As part of its current inquiry into class action proceedings and third-party litigation funding, the Australian Law Reform Commission (ALRC) has released a discussion paper that traverses the development of the federal class action regime 25 years after its introduction, in light of its original objectives, and includes a number of proposals for reform. The ALRC has now received submissions in response to the discussion paper and is holding a series of seminars to discuss its proposals with stakeholders, which we attended in Melbourne on 28 August 2018.

Terms of Reference

The terms of reference for the inquiry, commenced on 11 December 2017, require the ALRC to consider two overarching issues: the integrity of third-party funded class actions and the efficacy of the class action system. Noting the centrality of costs to both these issues, it is perhaps unsurprising that costs considerations are a particular focus of the ALRC inquiry. The ALRC is also tasked with making specific recommendations regarding legislative changes necessary to implement its findings.

The ALRC Discussion Paper

In its discussion paper, published on 24 May 2018, the ALRC has put forward a number of proposals for the reform of the federal class action regime, which, as noted above, were recently canvassed by the ALRC in consultative seminar.

1. Review the impact of continuous disclosure and misleading and deceptive conduct provisions

The predominant focus of the inquiry is on securities class actions, noting they are the most commonly filed class actions in the Federal Court. Despite their prevalence, none has proceeded to judgment and there has been relatively little judicial consideration of the underlying legal framework; relevantly, the continuous disclosure and misleading and deceptive conduct provisions under the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), including the validity of the ‘market based causation’ theory in the context of those provisions, outside the class action context.

One of the notable impacts of the existing legal framework is its impact upon the availability of directors and officers (D&O) insurance in the Australian market. While a multifaceted issue, current indications suggest there is a shortfall in the D&O premium pool available to meet current and projected insured securities class action losses and the cost of D&O insurance has increased by more than 200% in the last 18 months.

On that basis, the ALRC has recommended that the Government commission a review of the legal and economic impact of the obligations of listed entities in relation to continuous disclosure obligations and misleading and deceptive conduct under the Corporations Act and the ASIC Act, with regard to the targeting of corporate entities in funded securities class actions, shareholder value in corporate entities the subject of class actions and the availability and cost of D&O liability cover in the Australian market. This review is particularly timely in light of the likely fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, although it may not come soon enough for many entities.

2. Licensing of litigation funders

While there have been no reported instances to date of funding or behavioural issues with litigation funders, the ALRC appears keen to avoid such issues arising in the future and supports a recommendation by the Productivity Commission in 2014 that litigation funders should be licensed. Such licensing would, amongst other things, provide for minimum capital adequacy requirements (to be overseen by ASIC) and complaint resolution procedures (likely within the remit of the newly created Australian Financial Complaints Authority, which commences operation from November 2018).

The responsive submissions indicated overwhelming support for a licensing regime,[1] with the ALRC likely to recommend that a modified version of the Australian financial services licence (AFSL) regime apply to litigation funders involved in class action proceedings.

In addition, the ALRC appears receptive to suggestions that the Federal Court Act 1976 (Cth) (FCA) be amended to: (1) require third party litigation funders and insurers to act in a way that is consistent with the overarching purpose of the FCA;[2] and (2) expressly allow for costs orders against funders and insurers who do not comply with the overarching purpose.

3. Education to identify conflicts of interest

The ALRC has given detailed consideration to the various conflicts of interest that may arise in a class action proceeding, particularly in light of the tripartite arrangements often in place between group members, lawyers and litigation funders. In dealing with conflicts of interest, the ALRC has recommended developing specialised accreditation for lawyers in class action legal practice, including ongoing education regarding the early identification and management of actual or perceived conflicts of interest. The ALRC has subsequently clarified that any such accreditation program would be entirely voluntary. The proposal is otherwise largely uncontroversial.

4. Lifting the prohibition on contingency fees

In one of its more controversial proposals, the ALRC recommends that the prohibition on Australian lawyers charging on a contingency fee basis (that is, as a percentage of damages successfully recovered) in class action proceedings be lifted.

In acknowledgement of the strong criticisms levelled against contingent fee arrangements, the ALRC recommendation is subject to particular limitations, including a requirement that lawyers advance the cost of disbursements and indemnify the representative class member against adverse costs orders, blended billing methods are prohibited[3] and contingent fee agreements are permitted only with the leave of the court.

A majority of responsive submissions support the ALRC’s proposal in relation to contingency fees, although a further limitation considered by the ALRC in terms of setting statutory caps for contingent fee arrangements, has been abandoned.

5. Selection between competing class actions

The ALRC recognises that the competing class action has emerged in recent years as an issue that threatens to undermine the objectives of the class action regime by increasing expense and delay for both class members and respondents and potentially significantly reducing the pool of funds available for recovery.

Having regard to the statutory aims of the class action regime and noting the court’s more recent willingness to directly address the issue of competing class actions (for example, in GetSwift),[4] the ALRC has recommended that a single class action regime be implemented, by way of a front-loaded case management procedure set out in the Federal Court Class Actions Practice Note (GPN-CA), whereby:

  • all class actions are initiated as open class actions, with the court required to determine at a ‘selection hearing’ which one, of two or more competing class actions, should proceed (with the unsuccessful proceedings consolidated or permanently stayed);
  • respondents are precluded from participating in the selection hearing, on the basis that information revealed during the hearing would afford a tactical advantage to the respondent if disclosed publicly;
  • litigation funding agreements are only enforceable with the approval of the court (on a common fund basis), which means that binding contractual entitlements are only created following such approval; and
  • the court may permanently close the class for the purpose of mediation, to prevent the threat of re-opening the class being used for strategic advantage.

The ALRC is particularly concerned to put a stop to the problem of the ‘race to court’, where proceedings are issued without proper investigation. It has also made it clear that group members, as well as respondents and insurers, support a single class action proposal.

The ALRC is considering whether the Federal Court should be granted exclusive jurisdiction with respect to securities class actions, to eliminate forum shopping as a means of avoiding this proposed case management procedure. Unsurprisingly, the Victorian Supreme Court has strongly opposed any such move.

6. Improved rigour in the settlement approval and administration procedure

While the ALRC considers that legislative reform in relation to the principles to be adopted in the settlement approval procedure is unnecessary, it acknowledged that there may be merit (subject to cost considerations) in:

  • the appointment by courts of third-party contradictors at the settlement approval stage, to assess the strengths and weaknesses of a settlement from the perspective of unrepresented class members;
  • the appointment of a referee to assess the reasonableness of costs charged in a class action prior to settlement approval; and
  • seeking tenders for settlement administration.

The ALRC has sought input as to whether the terms of class action settlements should be made public, in the interests of transparency and open justice. One obvious issue with this approach is the potential for matters to be divulged that may disadvantage a party in the event of an appeal or in any subsequent proceedings issued by those not included in the settlement. The prospect of losing the veil of confidentiality may also serve to discourage defendant corporations, directors and officers from resolving disputes at an early stage.

7. Establishment of regulatory collective redress

Noting the transaction costs involved in class action litigation, the ALRC suggests that a regulatory collective redress scheme is established, along similar lines to that created in the United Kingdom,[5] which allows corporate entities to submit a voluntary redress scheme to the Competition and Markets Authority for approval as a mechanism to compensate consumers (as an alternative to private litigation).

There is broad support for a regulatory redress scheme although, noting it is beyond the scope of the ALRC’s inquiry to devise the appropriate scheme, it is likely that a recommendation will be made for this question to be referred elsewhere for further consideration.

What's Next?

The ALRC inquiry has undoubtedly provoked much needed discussion about the adequacy of the class action regime 25 years on from its introduction. Amongst the issues addressed are whether the legislative framework remains fit for the purpose of delivering on the Federal Court’s statutory mandate to facilitate the just resolution of disputes as quickly, inexpensively and efficiently as possible – for class members and respondents.

With the recent release of the VLRC final report into litigation funding and group proceedings,[6] the ALRC must take care to consider how any proposed reform is best coordinated across state and federal jurisdictions, to ensure uniformity in approach and limit forum shopping.

In the meantime, it is important that the recommended review of the continuous disclosure and misleading and deceptive conduct provisions of the Corporations Act and ASIC Act is undertaken as a priority, to ascertain the efficacy of those provisions and their impact upon the availability of D&O liability insurance in the Australian market.

The ALRC is required to submit a final report to the Attorney-General by 21 December 2018.