Proposed Australian class action reform - the implications for New Zealand

Friday 8 February 2019

Authors: David Friar and Simone Cooper

​The Australian Law Reform Commission (ALRC) has released a 339-page report on class action proceedings and litigation funders. The report comes off the back of significant growth in Australian class actions and litigation funding in recent years, which the Australian Institute of Directors has described as "unsustainable".

The New Zealand Law Commission is currently undertaking its own review of class actions and litigation funding and is likely to take a keen interest in the ALRC's report. In this update, we review the key proposals for reform in Australia and consider what they might mean for class actions in New Zealand.

Common fund orders

Litigation funders usually operate by taking a cut of any settlement or judgment from class members who have signed up to their funding agreement. Funders in Australia have sought to cut through the requirement of signing up members by seeking a court order that all members of the class contribute to the funder's costs, whether or not a member has signed up to the funding agreement.

Although the Australian Federal Court accepted in 2016 that it has the power to make common fund orders,1 there are two pending challenges to this ruling currently before the Australian courts.

The ALRC has proposed to codify the current law allowing common fund orders to be made, which would mean that the current challenges to common fund orders would be rendered moot.

We are aware of a recent application for a common fund order in a class action in New Zealand. However, that application has not yet been considered by the Court. Given the differences between the New Zealand and Australian class action regimes, it is hard to see that there is a basis for a common fund order under our current class action laws.

The New Zealand Law Commission's review of class actions will therefore be critical. If it adopts the ALRC's approach and recommends the courts be given the power to make common fund orders, we could see a radical change from the current basis on which litigation funders operate in New Zealand.

Continuous disclosure obligations

The Australian continuous disclosure rules require a company to disclose material information to the market. There may be a breach of the rules not only if a company officer has possession of material information, but also if the officer should reasonably have had possession of material information.

The ALRC has recommended that the legal and economic impact of the continuous disclosure regime be reviewed. It acknowledged concerns that the current regime is affecting corporate conduct and eroding shareholder value. In particular, proponents of the review emphasized:

  • There has been a recent increase in shareholder class actions, with almost 50% of class actions filed since 2017 brought by shareholders.

  • Shareholder claims are more likely to be funded – and more likely to settle – than other types of class actions.

  • Shareholder class action risk is curtailing the provision of future earnings guidance, and incentivising over-disclosure, both of which can create an uninformed or misinformed market.

  • Between 2011 and 2018, the cost of D&O insurance has increased 353%, with at least four insurers ceasing to provide D&O cover for ASX listed entities.

Interestingly, the NZX Listing Rules have recently been amended to adopt the same Australian rule that has now been criticised in the ALRC report. A large part of the reasoning for that change appeared to be for alignment with Australia (and certain other jurisdictions).

The changes to the NZX Listing Rules came into effect on 1 January 2019, but with a six-month transition period. Following these changes, there is a real risk that New Zealand will now start to see the same consequences of an expanded continuous disclosure rule as seen in Australia, with the concerns raised by the ALRC in its report likely to apply equally in New Zealand.

Stricter oversight of litigation funders

While litigation funding is said to improve access to justice, it comes with inherent risks. Some funders can fail to meet their obligations, use the courts for improper purposes, and exercise influence over the conduct of proceedings to the detriment of claimants.

In response to these concerns, the ALRC has proposed a range of changes to more closely regulate funders. These include a presumption that a funder must provide security for costs, as well as giving courts the power to award costs against a funder that seeks to undermine or delay litigation. The ALRC has also recommended that courts take a larger role in reviewing and approving litigation funding agreements. The courts would also have the power to reject or amend the terms of a funding agreement.

In New Zealand, the courts have taken the position that it is not their role to regulate litigation funding arrangements.2 The Chief Justice signalled a possible change in approach in PricewaterhouseCoopers v Walker, commenting that it was "well-arguable" that the funding agreement in that case was "contrary to law" due to the level of control that the funder had over the proceedings.3

It will be interesting to see whether the New Zealand courts will take a more interventionist approach, and if not, whether the New Zealand Law Commission will recommend reform along the lines proposed by the ALRC.

Other changes

The ALRC has recommended a number of other changes including:

  • Contingency fees: The ALRC has recommended that the current ban on charging percentage-based fees be lifted for solicitors acting for the representative plaintiff in class action proceedings, subject to leave of the court and paying security for costs, amongst other limitations.

  • Conflicts of interest: The ALRC has recommended a range of measures to ensure that law firms involved in class action proceedings adequately manage potential conflicts of interest between class members, third-party funders and acting solicitors.

  • Regulatory powers: The ALRC has recommended a review of the enforcement tools available to regulators to ensure there are sufficient alternative avenues to justice for consumers and small businesses who have suffered loss from defective products or services, or other unlawful conduct. Potential changes could include the introduction of new statutory powers for regulators to order redress to victims, as exists in the UK.

  • Competing class actions: The ALRC has proposed the introduction of a new statutory power to allow courts to resolve multiple class actions brought in relation to the same issue. A supporting case management procedure would be introduced, culminating in a "selection hearing" where the court would choose which claim should proceed.

We expect the New Zealand Law Commission to take a keen interest in each of these proposals when it picks up its review. Although it said last year that its review was "not currently a priority", we will see whether that continues to be the case in light of the ALRC's report and the recent changes to New Zealand's continuous disclosure rules.

If you would like to discuss any of the ALRC's recommendations and their implications for class actions in New Zealand, please contact the authors or your usual Bell Gully advisor.


1 Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd [2016] FCAFC 148.

2 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89.

3 PricewaterhouseCoopers v Walker [2017] NZSC 151 at [100].​


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • David Friar

    Partner Auckland
  • Jenny Stevens

    Partner Wellington
Related areas of expertise
  • Class actions
  • Litigation and dispute resolution