Work health and safety class action risk for directors: An emerging space

Setting the scene

In the last decade, class actions have become a much more pronounced liability risk for companies and individual directors across multiple sectors and substantive areas of the law, from shareholder actions to mass tort claims, consumer actions and claims against the State (e.g. the recent Murray Darling Basin water management claim and the CBD-Randwick light rail owner compensation action).

The expansion of class actions has been fuelled largely by the aggressive enforcement appetite of litigation funders (both Australian and international) and plaintiff class action law firms.

While shareholder class actions have been the primary source of growth in more recent times (a trend likely to continue with shareholder actions targeting alleged corporate culture and governance failings exposed during the Banking Royal Commission), funders and plaintiff law firms continue to actively explore new substantive legal areas in which to pursue fresh actions – to tap into the ‘rivers of gold’, so to speak.

Climate-related litigation (asserting a failure to consider, disclose and manage material climate risks) is widely expected to be the ‘next big thing’ in the class actions space in the immediate future. However, class actions against companies and directors based on alleged contravention of WHS laws may also be a class actions growth area in future years.

The WHS laws which could be used as the basis for alleged contraventions include:

• general WHS laws operating in each Australian jurisdiction. In model WHS jurisdictions (the Commonwealth and all states and territories except Victoria and WA), the uniform Work Health and Safety legislation places a primary duty of care on employing entities, as well as a positive duty on directors and officers, to conduct proper due diligence – i.e. taking all reasonable steps to ensure the employing company complies with its primary duty of care; and
• specific negligence-based industrial manslaughter laws providing for corporate and individual officer criminal liability (currently operating in the ACT¹  and QLD², and to become effective in Victoria³  and the NT⁴  in 2020, with proposed industrial manslaughter laws also introduced to Parliament in WA in late November 2019⁵, along with proposed gross negligence-based liability in NSW).⁶

Class actions growth may also legitimately be expected in relation to product liability, whether under the Australian Consumer Law, corresponding state and territory fair trading laws or other regimes such as safe building products legislation. The latter has been the subject of heightened scrutiny following the London Grenfell Tower fire tragedy, resulting in stricter regulations such as those introduced in NSW under the Building Products (Safety) Bill 2017. There are in fact two current Federal Court class actions on foot against the manufacturers of ‘Alucobond’ and ‘Vitrabond’ core cladding products, with property owners seeking compensation for the cost of replacing alleged defective and dangerous cladding. Further building-focused class actions may result from the Mascot Towers evacuation debacle and planned new NSW Government building regulations.

However, product liability cases, arising as an incident of company/director-consumer relations, fall outside the scope of the current analysis of class actions in the WHS space, which is an aspect of company/director-employee relations.

In the WHS context, the potential expansion of class actions can be viewed through what can usefully be divided into thematic, case theory and structural comparative analytical lenses.

Thematic lens

Thematically, there has been an increased focus on corporate and director conduct and accountability following the Banking Royal Commission, with ASIC now driving a more aggressive ‘why not litigate?’ enforcement approach under the direction of its dedicated Office of Enforcement.

In addition to the multitude of new regulator-initiated enforcement proceedings from ASIC throughout 2019 in response to Banking Royal Commission referrals and case studies,⁷  regulator proceedings are increasingly used by litigation funders as the basis to agitate for parallel shareholder or consumer class actions seeking compensation for alleged corporate contraventions (typically using continuous disclosure breaches as the underlying case theory). Current examples include the alleged shareholder and borrower class actions against each of the four big banks in relation to excessive fees (ANZ, AMP and CBA) and responsible lending breaches (Westpac).

The industry and regulator scrutiny of corporate and director liability, and the ongoing focus on the corporate ‘culture’, governance and compliance buzzwords, provides something of a critical mass that may spill over into other substantive legal areas which rely on similar concepts of due diligence, reasonable steps and cultural compliance.

Case theory lens

In terms of the core case theory, class actions in the WHS space could readily use mass tort claims as the theoretical underpinning given the similar need to establish a duty of care, a failure to meet that standard of care and quantifiable injury to specified claimants.

In the 25 year period between 1992 and 2017, mass tort claims (concentrating on negligence liability) represented 13% of the total class actions filed in Australia,⁸  so there is already a sound legal conceptual and analytical basis recognised by Australian courts as part of the existing class actions landscape which could seamlessly be carried over to WHS class actions.

Structurally, this framework will appeal to both local and international litigation funders, who continue to aggressively chase new funding opportunities in Australia (supported by plaintiff class action firms) as one of the most attractive jurisdictions for class action litigation anywhere in the world (widely viewed as second only to the United States). Notably, in the financial year ending 30 June 2019, 54 new class actions were filed in Australia, with litigation funders sponsoring more than 72% of those actions.

The reason for the appeal is a combination of:

• funder-favourable court decisions. Despite the High Court’s ruling in December 2019⁹  that courts lack the power to make common fund orders enabling litigation funders to recover a proportion of their fees out of a judgment or settlement from all claimants, without having to enter into a standalone costs agreement with each specific claimant, funders may still continue actions with the same vigour of recent years, simply in a different form (by closed actions, and also engaging in book-building to seek to have as many claimants as possible sign up to individual costs agreements);
• the flexible procedural rules in multiple jurisdictions throughout Australia, with class actions now permitted in the Federal Court, Victoria, NSW and QLD and a class actions regime due to commence in WA in early 2020; and
• the structural incentive for plaintiff law firms to seek new revenue sources in emerging areas following the regulation-driven downturn in personal injury litigation.

Increasingly, class actions are being viewed in a commercial, commoditised manner by funders and plaintiff law firms keen to make a profit. The potential return, for relatively low risk, has proven to be irresistible.

There may be increased regulation of funders when the Government issues its response (expected in early 2020) to the Australian Law Reform Commission’s December 2018 final litigation funding report,¹⁰   but whether this modifies the risk-reward balance enough to significantly reduce further funder-sponsored class actions in Australia remains to be seen.

While class actions rarely proceed to final judgment (the recent Myer shareholder class action being an exception to the norm),¹¹  a potentially significant early settlement sum can still be secured and this is a key driver for funders and plaintiff law firms. In the financial year ending 30 June 2019, at least $500 million in settlement payouts were approved by the courts. Paying ‘go away money’ is often a good proposition for directors to avoid hefty court fees in actively managed class action case lists, a decline in share price with an unresolved legal action over a protracted period and the ongoing diversion of directors’ time from everyday business matters and value-creating activity.

The takeaway

WHS class actions, like climate-related litigation, represent a fruitful area of opportunity for funders and plaintiff law firms on the lookout for new revenue sources in emerging industries and markets in Australia and internationally.

If it materialises, this will pose a serious new liability risk for companies and their directors which could result in compensation payouts in the tens of millions of dollars, not to mention substantial costs in legal fees. This is in addition to the existing risk arising from breach of industrial manslaughter laws – in that context, if officers are successfully prosecuted for an industrial manslaughter offence in the jurisdictions where those laws operate, they will face potential lengthy jail terms and multi-million dollar fines. An officer’s conviction for an industrial manslaughter offence will also provide the basis for automatic disqualification from managing all corporations under section 206B of the Corporations Act 2001 (Cth). Conviction of an officer and/or a company is also likely to have long-term reputational implications for the company, which may be rendered unable to win future public and private tenders and other engagements. Adding to the personal liability risk for directors is the significant tightening of the D&O insurance market in the current landscape, with premiums extending coverage to class actions liability soaring in response to the growth in class actions and settlement payouts. There are concerns that further premium increases, and possible blanket exclusions on certain types of class action compensation payouts in standard policies, will leave directors priced out of or excluded from sufficient cover altogether.