The Australian class action landscape is in a state of flux. Prior to the federal election earlier this year, reforms targeting litigation funding and other aspects of the class action regime continued to loom large; such reforms being primarily aimed at curbing the unprecedented rise in the number of class action filings. But with the election of the new Labor government, the tide has clearly shifted back to a more modest approach to regulation.
Labor has previously made it clear that it opposed many of the Coalition’s reforms. In particular, the proposed presumption of unfairness for settlements returning less than 70 per cent to group members; the permanency of the changes to Australia’s continuous disclosure regime; and the changes requiring litigation funders to comply with laws regulating managed investment schemes (MIS). As such, it appears likely that the reforms on these issues will either be reversed or abandoned in the near future.
The government will have less work to do in winding back the MIS reforms, following the recent Full Federal Court decision in LCM Funding Pty Ltd v Stanwell Corporation Limited. There, the court overturned its 2009 decision, and held that funded class actions are not MISs for the purpose of Chapter 5C of the Corporations Act 2001 (Cth). It remains to be seen whether litigation funders are still required to hold an Australian Financial Services Licence, though that is unlikely, and this decision will still reduce the regulatory burden and associated costs for litigation funders in Australia.
Nevertheless, several other key issues remain of interest going forward, particularly those that are the subject of the Australian Law Reform Commission’s 2019 report (ALRC Report), including:
- contingency fee agreements;
- so-called “common fund orders”; and
- class closure orders.
Contingency fee agreements
In considering the available mechanisms for funding class actions, the ALRC Report recommended permitting plaintiff law firms to enter into contingency fee agreements with representative plaintiffs.
Also known as ‘percentage-based fee agreements’, these agreements involve the solicitors providing their services in exchange for a percentage of the amount recovered in the litigation. Such fee structures are standard practice in the United States but are subject to a blanket prohibition across the legal profession in Australia.
In Victoria, however, an exception to the general prohibition was legislated in July 2020, with the introduction of section 33ZDA of the Supreme Court Act 1986 (Vic). This provision was the first of its kind in Australia and gives the Court power to approve the charging of contingency fees in class actions, by way of a ‘group costs order’.
The main argument raised in favour of contingency fees in class actions is that they would increase access to justice, particularly for small or medium-sized actions, which are typically not commercially viable for litigation funders. It is also said that they would provide greater returns for group members over third-party funded actions, given the absence of the litigation funder’s commission from the costs of bringing the action.
The charging of contingency fees is, however, somewhat controversial. The Law Council of Australia opposes the introduction of contingency fees in class actions, due to concerns regarding the undesirable ethical risks the fee structure will create for members of the legal profession.
Pre-election, the new federal Attorney-General was on record stating that Labor would only make changes to the class action systems that were “in the best interests of plaintiffs seeking justice”, which could indicate favourability towards allowing contingency fees. However, there has been no firm indication either way as of yet.
In the meantime, Victoria is likely to remain, from the perspective of plaintiff law firms, the most attractive forum in Australia for commencing class actions.