InDaily InDaily

Support independent Journalism Donate Subscribe
Support independent journalism

Australia should not sail down US-style class action path


A potential class action against the Ruby Princess cruise ship operators is focusing attention on the rise of litigation funders and their motives. Australia must guard against allowing a US-style legal system to take hold, argues Morry Bailes.

Print article

There was a moment of solidarity some weeks ago when Australians, faced with our present pandemic crisis, seemed to come together, momentarily casting self interest aside in a genuine attempt to pull through tough times.

Even politicians looked beyond the political divide to plan a way out of the mess. We were as one.

Then like a shot across the bow, lawyers announced a possible class action against the owners of the Ruby Princess and perhaps other potential defendants, and the cooperative bubble seemed to burst.

Could we really be talking of class actions at such a sensitive moment in our fight against Covid-19? Indeed we were.

It may be that that was the catalyst for the Attorney-General and federal parliament to launch an inquiry into the profits of litigation funders.

To say the legal profession is divided on this issue is an understatement. There exists diametrically held views.

To understand the complexities of these differences requires some understanding of the mechanics and ethics surrounding class actions and of the legal profession itself.

No lawyer may currently fund a class action, it is unethical to do so; however the state of Victoria is breaking ranks.

Second, as a matter of practicality there are few plaintiffs who can fund a class action, and even less who are prepared to be the lead plaintiff and potentially lose everything if an action fails and costs are awarded personally against that lead plaintiff. The argument therefore in support of litigation funders is that very few class actions would get off the ground without them.

They are, put simply, a necessary ‘evil’. But for tripartite agreements between litigation funders, lawyers and a plaintiff class, plaintiffs would never be able to access the justice system, and would never receive a financial remedy for their loss.

What has led to discomfort however is the amount of the damages awarded to a plaintiff class that is being appropriated by the litigation funder to underwrite the action. Typically the fraction of damages going to the funder is from 20 to 40% depending upon risk, and on occasion as high as 50%.

On the other hand, quite often a plaintiff in a class will have no idea about his or her potential to join a class action. Notification is given by mail to opt in (or out), and by opting in a person receives compensation that was unexpected. There is less concern that a fair fraction of damages award is being syphoned off to the funder, because the compensation may not have been expected in the first place.

Each class action of course has its own characteristics and in Australia the courts play an important role in approving funding agreements and approving settlements which award damages and costs, providing protection to the plaintiff class. Nonetheless there is a gathering disquiet about the enrichment of major litigation corporations, who typically analyse very carefully the risk of litigating a class action, and invariably fund only the out and out winners.

Which leads to the argument against. Primarily the case against is one of public policy. There is a concern that it is hard enough running a business profitably in Australia without the lurking risk of lawyers and litigation funders rising unexpectedly from the depths to take a bite of your profits because a business is said, for instance, to have mislead the market with an inaccurate securities announcement. Businesses do however mislead markets and some people suffer consequential losses. So that argument only goes so far.

However these actions appear increasingly to be predatory and opportunistic. Class action lawyers and litigation funders comb through market announcements to find potential actions, or corporate misrepresentations. In the United States it has gotten to such a point that any inaccurate description of a good may lead to a class action, even though the losses on an individual basis are negligible.

For example a widget is said to be of one dimension when it is fact another, thus the manufacturer is sued for a misrepresentation and breach of contract, even if the loss is negligible. The plaintiffs in the aggrieved class are sometimes asked if they wish to donate their pittance in damages to charity, leaving the lawyer and funder with the only benefit. Put in that context the public policy argument becomes rather more convincing.

 To be clear, things have not gotten to that in Australia by any stretch. However, Australia is a benign environment in which to bring class actions, more so now that Victoria is opening the floodgates by legislating to allow lawyers to charge American style contingency fees in class actions. Lawyers will in practice ‘fund’ the action.

So is this the answer? The legal profession is highly regulated, is bound by very high standards of professional ethics and by allowing contingency fees the less regulated litigation funders can be cut from the picture.

 The problem with lawyers stepping into the funder shoes is twofold. First, it will inevitably call into question our ethics. Because perception is reality, there need not be any unethical conduct for there to exist a perception of a lowering of ethical standards. As a profession we struggle enough to convince the public of our very high ethics without needing to fend this one off.

The second problem is that like individual plaintiffs, there are few lawyers or law firms in Australia that have the financial resources to not only underwrite a class action but to indemnify the class and pay an adverse costs order if the action fails. In fact there are a very few firms indeed, and a number of them originate in Victoria.

To have so few law firms able to be involved in such actions again risks failing ‘the pub test’. It will have the appearance that having turfed the litigation funders only a handful of legal firms will be able to step into  the gap. Those perceptions will exist even though those lawyers are acting entirely ethically, entirely lawfully and strictly with court approval.

Putting aside the argument that by taking this step Victoria will, overnight, become class action central, a huge boon to its profession, there is a distinct feeling of unease amongst many in the profession who see this as a retrograde step.

Enter then the current parliamentary inquiry, and a burgeoning distaste that Australia’s ranks of solidarity seem to have been broken by what is perceived to be an opportunistic class action arising out of the very Covid-19 pandemic we are fighting so hard to contend with and control. 

It is by no means the first of such inquiries but it may be more telling, because reform is in the Canberra air at present, and its terms of reference are wide ranging, including a consideration of the efficacy of contingency fees and the impact funding class actions has on the Australian economy.

Whilst it is imperative that the debate must take into account the benefits enjoyed by a class of wronged people who may never see any just outcome but for the ability to join a class action, it is equally imperative that Australia should not become like the United States in this regard. The US has not only damaged the reputation of its legal profession, it has gone too far in permitting class actions that appear contrived to benefit not those who have lost, but the lawyers and funders undertaking the litigation.

The British system of justice, on which we are based, long recognised that not every wrong cannot be compensated because it was against public policy. In short, because society could not afford it.

Corporations need to be held to account, but they must also be able to make their way untroubled by class actions based on contrivance and opportunity.

There is a balance to be struck, and thresholds to be established, otherwise we will slide towards an ever more litigatious society – and we will regret that outcome.

Our economy must not be damaged under the mantra of justice, when the real winners are funders and lawyers.

Morry Bailes is the managing partner at Tindall Gask Bentley Lawyers, past president of the Law Council of Australia and a past president of the Law Society of South Australia.

Want to comment?

Send us an email, making it clear which story you’re commenting on and including your full name (required for publication) and phone number (only for verification purposes). Please put “Reader views” in the subject.

We’ll publish the best comments in a regular “Reader Views” post. Your comments can be brief, or we can accept up to 350 words, or thereabouts.

Help our journalists uncover the facts

In times like these InDaily provides valuable, local independent journalism in South Australia. As a news organisation it offers an alternative to The Advertiser, a different voice and a closer look at what is happening in our city and state for free. Any contribution to help fund our work is appreciated. Please click below to donate to InDaily.

Donate here
Powered by PressPatron

More Opinion stories

Loading next article