Directors cannot afford to be complacent about class actions

While claims relating to the global financial crisis and market shocks seem all but over, Australian boards have been warned to brace themselves for a new wave of class actions.

A recently released report on class actions in 2013-14 in Australia by law firm King & Wood Mallesons (KWM) shows that class action filings are on the rise, with 27 new class actions filed since January 2013.

More than half of these new actions related to financial products and services. Seven shareholder class actions alleged breaches of the continuous disclosure obligations and/or misleading or deceptive conduct. A further seven concerned misleading or deceptive conduct or negligence in relation to financial products or investments.

Of the remaining 13 actions, five were linked to catastrophic events, such as equine influenza, bushfires and the explosion of a jet engine during a Qantas flight from Singapore to Australia. Five had a public interest element – for example, representing the interests of people with disabilities. Three were consumer-related actions.

Significant judgments in the 18 months to June 2014 concerning matters of both substance and procedure include:

  • ƒ The dismissal of the appeal by Standard & Poor’s, confirming that a ratings agency can owe a duty of care directly to investors.
  • ƒ The Cash Converters claim, which produced a decision that does away with the requirement that all group members have claims against all respondents and could (if upheld on appeal) vastly broaden the cases that may be pursued as class actions.
  • ƒ In the Willmott Forests class action, the court has shown for the first time that it is willing to consider ordering group members to provide security for costs where the claim is not supported by a third party litigation funder.

“We expect 2014-15 to be equally lively, with the very first weeks already including the announcement of Australia’s largest class action settlement ($500 million for Black Saturday bushfire victims) and the filing of one of Australia’s largest class action proceedings, in relation to the 2011 Queensland floods,” observes report co-author and KWM partner, Moira Saville.

The report warns that directors and other corporate officers can no longer afford to ignore, or be complacent about, the risk of a class action suit.

“It is no longer about being ‘unlucky’. For some companies, lightning has now struck twice, or even three times, as they are faced with more than one class action in their corporate lifetime. Companies and directors must be vigilant and be aware that a potential suit is always on the radar,” says Saville.

The report’s co-author and KWM partner Peta Stevenson partially attributes the rise in class actions to new and diverse players in the market.

“Entrepreneurial companies are seeing the potential for large windfalls in litigation funding and taking advantage of low barriers to entry,” she says.

“Law firms with a strong reputation in commercial litigation are beginning to push into the plaintiff space in recognition of the growing profit potential in class action suits.”

The report also notes that the Australian litigation funding “model” is also becoming an export product, with established players looking overseas for investment opportunities.

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