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High Court decision ‘disappointing’, class action funders say

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The Association of Litigation Funders of Australia (ALFA) says a High Court ruling that may prevent some class actions going ahead is disappointing.

The court last week ruled against the validity of making “common fund orders”, which have meant all beneficiaries of an action must pay the litigation funder out of proceeds, even if they had not individually signed up.

Without the orders, funders and plaintiff law firms would typically engage in a “book building” process that involves alerting potential participants and signing them individually.

“The impact of the High Court decision will be felt by claimants and funders with the book build increasing the costs of the litigation and slowing the litigation down,” ALFA CEO Pip Murphy told insuranceNEWS.com.au.

“There may be some class actions which don’t proceed in future due to funders and lawyers making an economic assessment that the case cannot proceed due to the costs of bringing the claim. It is disappointing that access to justice is being compromised in this way.”

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.

Meridian Lawyers Principal Andrew Sharpe says the court ruling will mostly affect cases where there is a large number of potential participants but the individual losses are relatively small.

“In those circumstances it is difficult to build a book and very costly,” he said. “The securities class actions are probably less likely to be affected.

“In cases against listed companies there are typically large institutional investors who will join an action as well as the small retail shareholders, improving the economics of the bookbuild process.”

Australian Industry Group CEO Innes Willox says other challenges are also looming, with the Victorian Government 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.

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 implications.

The High Court decision is available here.