ALRC Releases Final Report on Inquiry Into Class Actions and 3rd-party Litigation Funders

The Australian Law Reform Commission's (ALRC's) final report into class action proceedings and third-party litigation funders has been publicly released after being tabled in Federal Parliament on 25 January 2019. According to the acting Attorney-General, Greg Hunt MP, the report is "expected to stimulate debate amongst consumer advocates, the legal profession, the business sector, and across the wider community, on the issues raised by the report."

Background to the Report

The report was commissioned on 11 December 2017, by then Commonwealth Attorney-General, George Brandis QC. Broadly the ALRC was requested to consider whether, and to what extent, class action proceedings and third party litigation funders should be subject to Commonwealth regulation. The need for the inquiry was seen to arise from:

• an increased prevalence of class action proceedings in Australian courts; and
• an increasingly important role of litigation funders in class actions and other legal proceedings, including arbitration and like proceedings in the legal system.

Figures quoted in the ALRC's report show that there has been a substantial increase in class actions supported by litigation funding, for example, 2016-2017 saw 58% of class actions supported by litigation funding as opposed to 65% in 2017-2018. 

The ALRC released a discussion paper on 23 May 2018 which outlined the key aim of the inquiry as being "to ensure that the costs of class actions are appropriate and proportionate and that the interests of plaintiffs and class members are protected."

Terms of Reference

The Terms of Reference required the ALRC to consider the following matters:

•  whether there is "adequate regulation of conflicts of interest" between litigation funder and plaintiffs and between lawyer and litigation funder, including in the relationship between a litigation funder and a legal practice;
•  the desirability of imposing "prudential requirements", including relating to capital adequacy, and also requirements relating to the character and suitability of litigation funders; and
•  the adequacy of regulation around the "costs charged by solicitors in funded litigation" and, in particular, whether there is adequate regulation of the distribution of proceeds of litigation.

Effectively the aim of the terms of reference is to require the ALRC to consider two key issues of the class action regime, namely: 

•  the integrity of third-party funded class actions, and 
•  the efficacy of the class action system. 

The Report Recommendations

The report makes 24 recommendations, which can be summarised as follows:

Case Management (dealt with in Chapter 4 of the report)

Recommendation 1: recommends that Part IVA of the Federal Court of Australia Act 1976 (Cth) which deals with class action should be amended so that all representative proceedings are initiated as open class.

Recommendation 2: recommends that Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to provide criteria for when it is appropriate to order class closure during the course of a representative proceeding and the circumstances in which a class may be reopened.

Recommendation 3: indicates that Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide the Court with an express statutory power to make common fund orders on the application of the plaintiff or the Court’s own motion.

Recommendation 4: recommends that Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to give the Court an express statutory power to resolve competing representative proceedings; and Recommendation 5: provides that in order to implement Recommendation 4, Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to provide a further case management procedure for competing class actions.

Recommendation 6: recommends that the Supreme Courts of states and territories with representative/class action procedures, should consider becoming parties to the Protocol for Communication and Cooperation Between Supreme Court of NSW and Federal Court of Australia in Class Action Proceedings.

Recommendation 7: recommends that Part 9.6A of the Corporations Act 2001 (Cth) and section 12GJ of the Australian Securities and Investments Commission Act 2001 (Cth) should be amended to confer exclusive jurisdiction on the Federal Court of Australia with respect to civil matters, commenced as representative proceedings, arising under that legislation.

Settlement Approval (dealt with in Chapter 5 of the report)

Recommendation 8: recommends that Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should include a clause that the Court may appoint a referee to assess the reasonableness of legal costs charged in a representative proceeding prior to settlement approval.

Recommendation 9: recommends that Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should include a clause that the Court may tender settlement administration, and include processes that the Court may adopt when tendering settlement administration.

Recommendation 10: recommends that Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended to require settlement administrators to provide a report to the class on completion of the distribution of the settlement sum.

Regulation of Litigation Funders (dealt with in Chapter 6 of the report)

Recommendation 11: recommends that Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to prohibit a solicitor acting for the representative plaintiff, whose action is funded in accordance with a Court approved third-party litigation funding agreement, from seeking to recover any unpaid legal fees from the representative plaintiff or group members.

Recommendation 12: recommends that Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to include a statutory presumption that third-party litigation funders who fund representative proceedings will provide security for costs in any such proceedings in a form that is enforceable in Australia.

Recommendation 13: recommends sections 37N and 43 of the Federal Court of Australia Act 1976 (Cth) should be amended to expressly empower the Court to award costs against third party litigation funders and insurers who fail to comply with the overarching purposes of the Act prescribed by section 37M.

Recommendation 14: recommends that Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide that:

• third-party litigation funding agreements with respect to representative proceedings are enforceable only with the approval of the Court;
• the Court has an express statutory power to reject, vary, or amend the terms of such third-party litigation funding agreements;
• third-party litigation funding agreements with respect to representative proceedings must provide expressly for a complete indemnity in favour of the representative plaintiff against an adverse costs order; and
• Australian law governs any such third-party litigation funding agreement the funder submits irrevocably to the jurisdiction of the Court.

Recommendation 15: recommends ASIC Regulatory Guide 248 should be amended to require that third-party litigation funders that fund representative proceedings report annually to the regulator on their compliance with the requirement to implement adequate practices and procedures to manage conflicts of interest.

Recommendation 16: recommends regulation 5C.11.01 of the Corporations Regulations 2001 (Cth) should be amended to include ‘law firm financing’ and ‘portfolio funding’ within the definition of a ‘litigation funding scheme’.

Solicitors’ Fees and Conflicts of Interest (dealt with in Chapter 7 of the Report)

Recommendation 17: recommends that solicitors acting for the representative plaintiff in representative proceedings, should be permitted to enter into "percentage-based fee agreements" with the following limitations:

•  an action that is funded through a percentage-based fee agreement cannot also be directly funded by a litigation funder or another funding entity which is also charging on a contingent basis;
•  a percentage-based fee cannot be recovered in addition to professional fees for legal services charges on a time-cost basis; and
•  solicitors who enter into a percentage-based fee agreement must advance the costs of disbursements, and account for such costs within the percentage based fee.

Recommendation 18: recommends Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to include a statutory presumption that solicitors who fund representative proceedings on the basis of percentage-based fee agreements will provide security for costs in any such proceedings in a form that is enforceable in Australia.

Recommendation 19: recommends Part IVA of the Federal Court of Australia Act 1976 (Cth) should be amended to provide that:

• percentage-based fee agreements in representative proceedings are permitted only with leave of the Court; and
• the Court has an express statutory power to reject, vary, or amend the terms of such percentage-based fee agreements.

Recommendation 20: recommends that The Law Council of Australia should oversee the development of specialist accreditation for solicitors in class action law and practice. Accreditation should require ongoing education in relation to identifying and managing actual or perceived conflicts of interests and duties in class action proceedings.

Recommendation 21: recommends the Australian Solicitors’ Conduct Rules should be amended to prohibit solicitors and law firms from having financial and other interests in a third party litigation funder that is funding the same matter in which the solicitor or law firm is acting.

Recommendation 22: recommends Part 15 of the Federal Court of Australia’s Class Actions Practice Note (GPN-CA) should be amended so that the first notices provided to potential class members by legal representatives are required to clearly describe the obligation of legal representatives to avoid and manage conflicts of interest, and to outline the detail of any conflicts in that particular case.

Regulatory Redress (dealt with in Chapter 8 of the Report)

Recommendation 23: recommends the Australian Government should review the enforcement tools available to regulators of products and services used by consumers and small businesses (including financial and credit products and services), to provide for a consistent framework of regulatory redress.

Review of Substantive Law (dealt with in Chapter 9 of the Report)

Recommendation 24: recommends the Australian Government should commission a review of the legal and economic impact of the operation, enforcement, and effects of continuous disclosure obligations and those relating to misleading and deceptive conduct contained in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth).

Next Steps

Acting Attorney-General, Greg Hunt, said that now the ALRC's recommendations had been made publicly available the Government would "further engage with key stakeholders in developing its response to the report, to ensure that the class actions regime provides just and effective outcomes for all Australians .. The report raises complex issues which will need thorough consideration and the Government will carefully consider each of the report's recommendations."

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Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders: Final Report (Australian Law Reform Commission, December 2018)

Media Release: Australian Law Reform Commission inquiry into class action proceedings and third-party litigation funders (The Hon. Greg Hunt MP, Acting Attorney-General, 25 January 2019)

Media Release: Inquiry into Class Action Proceedings (Australian Law Reform Commission, 25 January 2019)

ALRC inquiry into class action proceedings and third party litigation funders: What you need to know (Maha Chaar, Norton Rose Fulbright Australia, 23 July 2018)