On 26 October 2016, the Full Court of the Federal Court allowed an application for a “common fund order” in a class action for the first time. The decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited  FCAFC 148 has significant implications for litigation funders and the conduct of class actions more generally.
The QBE class action
The proceedings concern allegations that QBE engaged in misleading or deceptive conduct and breached its continuous disclosure obligations in the period between 20 August 2013 and 6 December 2013, during which QBE allegedly failed to disclose matters relating to the financial performance of its North American business. The class is comprised of investors who acquired shares in QBE in the relevant period.
Approximately 1,290 group members (the “funded” class members) had entered into a funding agreement with litigation funder, International Litigation Funding Partners Pte Ltd (Funder). Pursuant to the funding agreement, those group members were required to pay the Funder a commission (either 32.5% or 35%) out of any favourable settlement or judgment sum. Class members who were not a party to the funding agreement (“unfunded” class members), and who did not opt-out of the class action, enjoy the benefit of the Funder assuming the commercial risks of litigation without committing to contribute a funding commission if the litigation is successful.
The applicants sought the Court’s approval of proposed funding terms binding all class members, including an order (known as a “common fund” order) that legal costs and the funding commission (which was fixed at 30%) was to be paid from the common fund of any favourable settlement or judgment, with the balance of the fund distributed pro-rata among class members. This effectively requires all class members to contribute to the funding commission.
This was the third application for a common fund order in the Federal Court since 2013; both previous applications were unsuccessful. While not ruling out common fund orders entirely, previous decisions expressed concerns regarding the fairness and appropriateness of common fund orders and have preferred “funding equalisation orders” instead. These orders would provide for the deduction of an amount equivalent to a funding commission from payments made to unfunded class members. Those deductions would then be returned to the “pool” of funds to be distributed to class members, ensuring that funded class members were not unfairly penalised for participating in the funding agreement.
The Court’s reasoning
The Court held that it was appropriate to make the common fund orders, subject to an amendment that deferred the funding rate, which was to be set and approved by the Court “at the appropriate time” (such as at settlement approval). The Court considered that an appropriate rate would depend on a number of factors, and would likely be “lower than 32.5%”.
These orders were held to be in the best interests of all parties for the following reasons:
The Court already takes a “common fund” approach to the payment of legal costs, which are subject to the supervision of the Court. There was no reason in principle for treating litigation funding costs differently from legal costs.
By subjecting the funding commission rate to judicial approval, the interests of the class would be protected. Considerations relevant to any approval could include litigation risk and exposure to adverse costs orders, comparable rates set in other proceedings or in the market generally, the sophistication of the class and the information provided to class members, the quantum of legal costs and settlement, and any objections by class members.
Class members (both funded and unfunded) are potentially better off by allowing the Court greater control over the funding commission rate, even taking into account the relative benefits of a funding equalisation order.
Common fund orders incentivise litigation funders (whose crucial role in facilitating class actions was affirmed by the Court) and encourages “open” or “opt out” class actions, which in turn discourages competing “closed” class actions in which groups of class members in funding agreements with different funders launch competing class actions.
A great result for Funders? Mind that risk
The implications of this decision for both defendants and litigation funders are presently uncertain and more complicated than they appear. As a starting point, whether or not a common fund order will be made will depend on the circumstances of the case (particularly the stage of the proceeding) and the need to ensure fairness and equality of treatment for all class members.
Defendants may take comfort from the Court’s comments that the common fund order is not intended to affect liability in the proceedings. However, the rate of the funding commission is a significant variable that could potentially impact on the willingness of class action plaintiffs to negotiate a settlement at an early stage in the proceeding.
For litigation funders, this decision has both positives and negatives. On the one hand, funders are potentially able to draw their commission from a significantly larger pool of funds. On the other hand, the fact that common fund funding terms are subject to judicial approval exposes funders to the risk of a significant reduction in the funding commission rate and introduces a new variable to the assessment of the profitability of funding a proceeding. This can be contrasted with commercial funding agreements, in which the rate can be negotiated and in which there is no cap on return.
Those concerns may well be put to rest as common fund applications become more prevalent. In any event, litigation funders would be well advised to consider the risks carefully before pursuing the common fund.
We also wait to see whether the possibility of a common fund encourages faster filing of securities class actions (i.e., pre book-build filings).