An Economic Perspective on Costs in Australian Class Actions

Abstract

The Australian class action procedure has generated much controversy about how best to ensure that its costs do not outweigh its benefits. The increasing prevalence of litigation funding has further complicated the cost–benefit analysis. This article develops an economic framework for understanding the principal sources of costs in Australian class actions. In particular, information asymmetry among the key players in a class action generates agency costs, and the self-interested behaviours of these players may give rise to negative externalities on non-parties and the civil justice system. Yet measures to reduce agency costs and negative externalities may themselves give rise to costs, which we call preventive costs. These costs form part of our analysis. Our framework explains the core characteristics of Australian class action law and practice, and offers suggestions for ensuring that the costs of the class action procedure are fair and reasonable.

Keywords: Class actions, law and economics, agency costs, moral hazard, externalities, litigation funder

JEL Classification: K41, K42