZ [2021] VSC 573). This case illustrates that the Court will not allow a GCO where group member interests could be adversely affected.

With further GCO applications on foot and forthcoming, the law in this area will develop significantly in 2022.

Litigation Funding – Licensing and Scheme Registration Requirements

On 22 May 2020, the Australian Government announced its intention to regulate litigation funders and funded class actions under the Australian Financial Services Licence (AFSL) and Managed Investment Scheme (MIS) frameworks respectively.

The government did so by withdrawing a regulation that exempted funders and funded class actions from the AFSL and MIS frameworks. This exemption had been applied after a controversial two-to-one decision of the Full Federal Court of Australia found that funded class actions fell within the statutory definition of an MIS (despite their being no positive legislative intent to impose those requirements).

This exemption was removed on 22 August 2020.

All litigation funders providing funding to Australian-based class actions are now required to hold an AFSL and must register each funded class action as an MIS. This also requires them to provide Product Disclosure Statements and Financial Services Guides to retail investors.

Class actions commenced before this date are not affected by this regulatory change.

The Australian Government made this decision against the recommendation of the Australian Law Reform Commission and in the face of opposition from the Australian Securities and Investments Commission (ASIC), which is the regulator responsible for AFSL and MIS obligations and compliance.

The effect of these regulatory changes has been to impose a significant administrative and compliance burden on litigation funders that does not, arguably, apply to self-funded law firms.

This has caused a considerable amount of disruption in the Australian litigation funding industry, and some previously active funders have not funded a class action since the regulations were introduced.

There are concerns that, by impacting on competition in what was previously a highly competitive market, these regulations will increase the cost of class actions for group members.

Changes to Australia’s continuous disclosure regime 

In May 2020, the Australian Government announced temporary changes to the continuous disclosure regime that apply to all publicly listed companies in Australia, and which are crucial to the transparent and efficient operation of equity markets. These changes were said to be a short-term measure intended to provide relief for listed companies grappling with the coronavirus epidemic.

However, the changes were made permanent, and also extended to misleading conduct provisions, from 13 August 2021. The key elements are that:

1. claimants are required to prove a state of mind or fault element when alleging a failure to immediately release market-sensitive information – it is necessary to show that company directors and/or officers knew, or were reckless or negligent as to whether, the information was market-sensitive. Previously, claimants only needed to establish subjective ‘awareness’ of material price-sensitive information; and

2. companies and their officers are not to be liable for misleading or deceptive conduct in circumstances where the continuous disclosure obligations have been contravened, unless the requisite fault element has been proven.

ASIC, institutional investors and other independent agencies strongly opposed the reforms, noting that Australia’s continuous disclosure framework had played a critical role in improving the efficiency and cleanliness of the ASX, allowing market participants to invest with a high degree of confidence that price-sensitive information has been disclosed.

The government made these (and other) reforms in response to concerted campaigning from the business, company director and insurance lobbies, which all have members with a strong financial interest in avoiding liability for (what were previously) breaches of the law.

Whether this amendment materially lowers the standard of corporate disclosure will depend to a considerable extent upon how the provisions are interpreted by the Courts. We expect that defendants will seek to strike out statements of claim for failing to adequately plead the new mental element. These interlocutory decisions will help develop the law in this area and provide guidance to all parties as to the extent of the reform’s impact.

Statutory Price Interventions and MIS amendments 

On 27 October 2021, the Australian Government introduced into Parliament proposed legislation which:

1. imposes a statutory presumption that any litigation funding structure involving third party litigation funders and which returns less than 70% of class action ‘claim proceeds’ to group members is unreasonable; and

2. amends the operation of the MIS regimes to encourage ‘claimant bookbuilding’ in funded class actions and imposes a quasi-opt-in requirement for funded class actions.

The proposed legislation has been met with strong opposition, including from defendant law firms that are concerned that the amendments will make it inevitable that multiple class actions will be filed in relation to every potential dispute.

Its impact on funded class actions in Australia will greatly depend on how the legislation is interpreted by the Courts and how litigation funders respond to this risk in the interim. There is a considerable risk that these changes, again by reducing competition in the class actions market, will increase the prices for claimants and make some meritorious class actions uneconomic – with a particular impact on ‘consumer’ class actions where individual losses are relatively low.

Despite strong opposition, the reforms have received strong support from the business and company director lobbies.

The legislation is being pushed forward on an expedited timetable, with limited opportunities for review. It is expected that the Australian Parliament will vote on this legislation in late 2021. The next Federal election will take place no later than May 2022.