Class Action confusion: access to justice in the face of regulatory change

Michael Kontoudis, Practical Guidance Senior Legal Writer – Dispute Resolution

Class actions are now a mainstay of the Australian litigation landscape. As of April 2023, there were 144 class action proceedings on foot across all registries of the Federal Court of Australia alone, not including the significant number of class actions on foot in each of the State Supreme Courts with their own regimes (including in Western Australia, whose dedicated regime commenced operation on 24 March 2023). For information about the various Federal and State regimes, refer to our Guidance Note: Comparing the State and Federal class action regimes.

Accordingly, corporations and businesses operating in Australia must reckon with the possibility that they will be named as defendants in class actions. For more, refer to our Guidance Note: Steps to take when threatened or served with a class action.

While one of the central aims of the class action regime is to facilitate access to justice, its procedural characteristics (and associated funding models) have engendered anxiety about the possible facilitation of predatory litigation, spurred on by lawyers and litigation funders. This anxiety has resulted in an ongoing political tussle of regulation and de-regulation that has created uncertainty.

Class actions and access to justice

The first statutory regime for class actions in Australia commenced in 1992 with the enactment of what is now Part IVA of the Federal Court Act 1976 (Cth) (Act). A similar regime was subsequently enacted in each of Victoria, New South Wales, Queensland, Tasmania and Western Australia.

The stated purpose of Part IVA of the Act is, according to the second reading speech for the relevant legislation, to “provide a real remedy where… each person’s loss is small and not economically viable to recover in individual actions… [and] thus give access to the courts to those in the community who have been effectively denied justice because of the high cost of taking action”.

The promotion of access to justice was a defining purpose of the class action regime, enabling individuals to litigate claims and seek remedies against powerful defendants such as corporations and governments, who are more likely to engage in conduct on a national (or global) level that may result in wrongs committed against many hundreds or thousands of people.

Put simply, the class actions regime creates power in numbers in circumstances where it would not be possible for large-scale wrongs to be litigated by individuals on their own.

Anxiety about potential predatory litigation

As the class actions landscape flourished and developed, so too did the mechanisms for funding those actions. The growth of the third-party litigation funding industry accelerated, with funders exempted from regulations applicable to financial services providers on the public policy ground that third-party litigation funding furthered access to justice by means of class action claims.

Simultaneously, however, some lawyers and businesses harboured a growing concern that class actions were being exploited by class action lawyers and litigation funders.

In Mobil Oil Australia Pty Ltd v Victoria (2002) 211 CLR 1, Callinan J gave voice to this anxiety when he observed at [183] that class actions were the subject of ‘increasingly competitive entrepreneurial activities of lawyers… in which, in a practical sense, the lawyers are often as much the litigants as the plaintiffs themselves, and with the same or even a greater stake in the outcome than any member of a group”.

This anxiety persisted for years and was inflamed and exacerbated recently when the impropriety of lawyers and a litigation funder in the Banksia Securities class action (Bolitho v Banksia Securities Ltd (No 18) (remitter) [2021] VSC 666) (Banksia) was laid bare.

Justice John Dixon’s judgment in Banksia, which runs over 680 pages, was handed down in October 2021 and exposed serious misconduct on the part of lawyers, barristers and the litigation funder bankrolling the class action, who created fake (and inflated) invoices to entitle themselves to a more significant portion of the proposed settlement.

The conduct of the lawyers and funder in Banksia was atypical, aberrant and ultimately discovered and remedied by existing court procedures. Nonetheless, Banksia would become a tarnished symbol for class action litigation and the catalyst for legislative reform by the government of the time.

Clamp down on class actions and litigation funding

Between 2019 and 2022, a raft of legislation was introduced in a concerted effort to regulate how class actions are funded and prosecuted.

Among the legislation passed was the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (CALF Regulations) in August 2020, which requires litigation funders to hold an Australian Financial Services Licence (AFSL), within the purview and scrutiny of ASIC. The CALF Regulations also require funding schemes to be registered as managed investment schemes (MIS) in accordance with the requirements of the Corporations Act 2001 (Cth), to nominate a responsible entity, and to distribute product disclosure statements to group members. The practical effect of this legislation was to subject litigation funders to greater regulatory oversight.

Another example is the Treasury Laws Amendment (2021 Measures No 1) Act 2021 (Cth), which modified the statutory requirements for continuous disclosure by listed companies (regulating when a company has to disclose material information to its shareholders), with the effect that a listed entity would only be liable for failing to disclose information not generally available where it knew, was reckless, or negligent as to whether the information was price-sensitive. These changes, when contrasted with the previous ‘strict liability’ provisions, render it more difficult to prosecute securities class actions against listed entities and their directors.

More recently, the introduction of the now lapsed Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021 (Litigation Funding Bill) in October 2021 saw the previous government contemplating the enactment of a raft of provisions that could have had the effect of stifling the willingness and ability of funders to fund class actions, including a rebuttable presumption that group members in funded class actions should receive no less than 70% of any claim proceeds. The proposed new provisions would have replaced the current funding approval process where a court exercises its discretion to approve settlements and payments to litigation funders.

For more on funding of class actions, refer to our Guidance Note: Litigation funding and Guidance Note: Options for funding a class action.

Potential repeal and reform

On 10 December 2022, the (then) newly-elected federal government enacted the Corporations Amendment (Litigation Funding) Regulations 2022, which effectively provide relief from the requirements in the CALF Regulations for class action funders to hold an AFSL and comply with the managed investment scheme requirements. In practice, these regulations reinstate the long-standing exemption for litigation funders.

Other possible steps that the government may take in future to shape the regulatory landscape for class actions include:

• not proceeding with the Litigation Funding Bill (including the proposed 70% statutory minimum return for group members);
• reforming the modified requirements for continuous disclosure (to remove the fault element) to make it easier to bring securities class actions against companies and directors; and
• reconsidering the Australian Law Reform Commission (ALRC) recommendations handed down in its December 2018 report on class actions and litigation funding, which recommendations included the implantation of a number of changes to the class actions regime, such as permitting contingency fee arrangements in Federal Court class actions (akin to the Group Costs Order regime in force in the Victorian Supreme Court), with the aim of pushing down costs and capping funding agreements to prevent litigation funders taking too significant a proportion of settlement proceeds.

Time will tell which, if any, of these steps will be taken by the government, or when. What is apparent is that class actions continue to be a cornerstone of the Australian legal landscape and play a critical role in facilitating access to justice in the face of mass wrongs. Stable and well-understood court procedures and regulatory oversight of class actions may enhance the ability of class action groups to access just outcomes.

Class actions content in Practical Guidance Dispute Resolution module

LexisNexis^® Practical Guidance Dispute Resolution module, which includes a dedicated Class actions topic, is designed to help practitioners keep up with developments and meet client needs in uncertain times.

Refer to our subtopics, including:

• Preliminary considerations when commencing a class action;
• Commencement of class actions;
• Group members and case management; and
• Defending a class action.

Contact your Relationship Manager for more information about the Dispute Resolution module or visit our Practical Guidance website.