Introduction to the class actions framework
The class action landscape in Australia has seen significant changes in the past few years, and 2020 was no exception both with significant judgments being handed down and with new regulations impacting funders – and this was despite the global pandemic caused by covid-19. Notwithstanding these changes, Australia's class actions framework has continued to function well, balancing the desire for better consumer protection and access to justice with the need for certainty and a measured, appropriate regime for defendants and the corporate world, that is, one that is not overly 'plaintiff friendly'. There are regimes for class actions in the Federal Court of Australia and the Supreme Courts of Victoria, New South Wales and Queensland.2 They have all adopted the broad 'opt out' model. Western Australia is in the process of introducing a class action regime; however, the 2019 Bill has still yet to be passed.3 The Federal Court regime was the first class action regime to be introduced in Australia over 25 years ago now in 1992, and although there are some differences (particularly with the Supreme Court of Victoria), the state regimes are broadly similar to the Federal Court.
A feature of the Australian class action regime is that until recently, Australian lawyers have not been permitted to charge 'contingency fees', that is, a fee based on a percentage of the amount recovered. This has seen a very sophisticated and significant third party litigation funding market develop in Australia, which has attracted significant capital and driven up the number of class actions filed. However, recently one state, Victoria, passed legislation in late 2020 allowing lawyers to charge contingency fees in class actions in its courts, but exactly how that will operate is currently playing itself out with the first of these cases making their way through the courts now.
Class actions in Australia are easily commenced on behalf of all class members by a representative who becomes the named applicant. The threshold requirements are:
- at least seven people have claims against the same person;
- the claims arise out of the same, similar or related circumstances; and
- the claims give rise to substantial common issues of law or fact.4
The applicant may bring proceedings against several respondents even if not all class members have a claim against all respondents. As long as seven or more persons have claims against the same respondent, an applicant can join other respondents against whom some class members have claims, but some do not.5
An important differentiator for Australia's class action framework is that there is no 'class certification' process. The lack of such a threshold has given rise to a number of competing class actions being filed in relation to the same wrongdoing, and that has led to skirmishes known as 'beauty parades' to determine which one or more of the overlapping class actions should proceed.
Australia's class action regimes operate on an opt-out basis. As Justice Jessup of the Federal Court explained, 'an applicant will define on whose behalf the proceeding is brought and, unless they opt out, all persons who fit within the relevant definition will be part of the class, and bound by any result' whether they consent to that or even know about the action.6 This is a point of distinction between Australia and some other jurisdictions that oblige class members to opt in to a class action.
As a consequence of the applicant's ability to define the class in the pleading commencing a class action, a common practice has been to commence class actions on a 'closed-class' basis. In these instances, the class definition usually comprises those persons who have entered into a funding agreement with a third-party litigation funder, effectively requiring potential class members to opt in by taking the positive step of executing a funding agreement. Although this appears to be inconsistent with the 'open-class' and opt-out model in the legislation, in 2007, the Full Federal Court held that a closed- or limited-group class action is permissible.7 It is generally accepted that this model has contributed to funders' preparedness to fund class actions, and therefore to an overall increase in their number.
Class actions commenced since 1992 cover a variety of areas, including mass torts such as defective pelvic mesh implants, damage from extreme weather events such as bushfires and floods, failing buildings, the Volkswagen diesel emissions scandal, responsible lending obligations, employment-related cases and human rights cases such as stolen wages from Aboriginal and Torres Strait Islanders. The recent trend in the Australian class action space has continued with a greater number of claims by investors seen in the securities or shareholder class actions space8 and consumer claims concerning financial products or services. We are also starting to see the emergence of class actions in the climate change and corporate social responsibility space.
The year in reviewi Evolution of power to make 'common fund' orders
October 2016 was a significant milestone for class actions in Australia, with the Full Federal Court approving at an early stage of a case an application for an order known as a 'common fund' order in Money Max.9 In Money Max, the Court very early on in the case accepted that all class members must contribute to the litigation funder a percentage of any monies they receive as a result of the proceeding, irrespective of whether they have entered into a funding agreement with the litigation funder. This of course provided greater certainty for funders and removed risk as they knew at an early stage what returns they would be guaranteed if successful. This decision has been seen as encouraging litigation funders to fund more open class actions, as they could safely presume that they would be able to recover monies from all class members, including those who did not execute a funding agreement.10
From December 2019, a period of uncertainty began, with the High Court delivering a judgment in Lenthall,11 finding that the courts were not empowered to make common fund orders in class actions at an early stage of the proceedings. This has had a significant impact on the class action space, with potential implications for consumers and funders alike. There were concerns that there would be fewer cases filed or only filed on a closed-class basis and a reduced appetite for certain types of class actions, such as consumer-focused actions with high numbers of group members but low-value claims. There was a concern about a return to the time-consuming and prohibitively expensive book-building era.
Many commentators and judges had their own views about the interpretation of the High Court's decision, and whether it closed off common fund orders for good, or simply confirmed the lack of power to make them at an early stage of class action proceedings, as opposed to making orders in the nature of a common fund order at the end of proceedings either for the purposes of the settlement of a class action (a 'settlement CFO') or following judgment on a class action (a 'judgment CFO'). More recently, the NSW Court of Appeal and Full Court of the Federal Court gave positive indications about the ability of the courts to make common fund orders at a later stage of proceedings; however, those judgments12 were not decisive because the issues in those cases did not go beyond hypothetical postulation.
This uncertainty has, for the time being, been resolved since Justice Lee's approval in December 2020 of a settlement CFO in Swann13 pursuant to Section 33V(1) of the FCA Act, although his Honour expressed that he would have made the order in any event relying on Section 33V(2) or in equity. Similarly, in February 2021 Justice Beach approved a settlement CFO in Davantage.14 Time will tell whether the question about the power of the Court to make CFOs at the end of proceedings makes its way to the High Court and if so what they will say. The upshot is that this key area still has high risks for funders because of this uncertainty.ii Scrutiny of litigation funding and contingency fees
The intense scrutiny of litigation funding in Australia continued throughout 2020.
In May 2020, the Australian federal government announced a fourth inquiry into litigation funding and the regulation of the class action industry. This followed the Productivity Commission's 2014 report on Access to Justice Arrangements, the Victorian Law Reform Commission's 2018 report on Access to Justice: Litigation Funding and Group Proceedings, and the Australian Law Reform Commission's 2019 report on Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders. It is fair to say that all these reports broadly supported the current class action regimes in Australia although recommending various minor amendments here and there. Interestingly, all inquiries also supported the introduction of contingency fees for lawyers. Largely however, governments did not act on the vast majority of the recommendations made (apart from Victoria introducing contingency fees for lawyers in class actions).
Notwithstanding the commencement of this fourth inquiry and before it reported back to the Parliament, on 22 May 2020 the Australian federal government announced sweeping new changes to the regulation of litigation funders in Australia. These controversial changes, effective from August 2020, require litigation funders operating in Australia to have a financial services licence, and to comply with the Managed Investment Scheme rules and regulations. There are onerous obligations around, and also a number of unanswered questions about, compliance with and the operation of these regulations. This uncertainty and the largely 'red tape' nature of the regulations have put a brake on the activities of litigation funders as they work through all the implications.
The fourth recent inquiry generated significant interest and resulted in a report released on 21 December 2020 by the Parliamentary Joint Committee on Corporations and Financial Services (the Parliamentary Joint Committee Report). The Parliamentary Joint Committee Report proposed 31 recommendations, including (inter alia) increased disclosure requirements concerning conflicts of interest, changes to continuous disclosure laws, requirements for litigation funding agreements to be approved by the Court to be enforceable, the introduction of express powers for the Court to resolve competing class actions, to make class closure orders, to reject, vary or amend the terms of any litigation funding agreement and to make costs orders against litigation funders. The Parliamentary Joint Committee Report also expressed support for the changes to the regulation of litigation funders in Australia, but recommended legislating a fit-for-purpose MIS regime tailored for litigation funders. All eyes are now on exactly what legislation will be formulated and introduced to give effect to these recommendations.
Contingency fees also continued to attract attention in 2020, with the Victorian Labor government passing legislation15 effective from 30 June 2020 that permits lawyers to charge contingency fees in Victorian class actions, which is a first for Australia. These will be called group costs orders (GCOs) and must be approved by the Court. In return for allowing lawyers to charge a contingency fee, GCOs will require the lawyers to provide security for costs and to take on adverse costs liability.
The Parliamentary Joint Committee Report, recognising the risk of forum shopping given this change to the class action framework in Victoria, has recommended that the Federal Court be conferred exclusive jurisdiction with respect to civil class actions arising under the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth). This would mean no such actions could be commenced in Victoria and so no contingency fees charged in shareholder class actions.
So far, there have only been one or two class action cases filed in Victoria where GCOs have been sought, but no case has yet come before a judge for approval of the GCO. This will be one of the most interesting developments in Australia this year to watch.iii Competing class actions
The lack of a North American-style process of certification of class actions at a pre-commencement hearing for class actions in Australia has contributed to a rise of competing class actions.16 Most commonly occurring after high-profile corporate misconduct or 'stock drops', multiple, separate class actions are commenced against the same defendant in respect of the same conduct generally alleging the same wrongdoing.
Australian courts have had to contend for some time now with how to best manage these competing class actions, including considerations about which action ought to proceed and which actions ought to be stayed, and which principles should be applied in coming to that decision – similar to the 'carriage motions' in Canada, but more commonly known in Australia as 'beauty parades'. Without clarification around the principles that will be applied to determine a 'winner', the outcome of these beauty parades has been highly uncertain and has acted to dissuade investment by litigation in funders in class actions where there is a reasonable chance their proceeding may be stayed.
Protocols were agreed between the Federal Court and the Supreme Courts of New South Wales17 and Victoria18 for dealing with similar situations across different courts in the future, but the issue of the principles to be applied in determining a 'winner' have now been resolved by the recent decision of the High Court in Wigmans v AMP Ltd & Ors.19
A majority of the High Court in Wigmans made clear that there is no presumption that a class action commenced first in time shall prevail and that in competing class actions, where the interests of the defendant are not differentially affected, it is necessary for the court to determine which action going ahead would be in the best interests of group members. The majority declined to list exhaustively the factors relevant to determining which action would be in the best interests of group members, observing that a court should determine the question 'by reference to all relevant considerations'. That said, the majority noted that the likely success of an action or quantum of recovery would be relevant matters in determining the question.iv Shareholder class actions
Australia's class action framework is comparatively favourable to shareholder claims in particular because generally there is no requirement for intent or 'scienter' and this has attracted significant attention in the four industry reviews conducted to date. Submissions from stakeholders have expressed concerns about shareholder class actions not being in the public interest, being economically inefficient, and driving undesirable economic outcomes such as upward pressure on D&O insurance, the unwillingness of directors to take on roles on Australian boards, and creating a risk-averse decision-making environment within companies.20
As part of its response to the covid-19 pandemic, in 2020 the Australian government took action by making amendments to Australia's continuous disclosure regime.21 These amendments, recognising the challenges for companies to release reliable forward-looking guidance to the market during the pandemic, introduced temporary changes requiring claimants to prove fault for private and regulatory actions involving allegations of continuous disclosure contraventions. These changes have been welcomed by corporate Australia, and the Parliamentary Joint Committee Report recommended that the Australian government permanently legislate these changes. At the time of writing, the government just announced it would make these changes permanent for shareholder class actions. This will have a negative effect on the bringing of some class actions.