27 March 2020
It has not taken long. Media reports of lawyers investigating potential class actions in connection with the Ruby Princess will not be the last we hear about plaintiff law firms exploring class action litigation arising from COVID-19.
As the impact of the virus deepens, consumers and affected businesses will look for avenues to recover and, inevitably, law firms and litigation funders will be looking for opportunities to act – just as they did in the wake of the Global Financial Crisis.
While the situation is changing every day, in this article we set out our current thinking on the risks that potential class action targets might be facing in the fall-out from the COVID-19 pandemic.
There should be little doubt that listed entities sit on top of the pile of potential class action targets. In many cases, guidance has been downgraded or withdrawn; earnings are likely to fall drastically; markets are experiencing unprecedented volatility; and value has been lost. All of these factors, coupled with recent judicial acceptance of market-based causation and challenges associated with securing insurance coverage, could lead to a perfect storm for listed entities.
While many will fairly point to the unforeseen impacts of COVID-19, it is also reasonable to expect that much will be made of companies being slow to anticipate and respond to the virus to ensure pandemic-readiness (especially given the lessons available to Australian companies based on events in China).
The litigation risk flowing from COVID-19 might be even more acute for those industries at the front lines of the virus’s impact, such as tourism, hospitality, leisure, transport, IT and health care.
As we move forward, the inevitable flurry of capital raising is also likely to catalyse litigation risk – particularly while market volatility remains and performance is unpredictable. That litigation risk extends beyond those undertaking the raise, to include the professional advisers supporting the raise.
The challenges confronting listed entities also create acute risks for directors in the current climate.
To begin, we expect shareholder claimants will look more closely at the role of directors in an effort to access ’side A’ insurance coverage, given the challenges companies have faced in recent times in securing ’side C’ extensions. The Dick Smith litigation currently before the NSW Supreme Court is a case in point.
Economic uncertainty will also heighten challenges for directors in decision-making, disclosure and in coming to terms with the company’s financial position during reporting periods. Happily, however, directors have been granted some limited reprieve in the form of the Federal Government’s relaxation of the insolvent trading regime.
Tied closely to the fortunes of listed companies will be the fortunes of the auditors of those companies.
The UK Financial Reporting Council (FRC) has published guidance on audit issues arising due to COVID-19. Putting to one side cashflow volatility and potential difficulties in going concern assessment, the FRC has warned auditors about the challenges of conducting ’high-quality audits’ given the practical obstacles presented by social distancing.
While ASIC has indicated it is talking to market participants about these challenges, it currently does not see them as warranting any relief. This comes in the wake of ASIC’s recent Audit inspection report for 2018-19 which found that auditors did not, in ASIC’s opinion, “obtain reasonable assurance that the financial report was free from material misstatement in 26 per cent of the key audit areas that ASIC reviewed”. As COVID-19 sees ASIC reprioritise its efforts towards consumer protection, audit appears likely to remain a key focus for the regulator.
In addition to ASIC’s efforts, there are currently a small number of significant audit negligence claims before the courts. The trajectory of those claims and the determination of central issues such as duty and the application of professional standards schemes may have very profound ramifications for the audit industry in these challenging times.
The Federal Government’s recent announcement allowing superannuants adversely impacted by COVID-19 to draw on superannuation balances has the potential to trigger a domino effect in the superannuation industry, expanding on the current wave of class actions against superannuation trustees.
Funds will have suffered significant investment losses as a result of recent market volatility. As superannuants avail themselves of early draws on super funds, investment losses will be locked in, and fund balances will experience material declines.
Regardless of merit, we expect it is highly likely these losses will see claims by aggrieved superannuants looking to find ways to re-establish diminished balances. Those claims will focus on the investment strategies of funds, their relative performance in the market and the timeliness of the response to the COVID-19 outbreak.
COVID-19 will change the way we work. Until such time as those changes become the norm – both in legislative terms and real terms – there will be challenges, and mistakes will be made.
At the outset, it is highly likely that underpayment claims like those that have confronted Woolworths and others will continue to be prosecuted. It is conceivable that the prevalence of such claims may increase due to the under-capture of hours by casual workers working remotely.
Casual workers are, and will continue to be, the first to feel the employment pinch driven by COVID-19. Many of these casual workers will have been long-standing employees and will not receive any termination benefits. It would be reasonable to expect that misclassification claims in the wake of Skene will persist.
Changes to employment conditions for large swathes of an employer’s work force are also likely to catalyse litigation where there is scope for debate about the permissibility of those changes. While decisions are being made now in the best interests of the company, they undoubtedly create a class action risk given the number of employees adversely affected and the increasing focus of plaintiffs in this area.
Many people have had travel plans thrown into disarray; often those plans have been cancelled by the travel operators in response to government restrictions. However, cashflow demands will see those operators offer credit rather than refunds. Aggrieved customers may push for refunds, particularly with no certainty about the ability to lock in future travel plans, and the impacts of COVID-19 on household cashflow. An unwillingness to refund may trigger claims.
With dramatic changes to consumer activity, and significant demand for certain goods and services, there is potential for price gouging, anticompetitive conduct and misleading and deceptive conduct claims. The ACCC has moved early to intervene where it sees misconduct, and class actions may follow where the misconduct appears to run deep.
Off the back of the World Health Organisation declaring the COVID-19 outbreak a pandemic, the Insurance Council of Australia has classified the disease an “insurance catastrophe”.
At this stage, the insurance impacts are still being measured, with significant losses to come. However, despite ASIC’s encouragement for insurers to adopt “fair and efficient claims handling” reflecting the duty of utmost good faith owed by insurers, insurers will be seeking insulation from insured risks by utilising exclusion clauses. In the context of consumer policies in particular, there may be challenges to the operation of such exclusions.
In its media release of 23 March 2020 advising of a recalibration of its regulatory priorities, ASIC indicated it would take account of the current circumstances in assessing compliance with responsible lending requirements. While this may be ASIC’s attitude, lenders are still amenable to responsible lending requirements in their dealings with customers. Breaches of these requirements, and the extension of credit to the vulnerable (or those exposed to the financial impacts of COVID-19), may see future defaults and trigger future claims.
COVID-19 has seen significant increases in online traffic, with major government online resources cracking under the added strain. What is not yet clear is how the changes to online user habits will affect the risk of data and privacy breaches. It is not unreasonable to expect that we will see the prevalence of these type of claims spike dramatically, exacerbated by the use of new communication technologies which may not employ sufficiently robust security measures.
Perhaps the greatest question mark is to be reserved for the roles played by state/territory and federal governments. The COVID-19 crisis has resulted in massive incursions by government into the private sector in ways not seen outside of periods of war. The impact of those incursions has already been, and will continue to be, far-reaching. While many will benefit from government attempts to stem the virus and its impacts, many will also suffer.
Whether or not there will be an appetite (let alone a viable basis) to pursue legally complex and challenging claims against government remains to be seen. However, the potential size of the reward means the possibility cannot be ruled out. That possibility may come into sharper focus as we assess the merit of government decision-making with the benefit of hindsight.
Business decisions are being made rapidly, in a constantly changing environment. Often, those decisions are ‘life or death’, leaving little time to process key considerations in a methodical and robust way. Decisions are being made now to confront today’s challenges and ensure survival, rather than with a careful eye to the future risks that might emerge from the existing uncertainty. All of that means that class actions are an inevitable risk, with funders and plaintiff law firms already beginning to mobilise.
This article is part of our insight series COVID-19: Navigating the implications for business in Australia and beyond. To get notified by email when new COVID-19 insights are released, please subscribe for updates here.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.