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Class actions: Caught in a custody battle

Class actions: Caught in a custody battle

By Andrew Paull and Eleanor Toohey

Civil Procedure 

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This article explores the tension between judge-led and legislative reform of the class action mechanism – a jurisprudential debate with deep historical roots.

Snapshot
  • The future of Australia’s class action regime is being fiercely contested, revealing tensions between different arms of government.
  • On the one hand, there has been ongoing judge-led reform, with a focus on active judicial management and court supervision.
  • On the other, parts of the executive branch of government wish to diminish judicial management powers in favour of regulation.

Australia’s class actions regime is now in its 28th year, by which age one might expect it to have moved beyond the turmoil of a custody battle. And yet, in 2020, the regime finds itself being pulled in almost diametrically opposed directions, by different parties each with their own distinctive vision of its future.

On the one hand, there is the judiciary. While far from a monolithic entity, and acknowledging the real differences of approach and opinion that may exist among judges, the judiciary has for some time been developing specialised case management tools intended to shape the way that class actions operate in Australia, and to bring their reality closer to that which was envisaged when the procedure was introduced into Australian law – that is, first, a mechanism which exists to provide access to justice by allowing for the collectivisation of claims as a means of overcoming obstacles such as the prohibitive cost of litigation and, second, a means to increase the efficiency of the justice system.1

This judge-led reform of class actions practice has predominantly occurred under the guise of s33ZF (or equivalent provisions) of the Federal Court and Supreme Court Acts – a flexible provision which empowers a presiding judge to make any order that is “appropriate or necessary to ensure that justice is done in the proceeding”. 

On the other, there is a growing number of independent expert groups that have been commissioned to opine on the operation of class actions in recent years, including the Australian Law Reform Commission (ALRC), the Victorian Law Reform Commission (VLRC) and the Productivity Commission. 

Finally, there are the federal and Victorian governments, each of which have been making their own legislative amendments to the system. And here, again, another division. The federal government’s reforms (both actual and mooted) have been directed towards shifting the regulation of class actions away from the judiciary and have at times directly conflicted with the recommendations of the various independent law reform commissions. In contrast, the Victorian reforms have, by introducing “group costs orders”, enacted a consistent recommendation of the ALRC, VLRC and Productivity Commission and increased the power of Victorian courts to regulate class actions. 

Judge-led reform 

Class actions practice has been shaped by several key decisions under s33ZF of the Federal Court Act. The section, which is broadly drafted, equips judges with the power to make any order that is “appropriate or necessary to ensure that justice is done in the proceeding”. 

Some years after the federal regime commenced, Wilcox J, who had played a central role in drafting the proposed form of s33ZF, explained that: 

“In enacting Pt IVA . . . Parliament was introducing into Australian law an entirely novel procedure. It was impossible to foresee all the issues that might arise in the operation of the Part. In order to avoid the necessity for frequent resort to Parliament for amendments to the legislation, it was obviously desirable to empower the Court to make the orders necessary to resolve unforeseen difficulties; the only limitation being that the Court must think the order appropriate or necessary to ensure ‘that justice is done in the proceeding’”.

In other words, the provision empowers the judiciary to harness its legal expertise and interpret and apply the laws enacted by the legislature and enforced by the executive. It may almost be perceived as an extension of the constitutional role of judges in interpreting legislation, itself “an expression of common law constitutionalism”.

For many years, judges saw s33ZF as granting a wide mandate to develop new practices and procedures that refine the operation of the class actions mechanism in Australia. For example, s33ZF was relied on by judges as providing the power to regulate overlapping class actions,4 make “funding equalisation orders” with the effect that the costs of a class action are borne by all group members,5 require the production of a defendant’s insurance policies to the plaintiff in advance of a mediation,6 appoint “sample group members” and declare those persons immune to an order for adverse costs7 and to found a “common fund order” (CFO), pursuant to which the costs of litigation funding for a class action may be determined by the court and applied to all group members8 (see below). By these and other decisions, the judiciary gradually expanded the case management toolkit that was available in class actions and shaped the landscape for mass claims. 

The evidence would suggest that this ongoing process of judicial reform was effective in allowing the class actions procedure to operate as the drafters had intended. The CFO mechanism in particular meant that consumer class actions were able to be commenced and supported by litigation funding in a way that had not previously been possible. Indeed, in the years following the Money Max decision, 30 per cent of filed class actions were consumer protection claims9 – an increase from the 9 per cent seen over the first 25 years of the regime.10 These types of consumer claims are precisely the sort that were envisaged when the regime was introduced. 

The shake-up of s33ZF 

As will be discussed below, the federal government may soon be taking steps to limit judicial discretion and diminish the court’s role in regulating class actions. Such a situation highlights the inevitable tension which arises under Australia’s fundamental “separation of powers” doctrine – in this instance, the competing powers and expertise of the judiciary, the legislature and the executive. 

But, interestingly, the most recent challenge to the scope of judicial licence under s33ZF came from the judiciary itself. In December 2019 the High Court of Australia handed down a landmark decision in Brewster v BMW Australia Ltd and Lenthall v Westpac Life Insurance Services Limited (Brewster).11 The High Court overturned the 2016 Money Max decision (referred to earlier) and held that neither the Federal Court nor the Supreme Court had the power to impose a CFO under s33ZF. While the High Court reaffirmed that the power under s33ZF is broad, the majority held that the section does not empower a court to impose “an order in favour of a third party with a view to encouraging it to support the pursuit of the proceeding”.12 Therefore, the Brewster decision reduced the scope of s33ZF, limiting the judiciary’s power to regulate relationships between group members and third-party litigation funders. 

Time to step back, review and review again 

As the class actions jurisprudence has matured, governments have appointed various independent bodies to review the operation of this legal procedure. Those reviews have also tended to focus on the involvement of litigation funding in class actions. 

There have now been at least five government-sponsored reviews related to class actions,13 the most recent of which have been the VLRC’s report on “Litigation Funding and Group Proceedings” tabled in June 2018 and the ALRC’s “Inquiry into Class Action Proceedings and Third-Party Litigation Funders” tabled in January 2019. Each report represented the culmination of more than 18 months of industry consultation and research, involving representatives from across the spectrum of class actions practice. 

Both the VLRC and the ALRC recognised the essential role of the judiciary in regulating the class actions before Australian courts, describing this role as “crucial” to the regime, and in fact recommended measures intended to expand this role and strengthen the courts’ powers of self-regulation. Both reports also endorsed increased judicial power and discretion with respect to the costs charged by litigation funders and plaintiff lawyers, with recommendations that:

  • courts be empowered to make CFOs and then set and vary litigation funding charges according to their discretion
  • plaintiff lawyers be permitted to charge on a contingency fee basis in class actions, again with the rate to be set by the court. 

In terms of the question of whether power to regulate class actions should be vested in the judiciary or in government, these reports represented a very strong endorsement of the judiciary. 

Political intervention

The federal government is yet to provide its response to the most recent ALRC report including whether it will take the recommended steps to increase judicial powers to supervise and manage class actions. 

At present, all indications would suggest that it is moving in the opposite direction to that recommended by the ALRC and VLRC. To date, the federal government has taken two substantive legislative steps that affect class actions. 

First, it has passed regulations under the Corporations Act 2001 (Cth) which will require litigation funding to be regulated like a financial investment, with litigation funders required to hold financial services licences and the litigation treated as a managed investment scheme (with a public disclosure statement and related requirements). This regulation was passed despite having been expressly considered and rejected by the ALRC. 

Second, in its suite of responses to the COVID-19 pandemic, the federal government has passed laws that, at least temporarily, lessen the continuous disclosure obligations of companies listed on the Australian Stock Exchange. Again, this move is contrary to the advice of the ALRC, which advocated for further consultation and a specific review of these laws before any changes were made. 

In parallel with those changes, the federal government has established a Parliamentary Joint Committee to conduct an inquiry into “Litigation funding and the regulation of the class action industry”. The Committee conducted public hearings in July and August of this year and is due to provide its report on 7 December 2020. 

The tenor of the public hearings suggests the present government wishes to take the regulation of class actions even further out of the hands of the judiciary. The Liberal members of that committee have argued in the course of those hearings that “judicial oversight of [class actions], has failed again and again” and “the judiciary, no matter how experienced they are, can't possibly be expected to have regulatory oversight of [class actions]”.14 These types of comments send a strong signal that the federal government may seek to wrest power and responsibility for the management and regulation of class actions and litigation funders away from the judiciary and instead place it in the arms of bodies such as ASIC. 

To shift power and responsibility away from the judiciary in this way would be to move things in the opposite direction to that recommended by the ALRC and VLRC. Further, it would be contrary to the wishes of ASIC, which has previously indicated that it does not consider itself well placed to regulate this area,15 and to the expressed wishes of at least some members of the judiciary. For example, Beach J of the Federal Court recently commented extrajudicially on proposed legislative reform in the class actions space, noting that “less is more”, that “too much regulation will impose unnecessary rigidity with unintended consequences” and that it may be “more desirable to let the dynamics flowing from the courts . . . play out over the next few years rather than to impose any so-called solution now, particularly one tailored only to the current short term exigencies”.16 

In contrast to their federal counterparts, to the extent the Victorian state government has engaged in reform of this area of law, those changes have been consistent with the recommendations of the various law reform bodies. Most notably, the legislation permitting “group costs orders”17 in Victorian class actions was in line with recommendations made by each of the ALRC, VLRC and the Productivity Commission. Moreover, the legislation was drafted in a manner that places control of those costs orders entirely in the hands of the Supreme Court judiciary. 

Conclusion 

In a country where the political system is founded on the separation of powers doctrine, it is not unusual for there to be some tension between the judiciary, the legislature and the executive, particularly in areas where their respective powers and responsibilities might overlap. Indeed, many might regard this tension “as indicating a healthy and well-oiled, working government”.18 Though, as noted by McHugh J, speaking extrajudicially on this tension as it arises in administrative law, “Occasional conflict may do no harm. But if tension persists . . . it damages the public interest”.19 

This dynamic is playing out in real time as the struggle for custody over Australia’s class actions regime continues. On all sides of the contest, however, there seems to be agreement that class actions can and do serve a vital role in providing access to justice. For this reason, we must hope that any further changes to the current regime are evidence-based and informed by the views and advice of experts, including the experienced judiciaries of our state and federal courts. 

Otherwise, as is often the case in custody contests, there is a real risk that the dispute could harm the very thing it is intended to protect. ■


Andrew Paull is a practice group leader in Slater and Gordon’s class actions team. Eleanor Toohey is a lawyer in Slater and Gordon’s class actions team.

  1. ALRC, Grouped Proceedings in the Federal Court, Report No 46 (1988) at [13] and [18]; Australia, House of Representatives, Parliamentary Debates (Hansard), 14 November 1991 at 3174–3175. 
  2. McMullin v ICI Australia Operations Pty Ltd (No 6) [1998] FCA 658; 84 FCR 1 at 4. 
  3. Momcilovic v The Queen [2011] 245 CLR 1, 48 [46]. 
  4. Kirby v Centro Properties Ltd [2008] 253 ALR 65, 72 [31] and 74 [37]. 
  5. P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4) [2010] FCA 1029, [27]–[28]. 
  6. Simpson v Thorn Australia Pty Ltd trading as Radio Rentals (No 4) [2019] FCA 1229, [21]. 
  7. Matthews v SPI Electricity and SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No 5) [2012] VSC 66, [41]–[44]. 
  8. Money Max Int Pty Ltd v QBE Insurance Group Ltd [2016] 245 FCR 191, 194 [7]–[8] and 207 [66]–[67]. 
  9. King & Wood Mallesons, "The Review: Class Actions in Australia 2018/2019", p4. 
  10. Vince Morabito, "An Empirical Study of Australia’s Class Action Regime: The First Twenty-Five Years of Class Actions in Australia" (July 2017) 27. 
  11. [2019] HCA 45. 
  12. Note 11 above, 64 [47]. 
  13. ALRC (1988), VLRC (2008), Productivity Commission (2014), VLRC (2018), ALRC (2019). 
  14. Evidence to Parliamentary Joint Committee on Corporations and Financial Services, Parliament of Australia, Canberra, 24 July 2020, 31 (Mr Falinski) and 29 July 2020, 26 (Mr Falinski). 
  15. ALRC, Integrity, Fairness and Efficiency – Inquiry into Class Action Proceedings and Third-Party Litigation Funders, Report No 134 (2018) 162 [6.37]. 
  16. Herbert Smith Freehills Class Action Fireside Podcast, Episode 6: Myer Shareholder Class Action, (13 August 2020) at 23:24–23:34 and 23:50–24:03. 
  17. A form of damages-based contingency fee. 
  18. The Hon Justice Michael McHugh, "Tensions between the Executive and the Judiciary" (Speech delivered at the Australian Bar Association Conference, Paris, 10 July 2002). 
  19. Note 18 above.

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