Justice Wigney recently handed down a decision on a common fund application in the Allco Finance Group class action. The decision focused on the Court’s ability and discretion to make an order permitting a litigation funder to in effect fund the entire class of an open class representative proceeding, even where members of the group had not entered into any funding agreement with it1.

It is significant because it is one of the first Australian cases to consider the US “common fund” doctrine. Had it been successful, it would have significantly increased the potential returns for litigation funders running class actions, and widened the scope of litigation funding in Australia. In his judgment, Wigney J noted the modern-day reality of the involvement of commercial litigation funders in class action proceedings, but suggested that this should be addressed by legislative reform rather than “piecemeal utilisation by judges of general discretionary powers”.

The Application

The Application was made by the two representative parties to the Allco class action, who had entered into a funding agreement with International Litigation Funding Partners Pte Ltd (ILFP). They sought orders:

  1. Approving the amounts payable to ILFP under the funding agreement as reasonable consideration; and
  2. Declaring that the Applicants are entitled to pay these amounts out of any amounts recovered from the Respondents.

Under the funding agreement, where any amount was recovered from a settlement, judgment or order for the Applicants or other members of the class, this amount would be held on trust by the solicitors for the Applicants. An amount would then be payable to ILFP – including out of that part of the trust referable to members who had not signed up to the agreement. This was calculated to reimburse ILFP for legal costs incurred by the Applicants and paid by ILFP, and to provide a commission to ILFP calculated on the basis of a percentage (effectively between 32.5 – 35%) of any amount ultimately recovered.

The Application was made at a preliminary stage in the proceedings, following exchange of pleadings but prior to exchange of other substantive material.

The “Common Fund” doctrine

The Applicants relied on the “common fund” doctrine developed by courts in the United States. A “common fund” provides that a litigant who recovers a common fund for the benefit of persons other than himself is entitled to a reasonable fee from the fund as a whole. In the United States, the court can at the outset establish a “framework” for an eventual fee award, which is ultimately made at the conclusion of the proceedings.

The application of this “common fund” approach to litigation funding of class actions in Australia would provide litigation funders with greater financial security at the time of commencing proceedings. It would in effect allow funders to commence proceedings on behalf of a large class without the need to seek out class members until after the matter had been resolved and the award amount determined.

Court decision and reasoning

Justice Wigney dismissed the Application without making the orders sought.

Although not finally deciding the issue, he found the Court would have had the power to make orders in the terms sought, under the Court’s general power with respect to representative proceedings. This is the power to “make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding” (s 33ZF Federal Court of Australia Act 1976(Cth) (FCA Act)).

Nevertheless, Wigney J was not convinced that the orders were required in this case to ensure justice is done in the class action. In coming to this finding, his Honour particularly commented on the early stage of the proceeding, and the difficulty this created in assessing the reasonableness of the funding agreement. He also noted there was insufficient evidence to determine the size of the class, the value of the claims, and the amount ultimately payable to ILFP.

His Honour noted that at the commencement of the proceeding a number of different outcomes were possible, not all of which would involve the creation or constitution of a fund. Further, where a fund is ultimately created, the Court is likely to be able to deal at that stage with any possible unfairness or inequity arising from the fact that only the Applicants entered into funding agreements.

Wigney J found that it was the commercial interests of ILFP that really lay at the heart of the Application, and that the orders would not be in the best interests of the group members as a whole (other than the Applicants) at that stage of the proceeding. He did not rule out the Court making orders to the same effect at some later stage.

Legislative Reform

Wigney J touched upon the need for legislative reform of the FCA Act, to address the involvement of commercial litigation funders in many modern-day class actions. His Honour noted that “in some respects, the Applicants’ submissions made out a fairly compelling case for reform”. Further, that there “is something to be said for the proposition that some form of common fund approach, similar to the common fund doctrine in the United States, should be adopted in Australia to deal with the reality of commercial litigation funding in representative proceedings.”

Although showing some support for the “common fund” approach, his Honour did also note that in the event such reform was adopted, changes may be required to the FCA Act to more closely align with the position in the United States. In the US, following the establishment of an initial framework there is a greater ability of the court to scrutinise the actions of and costs incurred by the litigant funding the proceeding, and to amend the final amount payable at the time of determination. 

Implications

  1. Although a successful outcome in this Application would doubtless have increased the profitability of funded class action litigation, litigation funding remains a profitable enterprise in Australia and there are few signs of any change to its importance in the class action litigation landscape.
  2. It is unlikely that the Court will approve early plans to establish a “common fund” where details such as the size of the group, the value of the claims, or the amount to be paid to the litigation funder are not clear.
  3. Litigation funders who nevertheless proceed to run class action proceedings with only a small number of group members signed up will be taking a risk that the Court may not order the remaining group members to contribute to their recovery.
  4. The Court’s comments suggest it will scrutinise funding agreements and the costs incurred by litigation funders, and will not permit unreasonable costs to be charged to group members – particularly where those group members have not signed up to the funding agreement.
  5. There is the potential for a review of the current regime for representative proceedings in the Federal Court. While it is likely there would be vigorous debate over the precise details of any such reform, if the reform addressed the issues in this case it would ultimately provide greater clarity around the involvement of litigation funders in class actions in Australia.