‘Blackmail’ of class actions needs reform

THERE is now very little doubt that corporate Australia is facing a system of justice that looks more like a system of blackmail.

THERE is now very little doubt that corporate Australia is facing a system of justice that, intentionally or otherwise, looks more like a system of blackmail.

When confronted with class ­actions, the general counsel at Australia’s biggest companies know it makes financial sense to settle, regardless of the merits of the case.

They know that years of in­attention by policymakers in Canberra mean corporate Australia is now confronted by the world’s most sophisticated, and least regulated, litigation funding industry.

They know that doubts about the operation of critically important legal concepts like proportionate liability play into the hands of those who hope to extract multimillion-dollar settlements before the merits of their arguments can be tested in court.

Company directors have an enormous incentive to settle. Statutory provisions in some jurisdictions can limit their access to corporate insurance policies designed to cover the cost of defending themselves in court.

The reality facing corporate Australia is that Australian governments have betrayed them. They have produced a legal system that seems designed to extract as much money as possible from the business sector.

And it’s getting worse. Securities class actions are being filed at a rate that is well above average and announcements from plaintiff law firms indicate there is more to come. In the parlance of law firms, the pipeline is strong.

There will be those who argue that this growing level of legal risk is actually a very good thing because it means more people are gaining access to justice.

The reality is that the biggest single component of the class-­action industry has nothing to do with compensating individuals who might have lost their homes in bushfires, or suffered some personal injury. Class actions are the most ­efficient method of dealing with personal injury claims. The problem is not related to that type of case.

This focus is all about transferring wealth between different groups of corporate investors and shareholders, many of whom might be institutions. Along the way, entrepreneurial lawyers and highly efficient litigation funders are lining up to clip their ticket.

The environment is so conducive to securities class actions that it is dragging in capital from all over the world. The profits are so good some corporate law firms are considering swapping sides.

Foreign litigation funders are keen to invest, safe in the knowledge they will never be asked if they are run by crooks, or whether they are financially sound. This is the legacy of neglect. The sooner Attorney-General George Brandis unveils his reform plans the better.