Today’s decision of Justice Wigney in Blairgowrie Trading Ltd v Allco Finance Group Ltd FCA 811 represents a setback in attempts to broaden the scope of litigation funding in Australia, and limits funder entitlements to those contractually agreed with individual group members.
The application, brought by the applicants in the Allco class action, sought upfront approval by the Court of percentage amounts to be deducted from every group member’s share of any settlement or judgment sum, with such amounts to be paid to International Litigation Funding Partners Pte Ltd (ILFP), the funder of the action. These “common fund” orders would, if granted, have applied to all group members regardless of whether they had signed a funding agreement with ILFP. Under the agreement, between 22.5% and 35% of any settlement or judgment sum (after legal costs) would be paid to the funder.
In dismissing the application, Justice Wigney determined that the proposed orders were neither appropriate nor necessary to ensure that justice was done at this point of the proceeding, and would otherwise be premature and inconsistent with the statutory class action scheme. His Honour did not find that the proposed orders would be beneficial to or in the best interests of the group members as a whole, and indicated that the only clear beneficiaries would be the applicants and ILFP.
Background to litigation funding and the application
Litigation funding is commonly used in class action proceedings in Australia, with funders usually agreeing to indemnify any representative applicant against adverse costs orders and to pay ongoing legal fees and disbursements (which can amount to millions), in return for a later premium comprised of a reimbursement of expenses plus a percentage of any settlement or judgment sum received.
Due to the potential high costs and risks of the litigation involved, funders will usually seek to sign up a minimum number of group members (by claim amount) to ensure that the arrangements are commercially viable prior to funding. Proceedings are usually then commenced on a “closed class” basis, in which group members are only those who have signed funding agreements.
Issues can arise, however, where the class is opened prior to settlement or judgment, or an action is commenced on an open basis (that is, all group members affected by the impugned conduct), but is funded by only a portion of those group members who have signed funding agreements.
The Courts have been willing to make orders designed to deal with the potential inequity between group members to ensure that the costs of the litigation are fairly borne, and that those who have not entered into funding agreements do not receive a disproportionate payout. However, such orders have only been made at the time of settlement approval, and have been made on different bases:
- In Pathway Investments Pty Ltd v National Australia Bank (No 3)  VSC 625, Pagone J made orders by consent to the effect that group members who had not entered into funding arrangements had an amount deducted from their payout and paid to the litigation funder equivalent to the amount they would have paid, had they done so. The terms of the litigation funding agreements were effectively imposed on the non-funding members, even though they did not enter into any such agreement – an expost facto common fund approach.
- In Modtech Engineering Pty Limited v GPT Management Holdings Limited  FCA 626, Gordon J refused to approve that part of the settlement scheme that would have paid the 25-30% commission not just from the settlement amounts attributable to the 92% of group members who had entered funding agreements with CLF, but also from amounts attributable to the 8% who had not. As a result, the proposed scheme would have seen the funder receiving an amount greater than the sum to which it was contractually entitled. Her Honour instead applied a ”funding equalisation” formula, which took the amount that would have been paid to the funder by non-funding group members (if they had signed funding agreements) and redistributed that amount pro-rata amongst all group members. As a result, group members as a whole were better off than under the “common fund” approach; the litigation funder on the other hand did not receive a windfall.
The difference in the Allco application was that the applicants and the funder were asking the Court to make a decision about the approach at an early stage of proceedings, before any outcome was known.
The application in Allco
The Allco class action was commenced as an “open class”. This was a deliberate choice by the original funder, as the 1400 group members who had signed up at that time did not, in the funder’s opinion, make the claim economically viable and it was facing the expiration of a limitation period. Funders usually prefer closed classes as they provide economic certainty.
The proceedings involve claims against Allco by disaffected shareholders concerning alleged disclosures and non-disclosures of information as to its financial position in 2007 and 2008. The proceedings are not well advanced, and parties are yet to file evidence. Maurice Blackburn contemplated bringing the proceedings as early as 2008, with IMF (Australia) Limited initially signing up potential group members until it determined it was not commercially viable in 2012 (at which time those funding agreements were terminated).
ILFP then stepped in as a funder, and entered into a funding agreement with the applicants and Maurice Blackburn. Importantly, the terms of this funding agreement were unusual in that it was clear that no other group members were expected to enter into terms (and were not offered terms), and provided for payment of the funder’s commission by reference to amounts received on judgment or settlement extending to claims by other group members.
The present application was brought to give effect to this term, as the proposed orders would, if granted, enable the applicants to fulfil their contractual promise to ILFP by having the court declare such payments to be approved as reasonable.
The application was heard in December last year. The applicants argued that the proposed order was within the Court’s power under its general discretionary power, and that it was warranted insofar as it: (1) was analogous to other instances where the Court had ordered costs be borne from a common fund; (2) ensured an equal and equitable outcome between all group members; (3) will be beneficial for group members (insofar as the proceedings may not continue if the order is not made); (4) is consistent with the policy behind the class action regime; (5) would protect the rights of group members (who will be protected by the Court’s supervision in any settlement and who could opt out); and (6) is consistent with orders made in similar proceedings in Australia and elsewhere.
In response, the respondents submitted that the proposed orders were unconventional, unprecedented and contrary to the class action regime. They also submitted the orders were beyond power.
Justice Wigney determined that, in order to be made, the proposed orders were required to be appropriate and necessary to ensure that justice was done. This required a consideration of the rights and interests of group members as a whole. The Court also noted that the necessity of the orders was driven, not by group member interests, but by the fact that ILFP and the applicants had entered into such arrangements.
In the circumstances Justice Wigney concluded that the order was neither appropriate nor necessary to ensure that justice was done, and that the main consideration in this respect was the lack of available information to enable the Court to determine the implications of making the proposed order, such as the number of group members, value of claims, or costs of the proceedings. His Honour held that even if the discretion to make this order did arise, it would not be appropriate to exercise that discretion at this stage of the proceedings.
In coming to this determination, however, Justice Wigney expressly left open the possibility that such orders might be made in the proceedings in the future, to ensure that the applicants alone did not bear the burden of meeting costs and expenses, or that such order could be made at some time in some other matter in the future. His Honour also highlighted that this area was one for potential legislative reform, noting that it would be preferable for any common fund regime to be put in place by parliament rather than dealt with piecemeal by the Courts.
The application was novel and, if successful, would have been a “game changer” in class action litigation, by facilitating funders to run “open class” actions without lengthy book building.
The Court did not shut the door to an application made at an appropriate time or in other circumstances, but His Honour was not persuaded that the orders sought were appropriate or necessary to ensure that justice was done for group members in circumstances where there was:
at this early stage of the proceeding, considerable uncertainty and a lack of information concerning the implications of making such an order.
His Honour commented that, while there was something to be said to a common fund approach to deal with the “reality of commercial litigation funding” in class actions, it would perhaps be preferable for that to occur as a result of legislative reform rather than piecemeal utilisation by judges of discretionary powers under the Federal Court Act 1976(Cth).