Overview

For the first time an Australian Court has made a ‘common fund’ order allowing litigation funders to extract their commission from all class members in an open class, even those who have not entered into a funding agreement with a litigation funder. However, the orders include certain safeguards which are aimed at protecting class members’ interests and which may well dampen the incentives for litigation funders to seek such orders.

This has been a highly anticipated decision (going straight to the Full Federal Court) and in what appears to be a judgment heavily influenced by policy considerations of Murphy J (formerly of Maurice Blackburn), it may pave the way for more funders to bring more “open” class actions knowing that they will get a commission from all class members, not just those who have signed up with them. It may increase the size of actions and settlements for Australian companies sued and so the profits for funders. On the other hand, the orders proposed by the Court in this instance allow the Court to set the commission rate at the time of settlement which may mean the funder’s commission will be reduced below the rate it has already contracted with for funded class members. This brings a level of uncertainty for funders.

What this decision intended to remedy was the increasing number of competing “closed” class actions brought over the same wrongdoing but by different classes who signed up with different funders or different lawyers. Instead, what we may see is now a race to file “open” class actions and so still competing “open” class actions but not competing closed classes.

It is not easy to see this decision being appealed (why would QBE appeal) but it is certainly a game changer for class actions, litigation funders and corporate Australia.

The Decision

The decision in Money Max Int Pty Ltd v. QBE Insurance Group Limited [2016] FCAFC 148 is a unanimous decision of the Full Federal Court comprised of Murphy, Gleeson and Beach JJ. The judgment is in respect of an “open” class action comprising both persons who have entered into a funding agreement with a litigation funder, International Litigation Partners Pte Limited (Funder) and those who have not. The ratio of funded to unfunded class members was said to be somewhere in the range of 25:75 and 47:53 – that is unfunded class members formed a majority or at least an equal share of the total class.

The Applicant sought at an early stage of this case an order under s33ZF of the Federal Court of Australia Act applying the terms of the litigation funding agreement to all class members, including those who had not signed a litigation funding agreement (Common Fund Orders). The Applicant did not seek to have the totality of the litigation funding agreement imposed on all class members. Instead it sought to have a set of funding terms, modelled on the terms of the litigation funding agreement, imposed on all class members. The funding terms provided for a slightly reduced funding commission of 30% to be applied to all class members.

The Defendant, QBE, opposed the order. It argued that the Common Fund Order would lead to “a substantial and unjustified increase in the aggregate funding commission” payable to the funder(at [5]). It also argued that the Court was not empowered to approve or impose commercial arrangements on some class members at the request of others (at [32]).

The Full Federal Court held that a Common Fund Order was within their power to make and was appropriate in the circumstances (at [7]). However, the Full Court also included some important safeguards and modifications to the orders sought by the Applicant.

Perhaps most significantly, the Full Court was not prepared to apply a blanket funding commission of 30% to all class members at this stage saying it was more appropriate for the Court to consider the commission rate issue later “when more probative and more complete information will be available to the Court, probably at the stage of settlement approval or the distribution of damages”. Those considerations included, inter alia, the commission which had been agreed to by sophisticated funded class members (which showed acceptance of the rate by ‘astute’ class members), the information provided to class members about the funding commission, a comparison of the commissions applied by funders in comparable actions, the risks assumed by the litigation funder and the timing and size of any settlement or damages award(at 80]). The Court strongly hinted that a blanket rate was likely to be lower than the existing contracted rate (in this case between 32.5% and 35%). This aspect means there is real uncertainty for the funder as to what its final commission rate may be.

The other key safeguards were as follows:

  1. The orders contained a condition that no class members could be worse off under the Common Fund Orders than he or she would have been if the orders were not made; and
  2. If a class member, once informed of the orders, does not want to be bound by them, he or she can opt out of the proceedings (opt out notices have not been issued in the proceedings).

In view of the above, the Full Court felt that the class members interests were better protected by a Common Fund Order than the alternative ‘equalisation order’ usually applied in settlements of shareholder litigation funding cases between funded and unfunded class members at the conclusion of class action proceedings (at 128])

The Full Court accepted that the Funder may be ‘discomforted’ by this result which obliged it to fund the proceedings even though its consideration was subject to Court approval at a later time and therefore uncertain. However, the Full Court felt that as the jurisprudence around approval of litigation funding charges develops, “the courts will approve funding commission rates that avoid excessive or disproportionate charges to class members but which recognise the important role of litigation funding in providing access to justice…” (at [82]).

The Court seemed heavily influenced by policy considerations and appeared to feel that common fund orders may enhance access to justice by encouraging “open class” actions rather than “closed class” actions. This in turn may reduce the prospect of overlapping or competing class actions and so reduce the multiplicity of proceedings and the subsequent satellite disputes, additional costs and wasted Court time that seems to be occurring more and more with closed class actions these days.

For a copy of the decision please click here.