Problems with the School of Class Actions: Balancing Judicial Resources, Case Management and the Interests of Justice

  Download RTF - 337 KB

---

Introduction

1. The class action regime that exists under Part IVA of the Federal Court of Australia Act 1976 (Cth) has recently celebrated its 24^th birthday and, like many millennials or Gen Y’ers of a similar age, this regime has been experiencing a transitional period. Part IVA has slowly been transitioning from the heady days of its adolescence to a more settled and mature regime, with some key procedural issues in the regime now largely settled. For instance, significant, formative issues such as the whether the regime permits opt-in classes, the Court’s role in approving settlements, and the legality and regulation of litigation funding have been extensively considered by the Federal Court and, in some instances, the High Court.

2. While Part IVA is well beyond the problems associated with its infancy and terrible teens, class action procedure now faces the type of nuanced questions regarding its operation that one would expect of a maturing, introspective university student. The growth in the number of applicant law firms and litigation funders^[1], which Professor Morabito noted has arisen following determinations of the legality of litigation funding and judicial approval of closed classes^[2], has led to more filed class actions currently on foot which are posing more novel and innovative questions for courts on several fronts. The novel and innovative questions which I will be considering today are those that arise when competing class actions are commenced in relation to the same or similar subject matter^[3].

Background

3. Before turning to the particular issues raised by the novel and innovative questions that the maturing Part IVA regime faces, it is worth noting that the growth in the number of filed class actions reflects the utility of a system of mass redress in the present era of mass wrongs, standard form contracts and statutory disclosure requirements. The economies of scale which class actions achieve afford litigants with real, but perhaps not sufficiently substantial loss to justify the commencement of legal proceedings, the capacity to obtain redress.

4. The utility of class actions as a form of mass redress was noted by Gleeson CJ in Campbells Cash & Carry v Fostif Pty Ltd (2006) 239 CLR 389. There, Gleeson CJ endorsed the comments made by Mason P in the court below regarding the economies of scale that class actions can achieve, noting that “one traditional function of representative proceedings is the avoidance of multiplicity of actions”[4]. In that case there were complex but common issues amongst claimants. They arose because retailers of tobacco products sought restitution of part of an amount paid to licensed wholesalers of tobacco products in respect of licence fees. A portion of the licence fees paid to wholesalers was not remitted to the taxing authority in respect of licence fees for a short period of time due to a change in tax treatment of tobacco products. The proceedings were brought as a representative proceeding in the Supreme Court of NSW. In these circumstances, Gleeson CJ endorsed the view that in the absence of a representative proceeding on behalf of the retailers, there would have been a “costly procedural morass” if thousands of separate actions had been commenced by the various retailers^[5].

5. Indeed, it was these considerations which led me to convert the proceedings in Wingecarribee Shire Council v Lehman Brothers Australia Limited [2010] FCA 747 into a class action under s 33C(1) of Part IVA. The proceedings were commenced in 2007 solely by Wingecarribee Shire Council on the basis of its acquisition of collateralised debt obligations (CDOs). As publicity around CDOs grew during the global financial crisis, other councils subsequently alleged that they had similar dealings with Lehman Brothers in relation to similar financial instruments.

6. In that judgment, I noted the utility that could be delivered by converting proceedings from those conducted by a single applicant to a representative proceeding in resolving a multiplicity of proceedings featuring the same issues:

The initial proceeding brought by Wingecarribee Council identified a matter within the jurisdiction of the Court. Other councils now claim that similar issues relating to that controversy have arisen between them and Lehman Brothers from their acquisition of similar financial products. Those councils may well have been part of the Wingecarribee Council matter as it was originally commenced: cp Re Wakim; Ex parte McNally (1999) 198 CLR 511 at 585-587 [139]-[145] per Gummow and Hayne JJ. However, in any event, there is now before the Court an application to determine what is claimed to be a wider controversy between the various proposed subgroups of Councils that dealt with Lehman Brothers and it in relation to the provision to them of CDO products. In addition, s 22 of the Federal Court of Australia Act requires the Court to determine all matters in controversy in one proceeding if that is possible, as I explained in Strong Wise Ltd v Esso Australia Resourses Pty Ltd (No 2) [2010] FCA 575 at [53]-[55].

Because Lehman Brothers is in liquidation, it is necessary to grant, if the proceeding is to proceed in the Court, leave to begin and proceed with it under s 471B of the Corporations Act 2001 (Cth). The parties recognise that a substantial controversy between them has arisen in the liquidation. These proceedings will assist the liquidators in determining the admission of debts in the liquidation, and in determining a significant range of issues that would, in any event, be highly likely to require litigation.^[6] (emphasis added)

7. This shows the very practical benefits associated with a class actions regime and highlights how courts can effectively use representative proceedings when facing a multiplicity of proceedings with complex but common issues.

8. The case management utility that a class action regime provides is however merely a corollary to the access to justice benefits facilitated by Part IVA. This was noted as a key parameter of the scheme’s success by Murphy J recently when discussing the place of class actions in the Federal Court’s adoption of a National Court Framework. In discussing Part IVA’s efficiencies and its capacity to deliver access to justice for claimants, Murphy J emphasized that class actions delivered broad benefits for class members:

The most important touchstone in regard to the health of the regime is in relation to the regime’s expressly stated aim to enhance access to justice by improving an individual’s ability to access legal remedies, and by making substantive laws more enforceable and effective. The regime has delivered handsomely on this aim. It has been successfully applied to numerous and diverse causes of action on behalf of a huge number of claimants, and resulted in damages awards in the region of $2 billion, making substantive laws more effective for the community^[7].

9. The virtues of Part IVA are reflected by, amongst other things, the fact that the federal regime has been essentially copied for the Supreme Court regimes in Victoria and New South Wales^[8]. It is welcomed by regulators such as the ACCC and ASIC, who consider cartel and shareholder class actions as vital to maintaining market integrity and achieving compensation for the victims of misconduct^[9]. Further, some of the worst excesses of the US-style litigation appear to have been avoided as empirical studies suggest there has not been a rise in applicant lawyers commencing unmeritorious class actions in an effort to obtain “blackmail” settlements[10].

10. The class action procedure created by Part IVA has had some success in achieving its objectives in facilitating access to justice, however it is worth discussing the impact of both the growth of litigation funders and the use of closed classes, which are now central to the efficacy of the operation of the Australian class action regime.

Litigation funding

11. The potential role of litigation funders was not contemplated originally by the members of the Australian Law Reform Commission, who drafted the 1988 report titled “Grouped Proceedings in the Federal Court”, which preceded the adoption of Part IVA^[11]. That report proposed alternative funding mechanisms for class actions, recommending that the financial burdens entailed in bringing and running class action litigation be shifted from the class representatives to either their solicitors (by authorising them to charge conditional uplift fees), or, to a public class action fund[12]. In enacting Part IVA, neither of these recommendations was adopted by the Parliament of the day, with little direction given as to potential funding options for class actions. One Commissioner who assisted in the drafting of that report was Wilcox J, also a judge on the Federal Court, who in August 2009 noted that:

When I learned there was to be no fund, I thought there would be no group proceedings. However, I had overlooked the entrepreneurial spirit of the legal profession. I should not have done so. There has always been a group of solicitors, with supporting barristers, who are prepared to take on good looking cases on a speculative basis, regarding themselves as sufficiently rewarded by the party-party profit costs and what is (hopefully) a not exorbitant solicitor-client charge[13].

12. In some respects, litigation funding has emerged as a uniquely Australian phenomenon, filling the void in the alternative fee arrangement diaspora that exists due to the absence of contingency fee provision in the regulation of the Australian legal profession^[14], no mechanism of class certification or a common fund to ensure applicant lawyer’s fees are paid^[15], the lack of a devoted, public class actions fund^[16], and the possibility of an adverse costs order against the applicant, giving rise to a need for indemnification of lead applicants/representative parties^[17].

13. The peculiarity of the Australian litigation funding industry is noted both by the exportation of this particular form of alternative fee arrangement to other jurisdictions, with Australian funders establishing operations in both the UK and USA[18]. Further, compared to other common law jurisdictions, there are higher rates of responsiveness of potential class members to invitations to join or withdraw from representative proceedings in Australia. Professor Morabito’s study has found that the average opt-out rate for class actions in Australia is 13.78%, with the median opt out rate at 5.28%^[19]. While these may sound like relatively low percentages of class members making an election as to their participation in a class, they are much higher than in other jurisdictions. For instance, comparative studies in the US have shown the opt-out rate in a large sample of consumer cases between 1993 and 2003 was less than 0.2%^[20]. There are many possible causes of this higher opt out rate in Australian representative proceedings. While Professor Morabito did note that a review of the comments written by class members on opt out forms revealed that some class members exhibited a total misunderstanding of the action.^[21] It remains likely that the presence of competing litigation funders offering differing terms and incentives, while seeking to build classes, increases the responsiveness of potential class members to potential representative proceedings.

14. However, litigation funding is not a panacea to the obstacles that impair access to justice. While there is little evidence that unmeritorious claims are being brought and sophisticated defendants often make commercial decisions to settle class actions with sizeable distributions, suggesting that such actions are likely to have had reasonable prospects^[22], concerns remain as to the quantum of a litigation funder’s fee. Previous research by the Standing Committee of Attorney-Generals has found that the share of damages payable to funders typically ranges between one third and two thirds of any award, a large proportion of a damages award.^[23] That is, on any view, a significant cost for group members or third party defendants to absorb. It raises real public policy issues.

15. There is a growing concern about whether these bargains, particularly the proportion claimed by funders, between claimants and funders or, in many cases, the representative party and its lawyers and funders, represent commercial returns or are exploitative of the very individuals with whom the funder is contracted to support. Courts in Australia do enter into consideration of the commercial terms of the funding agreement when approving settlement of class actions, such as by applying a funding equalisation formula to the settlement, an approach taken by Finkelstein J in P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029 at [28]; Stone J in Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19 and by Gordon J, then of the Federal Court, in Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626. The funding equalisation formula adjusts the commercial terms of the bargain between litigation funders and class members by taking the amount that would have been paid to the litigation funder by non-funded group members if they had signed funding agreements and redistributing that amount pro rata amongst all group members. In this way, equality of outcome is achieved as between the funded and unfunded members of a class.

16. However, entry into the commercial terms of a funding agreement has equally been cautioned against, with Pagone J during his Honour’s tenure on the Supreme Court of Victoria, noting that the entry into the commercial terms of a funding agreement should turn on a case-by-case basis:

It is not for the Court to express a view about the commercial desirability of the quantum paid to the litigation funder under these arrangements … In other cases it might be necessary for separate justification of the amounts paid to a litigation funder before the Court approves a settlement.^[24]

17. The problems inherent to courts exercising oversight of the commerciality of the relationship between class members and litigation funders in the absence of a bespoke legislative scheme were highlighted by the Supreme Court of New Zealand in Waterhouse v Contractors Bonding Ltd [2014] 1 NZLR 91. In relatively straightforward factual circumstances, where the respondentwas seeking disclosure of the applicant’s agreement with a litigation funder, the Court found:

It is not the role of the courts to act as general regulators of litigation funding arrangements. If that is considered desirable, it is a matter for legislation or regulation. It is certainly not the courts’ role to give prior approval to such arrangements, at least in cases not involving a representative action.[25]

18. This uncertainty with respect to the oversight by the courts in relation the bargain between class members and litigation funders appears likely to continue in the absence of specific legislation or regulation on the topic. However, at present, the significant benefits to the existence of litigation funders outweigh the costs and improve access to justice. As the Chief Justice of Western Australia has noted, litigation funding can ‘augment the very limited means by which people who can’t otherwise afford to go to court can have their cases properly presented’^[26].

Closed classes

19. The consequence of the rise of class actions funded by a third party in Australia is the rise of closed classes within what was ostensibly an opt-out regime under Part IVA. When Part IVA was originally enacted in 1991, the Attorney-General stated a belief, in the Second Reading Speech, that opt-out class actions would prevail:

“… the Government believes that an opt out procedure is preferable on grounds both of equity and efficiency. It ensures that people, particularly those who are poor or less educated, can obtain redress where they may be unable to take the positive step of having themselves included in the proceedings.”^[27]

20. As such, it would seem to have been originally contemplated by the legislature that opt-out class actions would prevail in representative proceedings in the Federal Court and such an approach was initially adopted by Stone J in Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394. In that case, the class was limited to those persons who had retained a particular solicitor’s firm, entered into a funding agreement with a particular litigation funder and who had suffered loss by acquiring shares in Aristocrat during a particular time period. Her Honour found that while the arrangement with the litigation funders did not amount to an abuse of process, the restriction on class members retaining a particular solicitor’s firm was an abuse of the court’s processes as it created an opt-in proceeding contrary to both the intention of the Parliament and the policy of the Act.^[28]

21. Part IVA has subsequently been construed to permit opt-in classes to be formed on the basis that s 33C provides that representative proceedings may be brought on behalf of a subset of a group or a closed class. The rationale for proceedings to be brought on behalf of a sub-group of a class is that there will be some actions where the loss falls disproportionately on a particular subset of a group, or, as Professor Cashman has noted, there may be dynamic efficiencies obtained by only drawing certain individuals with easier to conduct, less expensive and easier to settle claims into a group^[29].

22. The legality of closed classes was confirmed in Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275. In that judgment, the Full Court of the Federal Court of Australia held that a group member definition that limited the class to those who had signed a litigation funding agreement, in effect, gave rise to an ‘opt-in’ proceeding, but was permitted by the terms of Part IVA. The Court found that the words of s 33C, which permit a class ‘representing some or all of them’, showed an intention by Parliament that there was to be ‘no right of complaint’ merely because some persons had been omitted from a defined group.

23. The consequence of the judgment in Multiplex is that more closed class proceedings are brought in representative proceedings.[30] The reason more closed class actions are brought is because there are improved commercial terms associated with the formation of closed classes. Opt-in classes remove ‘free-riders’, persons in opt-out representative proceedings who receive a benefit from the action but do not enter into a litigation funding agreement with the relevant litigation funder. The existence of closed classes allows the litigation funder to maximize its share of the award in the proceedings, delivering better commercial returns. However, the unwanted consequence of the parallel rises of litigation funders and closed classes in Part IVA representative proceedings has been a growth in competing class actions over the same or similar interests of class members.

Competing class actions: the unintended consequence of litigation funding and closed classes

24. Competing class actions, known as ‘overlapping’ class actions in North American jurisprudence, have been a common feature of more than two decades of Australian class action jurisprudence. For example, competing class actions were brought in the late 1990s in respect of the NSW HomeFund housing loan scheme^[31], the World Hot Bread Bakery’s salmonella outbreak^[32], and the Longford plant explosion and fire^[33]. However, the frequency with which competing class actions are commenced over the same or similar interests of group members has increased significantly in the wake of the judgment in Multiplex. Figures indicate that prior to the Multiplex judgment, competing class actions were filed approximately every 14 months, however in the wake of the decision in Multiplex, analysis indicates that instances of competing class actions arise more regularly, approximately every 9.6 months.^[34]

25. This phenomenon of increased instances of competing class actions being commenced has been particularly prominent recently. For instance, the Supreme Court of Victoria earlier this year part heard a second class action brought against Downer EDI which settled on the fourth day of trial,^[35] following the earlier settlement of a class action against the company in 2014,^[36] and, last year, multiple law firms were engaged in a race to file proceedings against Volkswagen and related entities in light of the allegations of emissions rigging.^[37] The increased prevalence of competing class actions being filed poses novel and innovative questions. These questions include how courts are best to control or manage more than one class action over the same or similar subject matter, how can judicial resources and the interests of justice be balanced amongst competing class actions and whether there is a need for reform.

Class actions in respect of the same or similar subject matter 

26. The reason this topic of competing class actions is of such interest to me is as a result of my experience recently with the Provident Capital proceedings. As background, I appointed receivers of the property comprising the security for the debenture holders to Provident Capital in June 2012. The Trustee for holders of debentures issued by Provident Capital also appointed those same persons as receivers under a private appointment pursuant to the debenture trust deed. In July 2015, I considered an application by the trustee of the debenture trust deed under s 283HA of the Corporations Act 2001 (Cth). That application was filed to determine whether the trustee was disqualified from continuing to act in office or whether it would be justified, or obliged, to retire as trustee under cl 9 of the trust deed (which replicated the statutory duty of a trustee under s 283AC(2) of the Corporations Act), or whether the court ought to terminate its appointment and appoint a new trustee in its place.^[38] The reason for the application was the trustee was concerned that, if it continued to act, it may have a conflict of interest or a duty between third parties suing it, or the liquidators investigating it, for any possible action Provident may have against it in respect of its conduct as trustee and under the trust deed.

27. Third parties sued the trustee in two separate representative proceedings, one lodged in the Victorian Registry of the Federal Court of Australia under Part IVA and one lodged in the Supreme Court of New South Wales.^[39]

28. The Victorian proceedings, commenced in 2014, claimed loss or damage against the trustee under s 283F(1) of the Corporations Act and damages at common law for anxiety and stress, together with interest and costs, in respect of the trustee’s conduct and its failure earlier to appoint receivers to Provident under the trust deed. The group was constituted, under Pt IVA, as comprising all persons who on 18 September 2012 were holders of debentures issued by Provident, that being the date on which Provident entered voluntary administration, and who suffered loss or damage as a result of the trustee’s contraventions of s 283DA of the Corporations Act, as alleged in the statement of claim. In substance, the common questions pursued in that proceeding, which will affect all group members, relate to:

• the nature and scope of the trustee’s obligations under s 283DA of the Corporations Act;
• what, if any, steps the trustee was obliged to take from early December 2008, in light of what it knew or ought to have known about the then financial position, performance and assets of Provident;
• if the trustee had taken those steps, whether Provident would have been precluded from issuing further debentures after that time, either because of court orders or steps that might have been taken by the Australian Securities and Investments Commission; and
• if the trustee had taken those steps, whether receivers would have been appointed at an earlier time to the property of Provident, secured by the fixed and floating charge, to protect the interests of the debenture holders, so that a greater realisation may have occurred.^[40]

29. The trustee was also involved in representative proceedings that were filed on 10 June 2015 in the Supreme Court of New South Wales. The class representatives in those proceedings claimed compensation under s 283F(1)(a) of the Corporations Act by reason of alleged contraventions by the trustee of s 283DA(b)(ii). The class representatives have sued on behalf of themselves and a closed class of persons who, firstly, held debentures issued by Provident as at the date the court appointed receivers (29 June 2012), secondly, suffered loss and damage by reason of Provident’s conduct alleged in the statement of claim and, thirdly, have signed a litigation funding agreement with a funder called Litman Holdings Pty Ltd. Their statement of claim is lengthy and is apparently a more complex document than that in the Victorian proceedings. It raises common questions about whether:

• Provident breached the loan to valuation ratio criteria in the trust deed;
• Provident breached requirements of the trust deed concerning the use of debenture funds;
• Provident breached s 283BB(a) by not carrying on and conducting its business in a proper and efficient manner;
• Provident breached requirements in the trust deed for solicitors’ certification of title;
• whether a trustee exercising reasonable diligence in the position of the trustee would have done or ought to have done or failed to do a number of things that are set out in detail in the pleading; and
• whether the trustee failed to meet its obligation under s 283DA(b)(ii) to exercise reasonable diligence to ascertain whether Provident had committed any breaches of its obligations previously alleged.^[41]

30. I ultimately found, for reasons beyond the scope of today’s lecture, that the trustee was not disqualified from continuing to act as trustee under s 283AC(2) and that it was not justified, or obliged, to retire as trustee under cl 9 of the trust deed, provided that the trustee did not seek to avail itself of any right of indemnity from the trust fund without seeking the prior direction of the court.

31. However, the proceeding did draw my attention to the risk of competing class actions duplicating substantive claims, wasting judicial resources and negating many of the efficiencies upon which Part IVA is premised. In that judgment, I noted that:

“… there is a likelihood of there being an extravagant waste of the trust estate that will possibly occur by reason of the two concurrent representative proceedings. No doubt, at some point there will be a need for consideration as to whether one of those proceedings ought be cross-vested into the one court for case management to avoid unnecessary duplication of costs. The parties and the courts will need to ensure that the damages that are sought to be recovered from the trustee, for the stated benefit of debenture holders who have lost the full value of their investments, will not be frittered away on litigation funding charges and duplicated legal costs in two proceedings that will cover what is likely to be very similar, if not identical, ground. Each proceeding appears to have a considerable overlap in the represented classes, although the New South Wales class appears to be narrower, being limited to persons who have signed litigation funding agreements with a particular funder.

The burden on the administration of justice generally, of having to accommodate class actions of this nature, to say nothing of the waste of the potential funds that might be available from the trustee by maintaining two very large causes of action over substantively the same ultimate subject matter, cannot be gainsaid. Hopefully, at some point, common sense will prevail over what may be thought to be the commercial interests of those promoting the two class actions, for the asserted ultimate benefit of the persons who have suffered loss and damage here.”^[42]

32. This issue of overlapping class actions wasting resources and duplicating judicial processes is a threat to the efficient operation of class action proceedings in jurisdictions around the world. For example, the US Advisory Committee on Civil Rules has noted that:

“… overlapping class actions in federal and state courts threaten the resolution and settlement of such actions on terms that are fair to class members, defeat appropriate judicial supervision, waste judicial resources, lead to forum shopping, burden litigants with expenses and burdens of multiple litigation of the same issues and place conscientious class counsel at a disadvantage.”^[43]

33. Similar concerns have been raised in Canada, where the Uniform Law Conference of Canada’s Committee on National Class and Related Interjurisdictional Issues noted that the existence overlapping class actions means ‘the potential for chaos and confusion remains high’ amongst class members. These issues are caused by the inclusion of class members in multiple proceedings and uncertainty as to size and number of class members.[44]

34. These sentiments have also been expressed in the Federal Court by judges presiding over proceedings involving the consolidation of multiple classes into single proceedings. Finkelstein J noted in the Centro proceedings, where there were three proceedings brought by two applicant law firms against a variety of different respondententities that formed Centro group that:

“…it is undesirable that multiple actions raising the same or similar issues be tried separately, perhaps before different judges. For one thing it is undesirable that common issues should be separately litigated since the decisions could be inconsistent. For another, there are obvious efficiencies (both as regards court time and parties’ costs) in having common questions resolved at one time.”[45]

35. The issue of competing class actions is particularly pronounced in Australia given the absence of any regime of certification, in contrast to other jurisdictions, such as those that apply in the US, Canada, UK, and as has been recommended for adoption across member states by the European Commission.^[46] Judicial certification of classes has been adopted in part to address the risks of overlapping class actions occurring, albeit with varying degrees of success.

36. Despite judicial concerns regarding the rise of competing class actions, there has been relatively little jurisprudence under Part IVA in relation to consolidating competing class actions into a single proceeding. Instead, as Professor Morabito has noted, it is ‘largely through the conduct of the relevant lawyers than through the handing down of judicial pronouncements’ that competing class actions have been consolidated and case managed.^[47] While the fact that parties have been able to join proceedings or have proceedings heard alongside each other has proven the flexibility of Part IVA and the docket system in the Federal Court, it is worth considering the limited but unsettled jurisprudence that the Federal Court has adopted when considering how to case manage competing class actions.

Case management

37. There have been a relatively limited number of cases where reasons have been provided for taking particular steps to deal with competing class actions. However, the reasons provided by Merkel J in Johnson Tiles Pty Ltd v Esso Australia Ltd (1999) ATPR ¶41-679 and Finkelstein J in Kirby v Centro Properties Limited (2008) 253 ALR 65 illustrate the divergent approaches which have been adopted in light of the absence of a class certification mechanism or particular legislative direction for dealing with competing class actions.

38. In Johnson Tiles, Merkel J was considering applications brought by the respondent in three separate proceedings to strike out each proceeding on the ground the proceedings were an abuse of process, or alternatively, strike out only certain proceedings so that only one proceeding continued. These proceedings each related to the Longford gas plant explosion in Victoria which occurred on 25 September 1998, leaving reticulated gas unavailable to Victorian gas consumers until 12 October 1998. In this judgment, the three proceedings which the respondent sought to have struck out had the following group member definitions:

• all persons who suffered injury, loss or damage as a consequence of the explosion and fire;
• employees stood down from their employment at the gas plant during the period of its closure, persons who conducted particular businesses affected by the gas plant closure, persons who conducted manufacturing, and domestic users of gas; and
• all persons who suffered injury, loss or damage as a result of the failure of the respondent to supply gas.

39. The solicitors acting in the first and second proceedings filed joint submissions that their proceedings should be consolidated and allowed to proceed under Part IVA. A fourth proceeding, brought on the behalf of members of the National Union of Workers, was also commenced but not dealt with in the judgment, as it was discontinued prior to the judgment being delivered. In the judgment, Merkel J commented that in deciding which competing class actions would continue would depend on a variety of considerations, but that there was no general principle against overlapping class actions being permitted to continue:

“Where more than one such proceeding has been issued the Court will determine which of the proceedings is to continue under Pt IVA. A number of factors, including avoidance of vexation and oppression, are relevant considerations in that regard. In such circumstances, prima facie, the commencement of a bona fide representative proceeding prior to the Court giving substantive directions (including the giving of notice to group members) in an existing but overlapping representative proceeding will not, of itself, be vexatious and oppressive.”^[48]

40. Additionally, his Honour found that the ‘first come, first served’ principle for determining which class to proceed had no place in either the principle, authority or object of the statutory scheme in determining which proceedings to allow^[49].

41. While his Honour held that none of the three proceedings constituted an abuse of process, he found that it would be vexatious and oppressive for the respondent to face multiple Part IVA proceedings, unless it was in the interests of justice that a second proceeding be permitted to continue. In these circumstances, Merkel J considered that only the first proceedings, brought on behalf of all persons who suffered injury, loss or damage as a consequence of the explosion and fire, and, the second proceedings, brought on behalf of all employees stood down from their employment at the gas plant during the period of its closure, persons who conducted particular businesses affected by the gas plant closure, persons who conducted manufacturing, and domestic users of gas, should be permitted to continue. There were three general considerations which led his Honour to this conclusion: the consolidated proceedings would cover all the claims of general categories of persons who suffered loss; the solicitors’ firms involved in these proceedings, Slater & Gordon and Maurice Blackburn, had sufficient resources to conduct the proceedings, distinct from considerations of expertise or experience, to manage the proceedings and represent the class; and, both of these proceedings had substantial support from class members.

42. This approach is to be contrasted with the considerations taken into account by Finkelstein J in determining which proceedings to permit to proceed in the Centro class actions. In Kirby v Centro Properties Limited (2008) 253 ALR 65, a shareholder class action, there were three proceedings brought by two firms of solicitors, with two of those proceedings being closed classes using an opt-in arrangement, and the third being an opt-out proceeding, utilising a litigious strategy known as ‘remaindering’ to capture the remainder of class members who had not opted-in to the class. In that instance, Finkelstein J considered that the only relevant consideration in choosing which class to permit to proceed was the best interests of class members and, to this end, proposed the establishment of an independently-selected litigation committee to advise upon the interests of the relevant class members, with the power to establish such a committee being found in s 33ZF of the Act. The litigation committee is a feature of US class action jurisprudence and facilitates a sealed-bid auction process, where law firms submit sealed bids to act for a group, with a judge determining the winning bid on advice of the litigation committee.^[50] Such an approach was novel in the context of determining the ‘best interests’ of group members.

43. In addition to the committee determining the best interests of class members, Finkelstein J considered it would also be necessary to have regard to:

• the experience of the relevant law firms in securities class actions, as well as the background and experience of the relevant lawyers;
• the costs that the firms expect to charge for all work performed;
• a statement of the terms pursuant to which proceedings are being funded; and
• the amount that is regarded as fair compensation to the law firm whose action is not permitted to proceed.^[51]

44. In expressing these factors as the relevant considerations, Finkelstein J discounted both the interests of litigation funders and the ‘first come, first served’ preference for class actions as factors for consideration. Despite his Honour’s judgment adopting these novel approaches, his Honour later recused himself due to a shareholding in the respondent company and these innovations were not adopted.

45. The degree of divergence in the approaches of Merkel and Finkelstein JJ illustrates the unsettled nature of jurisprudence regarding consolidating competing classes in the Federal Court. While the existence of unsettled jurisprudence is not problematic, as both Merkel and Finkelstein JJ were able to reach pragmatic resolutions to the issues regarding case management of competing class actions, it does indicate that the proper means of case management of competing class actions has not been entirely settled and there do remain some key questions to be asked of the Court’s role in determining which competing class actions are to proceed.

Balancing judicial resources

46. In relation to case management of competing class actions, the establishment of the National Court Framework (NCF) and the release of both the NCF central practice note and the draft Class Actions practice note reflects that the Federal Court is making real efforts to improve case management procedures in class actions. The innovations which both the NCF central practice note and the draft Class Actions practice note introduce include:

• two judges generally being docketed to a class action proceeding. This will include a trial judge, who sits within the relevant national practice area or sub-area, to hear the trial and deal with evidentiary and trial preparation issues (including the determination of common questions). If the trial judge is not experienced in class actions, a case management judge with experience in class actions will also be docketed to the proceeding to hear and determine interlocutory disputes and proactively manage the case;
• the appointment of a class actions registrar, to assist judges and the parties and act as a central contact point in the management of class actions. The class actions registrar will seek to convene an early mediation in order to understand the barriers to resolving the dispute and the information that the parties might need to progress settlement discussions (including in relation to the value of the claim);
• the establishment of more prescriptive procedures surrounding the first case management hearing to ensure that parties are sufficiently prepared to deal with substantive case management issues at the initial directions hearing;
• establishing procedures around communications to class members;
• changes to ensure that there is adequate disclosure of costs agreements and litigation funding agreements to class members, the respondent and the Court, with particular regard had to the ‘tactical advantage’ that any disclosure will provide to the parties to the proceeding and emphasis being placed on the disclosure of potential conflicts of interest between lawyers, funders and class members;
• more prescriptive procedures for settlement approval applications made to the Court, such as requirements for certain relevant statements to be tendered by the parties in relation to settlement; and
• the adoption of procedures for more extensive oversight of legal costs in litigation in certain instances, to provide greater protection for class members.

47. The innovations presented by both the NCF and the draft class actions practice note are already being adopted, with the ‘tactical advantage’ test for disclosure of litigation funding agreements recently being applied in judgments I have handed down in both continuing class actions against S&P in respect of its rating of synthetic collateralised debt obligations (SCDOs) prior to the global financial crisis and the Provident Capital liquidation proceedings.^[52] While neither the NCF nor the draft class actions practice note directly address the issue of case management of competing class actions, the adoption of these practice notes does reflect that the Federal Court is taking proactive steps to encourage efficient resolution of disputes between parties to class actions. It is anticipated that these innovations will assist the Court to better manage judicial resources in class action proceedings and limit the wasted resources that can result from a multiplicity of class actions.

Calls for law reform

48. While the Federal Court has recently been taking steps to improve case management practices, there appears to be a real case for proper and meaningful consideration of whether Part IVA does need to be reformed. While the Australian Law Reform Commission recommended a complete review of Part IVA in 2000, there has not yet been such a review^[53]. This is particularly problematic in light of the adoption of regimes similar to Part IVA in both Victoria and NSW, and the prospective adoption of similar schemes in Queensland and Western Australia.^[54] However, the growth in the number of filed class actions, particularly the growth in the number of closed class actions, has led to perhaps unforeseen consequences, such as an increase in the number of competing class actions filed in respect of the same mass wrongs and the issue of proper disclosure of funders’ fees, warranting a proper review of the legislative scheme.

49. This point, the need to review Part IVA, is being made increasingly often in judgments handed down by the Federal Court. For instance, in Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (2015) 325 ALR 539, Wigney J held that there was no basis for the establishment of a common fund for litigation of a class action based on the form of Part IVA but found that:

“There is something to be said for the proposition that some form of common fund approach, similar to the common fund doctrine in the United States, should be adopted in Australia to deal with the reality of commercial litigation funding in representative proceedings. It would, however, perhaps be preferable for that to occur as a result of legislative reform, rather than by way of the piecemeal utilisation by judges of general discretionary powers such as ss 23 and 33ZF of the FCA Act.”^[55]

50. There are also key questions posed regarding proper disclosure of funders’ fees and the appropriate treatment of such fees in light of the draft class actions practice note. These questions are often met with a desire for clarification of the appropriate degree of disclosure of such fees. In Hodges v Waters (No 7) (2015) 232 FCR 97, it was said by Perram J, when approving a class action settlement, that the fees in question were:

“… commercially sensitive and … confidential. Their confidential nature is a consequence of the agreements which were entered into by the applicants in the proceedings. Whilst I will not set them out I will indicate that they consume just over one third of the settlement monies. This is the flipside of the Faustian bargain constituted by the funding agreements. Whilst they are, in my view, very substantial they reflect the commercial risk that the funder was taking with its own money. I would reserve for another day whether this information should properly remain out of public view.”^[56]

51. While the proper disclosure of both litigation funders’ fees and the commercial terms of litigation funding agreements is difficult to determine at times, judgments I handed down in the S&P SCDO securities class actions and in the Provident Capital proceedings, show the central practice note and the draft class actions practice note do provide guidance as to the proper form of disclosure to some degree.^[57]  Nonetheless, the foregoing passage of Perram J and my judgment in relation to the S&P class actions note that there may be some circumstances where full disclosure of a litigation funding agreement would be warranted.[58] Whether there is a place for the full disclosure of a litigation funding agreement, particularly in circumstances where competing class actions exist, is perhaps an issue which could be answered by a review of the operation of Part IVA.

52. It would appear to be particularly prudent to review Part IVA in light of the issues facing the regime, such as those posed by competing classes, amid the reform of class action procedure which has occurred elsewhere around the world in recent years. For example, the UK has recently adopted a sectoral-specific class actions regime for competition law infringements^[59], while France and Belgium have enacted statutory class action regimes in light of the European Commission directive issued in 2013 on representative proceedings.^[60] Elsewhere, the New Zealand parliament has drafted bespoke class action legislation, although that has not yet been adopted.^[61] In light of the current constraints with the Part IVA regime I have discussed here today, it would appear prudent to revisit Part IVA and determine whether it is fit-for-purpose in light of current challenges.

Conclusion

53. When Parliament considered the introduction of Part IVA, a then senior member of the opposition, the Hon Peter Costello MP, made the following comments in relation to the scheme’s operation:

“…if a lawyer finds a person who has bought a damaged toaster and another lawyer finds another person who has bought a damaged toaster, each can commence a class action on behalf of all toaster buyers and the court, presumably, will have to decide which one of the actions goes forward as a class action.

In reality, the court will decide which group of lawyers will get the proceeds of running the class action. We will have entrepreneurial lawyers finding applicants, turning them into class actions and basically fighting over the pickings.”[62]

54. Unfortunately, it appears we are now living in a world of aggrieved toaster buyers, with courts exercising limited scrutiny of competing class actions. While this is not problematic in itself, with the Federal Court adopting novel and innovative jurisprudence when presented with an opportunity to determine which classes to proceed accompanied by new procedures for effective case management of class actions, the issue of competing class actions does arise in the context of a broader spectrum of issues facing the millennial Part IVA. In light of these issues, it may now be time for some more mature counsel of the representative procedure provisions in the Federal Court of Australia Act 1976 (Cth).

---