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COVID-19 economic crisis, class actions and funded litigation

10 November 2020

#Dispute Resolution & Litigation, #COVID-19

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COVID-19 economic crisis, class actions and funded litigation

It is now trite to say that the COVID-19 pandemic has resulted in both a medical and economic crisis for the world. We continue to see global infection, and in some countries death, rates soar, while economic activity all over the world has plummeted. Most businesses are contemplating what may be the largest economic downturn in history. But there are some exceptions. For example, there has been reported growth in the grocery, alcohol and homeware sectors, as well as in industrial cleaning and home delivery services, among others. 

In the professional services sector, there was an initial increase in requests for advice from businesses which were forced to shut down or significantly reduce levels of service as a result of COVID-19. For example, law firms initially saw a flurry of requests in the workplace relations space – what are our obligations and rights with respect to our staff when our business is shut down?  There were also requests for advice regarding frustrated contracts and force majeure clauses. Despite this activity, we also saw some professional services firms reducing staff numbers or at least hours worked and/or cutting their professional and support staff’s take-home pay. And the lifeblood for many professional service firms, transactional and consulting work, also slowed significantly.

Surprisingly to some, insolvency practitioners are reporting very low levels of activity. The general wisdom appears to be that this is as a result of steps taken by the government to prop up the economy with programs such as JobKeeper and the temporary amendments to the insolvency regime. It will be interesting to see what happens to the so-called ‘zombie’ companies when those programs are wound back. Will there be a significant wave of corporate insolvencies? Certainly, the history of such crises suggests that many businesses will fail, particularly those which had high levels of debt or were struggling financially before the onslaught of COVID-19 and which have not restructured in the meantime. And, this may mean an uptick in work for some segments of the professional services market. For example, insolvency practitioners are predicting a potentially overwhelming increase in work.

But what about class actions and funded litigation? It is now 12 years since the global financial crisis (GFC), which presented a boon to funded litigation and class actions with the last of those matters only coming to an end in recent years. Two years before the GFC, the High Court of Australia cleared the way for litigation funding in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 (Fostif). In that case, the Court held that litigation funding was not an abuse of process or contrary to public policy.

Since the decision in Fostif and the GFC, the number of class actions and the amount of funded litigation in Australian courts has expanded significantly and litigation funding has become an established part, not only of the Australian legal system, but also the Australian economy. By 2017, there were 25 litigation funders active in the Australian market (Victorian Law Reform Commission, Access to Justice – Litigation Funding and Group Proceedings, Consultation Paper, July 2017m 2.71-2.72).

But will we see an increase in class actions and funded litigation following the COVID-19 financial crisis similar to that following the GFC? If there is an onslaught of corporate failures, including failed managed investment schemes, then such litigation seems likely to ensue. However, in the last year, Parliament and the courts have taken steps which might slow such litigious activity. For example, since 22 August 2020, there is a general obligation for operators of litigation funding schemes to hold an Australian Financial Services Licence and each litigation funding scheme must be registered. This exposes litigation funders to scrutiny by the Australian Securities and Investments Commission and requires them to act honestly, efficiently and fairly, maintain appropriate levels of resources and be competent to provide financial services under licence as well as various other obligations.

In addition, a question has recently arisen as to whether the courts have power to make common fund orders. Last week in Davaira Pty Limited v 7-Eleven Stores Pty Ltd & Ors [2020] FCAFC 183, while the Full Court of the Federal Court seemed to accept that there is power to make such an order if “a concrete proposal” is put before it, the Full Court declined to answer a question as to whether a common fund order can be made on settlement or judgment in a class action. The Court stated that the issue should be dealt with on fact, not assumptions.

With an amicus curiae being appointed to argue against a common fund application by the funder of a class action against two Insurance Australia group subsidiaries (Jones Asirifi-Otchere v Swann Insurance (Just) Pty Ltd & Anor) there may be a judicial answer to the question as to whether the courts have power to make common fund orders. There is also a call for a legislative solution to this question. Either way, particularly if it is held that the courts do not have the relevant power, there is pressure on the book building process and settling class actions is arguably more difficult. Coupled with the increased regulation of litigation funders referred to above, questions around common fund orders, potentially make class action litigation economically less attractive to litigation funders.

Only time will tell whether these issues will function as a break on class actions and funded litigation. However, in the meantime, corporations and their directors, officers and auditors, as well as government departments need to be aware that there is an increased risk that they may become the target of a class action as the current economic downturn unfolds. Such entities must ensure their affairs are in order and seek legal assistance early.

Author: Susan Goodman

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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