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High Court throws class action curveball

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A High Court decision on class action funding is expected to slow the launch of some litigation by taking away a fast-tracking option, but the level of activity is likely to remain high.

Increasing class action activity that has caused directors’ and officers’ (D&O) premiums to soar has been blamed on the rising number of litigation funders operating in Australia, and the ease with which actions can commence.

But the court yesterday ruled against the validity of making “common fund orders”, which mean all beneficiaries of an action must pay the litigation funder out of proceeds, even if they were not individually signed up.

The Insurance Council of Australia has previously expressed concerns about the impact class actions can have on D&O claims and on premiums, and says insurers that offer those types of products will review the court decision for its potential implications.

Australian Institute of Company Directors GM of Advocacy Louise Petschler says the decision will make it harder for litigation funders whose business model relies on common fund orders, but there are others who use different options, and wider issues remain.

“While the decision might deter some claims, the case does not solve the underlying problem which is the ease with which shareholder claims can be brought and their cost to the broader economy,” she told insuranceNEWS.com.au.

Corrs Chambers Westgarth Head of Class Actions Chris Pagent says the decision will likely mean that getting a case off the ground becomes a more expensive and slower process due to costs associated with “building a book” of participants.

But he told Australasian Lawyer that the number of defendants facing shareholder claims would likely stay the same, with less competition for the right to prosecute the claims.

Maurice Blackburn Lawyers class actions national head Andrew Watson says common fund orders increase access to justice and reduce costs to participants.

“It is now up to governments to contemplate whether specific legislation should be introduced to allow common fund orders,” he said.

“Class actions will continue to run and to play an important role in holding corporations to account and allowing people who otherwise would not be able to take on those corporations to access justice and compensation.”

The Australian Industry Group CEO Innes Willox also warns that in Victoria, the Government is proposing to allow lawyers to charge contingency fees.

“This would only exacerbate the situation and put the fox in the henhouse by allowing lawyers to be incentivised to earn the type of huge unregulated commissions currently enjoyed by litigation funders,” he said.

Shine Lawyers says it will very carefully consider the impact of the High Court decision.

“As noted by the High Court, book-building was commonplace until a few years ago and has been undertaken very successfully by Shine Lawyers in many cases,” Head of Class Actions Jan Saddler said. “This and other options will be considered by us as a consequence of this decision.”

The High Court ruling found that making common fund orders goes beyond what is appropriate or necessary under existing law to ensure justice is done.

“The making of an order at the outset of a representative proceeding, in order to assure a potential funder of the litigation of a sufficient level of return upon its investment to secure its support for the proceeding, is beyond the purpose of the legislation,” the judgment says.

The High Court decision is here.