Lessons from Down Under: A warning of what’s to come?

26 Aug 2020

DRD Analyst, Ross Ewing investigates the debate in Australia on class actions and litigation funding and considers how the same argument could soon be happening in the UK.

Australia: a booming market for class actions

While working from home you may have spotted law firm PGMBM’s new advert during the commercial breaks on Sky News. They are promoting their new group action case in the UK against Mercedes Benz for misleading customers about the nitrogen oxide emissions from their cars. Their slick new campaign website tells prospective claimants that they could be entitled to over £10,000 if they were sold a qualifying vehicle.

The PGMBM action (one of many such claims being faced by Mercedes) is just another example of the increasing number of group action cases we are seeing in the UK, mainly driven by the Consumer Rights Act 2015 and several favourable court judgements in recent years. This trend looks set to continue, at least for the time being. The procedure in Scotland allowing for ‘opt in’ and then ‘opt out’ group actions has just come into force and the European Union has agreed a new Directive which could pave the way for unified group action provisions across the bloc too.

But are there potential clouds on the horizon for the flourishing group action industry? Australia, a booming market for class actions, is in the middle of a major political and public debate over the societal benefits of class actions and the funding often used for them. It may not be long before a similar debate is had in the UK.

Supporters of class actions in Australia, and around the world, make the case that they are good for the ‘little guy’. They allow groups of individuals, often with limited means, to take on corporate giants when loss or injury has been inflicted upon them. In Australia, campaigners for the newly formed Keep Corporations Honest group say that $3 billion has been transferred from large organisations to “ordinary Australians” who have been “ripped off or hurt” in class action cases, which demonstrates their social good.

Others oppose class actions, like Michaela Healey, who leads The Magokoro Practice, which evaluates how boards function and directors operate. She wrote in the Australian Financial Review saying she believes that they are a bad thing for business and society, and she makes the case for more regulation on the practice.

Healey suggests that the stratospheric rise in class actions since their inception in 1992 has not “kept corporations honest”, rather she believes they have created risk-averse directors and stagnant companies that are of little benefit to their shareholders and the wider economy.

However, surely it is good for businesses and the communities in which they operate if they are cautious in following the law and ensuring best practice under the warning of legal action if they get it wrong?

The funding mechanism often used for these types of actions is also under the spotlight Down Under. Litigation funding allows companies or individuals the access to funds to bring forward a case with the agreement that a percentage, or fixed fee, is paid in the event of a successful claim. This model has become very popular in recent years and it has acted as an enabler for large-scale actions by groups of individuals against big businesses, which many would argue can only be a good thing.

The Litigation Funding Model

Corporates, as well as individuals, have warmed to the litigation funding model and that only looks set to continue as DLA Piper has just become the biggest City law firm to establish a third-party funding offering. Litigation funding can be used to pursue legal claims that a business may have written off as too expensive and risky in the past. The financing provided by the funder can also be treated as income on the balance sheet rather than costs, allowing a business to free up more of its capital for other needs. Litigation therefore effectively becomes an asset, not a drag on resources and time.

Critics are quick to claim that funders are driven solely by generating financial returns and that they pry on victims by taking very significant proportions of any compensation.  However, this is a competitive market, where multiple funders compete for valid claims, so it seems unlikely that excessive fees would be tolerated. More broadly, if compensation is won, this would indicate a wrong-doing had taken place. Without funding, it’s hard to see how the defendant would otherwise have been brought to court.

As the Australian inquiry and resulting PR battle shows, this is an interesting debate that pits the need for accountability and redress for victims against a claims culture that some decry as driven by firms purely in pursuit of profit for themselves.

There is every possibility that the UK could be having the same debate as Australia about the benefits of group actions in this country in the not too distant future. Now may be the time for funders and solicitors’ firms to make the case for the benefits of group actions and litigation funding before their opponents get ahead of them.