Surge in class action lawfare hits economy

An explosion in overseas-backed litigation threatens investment and jobs in Australia.

Ai Group chief executive Innes Willox. Picture: AAP

An explosion in class action claims funded by overseas litigation backers is threatening investment and jobs in Australia, with more than $10bn in claims lodged against businesses in the last financial year.

Ai Group chief executive Innes Willox has warned that the surge in litigation presented a “clear and present danger” to the nation’s “fragile economy” amid record insurance premium increases and limited regulation to minimise class action exposure.

Business, legal and insurance figures have called on the Morrison government to urgently ­address the spike in class action claims in the past two years.

The Ai Group, representing the interests of more than 60,000 businesses, will release a seven-point plan on Wednesday aimed at reining in class action claims before they damage the economy.

“Investment and jobs are threatened and business insurance costs are going through the roof. The Australian gov­ernment needs to act now to rein in speculative and costly class ­actions before they materially damage our economy,” Mr Willox said.

“Overseas litigation funding firms have moved into Australia in a big way due to the fact that class actions in Australia are subject to scant regulation, compared with other countries such as the US and UK.

“Overseas investors should not be permitted to make super-profits at the expense of Aus­tralian businesses and jobs.”

The Australian understands $10bn is a low estimate in relation to overall claims made against Australian businesses, and there were growing fears that start-ups and corporations unable to service insurance costs would move offshore.

The Australian understands of the 54 prominent class action cases commenced in the last fin­ancial year, a majority were backed by overseas funders, with leading plaintiff lawyers including Maurice Blackburn, Shine Lawyers, Slater & Gordon and William Roberts Lawyers. Major corporations targeted include Westpac, Domino’s Pizza, Bayer Australia, Santos, Volkswagen Australia and Woolworths.

In July, Allianz Global Corporate and Security announced it was abandoning liability cover in Australia following the class ­action surge, declaring it “untenable” to remain in the market.

Mr Willox said the government must introduce legislative amendments into parliament to implement a raft of protections. “Regulation cannot be left to the courts. Litigation funding arrangements are financial products and these arrangements need to be regulated like other fin­ancial products,” he said.

Mr Willox, who warned that class actions were leading to “massive increases in insurance costs” that could be spent on job creation and investment, said the level of returns sought by some litigation funders and plaintiff law firms was “unconscionable and have been criticised by the courts”.

“Workers are being enticed to join some of the class actions through, what many would argue, is misleading and deceptive conduct,” he said.

Mr Willox said the government must act quickly on Australia’s “lax class action laws” to protect the economy from speculative class action claims.

The seven-point plan calls on the government to regulate litigation funders through the Australian Securities & Investments Commission, impose reasonable limits on returns to plaintiff lawyers and litigation funders, and prohibit litigation funders from exerting any control over the positions and arguments prosecuted by law firms.

The Ai Group also asks to expose plaintiff lawyers and litigation funders to adverse costs orders for unsuccessful class ­actions and to increase the current minimum number of plaintiffs and implement a “predominance rule” that operates in the US requiring common issues among claims. The peak industry group also wants the government to implement a preliminary or certification hearing process, under a similar system operating in the US.

Colin Biggers & Paisley Lawyers head of class action practice Michael Russell said the rapid increases in class actions had been sparked by “local and overseas litigation funders” expanding their operations and investments into Australia. “Australia is now seen as the most attractive jurisdiction for litigation funders to set up. This has come at a huge cost to the Australian economy because Australia has now become a far more difficult, expensive and high-risk place to do business,” Mr Russell told The Australian.

“Some insurers have left the Australian market citing class ­action losses and exposures as too significant to maintain a viable insurance business in Australia.”

Mr Russell said litigation funders were coming to Australia with “enormous amounts of capital seeking to replicate the high returns that have been achieved by other litigation funders in Australian litigation in recent times”.

“Litigation funding is big business globally, particularly as traditional investments such as the equity and capital markets have become increasingly regulated and increasingly volatile,” he said.

The class action defence lawyer said the funding market for shareholder class actions had become “completely saturated over the past two years”.

“That’s resulted in litigation funders looking for alternative or less traditional types of litigation to invest in, with no shortage of enthusiasm or entrepreneurship. You only have to observe there have been no less than 12 funded employment and industrial class actions announced or begun in the past 18 months to see how eager funders are to deploy capital.”

Insurance broker Bellrock managing director Marc Chiarella said spikes in premiums for directors’ and officers’ liability insurance were linked to losses and uncertainty of shareholder class actions. He said 45 per cent of all SCAs commenced in the past 20 years were notified from 2016 on.

“All of these remain unresolved. Market statistics suggest for the 2016 year, against the Australian D&O market of $250m in gross written premium, $400m was reserved in claims. It gets worse. For the 2016 to 2018 period, reserves are estimated at $1.8bn,” Mr Chiarella said.

He warned that the risk to smaller companies was greater than larger businesses that could self-insure and have bigger budgets for internal compliance and risk management staff.