Unlike the Bible, when David takes on Goliath in the real world, Goliath almost always wins. Not any more. Enter the new species of litigation – the class action and the litigation funder. As we become more risk averse to litigation, yet continue to live in an age of consumerism where goods and services are mass produced, the idea of an army of Davids is emerging.

Class actions are a species of litigation emanating from the US, where individuals joined together to take legal action against a company or Government. They are becoming more common in Australia, especially following tort reforms in 2002 and are referred to as ‘representative proceedings’ which can be brought by virtue of the Representative Group Proceedings Act 1991. There are three threshold requirements. Firstly, seven or more persons must claim against the same defendant. Secondly, claims must arise from related circumstances and thirdly, there must be a substantial common issue of law or fact.

In every class action suit, there is a lead plaintiff

The lead plaintiff is usually carefully chosen because an order for costs can only be made against the unsuccessful lead plaintiff and not against all the members of the class. Increasingly, lead plaintiff is conveniently so impecunious that even if the class members lose the action and a costs order is made against the plaintiff, the defendant will rarely enforce the costs order. All members are bound by the outcome of the proceedings, unless they ‘opt out’. If the parties want to settle an action, they must obtain Court approval to settle a class action in the Federal Court. The Federal Government has introduced new regulations which will come into effect on 13 July 2013, which mirror the effect of the class order reliefs granted by ASIC. The consequence is that although funding arrangements are ‘financial products’, they are not managed investment schemes and litigation funders do not require an AFSL licence.

The number of class actions has risen in the last couple of years and many of these relate to the “toxic debts” which were sold in the lead up to the GFC. Examples of such securities related actions are Centro, Lehman Brothers  and the Local Government Financial Services (LGFS) saga against SNP and ABN Amro. In the case of the latter, Australia is the first jurisdiction where proceedings were brought against a ratings agency for misleading and deceptive conduct in relation to complex debt obligation products sold in the lead up to the financial crisis in 2007. One of the main reasons for the rise is that Australia is home to the world’s only publicly litigation funder, IMF Australia Ltd (IMF), which has funded 142 class actions since listing publically. IMF currently has a whopping $1.5b on its books. There has also been a rise in institutional investors such as superannuation funds holding large investments in class actions while class action growth outside the US increased because of the 2010 decision of the US Supreme Court in NAB v Morrison which precludes non-US investors from obtaining compensation from foreign companies through the US Court system. Australia has suddenly become a very attractive place.

The number of settlements has also increased

In 2012, 13 class actions settled. Further, a comprehensive study by King & Wood Mallesons revealed that the size of settlements, on an annual basis, is increasing, particular where the class members consist of the victims who are directly affected by the alleged act that is the subject of the claim. The highest settlement was for $200M in Centro.

What are the pros and cons of class actions?

There is a well-supported argument that they promote greater access to justice. If you look at the websites of the various legal players, you can see this. Maurice Blackburn use terms like 'social justice' on their website and the slogan 'fight back to make a difference'. Shine Lawyers promise to 'right wrongs' and to empower the individual to seek justice for himself, his family and society. There has been a rise in class actions relating to immigration detention claims and bank fees. It is also arguable that they perform a useful commercial role, as they reduce the burden on ASIC to some degree. ASIC has expressed support for class actions, referring to them as a ‘self-help mechanism’ holding company boards to account. Since the original decision in James Hardie in 2009, ASIC has observed that board engagement with disclosure is improved.

But it doesn’t stop there. We are also seeing increasing intervention by ASIC in class proceedings. Recently, ASIC intervened in the Richards proceedings, in order to assist the Court in the settlement approval process. However, this is not to say that it gives an unqualified green light. ASIC recently decided to issue ‘speeding fines’ to Leighton Holdings' due to alleged breaches of its continuous disclosure duty. In Westpoint, ASIC rigorously fought requests for documents that ASIC had obtained through its investigatory powers.

On the flip side, class actions can be controversial

For example, does it make sense to permit a lawyer to initiate a class action where a utility company overcharged two million customers two cents per month? Maybe it is about the principle, although it can be viewed as a vehicle for plaintiff lawyers to make millions out of frivolous litigation. In King v AG Australia Holding Ltd (2003) which involved allegations that shareholders had been misled during the takeover battle with AMP, the lawyers were paid a further $15M on settlement. There is even talk of the Vodaphone class action becoming a ‘lawyer’s picnic’. One could also question the extent to which the class members are truly participating in the litigation as they usually play a passive role, save for signing up to the proceedings, which are driven by the lawyers.

The future is looking bright and profitable for the class action players

One of the UK-based class action consultancy groups, Goal Group, expects annual class action settlements in the Asia Pacific to be worth a massive $3.2b by 2020. Australia is to become a front runner (along with Canada and the Netherlands) as a regional centre for securities class actions. We are also likely to see a rise in natural disaster and public liability class actions in 2013 relating to the bushfires and the Queensland floods - along with an increase in proportionate liability defence. As we saw in the LGFS case in which each of LGFS, SNP and ABN Amro were each held liable for 33.3% of the loss in the LGFS saga. The battle of many Davids and the Goliaths is only just beginning.