The big class action debate

Regulations

Last updated: 24 August 2015

In case you missed it, there is a debate raging about the future of class actions in Australia.

The debate is unfolding on the pages of our leading business papers and it has truly flared up in the past year or so, even becoming the subject of inquiry by the Productivity Commission.

The main question being raised is the extent to which litigation funding should be regulated in Australia. Most of the debate revolves around:

The final outcome of this debate will have a significant impact on the future of litigation funders, plaintiff firms, class actions and, consequently, the Australian litigation landscape and business practices. I chose not to pass judgment, or pick a side, in respect of the arguments presented in this ongoing debate. My only intention is to highlight the debate and share the arguments presented in the course of the dialogue.

Admittedly, the unsavoury saga of Centaur Litigation and the lack of overall transparency of litigation funders it highlighted, the profit reports of litigation funders, increasing insurance premiums for directors and some other questionable professional conduct identified, do not help the camp arguing against the stronger regulation of litigation funding:

Most of the pieces in which the debate unfolds appear in The Australian and The Australian Financial Review. Unfortunately this means that many of the articles listed below sit behind their respective paywalls.

I would also observe that while the Financial Review, and other Fairfax publications, generally appear to strike a relatively balanced and impartial view on the topic, the overall tone of The Australian’s reporting on the subject seems to favour an advocacy approach on the side of the argument that sees (stronger) regulation in this area as necessary:

On a related note, in late 2014 the Chief Justice of the Federal Court of Australia announced an intention by the Court to take matters into its own hands and explore a stronger judicial oversight mechanism for class actions in the Federal jurisdiction:

In another related development, on 26 November 2014 in a judgment handed down in the Supreme Court of Victoria, in Bolitho v Banksia Securities Limited (No 4) [2014] VSC 582, Ferguson JA took a dim view of the close relationship between the plaintiff’s instructing solicitor, Mark Elliott, and Senior Counsel, Norman O’Bryan, and the litigation funding entity, BSL Litigation Partners Limited (BSL).

In circumstances where:

  • Mr Elliott, through his superannuation fund and another company controlled by him, and Mr O’Bryan’s wife are major shareholders in BSL;
  • Mr Elliott is the secretary and one of three directors of BSL; and
  • under the relevant litigation funding agreement entered into between the plaintiff and BSL, BSL is entitled to be paid up to 30% of any net amount received to resolve the dispute,

Ferguson JA held that:

I have reached the conclusion, for the reasons which follow, that the fairminded, reasonably informed member of the public would conclude that the proper administration of justice requires that Mr O’Bryan and Mr Elliott should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice.

Her Honour explained the reasons for this decision by noting that:

Here, the Observer is likely to conclude that although the litigation funding agreement success fee would not be payable to Mr Elliott in his capacity as a solicitor, nevertheless it is a contingency fee that would benefit him. The Observer would likely take the view that where the legal practitioner’s interest in the funder is sizeable, it would be inimical to the appearance of justice for lawyers to skirt around the prohibition on contingency fees by this means.

The Observer would also be likely to conclude that the difficulties for Mr Elliott are compounded because in addition to him, senior counsel (through his wife) has a connection with the Litigation Funder. This further tarnishes the appearance of justice, because there is no senior lawyer representing Mr Bolitho in the case before the Court who is independent of the Litigation Funder.

The Observer would note that the involvement of Mr O’Bryan in the Litigation Funder is less than that of Mr Elliott. He is not an officeholder and it is his wife, rather than a company, that holds shares.

Nevertheless, as a matter of common knowledge, the Observer would know that in most families, what is good or bad financially for a wife is good or bad for her husband and vice versa. As Mr Bolitho’s counsel recognised, the issue is not one of control of wife over husband, nor is it in any way a question of gender. It would make no difference to the analysis if it was Mr O’Bryan who was the shareholder and his wife the barrister. Rather, the real point is whether there is a real risk to the proper administration of justice if Mr O’Bryan were to continue representing Mr Bolitho because of his family’s interest in the Litigation Funder. Bearing in mind that the jurisdiction to restrain counsel is exceptional and is to be exercised with caution, the Observer would nevertheless likely conclude that there is a real risk. Again, the effect is that if the case for Mr Bolitho succeeds or is settled favourably, Mr O’Bryan will indirectly benefit from a contingency fee.

Consequently, the Observer would come to the conclusion that although Mr Bolitho would like him to act, in all the circumstances there is due cause to prevent Mr O’Bryan from continuing to act as counsel in the proceeding.


Related links:

Interesting judgments:

Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) [2015] FCA 811 (7 August 2015)

This decision of Justice Wigney, in which he refused to approve an application for a so-called ‘common fund’ arrangement in the shareholders class action against Allco Finance, caused a fair amount of excitement in legal circles.

In short, a ‘common fund’ arrangement, which is popular and common in the United States, is one which entitles a litigation funder to receive a commission from all class members who participate in a settlement or judgment, rather than just those members who have signed up to the funding agreement.

Under the application by the litigation funder, Litigation Funding Partners Pte Ltd, between 32.5% and 35% of any settlement or judgment sum (after legal costs) would have been paid to the funder, by all group members regardless of whether they had signed a funding agreement or not.

Justice Wigney determined that to be made, the proposed orders would have to satisfy s33ZF of the Federal Court of Australia Act 1976 (Cth) which requires that the order in question be ‘appropriate or necessary to ensure that justice is done in the proceedings’. This required a consideration of the rights and interests of group members as a whole.

Justice Wigney rejected the application, finding that the real reason for the application had ‘nothing to do with ensuring that justice is done in the proceeding’, but was rather made to secure the commercial viability of the proceedings for the funder. A scathing assessment.

The court also found that the application was made too early in the proceedings, at a time when costs are difficult to estimate, and there is a ‘considerable uncertainty and a lack of information concerning the implications of making such an order’. This will make the timing of any future common fund application by a funder a critical issue.

Especially when Justice Wigney’s comments are contrasted with Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626, where a post-settlement application by a funder for a commission from those class action beneficiaries who did not sign a funding agreement was rejected. In that case Justice Gordon noted:

CLF, as a litigation funder, made a commercial decision to fund these proceedings on the terms and conditions set out in the various LFAs. Relevantly, it made a commercial decision to fund these proceedings by entering into a LFA with 92% of group members. Not 100% of the group members, just 92% of the group members. The question which arises is why should CLF be entitled to receive between 25% and 30% of the amount recovered by those group members who chose, for whatever reason, not to enter into a LFA (defined, erroneously, in the Settlement Distribution Scheme as “Informally Funded Registered Group Members”)? The deduction of the funding commission was never part of a commercial bargain reached by CLF with these so called Informally Funded Registered Group Members. In fact, for whatever reason, the Informally Funded Registered Group Members decided to do the direct opposite and not enter into a LFA. What has changed? I can identify no reason why the LFA should now be imposed on the Informally Funded Registered Group Members. They have not agreed to it.

Justice Gordon in that case preferred to apply the ‘funding equalisation’ approach, which involves taking the amount which would have been paid to the funder by non-funded group members if they signed the funding agreement, and redistributing that money pro rata amongst all group members. This has been found to be a just and appropriate method of ensuring that those group members who do not sign a funding agreement do not receive a ‘free ride’. The funding equalisation approach is one which is well-established in the Australian jurisdiction.

Nevertheless, the decision of Justice Wigney will not draw a line under the availability of the common fund approach for Australian class action proceedings as predicted by some commentators. Although he rejected the application before him, he noted it is not outside the realm of possibilities for such orders to be made in the proceedings at a later stage:

It is neither necessary nor desirable to indicate one way or another whether a common fund order could or might be made in this matter if a settlement is contemplated, or a settlement approval is sought at some stage. Much will depend on matters such as the amount of the proposed settlement, the number of group members who are, or are likely to, participate in the settlement, the stage of the proceeding, and the costs and disbursements actually incurred. At this stage, the question is entirely hypothetical.

Justice Wigney also noted in a section of the judgment titled ‘Is there a case for reform?’ that the case before him indicates there may be a need for legislative reform to address the issues raised:

There is something to be said for the proposition that some form of common fund approach, similar to the common fund doctrine in the United States, should be adopted in Australia to deal with the reality of commercial litigation funding in representative proceedings. It would, however, perhaps be preferable for that to occur as a result of legislative reform, rather than by way of the piecemeal utilisation by judges of general discretionary powers such as ss 23 and 33ZF of the FCA Act.

Grant-Taylor v Babcock & Brown Limited (In Liquidation) [2015] FCA 149 (4 March 2015)

This was a seemingly unremarkable decision from the Federal Court of Australia which dismissed a claim by shareholders of Babcock & Brown Limited (in liquidation) who alleged a failure by Babcock to disclose material information to the market in breach of its continuous disclosure obligations.

What made the decision to stand out, was comments by Justice Perram in the course of delivering his judgment, where he considered the requirements for proof of loss and damage. In his obiter comments, in particular at [219], he concluded that shareholders do not need to prove direct reliance to recover compensation for losses arising from a failure to comply with continuous disclosure laws:

… whilst reliance is a sufficient condition for establishing causation it is not a necessary one.

I would accept that a party who acquires shares on a stock exchange can recover compensation for price inflation arising from a failure to disclose material required by s 674 to be disclosed, so long as they are not themselves aware of the non-disclosed material.

Whether these comments are an indication of the court’s willingness to facilitate shareholder claims in misleading conduct cases by simplifying the requirements for proof of causation and damages, and whether this will encourage an increase in securities class actions, remains to be seen.

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