Australian Federal Government Proposes Major Reforms to Class Action Law | Jones Day
The situation: The Australian Federal Government has released an exposure bill, the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation Funders (“Draft Bill”), which proposes significant changes to Australia’s class action regime. The bill builds on previous regulatory reforms on class actions, including regulations that require litigation-funded class actions to comply with the requirements of the Corporations’ “Managed Investment Plan” (“MIS”). Act 2001 (Cth) and litigation funders to hold a service license.
The result: The bill seeks to further regulate litigation financing in the context of class actions through the MIS regime. If passed by the federal Parliament, the bill would effectively cap the fees paid by class members to litigation attorneys and funders at 30% of any settlement or award of damages. The bill would also give the courts the power to change a proposed allocation to ensure that it is “fair and reasonable”. In addition, the payment of the funder’s fees would be limited to group members who specifically enroll in the program, rather than all group members who meet the definition of the group.
Look ahead: The proposed reforms, if enacted, would constitute some of the most significant reforms to the Australian class action system in recent history and could put downward pressure on the number of class actions initiated, placing an upper limit on the number of class actions initiated. Donor returns from litigation can affect and restrict the payment of contributions to plan members.
The bill makes it clear that a “class action funding scheme” is a SIM, in line with an earlier decision of the Federal Court of Australia in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd  FCAFC 147. This express legal recognition of systems such as MIS is intended to render ineffective any attempt to overcome the regulation of litigation funding through parties challenging this court decision in subsequent litigation.
The bill also adds requirements for the establishment of a class action financing plan, in particular:
- Members of the group must agree in writing to be members of the program and be bound by the terms of the constitution of the program;
- Each funding agreement for the plan must include a “Claims Proceeds Distribution Method” to determine the amount of any claim that must be paid to general plan members;
- The funding agreement must be subject to Australian law;
- The funder must pay for any court appointed arbitrator who examines the reasonableness of the funder’s fees and / or any opponents as to whether to make an order to approve or change the method of distributing the proceeds of the fund. claiming the agreement;
- The entity responsible for the plan should not receive any amount in relation to the plan that exceeds the reasonable costs of the entity for the administration of the plan.
The court may approve or modify the method of distributing the proceeds of the debt to ensure that the method is fair and reasonable in the interests of the general members of the plan as a whole.
The bill sets out a series of factors that the court “must only consider”:
(a) with regard to the procedure, the following: (i) the amount, or the expected amount, of the proceeds of the claim for the scheme; (ii) the legal costs of the proceedings incurred by the funder and the extent to which such legal costs are reasonable; (iii) whether the proceedings were managed in the best interests of the General Members in order to minimize the legal costs of the proceedings; (iv) the complexity and length of the procedure;
(b) the extent of the commercial return to the funder for the program relative to the costs incurred by the funder in relation to the program;
(c) the risks accepted by the parties to the agreement by becoming parties to the agreement;
(d) the sophistication and level of bargaining power of the general members in negotiating the agreement;
(e) any other compensation or recourse obtained by any of the general members of the plan in connection with the transactions or circumstances which are the subject of the class action financing plan;
(f) any other factor prescribed by regulation made for the purposes of this paragraph.
The tribunal must also receive and consider the reports of the arbitrator and adversary referred to above “unless it is not in the interests of justice to do so”.
The draft bill would also establish a rebuttable presumption that a return to general members of a class action funding plan of less than 70% of their gross proceeds is not fair and reasonable. The bill responds to the recommendations of a report by the Joint Parliamentary Committee on Corporations and Financial Services on Litigation Financing and Regulation of the Class Action Industry released in December 2020 (the “Report”). The report was referring to a finding by the Australian Law Reform Commission that the median performance of class members, through 2018, was 51% for funded claims, compared to 85% for claims where funders were not involved. Announcing a consultation process on the proposed 30% fee cap in May 2021, the attorney general said it was “particularly important to ensure that successful applicants are properly compensated in their cases as well as to prevent backers litigation fund and law firms to take disproportionate costs in the process ”.
The bill also has the effect, by specifying the condition of the enforceability of a litigation funding agreement, that a court would not issue orders that extend the funder’s fees or commission to members of the fund. group who are not members of the class action funding plan (that is, who have not agreed in writing to become a member of the program).
Three key points to remember
1. The bill gives the courts the express power to obtain expert assistance (through the independent arbitrator and the adversary) in examining the costs of financing litigation and ensuring that the fees charged by a funder are fair and reasonable. The draft bill also creates a rebuttable presumption that fees that cause class members to receive less than 70% of the gross proceeds of a class action are not just and reasonable.
2. The bill would appear to end the practice of making orders for unfunded class members (i.e., through a common fund order. This would also mean that funded class actions litigation would most likely be brought using a closed class definition that would require the use of “book building” to enroll class members in the plan. However, this may precipitate an increase in competing class actions, as all members of the group may not be included in a single class action.
3. The bill is one of the most significant proposed changes to Australia’s class action plan in recent history. It has the potential to exert downward pressure on the number and size of class actions initiated by setting an upper limit on the returns litigation funders can achieve and limiting fee recovery to program members. We will continue to monitor the progress of the bill and provide updates to clients in future publications.