The 30-year evolution of class actions in Australia

Even after 30 years in action, the future of class actions in Australia remains uncertain. What is clear, however, is the impact class actions have had – for claimants, lawyers, litigation funders and for corporate Australia. 

In this article we look at some of the more significant milestones in the evolution of the class action regime in Australia, and the factors that have shaped that change.

A new chapter - 1992 to 1999

The Australian class action regime was introduced in March 1992 through the enactment of Part IVA of the Federal Court of Australia Act 1976 (Cth). This followed the 1988 report by the Law Reform Commission (now the ALRC) which recommended that the introduction of a new grouped proceeding procedure would improve respect for the law by enhancing access to legal remedies, promote efficient use of judicial and legal resources, and allow individuals to obtain legal redress in a cost effective manner. 

The ‘opt- out’ regime reflected in Part IVA was later picked up by other states (first Victoria, then NSW, Queensland, Tasmania and WA) with minor variation. 

In its early days, the regime saw class actions being commonly brought for personal injury claims caused by consumable goods and defective products. Some noteworthy matters included the Legionnaires disease class action where 144 visitors to the Melbourne Aquarium contracted legionnaires disease, and the Wallis Lake Oyster class action where 184 people became ill after consuming oysters grown in Wallis Lake alleged to have been exposed to faecal contamination. These types of cases became less common following torts reform between 2002 and 2003. 

In August 1999, King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) became the first shareholder class action to be filed in the Federal Court. The group members were shareholders of GIO who claimed that the directors of GIO misled them about the true value of GIO shares in an attempt to persuade them to reject a hostile takeover bid by AMP. 

Although the matter settled for $97 million in 2003, the plaintiff law firm was engaged on a ‘no-win, no-fee’ basis and undertook significant risk and expenses in running the matter. 

With the realisation of the cost of class action litigation, it was clearly unsustainable in the long run, particularly in Australia where law firms were prohibited from charging contingency fees under all state and federal jurisdictions and were unable to accumulate capital to fund future class actions. 

These conditions provided fertile ground for the growth of commercial third party litigation funders whose function is to underwrite the legal costs (including adverse cost risk) in return for a share of any proceeds.

Rise of litigation funding and regulatory risks - 2000 to 2015 

Litigation funding rose to prominence in the early 2000s with one of the first funded cases being the shareholder class action against Aristocrat Leisure Ltd. At that stage, funded class actions only accounted for 3.2% of all class actions filed. Two key decisions between 2007 and 2008 cleared the way for the business of litigation funding in Australia.

The first was Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd, where the High Court held that third party litigation funding arrangements did not constitute an abuse of process even if the litigation funder exercised a degree of control over the proceeding with an expectation to turn a profit.

The second was Multiplex Management Fund v P Dawson, where the Federal Court accepted the concept of a ‘closed class’ action with class membership conditional upon the group member’s execution of the litigation funding agreement. The Court held that this is not contrary to the ‘“opt-out’ procedure under Part IVA. 

Closed class actions protected the commercial interest of funders by eliminating the ‘free rider’ problem 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 paved the way for an unprecedented level of litigation funding activities in Australia where the percentage of funded class actions more than doubled from the previous decade. Funding was most commonly seen in investor and shareholder class actions, accounting for more than 74% of all funded class actions filed between 2001 and 2016. 

Uncertainty struck, however, in 2008, following the decision in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11, with the Full Court of the Federal Court holding that the funding arrangements in that class action met the definition of ‘managed investment scheme’ under section 9 of the Corporations Act 2001 (Cth) and therefore must comply with requirements under Chapter 5C of the Corporations Act. 

In May 2010, ASIC intervened by making class orders exempting funded representative proceedings as managed investment schemes and thus negating the effect of the Full Court’s decision. The class orders were enshrined in legislation with the passing of the Corporations Amendment Regulation 2012 (No 6) (Cth). The status quo was thus restored. 

Common fund orders and competing class actions - 2016 to 2019

The year 2016 was pivotal for litigation funding in Australia with grant of the first common fund order in Money Max Int Pty Ltd v QBE Insurance Group Ltd. 

A common fund order is a court order that requires a funding commission to be paid to the funder by all group members, regardless of whether they have signed a litigation funding agreement. The concept was a boon for funders as it prevented an alternative solution to the free rider problem, while also avoiding the need for significant investment of time and money in the book building stage.  

Unsurprisingly, following the Money Max decision a number of overseas funders entered the Australian market, incentivised by reduced barriers to entry (as they no longer needed to embark on expensive bookbuilds) and the prospect of receiving large commissions.  New filings jumped to 47 in 2017 - a 62% increase from the previous year (pre-Money Max). The trend continued with 55 class actions filed in 2018. Of those filings, almost 50% represented shareholder class actions. 

The increase in filings brought a new challenge – competing class actions.  With the ‘race to the registry’, more than one claim (and often several) was being brought against the same respondent in connection with the same allegations. 

The Courts responded to this challenge by:

• recognising the issue of multiplicity should be dealt with at the early stages of the proceeding and that a number of approaches for managing competing proceedings are available to judges, including the power to permanently stay competing proceedings; and
  
  
• adopting a multifactorial approach for determining which proceeding(s) be allowed to continue (colloquially referred to as a ‘beauty parade’). The choice of funding model was a key consideration in deciding on any ‘beauty parade’.

Decline of litigation funding (2019 to present)

While courts considered themselves equipped to prevent the potential prejudices to a respondent facing multiple class actions, corporate Australia took a different view.  

The last few years have seen increased political pressure and scrutiny brought to bear on the class action regime and, in particular, the use of litigation funding to prosecute those claims.   

In December 2019, the High Court delivered its judgment in BWM v Brewster, holding that section 33ZF of the Federal Court Act did not empower the Court to make common fund orders, at least in the early stages of the class action proceedings.  

Then, in July 2020, the Federal Parliament passed the Corporations Amendment (Litigation Funding) Regulations 2020 which had the effect of reinstating the decision of the Federal Court in Brookfield by removing the exemption for litigation funders to carry an Australian Financial Services Licence. 

Compliance with the Corporations Act as a managed investment scheme has, so far, proven to be a costly exercise for funders.  

In response to increasing boardroom pressures, in August 2021, Federal Parliament passed the Treasury Laws Amendment (2021 Measures No. 1) Act 2021 to amend continuous disclosure obligations under the Corporations Act 2001 by importing a fault element into the test. 

The last incursion into the prevalence of funded class actions came in September 2021, when the Commonwealth Treasury announced another raft of changes to the regulation of litigation funding by introducing the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation Funders.  

The most material impact of the bill, if passed into law, will be to impose a 30% cap (by way of rebuttable presumption) on any funding commission. The Bill has been put on ice for the time being.  

The challenges to funding and the uncertainty introduced by these events has seen a marked decline in funded class actions, seeing international litigation funders closely consider the viability of their operations in Australia. 

Not all recent events have, however, dealt body blows to the class action regime’s continued survival. 

In June 2020, the Victorian Parliament passed the Justice Legislation Miscellaneous Amendments Bill 2019 (Vic), which permitted ‘group costs orders’ to be made in class actions filed in the Supreme Court, overturning the prohibition on contingency fees. 

The challenges to funding and the attractiveness of group costs orders may see the Victorian Supreme Court assume an even greater share of class action litigation.

Conclusion

Since its introduction 30 years ago, Part IVA has gone on a wild ride. While it is easy to see the recent challenges confronting the regime (and, in particular, the funding of claims brought under it) as signalling its death knell, we suspect we will be talking about class actions for another 30 years to come.