ALRC final report: class action proceedings and third-party litigation funders

The ALRC has now released its final report on 'Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders'.

In June 2018 we provided an overview of the Australian Law Reform Commission's (ALRC) interim discussion paper on class actions and litigation funders (available here).

The Inquiry focused on two overarching issues in the class action regime being the integrity of third party funded class actions and the efficacy of the existing class action system. The recommendations of the ALRC are expressed to be directed at promoting fairness and efficiency, protecting litigants and assuring the integrity of the justice system. Critically the ALRC has concluded, amongst other things, that:

1. litigation funding should remain within the purview of the Courts rather than regulation by the corporate watchdog, the Australian Securities and Investments Commission (ASIC);
2. there should be a Parliamentary review of the continuous disclosure laws in Australia, an area where there has been significant claims activity with shareholder class actions;
3. certain mechanisms should be introduced to prevent competing class actions and confer exclusive jurisdiction on the Federal Court of Australia for causes of action arising under specific commonwealth legislation; and
4. there are certain matters where the charging of contingency fees in class actions is justifiable.

A short summary of these four key recommendations is below.

Regulation of litigation funding

Although the ALRC's discussion paper proposed the introduction of a bespoke licencing regime for litigation funders in Australia, its final recommendation in relation to regulation steers away from the implementation of a licencing regime and instead focuses on the implementation of consumer protection measures through improving Court oversight of funding arrangements.

The effect of these recommendations (if taken up) would be to squarely place responsibility for oversight and supervision of funding activities within the ambit of the Court, rather than ASIC.

With the goal of ameliorating consumer risks to participants entering into funding agreements, the ALRC has recommended amendments be enacted to the Federal Court Act that would have the effect of:

1. clarifying that group members who are party to a funding agreement are not liable for unpaid legal costs in the event that the funder is insolvent; and

2. tightening the security for costs regime to include a statutory presumption that the funder will provide security in a form that can be enforced within Australia.

The ALRC has also recommended against imposing capital adequacy requirements on litigation funders.

Shareholder class actions and continuous disclosure

Shareholder class actions are a controversial and much debated aspect of the class action landscape in Australia, constituting a significant proportion of all class actions filed. The ALRC discussion paper proposes a federal review into the legal and economic impact of the current continuous disclosure regime that governs public entities listed on Australian stock exchanges, being the substantive law underpinning shareholder class action litigation.

In its report, the ALRC considers factors which might form the scope of a review of the substantive law underpinning shareholder class actions including:

1. particular legal and regulatory issues such as market based causation, reform of the ASX listing rules, whether remedies (damages) should be the subject of statutory reform, the appropriateness of available defences;
2. the proper scope of private and public enforcement;
3. the efficiency or otherwise of class actions;
4. the practical and economic impact of securities class actions on board behaviours;
5. the economic impact of class actions on corporations and classes of investors; and
6. submissions received as to the impact on D&O insurance.

Restriction on closed classes & competing class actions

Since the decision in Multiplex[1] closed classes have become a feature of the Australian class action landscape. The ALRC report explores the competing arguments in continuing to allow closed classes, versus structuring the class action regime so that all class actions operate on an open basis.

The ALRC report concludes that open classes are a preferable means of structuring class actions as they better promote access to justice and achieve a single binding decision for all related claims. In addressing the arguments that closed classes allow more control for claimants who do not wish to represent all affected persons, the ALRC Report suggests other mechanisms for the grouping of claims such as joinder and consolidation.

In order to ameliorate litigation funders' concerns regarding the proposed restriction on closed classes, the ALRC recommends that the Federal Court Act be amended to provide the Court with an express power to make common fund orders on the application of the plaintiff or the Court's own motion. The ALRC also continues to be unpersuaded that a class certification procedure, like that which operates in the United States and Canada, would enhance the practice and procedure of the class action regime in Australia.

Solicitors' fees – contingency fees and conflicts of interest

Contingency fee arrangements (also known as percentage-based fee billing) are currently prohibited in Australia. The ALRC has, however, recommended allowing a limited contingency fee model for class action proceedings, which it believes will:

1. enable greater access to justice for medium-sized class actions;
2. promote competition amongst funders and encourage lower commission rates;
3. provide a more straightforward method of billing for group members; and
4. increase returns for group members by allowing for unfunded actions.

The ALRC recommends that in order to achieve a limited contingency fee model that still addresses the concerns of stakeholders, statutes regulating the legal profession should permit solicitors to enter into contingency fee agreements subject to a range of limitations.

Overall, the recommendations made by the ALRC might be described as extensive but perhaps not revolutionary. Just how much of an impact they have on the class-action litigation landscape in Australia will inevitably depend on the appetite of the government to transform recommendations into reality.  

With the Royal Commission Report on Misconduct in the Banking, Superannuation and Financial Services Industry set to be handed down later this week which will also likely recommend a raft of legislative changes, the political climate is certainly ripe for legislative change.

1. Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (Multiplex) (2007) 164 FCR 275