Class actions: business or justice?

Class actions have been a part of the Australian legal system since 1992, but are they worth joining?

It is worth joining a class action? Some controversial settlements have seen lawyers and litigation funders garner most of the money.

Updated 21 March 2018

When 4000 investors joined a class action against failed plantation investment scheme Great Southern, a court-approved settlement in 2014 awarded them around A$23.5 million. After A$20 million in legal and other costs sucked up most of the award, Investors shared the remaining A$3.5 million.

The case is frequently quoted as an example of why class actions, often drawn out and stressful, can deliver little to the claimants. 

What is often overlooked in this case, however, is that it was resolved before the court delivered its judgment and that Justice Croft of the Victorian Supreme Court, who had to approve the settlement, said the plaintiffs’ argument had “completely and comprehensively failed”.

Without the settlement, they would have received nothing.

Who benefits from class actions?

Class actions have been a part of the Australian legal system since 1992, when a regime was introduced into the Federal Court.

The Supreme Courts in NSW and Victoria followed and in the past 24 years the three courts have heard 467 such actions, filed over 303 legal disputes. Nearly 50 per cent have been settled. 

At first glance this would seem to indicate success, but the settlements have led to criticisms around remuneration, with a perception that claimants are paying too much to the legal profession and litigation funders.

Professor Vince Morabito, from the Monash Business School Department of Business Law and Taxation says that any evaluation of the success of class actions must look beyond the Great Southern example, and understand the ongoing evolution of Australia’s regime. 

Class actions may be expensive but the regime means claimants pursue many cases that would otherwise never get started.

Morabito has evaluated Australia’s class action regimes in an August 2016 report funded by the Australian Research Council.

Accountants drawn into class actions

Accountants are not immune from claims, as shown by the announcement of potential action against private equity and accounting groups associated with troubled music start-up Guvera

Lawyers claim poor advice from accountants prompted clients to invest A$185.3 million in the Australian entity Guvera Pty Ltd, which was placed into external administration in 2017. Bannister Law is looking for investors to join a potential class action.

Litigation funders back class actions

Morabito says litigation funding has reinvigorated a class action system which was a “dying patient” 10 years ago, and ensured that more cases are filed. 

Litigation funders, who bear the cost of legal proceedings, began to appear in Australia in 2000, and have since supported about 50 per cent of the cases filed in the Federal Court. 

Of these, 92 per cent have been settled, compared with a 42 per cent settlement rate for unfunded actions.

“Even though litigation funders are very controversial, I think they add an extra level of safeguard because they have to be so careful in choosing which claims they pursue,” says Morabito.

“It makes sense that if you are careful in choosing which actions you fund, then it’s normal to expect you would have a fairly high settlement rate.”

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Legal firms and class actions

Morabito contrasts this with cases taken on a “no win no fee” basis by inexperienced law firms, which he says are attracted by media headlines and look at class actions as an “ATM machine”. 

“Thankfully in many cases they fail once and you never see them again,” he says.

The track records of these firms is very different from the well-established class action firms such as Maurice Blackburn and Slater & Gordon, whose experience and expertise have delivered significant success, says Morabito.

His research finds that the combined settlement rate of these two firms before the Federal Court, as at late 2016, was 78 per cent, acting on a no-fee basis. The firms also work on cases supported by litigation funders.

Brooke Dellavedova, class actions principal at Maurice Blackburn, says the firm has obtained more than A$2.5 billion in compensation since 1998, compensation which claimants would “almost certainly” not have received without a class action regime.

“We acknowledge there are legitimate concerns regarding the proportion of compensation which goes to costs and funding commission,” says Dellavedova.

“However, in matters conducted by Maurice Blackburn, whilst our costs are not calculated by reference to how much is recovered for claimants, our costs have on average been approximately 13 per cent of those amounts.” 

She says litigation funders are entitled to be paid for the risks they take.

The future of class actions

Morabito says controversy around litigation funding comes not only from the fee structure but because it treats an area of the law as an investment.

As investors, the litigation funders expect a return. They charge up to about 40 per cent of any settlement amount, their costs and in many cases also a “project management fee” which can be about 20 per cent of the costs.

The other issue, says Morabito, is that litigation funders can act on a contingency fee basis while Australian lawyers, unlike those in the US or UK, cannot. 

Lawyers can work on a no-fee or low-fee basis when cases are lost, but charge an uplift on normal rates, rather than a share of damages, if they win. 

This may change after a 2016 Federal Court judgment in an action against insurance company QBE, which created a precedent for the creation of a so-called “common fund”.

The implications of this are wide reaching. Funders would no longer need to sign up a sufficient number of members before they can commence proceedings, reducing their costs and eliminating some risk. 

The court would specify at the outset the proportion of compensation paid to funders in the event of a success.

Morabito says the changes are a positive development because they would result in more “open” class actions, brought by all victims, instead of on behalf of only those with funding agreements.

The cumulative changes would make class actions less expensive and more accessible, and create a regime closer to the ethos of the original legislation passed more than two decades ago, of enabling vulnerable people to band together to seek justice through the court system. 

Read next: The new crowdfunding rules – how will investors be protected?

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