The stated objective of the bill is to protect the interests of plaintiffs in class actions.
The real – though unstated – objective of the bill is to protect the interests of powerful defendants by making it more difficult for people to bring class actions in the first place.
It is a testament to the current government’s incompetence that the bill fails to achieve either the real or the stated objective.
As one submitter to this committee, Phi Finney McDonald, put it:
That the Government is seeking to present this reform as a consumer protection measure is Orwellian gaslighting.
Further highlighting the idiocy of this legislation is that it is opposed by leading class action defendant lawyers Herbert Smith Freehills.
Phi Finney McDonald was not alone in this assessment.
The committee heard overwhelming evidence that most of the measures in the bill would leave class action plaintiffs and defendants significantly worse off. For example:
The evidence received by the committee strongly indicated that the overall impact of the “rebuttable 70-30 presumption” would be to drive up litigation costs, discourage plaintiffs and defendants from settling disputes and so delay their resolution and – more generally – make the law “worse for everyone”. Moreover, as such a presumption would also raise the risk for funders, ”no funding [would be] available for some meritorious claims and … funding costs for all claims will likely be higher than they would otherwise be”.
Most submitters argued that, rather than resolving uncertainty in the existing law in relation to the availability of common fund orders as recommended by all members of this committee in December 2020, the bill “promotes … uncertainty and confusion around common fund orders” to the detriment of plaintiffs and defendants in class actions.
By requiring class members to agree in writing to be members of a litigation funding scheme, submitters have argued that the bill would lead to an increase in the number of closed class actions and this would, in turn, result in multiple class actions for a given event.
It is also important to put on the record that, while the Explanatory Memorandum acknowledges that the bill gives rise to a range of regulatory impacts on business, the committee can have no confidence that those impacts have been properly considered – or are even understood – by the Treasury or the Government. That is because, instead of preparing a comprehensive Regulatory Impact Statement (RIS) in relation to the bill, the Treasury certified a report by Liberal members of this committee as an independent review which involved a process and analysis equivalent to a RIS.
In other words, the Department of the Treasury certified a report written by Liberal MPs as “independent” and then used that report as the primary justification for a Liberal government policy.
Constitutional concerns
There are serious doubts as to the constitutional validity of the bill.
According to the Law Council, former Solicitor-General Justin Gleeson SC and other legal experts, it is not clear that the bill is constitutional.
Multiple and serious concerns were raised by submitters including but not limited to:
whether the corporations power in the Constitution (s 51(xx), and / or the referral powers to the Commonwealth (pursuant to s 51 (xxxvii)) can support the provisions;
whether the provisions would amount to an inconsistency with state class actions provisions so as to override them pursuant to s 109 of the Constitution, including impacts on the group costs order provisions unique to the Supreme Court of Victoria; and
potential issues arising in respect of overriding the power of state courts or directing state legislatures.
The Explanatory Memorandum fails to mention or address the constitutional questions in any way.
In response to these concerns, the Attorney-General’s Department was unable to provide the committee with any meaningful assurance that the bill is constitutional or offer any rebuttal whatsoever to any of the concerns set out in Mr Gleeson’s legal opinion. There was literally no explanation offered as to how or why the bill is constitutional. Indeed it was clear from the long silences, non-answers and visible discomfort at the questions that the officials from the Attorney-General’s Department harboured doubts as to the bill’s constitutionality.
As noted below, questions on notice have not been answered and it is utterly irresponsible of the committee to rush and complete its report without these answers.
The Liberal majority report fails to grapple with the questions of constitutionality raised, effectively misrepresenting the discussion and evidence as the Hansard and video record shows.
The Liberal majority “Committee view” section at paragraph 2.154 “defers” to the department’s “conclusion” that the bill is constitutionally valid, without any evidence and states that the committee “looks forward to receiving further evidence from the Attorney-General’s Department reinforcing this position”. So with no evidence, no answers and an acknowledgment that the Attorney-General’s Department had not considered the issues raised by the former Solicitor-General, the Liberal majority nevertheless conclude that everything is tickety-boo and confidently predict the content of responses from the public service not yet received.
Further highlighting the serious concerns, Justice Beech of the Federal Court of Australia handed down a judgement on 17 November 2021, raising questions regarding the constitutionality and drafting of the bill.
The case of Stanwell Corporation Limited v LCM Funding Pty Ltd considered whether a class action (funded by LCM) brought against two Queensland state owned coal fired power companies (Stanwell Corporation Limited and CS Energy Limited) was “grandfathered” for the purpose of the Corporations Amendment (Litigation Funding) Regulations 2020 from a requirement to be registered as a managed investment scheme.
The judgment found that the class action was grandfathered but, importantly, made the following comments:
At paragraph 6, that the class action should properly have been brought as an open class action as ”that is consistent with the philosophy of Part IVA of the FCA Act”. LCM as the funder of this action chose not to bring the action as an open class action due to the considerable uncertainty regarding the availability of common fund orders. Paragraph 6 in full is worth reading:
“Let me say now that it should not be assumed that I will allow the proceeding to proceed to trial as a closed class. It is not a plain vanilla commercial class action where investors seek to recover the value of their investments. Rather, it is one where the breadth of the alleged gaming strategies of these electricity generators has adversely affected all Queensland electricity consumers. The proceeding is a paradigm case of one that should be open. First, that is consistent with the philosophy of Part IVA of the FCA Act. Second, the conduct, if established, affects potentially more than a million electricity consumers in Queensland, not just the fortunate 50,000 or so that have signed up. I doubt that all consumers were notified of or given the opportunity to sign up. Third, the proceeding dispels the myth of the so-called advantages of book building in a case of this type. The book building here has resulted in an unnecessary, costly and inefficient delay of seven months in order that over 50,000 retail customers be separately signed up to individual funding agreements. There is little justification for such a barrier to entry so to speak or justice. Fourth, to allow the proceeding to remain closed will incentivise others to launch parasitic actions to cover the balance of the universe of electricity consumers. So the potential for and the vice of a multiplicity of proceedings. And indeed if not productive of such multiplicity now, that position may be all but inevitable if I later deliver a judgment in favour of the present closed class, unless I open the class after judgment. And if then, why not now? Indeed, why should the residual universe of consumers have the benefit of the asymmetry at that stage? They should be subject now to the potential risks and benefits, subject to any right to opt out.” (emphasis added)
At paragraph 19, that the decision in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11 which characterised a particular litigation funding scheme as a managed investment scheme was potentially wrongly decided as “it is arguable that the majority mischaracterised litigation funding arrangements as an investment by group members of property to achieve benefits, when such arrangements principally provide a mechanism for persons who share commonality in their unlitigated and separate choses in action to secure the payment for legal services necessary to vindicate those choses on a contingent basis”.
At paragraph 218 in relation to the bill before the committee:
[The bill] may need to be modified to bring its scope within the referral contemplated by paragraph 51(xxxii) of the Constitution bestowed by the States under the Corporations Agreement 2002 (as amended), assuming that the approval of the Forum constituted thereunder has not been sought, and also assuming that the concept of “managed investment schemes” under clause 507(1)(a) is limited to its objectively ascertained meaning as at the inception of that clause, which pre-dated Brookfield and was also not affected by or considered under the 2017 amendments. It may need to be modified to address direct or indirect conflicts with the provisions of Pt IVA of the FCA Act or at least to deal with the arguable conceptual incoherency in seeking to shoe-horn the statutory model for managed investment schemes under the Corporations Act into a funding mechanism designed to facilitate access to justice under the open class regime enshrined in Pt IVA, where class actions are controlled by representative applicants, with external legal representation and advice, and by the Court, rather than by group members exercising their democratic rights under a so called managed investment scheme, or by funders or any other entity expediently nominated as a responsible entity.
In essence, this judgment provides reasoned commentary which strikes at the heart of the bill. This cannot be left unaddressed by the Parliament.
Process
It is difficult to overstate the level of concern that has been expressed by submitters to this inquiry and Labor members regret that we have not been able to do justice to those concerns in this dissenting report. Government members provided us with a copy of the majority report on the evening of the 17th of November and we have had less than a day to consider it.
The fact that the majority and dissenting reports have had to be prepared in such a hurry is emblematic of the shambolic way in which the Government has approached this bill. That process can be summarised as follows.
First, members of the public were given less than one week to review an exposure draft of this complex legislation and make submissions to the Treasury.
Second, after ignoring most of the feedback the Treasury received from submitters, the Government introduced the bill into the Parliament on 27 October 2021 and gave this government-controlled committee three weeks to conduct its inquiry.
Third, this government-controlled committee gave members of the public only 7 days to make a submission (citing the three-week timeframe for the inquiry as the reason).
Finally, this government-controlled committee held one public hearing on 12 November 2021 and gave witnesses less than 2 business days to respond to questions on notice.
Despite the extraordinary short timeframe for responding to questions on notice, Labor members note that the only witnesses who failed to provide responses to the committee by the deadline were the Department of the Treasury and the Attorney-General’s Department.
In other words, the Government’s own witnesses were unable to meet the timeframes imposed by the government-controlled committee. As a result, the committee has not had an adequate opportunity to consider that evidence – a point that the Liberal members of the committee neglect to mention in their report.
Clearly, this committee – or another committee – needs significantly more time to work through the issues that have already been identified with this deeply flawed piece of legislation.
Real world impacts
The concerns with the bill are not merely academic. Litigation funders and plaintiff laws firms provided the committee with a list of actual examples of class actions that would have not proceeded – or at least would have been unlikely to proceed – had the measures in this bill been in place. The examples include:
Mervyn Street v State of Western Australia (known as the “WA Stolen Wages Class Action”), which is a class action involving thousands of Indigenous Australians in Western Australia whose wages were unjustly withheld or not paid as a result of wage control legislation in effect until 1972;
Eileen Cummings v Commonwealth of Australia, which is a class action involving Stolen Generations survivors;
Gregory John Lenthall & Anor v Westpac Banking Corporation & Anor, which was a class action alleging that Westpac overcharged its life insurance customers;
Hudson v Commonwealth, which was an environmental contamination class action against the Commonwealth of Australia (Department of Defence) relating to chemical contamination at Army Aviation Centre at Oakey in Queensland which resulted in diminution in property and business values; and
Riley Gall v Domino’s Pizza Enterprises Ltd, which was a class brought of delivery drivers and in-store workers who allege systematic underpayment relative to award entitlements.
The complete list of the examples provided to the committee can be found in the “Additional Documents” section of the inquiry website.
In our view, it is incumbent on the proponents of this bill to explain why they think it should be impossible – or at least significantly more difficult – for class actions like those listed above to proceed.
Labor members note that neither the Government nor the Liberal members of this committee have offered any such explanation.
Submissions in favour of the bill
The Mysterious Rule of Law Institute
One of the great mysteries of this rushed inquiry was the appearance of the Rule of Law Institute.
This mysterious outfit made no submission, yet was called by Liberal MPs for reasons unknown.
At the public hearing, the Institute declined to provide any substantive comment on the bill while praising the ”overall direction” of the bill.
It was clear that the presenter had no relevant expertise and, perhaps for that reason, was unable or unwilling to engage in specific discussion regarding concerns raised by other submitters in relation to the bill.
Moreover, after providing his evidence to the Committee the presenter, Mr Chris Merritt, was accused of “misstatements”.
Following the public hearing, a supplementary submission was received from Litigation Capital Management (LCM) in relation to Mr Merritt’s evidence. That submission states (among other things):
“3.1 Chris Merritt of the Rule of Law Institute of Australia provided the following evidence in the course of the Public Hearing: “… the worst example, which is outlined in several submissions to the current inquiry, was the 2015 settlement in a class action on behalf of 336 former employees of Huon Corporation. Once lawyers, funders and other service providers were paid, the former employees received nothing from the $5.1 million settlement.”
“4. LCM was the provider of litigation funding in relation to the above proceedings and in that capacity submits that the above evidence and reliance on the Huon Claim is simply wrong. LCM wishes to assist the Committee by providing the following correction to these misstatements:
4.1. The Huon Claim was not a class action.
4.2. LCM’s funding arrangements were with the named plaintiffs in the subject Supreme Court action. Those plaintiff parties were two very experienced professionals that were appointed as trustees of certain former Huon Corporation employees. In that role, the trustees were responsible for protecting the interests of the employees, and for progressing the legal proceedings on their behalf.
4.3. Further, LCM submits that it is sensationalist and ill-informed to refer to the distribution of this claim’s ultimate proceeds without exploring the claim’s history and background.”
The LCM submission goes on to provide further context and response.
In fairness, Labor members note that Mr Merritt has not had a reasonable opportunity to respond to LCM’s submission criticising his evidence. If the Government had given the committee adequate time to inquire into the bill, Mr Merritt would have had such an opportunity.
The Rule of Law Institute was given an opportunity to provide the committee with information about who funds the Institute. Disappointingly, the Institute did not provide the committee with that information (beyond referring, generically, to “private donations”).
In our view, no reliance whatsoever should be placed on the evidence received from the Rule of Law Institute.
Stuart Clark
It is a matter of regret to Labor members that the committee did not have the opportunity to question Mr Clark regarding his submission which is referred to at length in the majority report in glowing terms.
Labor members note that Mr Clark’s submission purports to be made in a personal capacity.
We also note that, while Mr Clark did not make a submission on the exposure draft of this bill, the US Chamber Institute for Legal Reform did make a submission which was purportedly authored by Scévole de Cazotte, Senior Vice President of International Initiative.
This is relevant because, in many respects, the Institute for Legal Reform’s submission on the exposure draft of the bill is identical to the submission Mr Clark made to this inquiry in his own name.
For example, on page 9 of his submission on the exposure draft, Mr de Cazotte wrote:
Litigation funders and plaintiffs’ lawyers released statements critical of the Bill and the reform proposals immediately upon its release. This was to be expected.
The Bill represents the first real challenge to a business model that has allowed the funders and their lawyers to extract enormous rewards from their ‘clients’ with little or no scrutiny let alone challenge.
For the first time, the Bill will establish a framework for the effective scrutiny of litigation funding agreements and the conduct of those who seek to benefit from the arrangements.
While the litigation funding industry, the corporatised plaintiffs’ legal firms, and their well-funded lobbyists have claimed that these reforms will severely affect, if not bring an end to, access to justice, there is simply no evidence to support that assertion.
On page 7 of Mr Clark’s submission, he used identical words. And there are many other examples of Mr Clark using identical language to Mr de Cazotte throughout his submission.
In determining how much weight to place on Mr Clark’s evidence, it would have assisted the committee to know whether this was just an extraordinary coincidence.
If Mr Clark was paid to write some or all of his submission by the US Chamber of Commerce (as it is known he has done work for them previously), the committee would have clearly benefited from understanding why Mr Clark has presented himself as an independent voice – signing off his submission as ‘Stuart Clark, Adjunct Professor at Macquarie University and a former President of the Law Council of Australia’ – despite his apparent links to a foreign lobby group.
It is deeply ironic that, in a submission where Mr Clark attacks the credibility and integrity of others, he failed to acknowledge apparent copying and pasting of large swathes of a submission made in someone else’s name to a completely different inquiry.
In our view, little reliance can be placed on Mr Clark’s submission, at least until these questions and concerns are addressed.
The recommendation in the majority report
Another significant concern raised by a range of submitters was that, in determining whether the distribution of claim proceeds is “fair and reasonable”, the bill would require a court to have regard to the list of factors set out in section 601LG(3) – and only those factors.
Such an approach, which neither the Treasury nor the Attorney-General’s Department could explain (let alone justify), would necessarily prevent a court from considering other relevant factors. As the Law Council put it:
It is of great concern to the Law Council that the current proposal in the Bill exhaustively prescribes for the court the only factors that it is permitted to consider when determining whether a claim proceeds distribution method, or any variation of that method, is fair and reasonable. Such a proposal, if enacted, would unduly fetter the court’s discretion by preventing it from acting as justice requires in a particular case. There are risks that this may produce injustice in some circumstances with unintended consequences that are at odds with the intention of the laws and fundamental principles which underpin the administration of justice.
While the report by Liberal members of the committee has not addressed most of the concerns that have been raised about the bill, we acknowledge that Recommendation 1 of the report would – at least – address this concern.
As well, even if Recommendation 1 is adopted and judicial discretion is retained, the (then) non-exhaustive list of factors should be more comprehensive and address the specific suggestions raised by submitters (in both initial and supplementary submissions) as to additional factors that require consideration.
The use of costs assessors and contradictors and the Banksia Securities case
Numerous submitters referred to the Banksia Securities case in their evidence to the committee. In that case, a litigation funder and five lawyers were found to have engaged in egregious conduct in connection with a fraudulent scheme.
The conduct of the funder and the lawyers in the Banksia Securities case was nothing short of disgraceful, and Labor members note that the matter has now been referred to the Director of Public Prosecutions. That is entirely appropriate.
It is also appropriate for members of this committee to review the decision of the Honourable Justice John Dixon in the Banksia Securities case and consider whether lessons can be learned (noting, of course, that Banksia Securities was a case in the Supreme Court of Victoria and not the Federal Court).
Consistent with the findings of the Australian Law Reform Commission three years ago, and consistent with comments made by Labor members of this committee in December 2020, Labor members believe that the Federal Court could and should make better and more regular use of independent fee assessors and contradictors to represent the interests of plaintiffs. It was, after all, a court-appointed contradictor who discovered the fraudulent conduct of the funder and the lawyers in the Banksia Securities case – and clearly it would have been preferable had such a contradictor been appointed much earlier in the proceeding.
While there may be cases in which it is not appropriate for the court to appoint a contradictor and/or a costs assessor (such as where, due to the size and complexity of a particular claim, the cost of appointing a contradictor or costs assessor clearly outweighs any possible benefit), those cases are likely to be rare.
Against that background, and in respect of funded class actions commenced in the Federal Court, Labor members support – in principle – the introduction of a rebuttable presumption that a contradictor be appointed.
Recommendation
The bill should not proceed in its current form and should be withdrawn
Recommendation
If the Government insists on proceeding with the bill, it should not do so until:
The bill has been the subject of a proper inquiry process (whether by this committee or another parliamentary committee). Necessarily, such an inquiry must provide witnesses with sufficient time to respond to questions.
The Attorney-General’s Department has comprehensively addressed, in writing, the concerns raised by Justin Gleeson SC and other legal experts about the constitutionality of the bill.
Mr Steve Georganas MPSenator Deborah O'Neill
Deputy Chair
Senator Louise PrattMr Julian Hill MP