The 30-year Evolution of Class Actions in Australia
Despite being in operation for three decades, the outlook for class actions in Australia remains uncertain. However, it is evident that class actions have made a significant impact on various stakeholders, including claimants, lawyers, litigation funders, and corporate entities in Australia.
This article examines notable milestones in the development of Australia’s class action regime and explores the influential factors that have shaped its evolution.
A new chapter – 1992 to 1999
The Australian class action regime was established in March 1992 when Part IVA of the Federal Court of Australia Act 1976 (Cth) was enacted. This followed the recommendations made in the 1988 report by the Law Reform Commission (now the ALRC), which proposed the introduction of a new procedure for grouped proceedings to improve access to legal remedies, enhance the efficiency of judicial and legal resources, and enable individuals to seek redress in a cost-effective manner.
The “opt-out” regime, as outlined in Part IVA, was subsequently adopted by other states with minor variations, starting with Victoria and followed by NSW, Queensland, Tasmania, and Western Australia.
In its early stages, the class action regime was commonly used for claims related to personal injuries caused by consumable goods and defective products. Noteworthy cases included the Legionnaires disease class action, where 144 visitors to the Melbourne Aquarium contracted the disease, and the Wallis Lake Oyster class action, where 184 people fell ill after consuming oysters alleged to have been contaminated with faecal matter. However, these types of cases became less frequent following tort reform between 2002 and 2003.
In August 1999, the King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) case marked the first shareholder class action filed in the Federal Court. The group members were shareholders of GIO who alleged that the directors of the company had misled them about the true value of GIO shares to dissuade them from accepting a hostile takeover bid by AMP.
Although the matter was settled for $97 million in 2003, the plaintiff law firm took on significant risks and expenses by operating on a “no-win, no-fee” basis. It became evident that the cost of class action litigation was unsustainable in the long run, especially in Australia where law firms were prohibited from charging contingency fees across all state and federal jurisdictions and were unable to accumulate capital for funding future class actions.
These circumstances provided an ideal environment for the emergence of commercial third-party litigation funders. These funders undertake the underwriting of legal costs, including the risk of adverse costs, in exchange for a share of any eventual proceeds from the class actions.
Rise of litigation funding and regulatory risks – 2000 to 2015
Litigation funding gained prominence in the early 2000s, with one of the first funded cases being a shareholder class action against Aristocrat Leisure Ltd. Initially, funded class actions represented only 3.2% of all class actions filed. However, two significant legal decisions in 2007 and 2008 played a crucial role in shaping the landscape of litigation funding in Australia.
The first landmark decision was Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd, where the High Court ruled that third-party litigation funding arrangements did not amount to an abuse of process, even if the funder exerted some control over the proceedings with the expectation of making a profit.
The second influential decision was Multiplex Management Fund v P Dawson, where the Federal Court recognized the concept of a “closed class” action, where class membership was conditional upon the group members signing the litigation funding agreement. The Court determined that this approach did not contradict the “opt-out” procedure under Part IVA of the legislation.
Closed class actions addressed the concerns of funders by resolving the issue of “free riders,” where group members who did not enter into litigation funding agreements were not obligated to pay a commission to the funder from their recoveries.
These decisions opened the doors to an unprecedented level of litigation funding activity in Australia, leading to a significant increase in the percentage of funded class actions compared to the previous decade. Investor and shareholder class actions were the most common types of cases funded, comprising more than 74% of all funded class actions filed between 2001 and 2016.
However, in 2008, uncertainty emerged following the Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11 ruling, where the Full Court of the Federal Court determined that the funding arrangements in that particular class action met the definition of a “managed investment scheme” under section 9 of the Corporations Act 2001 (Cth). Consequently, they were required to comply with the regulations outlined in Chapter 5C of the Corporations Act.
In response to this ruling, the Australian Securities and Investments Commission (ASIC) intervened and issued class orders exempting funded representative proceedings from being classified as managed investment schemes, thereby nullifying the impact of the Full Court’s decision. These class orders were later incorporated into legislation with the passage of the Corporations Amendment Regulation 2012 (No 6) (Cth), restoring the status quo.
Common fund orders and competing class actions – 2016 to 2019
The year 2016 marked a significant turning point for litigation funding in Australia, primarily due to the granting of the first common fund order in the case of Money Max Int Pty Ltd v QBE Insurance Group Ltd.
A common fund order is a court order that requires all group members, regardless of whether they have signed a litigation funding agreement, to pay a funding commission to the funder. This concept proved advantageous for funders as it addressed the free rider problem and eliminated the need for extensive investment in the book building stage.
The Money Max decision attracted the interest of overseas funders, who were enticed by reduced barriers to entry (no longer requiring expensive book building) and the potential for substantial commissions. As a result, the number of class action filings surged, with 47 filings in 2017, representing a 62% increase compared to the previous year before the Money Max decision. This trend continued in 2018, with 55 class actions filed, nearly half of which were shareholder class actions.
The rise in filings gave rise to a new challenge: competing class actions. Multiple claims, often against the same respondent and involving the same allegations, were being filed, leading to a “race to the registry.”
In response to this challenge, the courts implemented measures such as:
Recognizing that the issue of multiple proceedings should be addressed at the early stages of the proceedings and offering various approaches for managing competing actions, including the power to permanently stay competing proceedings.
Adopting a multifactorial approach to determine which proceeding(s) should be allowed to continue, often referred to as a “beauty parade.” The choice of funding model became a significant consideration in deciding which actions would proceed.
These measures aimed to streamline the handling of competing actions and ensure the most suitable proceeding was allowed to move forward, taking into account various factors including the funding model being utilized.
Decline of litigation funding (2019 to present)
Despite courts’ confidence in managing multiple class actions, corporate Australia has expressed concerns about the class action regime and the use of litigation funding to pursue claims. In December 2019, the High Court ruled in BWM v Brewster that section 33ZF of the Federal Court Act did not authorize the court to issue common fund orders in the early stages of class action proceedings. This decision limited the court’s power to make such orders.
Furthermore, in July 2020, the Federal Parliament passed the Corporations Amendment (Litigation Funding) Regulations 2020, overturning the exemption that allowed litigation funders to operate without an Australian Financial Services Licence, effectively reinstating the decision in Brookfield. Compliance with the Corporations Act as a managed investment scheme has proven costly for funders.
Responding to pressures from corporate boardrooms, the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 was passed in August 2021 to amend continuous disclosure obligations under the Corporations Act 2001. This introduced a fault element into the test, addressing concerns about the prevalence of funded class actions.
In September 2021, the Commonwealth Treasury announced proposed changes to the regulation of litigation funding through the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation Funders. The bill aimed to impose a 30% cap on funding commissions, subject to rebuttal. However, the bill has been put on hold for the time being.
These challenges and uncertainties surrounding funding have led to a decline in funded class actions, prompting international litigation funders to reassess the viability of their operations in Australia.
Despite these setbacks, some developments have supported the survival of the class action regime. In June 2020, the Victorian Parliament passed the Justice Legislation Miscellaneous Amendments Bill 2019 (Vic), which allowed for “group costs orders” in class actions filed in the Supreme Court, overturning the prohibition on contingency fees. This change, along with the challenges to funding, may result in the Victorian Supreme Court handling a larger share of class action litigation.
Since its inception three decades ago, Part IVA of the Australian class action regime has experienced significant ups and downs. While recent challenges, especially regarding the funding of claims, may suggest a bleak future for the regime, it is likely that class actions will continue to be a prominent feature for the next 30 years.
Despite the obstacles and uncertainties, the class action regime has proven to be resilient and adaptable. It has evolved and responded to various legal developments and societal changes over the years. The introduction of litigation funding, the emergence of competing class actions, and the ongoing legislative amendments demonstrate the dynamic nature of class actions in Australia.
While there are ongoing debates and regulatory changes aimed at addressing concerns and ensuring fairness, the core principles and objectives of class actions remain intact. The regime continues to provide access to justice, promote efficiency in the legal system, and allow individuals to seek redress collectively.
The future of class actions may involve further refinements and adjustments to address specific issues, such as funding arrangements and competing proceedings. The legal and business landscapes will continue to shape the class action regime, but it is likely that it will endure and play a significant role in the Australian legal system for years to come.
At MHN Asset Management PTY LTD, we offer two specialised litigation finance solutions designed to cater to the diverse needs of our clients: litigation disbursement funding and litigation funding. Both products aim to provide financial support to clients engaged in legal proceedings, while also offering attractive investment opportunities for our investors.