Litigation funders have recently sought to improve their financial recoveries by applying to Australian Courts for ‘common fund orders’ in class actions. Common fund orders require all class members who seek to benefit from the proceeds of settlement or judgment to contribute equally to the cost of legal representation and litigation funding costs, regardless of whether or not they had entered into a funding agreement.
Despite initial reluctance to make such orders,1 a litigation funder finally achieved success in the Full Federal Court decision of Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd (Money Max) 2 in late 2016. You can read more about our commentary on that case here.
Since then, there have been at least two important decisions, being Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgrs apptd) (in liq) (No 3), 3 (Allco) in which another common fund order was made and Earglow Pty Ltd v Newcrest Mining Ltd4 (Newcrest) in which an equalisation order was made. These decisions demonstrate the willingness of Australian Courts to modify and interfere with litigation funding arrangements.
The Opt-Out Model
Australia has an opt-out procedure in representative proceedings, such that every group member that falls within the class description is automatically part of the proceedings unless they affirmatively exclude themselves.5 The adoption of an opt-out model encourages “free-riding”, whereby group members may intentionally refrain from entering into a litigation funding agreement and wait until a successful outcome before coming forward to collect a proportion of the proceeds without having reimbursed the funder. Funders have sought to prevent “free riders” from sharing in litigation proceeds by restricting class actions to a ‘closed class’ group6 , typically only brought on behalf of a subset of group members who contractually enter into a funding agreement.7 The existence of closed classes has resulted in multiple class action proceedings financed by different litigation funders against the same respondents. This has been criticised by commentators as it gives rise to difficult case management considerations and creates uncertainty over the finality of the subject matter of proceedings. Common fund orders Given that funders want to maximise their profits from litigation, funders have instead sought to reduce “free-riding” and increase access to justice by applying the United States common fund approach to funding fees.8 In Money Max, 9 the Full Federal Court of Australia held for the first time that the funder in that particular case could be the beneficiary of a common order fund without needing to privately contract with all group members. This means that the entire class in that case will be liable to pay the funder a commission out of any proceeds recovered in the litigation through either a settlement or a judgment. Some uncertainty still remains for the funder, as the 2016 decision provides that it is the Court, and not the funder, that will set the commission rate; and that the rate will only be set later, at the end of the proceedings.
Common fund orders
Since that decision, a single judge of the Federal Court in Allco also made a common fund order on 31 March 2017,10 identifying how the Court may set a commission rate as a necessary consequence of approving a class action settlement. The Court was invited to approve a settlement distribution scheme which provided the funder with 30% of the net settlement sum (i.e. after deduction of the Class Applicants’ legal costs) which in reality equated to 22% of the gross settlement sum of $40 million (being $8.85 million). In approving the settlement, his Honour Justice Beach observed that generally speaking the percentage a funder will receive varies from case to case in Australia, but most commonly falls within a range of 25% to 40% and this was at the lower end of that range.11 Had the gross settlement sum been substantially higher, Beach J would have applied a “sliding scale” to the commission rate and accordingly set a lower rate “so that the amount paid to the funder would have remained proportionate to the investment and risk undertaken by the funder.”12 His Honour considered that the Court was empowered to “modify any contractual bargain dealing with the funding commission payable out of any settlement proceeds”.13
As an alternative, Courts have sought to address the perceived unfairness which exists between funded and unfunded members by making ‘equalisation orders’ following settlement or judgment. An equalisation order is when the Court orders unfunded group members to have their recovery deducted by an amount equivalent to the funding commission that would otherwise have been payable under a funding agreement. This amount is then redistributed back pro rata amongst the funded members.14 The Newcrest decision delivered on 28 November 2016 provides one recent example of a Court approved ‘equalisation order’, which operated as a redistribution recovery mechanism to all funded members. In approving the order, the Court observed:15
‘This mechanism is fair and reasonable because it achieves equality of treatment between class members. I can see no good reason why funded RCMs should carry the litigation funding costs of the proceeding alone and unfunded RCMs should be permitted to take the benefit of the proposed settlement...’
Whilst the approval of an equalisation order ensures equality between all group members, it generally does not affect or increase the amount of a litigation funder’s fee (subject to the “Court’s power to reduce the funding commission to be deducted pursuant to the terms of the settlement”)16. This means that all group members share equally in the balance of the settlement sum, but the funder’s recovery is capped at their contractual entitlement to commission fees.17
Implications for insurers
Together the cases of Money Max, Allco and Newcrest confirm the willingness of Australian Courts to modify and interfere with litigation funding arrangements where it is fair and reasonable to do so. The decisions are significant, but they are not of general application to all current and future class actions which will always be determined on the particular facts.
Whilst the potential availability of common fund and equalisation orders may give funders comfort that proceedings are commercially worthwhile in the absence of a requisite pool of signed up group members at the outset of a matter, there also remains uncertainty for the funder as to the commission rate that they will ultimately receive. This typically will not be determined until the Court approval process at the end of the proceedings. Moreover, the decisions do not extinguish or reduce the need for funders to do appropriate due diligence before commencing proceedings, nor do they otherwise turn cases with limited prospects of success into attractive funding propositions.
Insurers and financial institutions should be cognisant that these developments may result in more open class actions being brought in Australia, which could reduce multiplicity of actions and create certainty of outcome. It is equally worth noting that even if a common fund or equalisation order is made, this does not affect a respondent’s liability, nor will it affect the quantum of damage which an insurer may be required to indemnify the respondent for in satisfaction of a judgment (in the event that an insurance policy responds to the claim). Rather, these orders go to how settlement monies are to be distributed among class members and litigation funders.