Two recent first instance decisions - Earglow Pty Ltd v Newcrest Mining Limited and Camping Warehouse Pty Ltd v Downer EDI Ltd - have clarified the courts’ role and the scope of their powers when asked to approve a settlement which involves the payment of a commission or other fee to a litigation funder.
Overview of the Courts’ powers
Section 33V of the Federal Court of Australia Act 1976 (Cth) provides that class actions cannot be settled or discontinued without the approval of the Court. The Court may only approve a settlement where it is in the interests of the group members as a whole.
Earlier cases have established that:
- under section 33V, the Court may refuse to approve a settlement on the basis that any litigation funder’s commission is excessive; and
- instead of refusing approval, the Court may limit the commission payable pursuant to the Court’s power under section 33ZF(1) to “make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding”.
Earglow Pty Ltd v Newcrest Mining Limited (28 November 2016)
In Newcrest, the Federal Court was asked to approve a settlement of $36 million (including costs), with an aggregate amount of $6.79 million payable to the litigation funder. These proceedings were on an “open class” basis, although a “large number” of the members entered into funding agreements.
A question arose as to whether, if the Court considered the funder’s commission to be excessive, it could approve the settlement but reduce the amount of the commission. Justice Murphy noted that the decision as to whether a commission was excessive involved a consideration of whether the commission was fair and reasonable. This test does not require the commission to be “so disproportionate” to the funder’s risk and expense before the Court would intervene. The “fair and reasonable” test concerns the settlement as a whole and calls for a broader consideration. Proportionality of the commission is just one factor.
It was observed that since 2003 only one Australian shareholder class action was resolved without the involvement of a litigation funder, and as a result, “litigation funding charges have become a standard cost for class members in funded class actions”.
Justice Murphy referred to the Court’s powers, specifically sections 33V and 33ZF, and noted that the Court is “not limited to a binary choice between approving the proposed settlement or refusing approval”. His Honour confirmed that if a commission is found to be excessive or exorbitant, the Court has the power to approve the settlement but reduce the commission, and that doing so may be quicker, cheaper and more efficient (and just and appropriate in the interests of the class members) than outright rejection of the proposed settlement. As to whether funders would be bound by any such order (given they are not parties to the proceedings), Justice Murphy foreshadowed that if, in the future, funders attempt to deny that they are bound, the Court could require that funders undertake to be so bound at an earlier stage and before proceedings are permitted to continue, on the basis that the Court’s “protective role” should not be constrained.
Justice Murphy ultimately approved the settlement and concluded that the settlement was fair and reasonable, having regard to a number of factors, including:
- the way in which the commission was calculated (as a payment of between 26% and 30%, depending on each member’s shareholding);
- the rate being at the “low end of the range” and objectively reasonable;
- the aggregate amount itself;
- the fact that the provision of funding allowed the proceedings to be commenced; and
- the substantial expenditure and risk taken on by the funder.
Camping Warehouse Pty Ltd v Downer EDI Ltd (21 December 2016)
In Downer EDI, the Victorian Supreme Court was presented with a settlement of $8.25 million (including costs) for approval, including a “litigation funding premium” of $825,000. As the plaintiff was the only class member that was party to the funding agreement, the proposed premium was beyond the amount contracted for by the funder, and the Court had to consider whether it was appropriate to adopt a “common fund” approach to the payment of the premium, by which all group members would pay the same proportion of their settlement sum to the funder.
As we wrote in October 2016, Courts have only recently approved the conduct of a class action on a “common fund” basis, by which a litigation funder obtains certainty as to its ability to use an open class and obtain fees from class members without the need to enter into funding agreements, although to date Courts have put off the determination of the appropriate commission until a later point in the proceedings. The Downer EDI case was different, in that approval for a common fund approach to the payment of the funder’s fees was only sought at settlement.
Justice Digby concluded that in the circumstances of the matter it was fair and reasonable that group members who benefited from the litigation funder’s efforts and assumption of risk should bear a concomitant burden representing a reduction in the “common fund” so as to provide for appropriate payments to the litigation funder. His Honour took into account the fact that the overwhelming majority of group members would have been unlikely to recover any damages without the funder, due to the cost involved and the fact that the average payout per group member was $633.29. His Honour concluded for this reason that the premium was fair and reasonable, as well as having regard to:
- the “modest” amount of the premium, which would have a “relatively small impact” on the settlement payments to each group member. This amount was at the “low end” and represented only 10% of the settlement amount and one-quarter of the funder’s entitlement under the funding agreement;
- the “material benefits” that were generated for the group members as a result of the funder’s involvement and the fact that the plaintiff could not have met the costs of the proceedings without such assistance;
- the funder’s liability for significant taxed costs if the plaintiff was unsuccessful (estimated to be $3 to $4 million), which was a “real and substantial risk”;
- the funder’s “substantial injection” of funds as security for costs (by way of two payments totalling $825,000), which prevented the proceedings from being stayed and gave the class members access to justice;
- the settlement being reached soon after the second payment in relation to security for costs was made, which provided “an adequate basis upon which to also infer that the litigation funder’s willingness and capacity to pay the required further substantial security was an important factor leading to the settlement of the case”;
- although only the plaintiff was a party to the funding agreement, the plaintiff had been unable to obtain the class members’ contact details; and
- the application of the funding equalisation mechanism would not be appropriate recompense given the funder’s critical importance to the proceedings and the risks it had assumed.