- On 26 October 2016, the Full Court of the Federal Court handed down its decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited  FCAFC 148, approving for the first time an application to conduct a class action on a “common fund” basis.
- This decision is a game changer in Australian class action litigation, paving the way for litigation funders in “open class” actions to obtain fees from class members without the need to enter into funding agreements.
- In a joint judgment, Murphy, Gleeson and Beach JJ declared: "It is time that the Court gives further consideration to the interests of class members in relation to the reasonableness of litigation funding charges”. The Court supported orders imposing the burden of funders’ fees equally upon all class members who stand to benefit from the proceeding, whether or not they had previously entered into a funding agreement, with the Court to determine the reasonable rate of the commission to be paid to the funder at the end of the proceeding. The Court also indicated that it is “highly likely” that the rate approved will be lower than under the existing funding agreements.
- This decision may encourage funders to bring “open class” actions with potentially larger classes, but with the payout being determined by the Court. It also foreshadows an increased willingness on the part of the Federal Court to intervene to effectively supervise funding arrangements and, in particular, the commission paid to the funder.
Why is the “common fund” issue so significant?
To date, litigation funders have only been able to derive fees from those class members who enter into funding agreements with them. The preferred model of litigation funding has been a “closed class” action, where all class members have signed up to funding agreements. If a funder pursued an “open class” action, this would result in a division between “funded class members” and “unfunded class members”.
Courts have previously sought to address the perceived inequity which arises where the “funded class members” bear the obligation to compensate the funder while “unfunded class members” enjoy a “free ride”, while at the same time seeking to avoid payment to the funder of a fee greater than its contractual entitlement.
In some cases, Courts have sought to address the issue by making “funding equalisation orders” to redistribute the additional amounts received “in hand” by unfunded class members pro rata across the class as a whole. Courts have previously rejected the “common fund” solution, whereby the funder is recompensed from the common fund of proceeds obtained by the class as a whole in any settlement or judgment, although they did not rule out the possibility of this solution being applied in appropriate circumstances.
In this decision, the Federal Court has for the first time applied the common fund solution.
The common fund application was heard by the Full Federal Court at the direction of the Chief Justice.
On 26 October 2016, Murphy, Gleeson and Beach JJ approved, in substance, common fund orders sought by the applicant (other than in relation to the funding commission rate), inviting the parties to make further submissions before the orders are formally made.
The proposed orders require all class members, whether or not they have entered into a funding agreement with the funder (International Litigation Funding Partners Pte Ltd or “ILFP”) to pay the ILFP’s commission for funding the action, in addition to other costs. This is subject to ILFP, the applicant’s solicitors (Maurice Blackburn) and the applicant entering into undertakings to comply with the funding terms specified by the Court.
Importantly, the Court has taken on responsibility for setting a reasonable “Court-approved funding commission”, but only at a later stage of the proceeding (most likely at settlement approval or judgment). Significantly, the Court has stipulated that:
- the fee is “highly likely” to be less than the 32.5% or 35% funding commission agreed under the existing funding agreements; and
- as a “safeguard”, the fees to be paid to ILFP must not exceed the amount which it would otherwise have received, to ensure that ILFP is no better off under the common fund arrangement than under alternative arrangements (such as the funding equalisation orders).
- Court’s power to make common fund orders: Section 33ZF of the Federal Court of Australia Act 1976 (Cth) (the “Act”), which empowers the Court to “make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding”, was held to provide a valid basis for making common fund orders. The Court rejected QBE’s contentions that the Court lacked the requisite power, including the argument that the orders were not a valid exercise of judicial power.
- Funding commission rate: The Court indicated that the funding commission rate would only be set at a later stage in the proceeding when more probative and complete information becomes available to the Court to assess its reasonableness (notwithstanding that the applicant had proposed a lower rate of 30% to apply to all class members under a common fund model). Their Honours emphasised that the rate set is “highly likely” to be less than the rate already agreed with funded class members.
- Protection of class members’ interests: The Court considered that common fund orders would better protect class members’ interests in this case, in comparison to funding equalisation orders, which would “saddle” the unfunded class members with a deduction equivalent to the funding rate charged to funded class members.
- Opting out: The Court observed generally that any unfunded class members who are unhappy with a proposed common fund regime can “opt out” of a proceeding and commence a separate proceeding with or without funding. This was considered a sufficient safeguard for class members’ interests, provided that they are given proper notice and a right to object.
- Policy considerations: The Court found that a common fund approach to litigation funding charges and legal costs is consistent with the broad policy aims of the regime in Part IVA of the Act in light of the regime’s aims of enhancing access to justice and increasing the efficient use of judicial resources, and because the regime provides for an “opt out” model which makes it unnecessary to obtain the consent of a person to be a class member. As such, the Court noted that “closed class” actions have given rise to “a number of significant problems” (including reducing access to justice) and anticipated that common fund orders would enhance access to justice by “encouraging open class representative proceedings”.
- Impact on litigation funders: While noting that a funder “may be discomforted” by the prospect of funding a proceeding in which its fee is set by the Court at the end of the proceeding, the Court considered this a “matter for the funder” and noted that, should a funder not wish to pursue common fund orders, it may simply decline to give the required undertaking and rely on its existing contractual arrangements. The Court made clear, however, that:
“We expect that 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, are commercially realistic and properly reflect the costs and risks taken by the funder, and which avoid hindsight bias.”
This decision paves the way for an increase in “open class” actions in Australia using the common fund model. Whether this will become a common fixture depends, among other things, on funders’ willingness to take on the risk and uncertainties inherent in funding litigation in circumstances where the potential reward for doing so is determined by the Court, only at the end of the proceedings, and the Court’s calculation will be counterbalanced by its desire to protect class members’ interests.