Australia to expect class action reform – ALRC Report released
On 24 January 2019, the Australian Law Reform Commission (ALRC) report ‘Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders’ (Report) was tabled in Parliament.
The basis for the Inquiry was the increased prevalence of class action proceedings commenced in Australian courts, and the role of litigation funders in those class actions.
The Report contains 24 recommendations concerning the Federal system, some of which depart significantly from the reform measures proposed in the ALRC’s Discussion Paper of 31 May 2018 (Discussion Paper).
If implemented, the recommendations would change significantly the class action landscape and may lead to further legislative reform of securities law.
The key recommendations from the Report are discussed below.
High on the list of concerns was the composition of representative classes (open or closed) and the increase in multiple competing class actions. To address those concerns the ALRC recommends:
- The Federal Court (Court) be given exclusive jurisdiction for class action proceedings arising under the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth);
- All class actions to be initiated as open class (where all potential claimants are members of the class with the ability for members to opt out), rather than closed class actions (where class members take active steps to join the class);
- The Court’s Class Action Practice Note be amended to provide criteria for class closure and reopening of classes;
- The Court be given power to the Court to make common fund orders;
- The Court be given an express power to deal with competing class actions, with the ALRC supporting a single class action to proceed for each dispute;
- The States and Territories with class action procedures consider becoming a party to a protocol with the Federal Court to improve cooperation between them (Protocol).
The Report contains proposals for the notification of class actions and a designated period (90 days) for competing class actions to be commenced. It is proposed that a ‘selection hearing’ for any competing class actions be held. with litigants to disclose to the Court on a confidential basis the terms of any funding or costs agreements and number of members in a class. The ALRC recommends the Court ‘choose the proceeding which best advances the claims and interest of group members in an efficient and cost-effective manner’ without statutory criteria. The respondent would not be involved in the selection (or ‘carriage’) process.
The recommendation to confer exclusive jurisdiction on the Court is unlikely to be implemented, given the lack of support for the proposal to date and that it would mean the removal of class actions from State Courts; Protocol adoption is more likely to receive support from the State Courts.
Regulation of Litigation Funders
The ALRC recommends the Court have stricter supervision over litigation funders and litigation funding agreements in class actions, instead of implementing a statutory licensing regime for litigation funders as initially proposed.
Key recommendations are that:
- Third-party litigation funding agreements be enforceable only with approval of the Court;
- The Court have the power to reject, vary or amend the terms of such agreements;
- A funding agreement provide a complete indemnity to the representative plaintiff for an adverse costs order;
- There be a statutory presumption that a third-party litigation funder will provide security for costs in a form enforceable in Australia; and
- The Court have the power to order costs against funders and insurers who fail to facilitate the just resolution of disputed claims according to law and as quickly, inexpensively, and efficiently as possible.
Solicitors’ Fees and Conflicts of Interest
The ALRC recommends solicitors be permitted to adopt a limited percentage-based (‘contingency’) fee model for class action proceedings, which is subject to similar restrictions to the third-party litigation funding regime.
Key recommendations are that:
- Solicitors be permitted to enter into ‘percentage-based fee agreements’ (PBFAs) -allowing them to recover a percentage of the amount recovered in litigation- with the following limitations:
- an action funded through a PBFA cannot also be directly funded by another entity charging on a contingency basis;
- a percentage-based fee cannot be recovered in addition to fees charged on a time-cost basis;
- solicitors entering a PBFA must advance the cost of disbursements;
- there be a statutory presumption that solicitors funding class action litigation through a PBFA provide security for costs in a form enforceable in Australia;
- PBFAs are permitted only with Court approval; and
- The Court have the power to reject, vary or amend the terms of PBFAs;
- The Law Council of Australia should oversee a specialist accreditation scheme for solicitors in class action law and practice, including ongoing education in identifying and managing conflicts of interest.
PBFAs may enable more medium-sized class actions to proceed and will open up competition between solicitors and litigation funders and likely drive percentage-based fees down. They would also provide a further market for after-the-event insurers funding disbursements and adverse costs orders.
However, we question how effectively solicitors will be able to manage conflicts of interest, as PBFAs will necessarily put the respective interests of the solicitor and the client (and a solicitor’s obligation to put the interests of the client first) into direct conflict. Whilst conflicts do currently exist where a solicitor acts pursuant to a Conditional “No Win No Fee” Agreement, and can manifest themselves in a solicitor advising a client to accept a low value settlements offer so that a “Win” occurs, PBFAs would exaggerate such issues and we can foresee circumstances where, for example, advice to reject reasonable settlement offers may be given in order to (potentially) increase a solicitor’s percentage fee.
Shareholder Class Action Proceedings and Continuous Disclosure Obligations
The ALRC recommends that the Australian government 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 in securities actions. Most securities class actions allege breaches of these laws.
A review would look at whether the current regime is working, including whether it is encouraging unmeritorious claims, whether additional defences are required, and the impact on D&O insurance. Notably the ALRC commented that there was currently a lack of verifiable data (despite submissions from brokers and insurers) to support the hypothesis that class action activity has lead to the increase in insurance premiums and claims paid, and a decrease in the availability of D&O insurance.
The ALRC recommends:
- Permitting the Court appointment of referees to assess the reasonableness of legal costs before settlement approval;
- Permitting the Court to tender settlement administration and include processes for this to occur;
- Requiring settlement administrators to report to the group and Court following distribution.
The ALRC rejected the need to change the current settlement approval regime where a party may apply for a confidentiality order with respect to settlement, leaving it up to the Court to balance the principles of open justice with confidentiality concerns.
Other recommendations include a review of regulatory enforcement mechanisms to provide a consistent framework of regulatory redress, and steps to address conflicts of interest for solicitors and funders.
Although the focus of the ALRC is primarily on the protection of claimants, the ALRC’s recommendations are largely favourable to defendants and insurers by providing for a more robust and structured federal class action regime.
The true impact will however depend on the extent to which the recommendations are implemented by the government and the Courts and may take some time to emerge.