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

AUSTRALIA: DISPUTE RESOLUTION: CLASS ACTION (PLAINTIFF)

Practice Overview by Phi Finney McDonald

26 October 2022

In 2021/22 the Australian class action landscape continued to mature, with plaintiff lawyers and litigation funders growing in confidence and experience. Increased competition is driving creativity, while regulatory developments are promoting innovation in funding structures. The key themes are:

1. Contingency Fees: the Supreme Court of Victoria’s Group Costs Order (GCO) regime continued to draw shareholder class actions and consumer claims, with law firms and funders alike attracted by the flexibility and certainty offered by a legislated right to contingency fees.

2. Shareholder class actions here to stay: after a brief pause, shareholder class action filings rebounded. Defendants continue to take aggressive postures, leading to increased costs and delay in the prosecution of claims. However, plaintiffs have succeeded on several important appeals.

3. Challenging environment for funders: litigation-funded claims were caught up by the regulatory hurdles established by the conservative government then in power, which required funders to hold Australian Financial Services Licences (AFSLs) and register each funded class action as a Managed Investment Scheme (MIS).

4. Back to the future: the change in federal government in early 2022 heralds a period of further change in the class actions space. The Australian Labor Party (ALP) opposed the class action reform agenda of its conservative predecessor, and has publicly stated its intention to implement the recommendations made by the Australian Law Reform Commission (ALRC) in 2018. The government has already proposed draft regulations unwinding the AFSL and MIS requirements for funders and funded class actions, and further reforms seem likely - including the introduction of contingency fees federally.

Contingency Fees in Victoria 

There is growing jurisprudence around when and in what circumstances a GCO will be made, and the principles that the court will apply when determining an appropriate percentage. For example:

1. In Allen v G8 Education Ltd, the court found that a GCO of 27.5% of recovered proceeds was reasonable, based on a finding that the average legal and funding costs were 46% of the amounts recovered in class actions.

2. In Bogan & Anor v The Estate of Peter John Smedley (Deceased) & Ors, the court ordered a much higher GCO of 40% of recovered proceeds. It did so after accepting evidence that, absent the order, the litigation funder that was supporting the law firm would terminate its involvement, and that there were no realistic alternatives available.

The Supreme Court of Victoria will likely remain the venue of choice for shareholder class actions, and high volume/low value consumer claims over which it has jurisdiction: at least until such a time as contingency fees are allowed federally, the Federal Court’s power to make common fund orders is clarified.

Shareholder class actions 

In recent years, defendants have taken a more aggressive posture towards shareholder class actions. So far, and especially in 2022, they have had limited success.

In the Worley Parsons class action, shareholders alleged that the defendant company had breached its disclosure obligations by issuing profit guidance that lacked reasonable grounds.

Although successful at first instance, the defendant lost on appeal. In March 2022 the Full Court held that the trial judge had erred in her reasoning by focusing too much on what was known by the Board of Directors rather than the information available to the company. This was a significant victory for plaintiffs, as the test for ‘awareness’ has been hotly contested for some time. In October 2022 the High Court denied special leave to appeal.

In the BHP class action, the defendant had brought an application seeking to confine the operation and benefit of Australia’s class actions regime to Australian residents. This decision would have had profound implications for access to justice extending to all manner of class actions, including those relating to environmental torts committed overseas by Australian defendants. In BHP the plaintiffs argued that the defendant’s construction of the legislation was nonsensical, and the courts agreed. BHP lost its application at first instance and then lost unanimously on appeal before the Full Court. The High Court granted special leave to appeal, before dismissing that appeal unanimously.

Defendant lawyers have publicly stated that larger corporations defending shareholder class actions remain determined to litigate contentious points that, if successful, would establish important precedents. While this might benefit directors seeking to avoid liability, it is difficult to see the value for shareholders whose money is spent agitating losing arguments.

Challenging Funding Environment 

In mid-2020 the then-federal government withdrew regulations that exempted litigation funders from requirements to hold an AFSL and to register each funded class action as an MIS.

That exemption had been brought in following the Full Court of the Federal Court of Australia’s controversial decision in the case of Brookfield Multiplex that a litigation-funded class action met the definition of an MIS.

The withdrawal of that exemption meant that third-party litigation funders need to meet the compliance costs and burdens associated with the AFSL and MIS regimes. Some funders that were previously active in the class actions space withdrew. For those claims that did progress on a funded basis, their commencement was significantly slowed down while they navigated regulatory hurdles. This placed them at a competitive disadvantage with unfunded class actions, including those in which a GCO was contemplated.

Back to the Future 

In June 2022 the Full Court overturned its earlier decision, finding that Brookfield Multiplex was plainly wrong.

The effect of this decision is that funded class actions are no longer subject to the MIS regime.

Following their recent election, the federal ALP government has proposed draft regulations that would remove the requirement for litigation funders to hold AFSLs, while also promising a more thorough legislative agenda based on the ALRC’s recommendations. This included a plethora of reform ideas, including the introduction of contingency fees at the federal level, providing a statutory basis for Common Fund Orders, and reserving jurisdiction over class actions arising from the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) to the Federal Court.

The government is also expected to consider unwinding the amendment to Australia’s continuous disclosure laws that imposed a mental element into what had previously been a strict liability test.