The Australian Law Reform Commission (ALRC) has released its final report into class action proceedings and third-party litigation funders.
In undertaking its inquiry, the ALRC undertook extensive consultation with a broad range of stakeholders and experts. The final report attempts to balance the interests of these stakeholders, ultimately recommending a number of incremental reforms rather than wholesale changes to the litigation funding industry.
In formulating its recommendations, the ALRC’s stated aims are to promote fairness and efficiency; protect litigants; and assure the integrity of the civil justice system. Key recommendations include the following:
Review of substantive law
The ALRC has recommended that the Government should commission a review of the legal and economic impact of the operation, enforcement and effects of continuous disclosure obligations and those relating to misleading and deceptive conduct contained in the Corporations Act and the ASIC Act. The AICD advocated for the inclusion of this recommendation in the final report and was pleased to see its inclusion.
The AICD strongly supports continuous disclosure obligations as a vital component of robust disclosure and governance practices to deliver market integrity and investor confidence. However, we have significant concerns about the unintended consequences that have arisen as a result of the current regime – indeed, the lack of certainty around the law has not seen a single securities class action proceed to a final judgment on the merits.
A review would present an important and timely opportunity to consider whether Australia’s continuous disclosure laws and its interaction with the class actions regime are operating as intended, and serving the interests of justice. A recent review of international continuous disclosure and liability regimes commissioned by the AICD has revealed that Australian listed company boards are faced with higher reputational and personal liability risks from disclosure-based shareholder class actions than boards in the world’s major capital markets, including the UK and US. This is reflected in significant increases in the cost of directors and officers (D&O) liability insurance in light of the numbers of shareholder class actions in Australia (see here for further detail).
The ALRC emphasises that its call for a review of the substantive law that underpins shareholder class actions is directed at understanding the interaction between the relevant laws and their interaction with the class actions regime, because it ‘is only with a thorough understanding of the claims and counter-claims that have been made throughout the course of this inquiry that all stakeholders can have confidence in one another as shareholder class actions continue to be prosecuted, thereby preserving the integrity of the civil justice system.’
The Attorney-General has not backed this recommendation, and at this stage it is unclear what the ALP position will be.
Further regulation of litigation funders, but no new licensing regime
The ALRC has acknowledged the role that third-party litigation funders have in providing access to justice for group members, while also recognising some inherent risks (including the risk that they may fail to meet their obligations under funding agreements, use the Federal Court of Australia for improper purposes, or exercise influence over the conduct of proceedings to the detriment of group members).
The ALRC has stepped back from the recommendation proposed in its discussion paper regarding the introduction of a licensing regime for litigation funders, primarily due to a concern that a licensing regime may unnecessarily stifle competition amongst funders and artificially inflate the cost of funding. This was surprising given there does not appear to be any lack of capital to fund legal actions.
Instead, the ALRC makes a number of recommendations that would incrementally enhance regulation within the bounds of existing frameworks including:
- the introduction of a presumption that funders will provide security for costs;
- the introduction of a requirement that the funder indemnifies the lead plaintiff against an adverse costs order; and
- greater court oversight of litigation funding agreements.
Overall, we understand that these powers will not represent material departures from current practice.
Dealing with multiple class actions
The ALRC acknowledges the issues associated with multiple class actions, pointing to data that shows that since 1992, there have been 513 class actions commenced in relation to 335 legal disputes (with most overlapping matters being shareholder class action claims).
The ALRC’s self-proclaimed 'evolutionary not revolutionary' solution is to give the Court an express statutory power to resolve competing representative proceedings. This would often require the Court to select one action to proceed, while staying the remaining competing proceedings. However, it could also encompass consolidation, joinder or amendment powers to create a class action that includes common issues derived from various claims.
The ALRC also contemplates a new procedural ‘selection hearing’ at which the court will determine which claim will proceed, by reference to the overarching principle 'that the court is to choose the proceeding that best advances the claims and interest of group members in an efficient and cost-effective manner, having regard to the stated preferences of group members'.
The ALRC also recommends that all representative proceedings be instituted as ‘open class’ and that exclusive jurisdiction be conferred on the Federal Court with respect to civil matters, commenced as representative proceedings, arising under the Corporations Act and ASIC Act. We understand that the latter recommendation may give rise to jurisdictional or even constitutional issues, recognising that NSW, Queensland and Victoria all have their own class actions regimes.
The ALRC recommends the limited introduction of contingency fees in order to provide a greater return to group members, further enable medium-sized matters to proceed, and provide protection for group members against paying a single yet disproportionate fee.
It proposes a number of limitations, however, including that solicitors acting on contingency will provide security for costs and that an action that is funded through a percentage-based fee agreement cannot also be directly funded by a litigation funder or another funding entity which is also charging on a contingent basis.
This position echoed the findings of the Victorian Law Reform Commission (VLRC) in 2018, which reported that, as a matter of principle, it considered that, with appropriate regulation, lawyers should be able to charge contingency fees because it provides another avenue for funding clients who might otherwise be unable to pursue proceedings due to cost.
The AICD has previously expressed concerns that the lifting of the ban on contingency fees may give rise to significant conflicts of interest, which would undermine the lawyer-client fiduciary relationship. The VLRC addressed this issue in some depth, noting that lifting the ban on contingency fees would intensify the risk that the lawyer’s financial interest in the outcome of litigation will prevail over their duty to the client (although they ultimately concluded that lawyers are experienced in managing conflicts of interest and are subject to more extensive rules and obligations than litigation funders). We will continue to engage on this issue.
It is now a matter for the Attorney-General as to which of the ALRC’s recommendations he will act on – and given timing it may be that they roll-over until post the election. We also note that there are matters that will need to be resolved on a state level, including in relation to legal contingency fees and the recommendation regarding conferral of exclusive jurisdiction on the Federal Court.
We will keep members updated.
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