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Evolution of class actions and litigation funding: ALRC report offers a mixed bag

  • The ALRC report makes 24 recommendations directed at changes to the federal class actions regime and the regulation and charging models of litigation funders and lawyers involved in bringing class actions.
  • The recommendations offer mixed benefits for plaintiffs, defendants and funders.
  • Legislative reform to incorporate the ALRC’s recommendations will likely take some time, however the Federal Court of Australia is already working on a revised Class Actions Practice Note.

All stakeholders in the class actions market will be affected if the recommendations in the Australian Law Reform Commission (ALRC) Report: Integrity, Fairness and Efficiency — An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (report), are adopted. Given that more consultation will be undertaken in the next few months, it is important for interested parties to carefully consider the recommendations and engage in the Government’s consultation process.

The report’s recommendations are a mixed bag for those in the plaintiff, defendant and litigation funding camps. Plaintiff lawyers will welcome the proposal to permit contingency fees and defendants will welcome moves to combat competing class actions. Litigation funders have seen little change to the regulatory environment that has enabled third party litigation funding to thrive in this country but will be watching very closely how the courts and potentially the legislature respond to recommendations to expressly empower courts to vary the terms of funding agreements and common fund orders and to address competing class actions.

The report’s recommendations are just that — recommendations. However, public statements from the Federal Court of Australia indicate that the court is already working on a revised Class Actions Practice Note to address aspects of the report’s recommendations which do not require legislative change. It’s reasonable to expect that a new Practice Note will be implemented fairly promptly in contrast to legislative change which may or may not occur and where timeframes are likely to be measured in years not months.

The ALRC’s recommendations

The ALRC report makes 24 recommendations directed at changes to the federal class actions regime and the regulation and charging models of litigation funders and lawyers involved in bringing class actions. The Recommendations span:

  • case management
  • settlement approval regulation of litigation funders
  • solicitors’ fees
  • conflicts of interest
  • regulatory redress
  • a review of substantive law in the area of continuous disclosure.

Predictably, the key recommendations closely track the hot topics that have consumed significant court and party resources in recent times — for example, proposals to give the court express power to make common fund orders, vary third-party litigation funding agreements and resolve competing class actions.

Notably, the ALRC has failed to recommend a licensing regime for litigation funders instead preferring to embrace court (and plaintiff lawyer) supervision of funders and to recommend an additional reporting requirement by funders to ASIC about how they manage conflicts of interest.

Introduction of contingency fees

In arguably its most controversial recommendation, the ALRC has proposed the legalisation of contingency fees (or percentage based fees) for plaintiff lawyers who run class actions. The stated aim of this recommendation is to enable greater access to justice for medium sized class actions, encourage competition among funders, simplify billing for group members and allow for greater numbers of unfunded actions.

Supporters of contingency fees often point to the fact that litigation funders already utilise such a model. They argue that it is therefore logical for lawyers — who are heavily regulated and have ethical and legislative obligations — to do the same. Whether the move would actually bring down the overall costs of class actions is still yet to be seen. In response, critics argue there would be a fundamental conflict of interest between lawyers’ fiduciary duties and their financial interest in the outcome of the case.

Much of the debate in this area is predicted to focus on whether contingency fees will result in more class action opportunities being pursued that are not currently being pursued. This could be considered a positive outcome, as it provides greater access to justice. However, there is also a real risk that more claims of marginal merit may be pursued together with competing class actions and will in turn increase the burden on corporate Australia.

Permitting plaintiff lawyers to charge contingency fees in class actions would alter the current and, in many cases, long established relationships between plaintiff law firms and litigation funders. There are now more plaintiff law firms than ever before prosecuting class actions, and plainly, some are more experienced than others. There are around sixty litigation funders, twenty-five of which are currently active in the Australian class actions market. Class action litigation funding was an Australian innovation, and how firms and funders which profit from class actions will reshape their operations and whether this in turn delivers better outcomes for group members is to be watched.

Regulation of litigation funders

In contrast to a positive recommendation on contingency fees, arguably the most controversial aspect missing from the report’s recommendations is significantly tougher regulation and a licensing regime for litigation funders. The report stopped short of recommending a statutory licensing regime for funders, which had been proposed in the preceding discussion paper. Licensing has also previously been recommended by both the Victorian Law Reform Commission and the Productivity Commission. However, the ALRC was ultimately unpersuaded.

Instead the report’s recommendations focus on increased reporting obligations to ASIC on how conflicts of interest are managed and implementation of consumer protection measures by strengthening court oversight of funding arrangements. This includes court approval of litigation funding agreements and an express statutory power to reject or vary their terms.

Claimants may welcome this move as the ALRC reported that the median return to group members involved in funded claims between 2013–2018 was 51 per cent, compared to 85 per cent for unfunded claims. This of course ignores the relative risks, merits and quantum of these claims with data also showing that shareholder and investor class actions are much more likely to be funded compared to, for example, employment, product liability or cartel claims. Defendants may rightly be concerned about the ongoing absence of clearly defined obligations particularly considering the varying sophistication and financial stability of funders operating in the Australian market. On the other hand, aspects of the proposal have been met with criticism from some litigation funders, who argue such additional court powers to vary arrangements are only appropriate when dealing with a common fund order. To apply such powers outside of this context, they suggest, would be a fundamental departure from the freedom of contract and creates unnecessary uncertainty for funders.

Shareholder class actions: More investigation needed?

The report takes the next small step in responding to concerns from the Australian business community about how Australia’s demanding continuous disclosure laws have been utilised by the class actions industry.

The report recommends a government review of the legal and economic impact of the operation, enforcement and effect of federal statutory continuous disclosure obligations and those relating to misleading and deceptive conduct, noting the need for further investigation of how the laws for shareholder class actions and the class action regime interact.

Such a review is arguably necessary as around one in two class actions are shareholder class actions relating to corporation misconduct or corporate governance, and all are tied to the continuous disclose regime. Many potential defendants of shareholder class actions will want certainty about disclosure requirements and reduced liability, while those that rely on those disclosures will argue that the current regime is doing its job.

Case management: Competing class actions, opt out only and common fund orders

In moves generally thought likely to benefit class action defendants and group members more than plaintiff lawyers and funders, the report also recommends a raft of changes to aspects of how class actions are managed.

Competing class actions

The report recognises the growth of competing class actions and the need for the system to more formally evolve in response. The ALRC recommends that the court be given express statutory power to resolve competing proceedings.

While there is no legal prohibition on multiple proceedings, the report recognises sound public policy reasons for there to be a presumption in favour of a single class action rather than overlapping or competing actions in respect of the same conduct. The ALRC also recommends a mechanism to promote consistency of approach and access to justice in how competing claims are resolved. This includes the use of selection hearings so that, in essence, when a class action is filed there would be a period in which all other claims must also be filed, after which the court would then select the proceeding that best advances the claims and interests of the group members in an efficient and cost-effective manner.

This recommendation will benefit defendants. It also responds to concerns that multiple proceedings generate profit for litigation funders and plaintiff lawyers but fail to deliver better access to justice for claimants and unnecessarily increase the burden on defendants and the courts.

Restriction to open class

In an effort to enhance access to justice, the ALRC has recommended the class action regime be amended so that as a statutory requirement, all representative proceedings are initiated as ‘open’ classes. The current regime allows for ‘closed’ classes, which are restricted to persons who have a signed agreement with a litigation funder. The change would reinstate one of the original policy decisions when the class actions regime was introduced in 1992 as an ‘opt out’ regime.

Litigation funders have expressed concern about the proposal arguing that closed classes offer greater certainty in relation to the funding fee that might ultimately be recoverable and allows funders and lawyers to carefully investigate merits and viability of claims and the interest of class members before proceeding with a reduction in group members who ‘free ride’. They suggest the ALRC’s recommendation will create a race to the court and lead to wasted resources for the court and defendants.

As the ALRC itself has stated, its recommendations are evolutionary not revolutionary.

Common fund orders

Another issue expressly addressed by the report is common fund orders, a feature of the Australian class action landscape which has evolved to overcome the problem of ‘free riders’ and in response to litigation funders looking to increase their return on investment.

A common fund order is a court order requiring all group members, regardless of whether they have signed a funding agreement, to pay a proportionate share of a litigation funder’s commission from the proceeds of a judgment or settlement. Such orders are commonly sought by plaintiffs to provide certainty to funders that all class members are liable for the funder’s commission, should there be a favourable judgment or settlement.

While such orders have been pursued for some time, there have been recent challenges to their legitimacy in the Federal Court and the Supreme Court of New South Wales. The decisions reinforced the legitimacy of common fund orders but left the door open to a future challenge on the basis that common fund orders are inconsistent with the existing class action statutory regime.

The ALRC has recommended amendments to the Federal Court of Australia Act to provide the court with express statutory powers to make common fund orders on the application of the plaintiff or the court’s own motion.

Federal Court exclusive jurisdiction

In another interesting recommendation, the ALRC has proposed amendments to the Corporations Act 2001 and Australian Securities and Investments Commission Act 2001 to confer exclusive jurisdiction on the Federal Court for representative proceedings initiated under those Acts. This proposal reflects the challenges of competing class actions and the higher number of such class actions and would be a significant change from the current regime. Implementing a change of this kind would appear to give rise to a number of challenges not limited to whether the role of the state Supreme Courts ought to be restricted in this way.

How Australia compares to the rest of the world?

Australia’s class action market continues to be one of the most active in the world. As such, it was widely accepted that the ALRC’s review was appropriate to help ensure that the regime operates effectively. Outside of the US, Australia is the jurisdiction in which a corporation is most likely to face a class action. This is in part because Australia has one of the most developed litigation funding models anywhere in the world, a large number of lawyers, strict continuous disclosure obligations and the highest proportion of adult share ownership.

Striking the right balance

Has the ALRC struck the right balance between plaintiffs, funders, defendants and claimants and what about the next steps in (possible) class action reform?

As the ALRC itself has stated, its recommendations are evolutionary not revolutionary. Attorney-General Christian Porter welcomed the report and noted that he expected it to ‘stimulate debate amongst consumer advocates, the legal profession, the business sector, and across the wider community’. He plans to hold stakeholder meetings to ‘stress test’ the report’s recommendations.

The proposed changes are balanced in that some will assist plaintiffs, some will assist funders and others will assist defendants. Claimants, the group members that class actions are ostensibly brought to benefit, should also benefit from a range of the recommendations if implemented which include increased reporting obligations on funders, greater court supervision and power to amend funding arrangements, re-establishing open classes and potentially via the introduction of contingency fees if more suitable actions are pursued with a greater return to group members.

The position for litigation funders is mixed. Many may celebrate the absence of more fundamental reforms about how the industry is regulated but query how the operations of the larger, more sophisticated funders will compare to others and whether in time issues such as conflicts of interests, conduct and capital inadequacy will demonstrate that further supervision and regulation was needed sooner. In the interim, the litigation funding industry in Australia continues to thrive. How funding agreements and common fund orders are altered by courts, what happens with competing class actions and whether plaintiff lawyers are granted the recommended ability to charge contingency fees will also impact funders’ interests.

Plaintiffs and defendants both have recommendations that will be welcome and to be concerned about. Contingency fees directly benefit plaintiffs and increase the risk to defendants of increased litigation. Defendants’ interests are served by more scrutiny over litigation funders (though query whether there is enough), by the stated desire to usually have only one class action and not multiple actions proceed and by the support for the court to continue to regulate funding arrangements. The flagged need for a review of continuous disclosure laws is a small step towards addressing the business community’s concerns in that area.

The question is — will these recommendations be implemented? It is unlikely that the proposed reforms will be the subject of legislation in the coming months given competing priorities and an impending election. Some of the proposed changes would require a high level of co-operation for legislative reform at both a Federal and state level. Realistically, legislative reform to incorporate the ALRC’s recommendations will take some time if indeed the recommendations are implemented.

What we can expect, however, are changes to the Federal Court of Australia’s Class Actions Practice Note. Specialist judges in that court who have presided over many of the cases that have led to the calls for reform are already working on an amended Practice Note. That Practice Note may well address aspects of the report such as how to deal with competing class actions and funding arrangements. The court will be wary to ensure that its current wide ranging powers to ensure justice is done in class actions are maintained and are not curtailed by other specific provisions. The state Supreme Courts in New South Wales, Victoria and Queensland, can also be expected to consider the ALRC’s recommendations and to join with the Federal Court in considering how competing class actions filed across jurisdictions can be addressed efficiently and without encouraging forum shopping by prospective plaintiff lawyers.

The takeaway for those in the business community is that class actions and litigation funding are firmly entrenched as part of the Australian litigation landscape with more plaintiff lawyers and funders actively pursuing class actions than ever before.

The author would like to thank Ethan Tindall, Clayton Utz, for his assistance in preparing this article.

Alexandra Rose can be contacted on (02) 9353 4836 or by email at

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.

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