11 August, 2015
In brief
• Litigation funders suffered a setback recently when the Federal Court of Australia refused to permit them to force all class members to compensate them for the costs and risk associated with funding the Allco Finance class action.
• In its decision in the case of Blairgowrie Trading Ltd v Allco Finance Group Ltd(Receivers & Managers Appointed) (In Liq) [2015] FCA 811, the Court expressly recognised that the application was primarily designed to further the commercial interests of the litigation funder, rather than to ensure that justice is done.
• However, the Court did not rule out the possibility that funders could seek orders compensating them at a later point in a proceeding. A key factor in the Court’s reluctance to approve the proposed arrangement at an early stage of the case was the impossibility of determining whether the amount ultimately payable to funder would be reasonable.
• The Court was also concerned to protect unrepresented group members and was therefore disinclined to impose the terms of a funding agreement on all group members, including those who have not agreed to the terms.
• However, this decision does not signal a contraction of the class action market in Australia. In fact, the Court specifically commented on potential legislative reform to allow common fund arrangements, albeit with close judicial supervision.
Background
The Allco Finance class action
A class action was filed against Allco Finance Group Ltd (Allco) in the Federal Court of Australia in August 2013. The Applicants allege that Allco failed to comply with its continuous disclosure obligations and made false or misleading representations regarding its financial position during the global financial crisis.
As a result, it is claimed that the price for Allco shares was in effect inflated, which ultimately caused the group members (those who acquired Allco shares between June 2007 and February 2008) to suffer loss.
The proceeding is in an early stage, having barely progressed past the filing of pleadings.
Common fund application
The class action is currently being financed by a litigation funder, International Litigation Funding Partners Pte Ltd (ILFP).
The Applicants filed an application on 8 May 2014, which in essence asked the Court to approve a common fund arrangement. The operative order sought:
1. the Court’s approval that the amounts payable to ILFP under the existing funding agreement are reasonable, and
2. a declaration that the Applicants are entitled to pay these amounts out of any sums recovered should the Applicants be successful in obtaining a settlement or an award of damages.
Under the current funding agreement, the amounts payable to the funder include reimbursement of the Applicants’ legal costs and a commission of between 32.5% and 35% of the amounts recovered, not only in respect of the Applicants’ claims but also, critically, the claims of all group members.
The Applicants primarily relied on s 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) as the basis for making the order. Section 33ZF gives the Court general power to make any order it deems appropriate or necessary to ensure that justice is done.
The Respondents maintained that the order was neither appropriate nor necessary, and in fact unprecedented, unconventional, beyond power and unjust.
The decision
Wigney J was mindful of the novelty and potential ramifications of the proposed order.
He refused to make the order as it was neither appropriate nor necessary to ensure that justice was done in the proceeding, nor was it in the best interests of the group members as a whole.
Importantly, he found that the only real rationale for making the order at this early stage is to ensure that the proceeding was commercially viable from the funder’s perspective and had nothing to do with securing justice.
In the Court’s view, the order would be premature, unnecessary and inconsistent with Part IVA of the FCA Act as:
1. the reasonableness of the amounts involved could not be assessed at this early stage. This is because it is impossible to estimate, let alone ascertain, the amounts which could potentially be recovered by the Applicants (if any), and therefore ILFP’s commission,
2. it is more appropriate for such issues to be determined at the settlement approval stage, when the court can and will assess the reasonableness of returns to the funder, as well as issues of fairness and equity as between group members,
3. it was neither appropriate nor necessary to impose the Applicants’ commercial bargain with the funder on the group members as a whole (including those who have not agreed to the funding terms), at least at this early stage of the proceeding, and
4. the Applicants have sufficient costs protection since, if successful, they are likely to be awarded costs and, in addition, they have the right to approach the Court for an order under s 33ZJ(2) of the FCA Act for further recovery of costs.
Implications
This decision indicates that the Court is reluctant to approve a common fund arrangement where the primary motivation for seeking such an order is to facilitate the commercial interests of the funder. Instead, the Court’s focus will be on the question of what is appropriate or necessary to ensure that justice is done in the proceeding.
Interestingly, the Court specifically commented on the potential for legislative reform in this area. Wigney J appeared to support the adoption of the common fund approach in Australia to deal with the realities of litigation funding. At the same time, he also suggested the need for close judicial supervision and scrutiny of the funder’s involvement in proceedings.
Whilst this decision creates an obstacle to the promotion of class actions, it falls well short of affording current or potential defendants any complacency. Australia is still one of the most profitable class action markets in the world, and the most sophisticated funding market with major foreign players arriving each year. The debate regarding introduction of contingency fees for Australian lawyers could also herald class action growth.
For further information, please contact:
Ruth Overington, Partner, Herbert Smith Freehills
ruth.overington@hsf.com
