How do class actions work?

Class actions are a part of the legal system that enable disputes and claims involving multiple victims of mass wrongs to access justice. Through them, regardless of the personal resources of the many participants, the actions of large, powerful organisations can be properly challenged.

Take the example of a bank overcharging you - and thousands of others - for late credit card payments over months. It isn't worth taking legal action alone to seek compensation, because it would cost you tens of thousands of dollars. But if all those overcharged join in a single action, legal costs are distributed over a large number of claimants so that you pay costs indirectly through the law firm, which will take a cut of any compensation obtained.

Apart from bank overcharging, class actions have been fought and won to obtain compensation for bushfire trauma and damage, excessive loan interest, faulty hip implants, false and deceptive information given to shareholders, and reckless and inappropriate financial advice, to mention a few.

How it works

These actions are generally run on a "no win, no fee" basis. However, that does not mean it is free. Nothing in this world is, let alone anything where lawyers are involved.

Generally there is an announcement in the media that a class action is being mounted over a particular issue. Claimants can register from that point onwards until the action is filed in court. Generally, there are also opportunities for late entrants to sign up after the action has been filed but before a resolution has been reached.

Actions are either run as "closed" or "open". Closed means you need to actively register your interest by signing up. Open means anyone who has ever been affected by the wrongdoing in question is automatically included and covered simply by the class action law firm filing the action. There is no cost involved in registering for an action. You simply sign up, provide the relevant documentation when required and basically await the outcome. The lawyers go in to bat for you.

What if it fails?

The legal costs of mounting the action, conducting the hearing and the costs awarded to the other party are met by the class action law firm. It usually costs you nothing. This is the case with large, established firms such as Maurice Blackburn. But some smaller firms have asked people who join their action to contribute money and then, if the action proceeds to court, they may ask for more towards the fees.

So generally you only ever pay a proportion of legal costs if you win, which is deducted from the compensation. The plaintiff lawyers are usually covered by insurance or are backed by litigation funders to assist in the payment of costs incurred in an unsuccessful action.

What it costs

Unlike the situation in the US, Canada and the UK, where contingency fees are permitted (that is, charging a percentage of the compensation from the outset), in Australia lawyers are only able to charge hourly rates for the work undertaken.

A firm provides an estimate of the cost of running an action, although those estimates are subject to variables such as how the defendant approaches resolution or defends the case, whether the matter goes to a hearing, the duration of that hearing and whether there is a later appeal.

It is not uncommon for 30% to 40% of a compensation package obtained through the class action to be diverted to the lawyers who ran the case and the remainder is distributed to the class action's members.

Is it worth it?

Look at it this way: if you hadn't joined that winning class action, you would have got nothing. Claimants don't get 100% but someone has to pay the lawyers for their efforts and some compensation is a better deal than trying to take on the case yourself - where you will be exposed not only to your own huge legal costs but the defendant's costs too if you lose.

Pros

Nothing ventured, nothing gained. Even though the lawyers might get a big slice of the compensation, you could end up with something. If the action fails, generally you are no worse off.

Cons

These actions are complex, expensive and risky so it is important to go with a large firm with a good track record backed by significant resources and the best lawyers.

My call

I would never tackle a large institution on my own. The risk of losing and the legal costs incurred on the way through are too huge. This is a stress-free route with someone else gathering enough claimants to make a major court action worthwhile.

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