More questions raised on the future of class actions

By Tony Zhang|16 February 2020

The future of the class action industry is in a state of questioning and change, with Federal Court Justice Michael Lee indicating that broad powers should make common fund orders in class action settlements.

The events of the year in Australia’s class action space have demanded much debate and reflection.

There have been concerns that Australia could eventually become known to the global business community as the “litigation hellhole of the South Pacific” in its response to the ALRC report.

Could this also be the end of common fund orders, or possibly the start of something new? 

The BMW High Court case had drastic implications on affecting the funding market which has created a lasting impact on the booming class action industry.

A pre-2016 position has been returned, in a time where much thought will be about the future of class actions and the funding industry that drives it.

Federal Court Justice Michael Lee indicated in an ALFA conference in Sydney that there could be more broader powers in the interaction with the future of the class action industry, specifically to make a common fund order. 

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This would possibly mean a turning away from pure statutory power and moving towards a broader equitable power in the courts.

“We live in a world where there are fetish about statutes,” Justice Lee said.

“The law reform focuses most on tinkering statutes… the only way to achieve progress is for some sort of legislative amendments.”

Previously, Justice Bernard Murphy had told the ALFA conference in Melbourne that there is “no great disaster” in the High Court ruling.

Much debate is swirling around the way whether the equitable powers in the courts based on precedent of past class action cases could extend to make CFOs rather than statutory powers of the courts and bodies to influence class action funding.

“The fundamental aspect of this, it seems to me, which is often forgotten, refers to the implied power of the court, to a certain extent, as the court of equity, the equitable power of the court has, and that is the need to control its processes and the need to do equity between people,” Justice Lee said.

“To have some regard insuring that there is some ability within these traditional notions that the enquired power of the jurisdiction of the court to think of solutions that rise from the different forms in the past.”

The High Court decision has had profound impacts for the litigation funding industry and for defendants and could most possibly result in a decline in class actions, at least during the wait for a possible legislative solution.

Without the prospects of a CFO under the present legislative framework, litigation funders will now have to revert to the classic book-building exercises in order to ensure their returns from each group member which is distinct from funding equalisation orders that distribute the costs equally among group members.

The decision is also likely to have a significant impact upon continuing proceedings where CFOs are currently in place, while it is also possible that there could be an increase in funding commissions which have been the subject of increasing scrutiny and pressure by courts.

Litigation funders will have to come to court with the economic feasibility already built in place, instead of relying on a common fund order to make the action viable – which will probably slow, but not stop, Australia’s lively class action industry.

Justice Lee touched on the issue of the relative degree in the control imposed on class actions and its funding industry.

“One of the things I found very curious about reaction to people, who are apparently horribly concerned about controlling class actions, funding commission and controlling influence of funders in the Australian legal system,” Justice Lee said.

“There seemed to be a celebratory type, there seemed to be a fact of consequences of the court not being able to make common fund orders, is it changed what had been a very steady, very discernible decreases in the amounts of commission being charged by funders across class actions.”

Recently, a legislative solution was proposed in the state of Victoria in the form of contingency fees.

In a response, the ALFA conference had discussed the proposed solution, the bill before the Victorian Parliament (the Justice Legislation Miscellaneous Amendments Bill 2019 [Vic]) which proposes to permit the implementation of contingency fees for class actions in Victoria and for the legal costs payable to the plaintiff law firm to be calculated as a percentage of any award or settlement that may be recovered in the proceeding.

The solution to increase the number of class actions, stems from the government's belief to increase access to justice through more availability of cases based on contingency fees, but there has been a ripple effect in other states which are closely watching and debating the new Victorian legislative model and if it is the best way to resolve the common fund problem. 

The path of finding the correct course of class action remains both a problem practitioners and judges have constantly been encountering.  

Justice Lee referred to class actions as like a “whack a mole”, where solving one problem leads to another in place.

On the future of the funded class actions especially after a CFO, Justice Lee agreed in his personal view that it should be continued.

“They should continue, they have been a mechanism which has provided to address claims for a large number of people who simply would not have a system in place to maintain the claim.”

On the High Court ruling, the majority found that, although the powers conferred by sections 33ZF of the FCA Act and section 183 of the CPA are broad, they don’t extend to the making of a CFO because a CFO is not an order ensuring that justice is done by regulating how the matter is to proceed. 

Australia’s booming and lively class actions are backed by the massive funding industry which brings together cases especially with the prospect of CFOs. 

The recent changes of the High Court could impact the funding market, but more importantly, the stability and importance the funding community plays in their role, according to Justice Lee. 

“People are concerned about what is perceived to be a lack of control or vigour in the way in which the court is approaching and the way statutory bodies like ASIC are approaching controlling funding commissions,” Justice Lee said.

“By doing that, it can often minimise the critical importance of funders in providing that access to justice."

“Now one of the themes which is played out in a number of cases affected by this decision is the notion of what the court was trying to do in exercising its supervisory role in relation to the control of funding issues.”

In the conference, Justice Lee also addressed the tensions between authorities and the broader powers of the courts.

“There is this tension within the authorities at the moment with the ability of the court to interfere with bargains, freely arrived at with contractual counterparties, by which proceedings are funded,” Justice Lee said.

“I don’t think the courts have some sort of roving law reform, roving commissioner’s justification tribunal committal to go around changing the promises given by the law, in the absence in some sort of equitable or legislative laws or some sort of statutory basis which can interfere with contracts."

“In the legal system where law and equity work concurrently… it’s up to people to work out relief they seek in the statutory nature, or equity nature.”

The High Court’s decision was based on its interpretation of the legislation, so it is possible that the federal and NSW governments could amend the acts to restore common fund orders. 

However, from Justice Lee’s speech to the ALFA conference, much discussion will continually be raised ahead into the future of class actions, the questions regarding the Victorian contingency fee model, competition and the future of the common fund order.

More questions raised on the future of class actions
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