Nation of Litigants

A FLOOD OF FOREIGN INVESTMENT IN OUR LEGAL SYSTEM IS TURNING US INTO A NATION OF LITIGANTS. By Nick Cater.

Class action lawyers have been circling pandemic-struck Australia, staring down with gimlet eyes in search of grievances to inflame. In quieter times they spend their days scanning the transcripts of royal commissions or watching the ABC’s Four Corners.

In 2017, Four Corners reported allegations that firefighting foam containing poly-fluoroalkyl substances had spread toxic pollution to land close to defence force bases. Scary as it sounds, it turns out that most of us have some PFAS in our system and there is no firm evidence they cause disease.

Yet nearby residents and landowners had reason to be alarmed. Four Corners was not the first media outlet to spread fears that PFAS in large quantities might cause cancer, heart disease and put pregnant women and breastfed babies at risk.

The Department of Defence also had reason to be concerned. In the litigious times in which we live, everything is presumed risky until it’s proven safe.

The first three class actions were settled out of court in March. The department agreed to pay $212.5m to class action members near the Williamtown, Katherine and Oakey bases. It amounted to $100,000 per person.

There was also the matter of costs. The services of Shine Lawyers and Dentons, who ran the class actions, do not come cheaply. There were also the fees owed to Omni-Bridgeway, Australia’s biggest ­litigation funder, which was demanding a commission of 30 per cent.

When costs were agreed in court earlier this month, Omni-Bridgeway’s cut was $76.9m, of which $47.7m was profit.

With returns like these, it is little wonder that foreign investment is streaming into Australia, anxious for a slice of the returns.

The purpose of civil law is to deal with citizens whose rights have been infringed. Any remittances that lawyers and funders may make along the way should be incidental.

In the field of class actions, however, the lure of fat profits is driving a spiralling number of class actions in which compensation for the plaintiffs is little more than a by-product.

Our justice system has hurtled along the American path and then some. A study released this week by the Menzies Research Centre found that return on investment last year for Australia’s three biggest litigation funders was between 139 per cent and 165 per cent — 17 times more than investors in ASX 200 stocks and more than 10 times the average global hedge fund.

Not surprisingly, the number of class actions and the size of the claims has risen sharply. In November 2009, it was estimated that there were $2.6bn worth of active class action claims against Australian businesses. By 2019, that figure had quadrupled to more than $10bn.

Meanwhile. the lawyers and funders are helping themselves to ever larger pieces of the cake. In 2016, class action members would receive $6 in every $10 awarded, on average. By last year it had fallen to just $4, with legal and funding fees absorbing the rest.

It is little wonder that litigation funders and law firms are tripping over one another to get a slice of this. No fewer than five teams were bidding to take on AMP after the adverse findings by the financial services royal commission. Maurice Blackburn eventually won the right to seek damages for alleged breaches of corporate regulation. That is not a little ironic, since ­litigation funders are exempt from investment regulations thanks to a decision by Chris Bowen as treasurer in 2013.

Treasurer Josh Frydenberg has now announced that loophole will be closed, putting litigation funders under the supervision of ASIC. It remains to be seen if ASIC is up to the job.

The 1992 introduction of provisions allowing plaintiffs to litigate collectively was well intentioned. It was designed to make justice more affordable by sharing risk and costs. That noble aim has been corrupted by the profit motive.

Lawyers’ duties, long established, are to their clients and to the courts. A litigation funder, however, is under no such obligation. As third parties to legal proceedings, their interest is purely commercial. Yet their power to turn off the funding tap allows them to exercise near-total control over how proceedings are run. They pay the fees for plaintiff ­lawyers, they decide when and how to settle and they can pull their funding at any time.

The potential for a divergence of interest between the class members and funder is considerable. It is particularly troubling that the interests of class members are controlled by strangers to legal proceedings whose sole interest is their return on investment. It is a situation that is ripe for abuse.

Justice apart, there is a strong economic imperative to prioritise the reform of this area of civil law. The escalating cost of proceedings is significantly adding to the cost of doing business at a time when the economy is entering recession. Much of the burden of these costs is ultimately carried by ordinary Australians through the loss of jobs, wages, reduced retirement savings or as taxpayers.

In the case of PFAS, the picnic has barely just begun. As The Sydney Morning Herald reported with naive glee in March, the three cases settled so far are just the tip of the iceberg. At least 90 sites across the country are said to be contaminated with this stuff and class action lawyers are investigating the possibility of legal action at a further 24 military bases.

There is nothing fair about the system as it stands. Its impact is steeply regressive, rewarding some of the richest professionals in the country at the expense of those who can least afford it. Litigation that delivers private profits for a few at the expense of the many is an injustice that should not be allowed to stand.