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5 November, 2016
COURT-SUPERVISED COMMON FUNDS ARE NOW PERMITTED, BUT ARE THEY WHAT THE FUNDERS WERE HOPING FOR?
WHAT YOU NEED TO KNOW
The Full Federal Court has endorsed a common fund order, which requires all class members of an open class action to contribute to the funder's commission out of any settlement or judgment, even if they have not signed a funding agreement. In this case, the Court imposed important limitations which give the Court a central role in regulating the return to the litigation funder, including approving the total return having regard to the risks undertaken by the funder. The funder's return will also be capped so that class members can be no worse off than they would have been, had the common fund not been permitted.
The Court viewed this regime as likely to encourage open class actions and improve access to justice, and to reduce the number of overlapping closed class actions and their associated costs. It remains to be seen whether the common fund approach anticipated by the Full Federal Court will find favour with funders, who retain the option of running closed class actions. A key issue in class action funding is whether the Court should make "common fund" orders, which require all members of an open class to pay a funder out of any settlement or judgment. In an open class action, all members benefit from any settlement or judgment, whether or not they have entered an agreement with the funder.
Common fund orders prevent "free riders" taking the benefit of litigation funding without paying for it. Such orders have the potential to encourage more open class actions and for class actions to be commenced more quickly, without a traditional "book-build" process where class members are signed up to funding agreements. In 2015, the Federal Court rejected an application in the Allco Class Action. In Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148, the Full Federal Court has now distinguished Allco and decided to make a common fund order. While the QBE decision is expressly confined to the particular case before the Court, the Full Court's unanimous decision is authoritative and opens to door to common fund orders (supervised by the court) in future open class actions.
Background The application arose in a shareholder class action against QBE Insurance Group alleging misleading or deceptive conduct and breaches of continuous disclosure requirements. The class action was commenced as an open class action, which meant that the class included everyone who purchased shares in QBE over the relevant period. International Litigation Funding Partners Pte Ltd (the Funder) had entered into funding agreements with 1,290 of those class members (funded class members) representing more than half of the relevant shares acquired. The funding agreements provided for the Funder to have legal costs reimbursed and then be paid commission of either 32.5% or 35% on amounts received by the funded class members. Shortly after the first case management conference, and before the notice to class members giving them the chance to opt out, the applicant made a common fund application.
It was referred directly to the Full Federal Court (Murphy, Gleeson and Beach JJ). The applicant sought approval for common funding terms including for commission to be paid by all class members at a rate of 30%, which was slightly less than in the Funding Agreements but could generate a substantially higher return given the size of the class. The Court allows a common fund with limitations In a joint judgment, the Court unanimously rejected the applicant's proposed orders, which would potentially have generated a disproportionate return to the Funder. However, it was prepared to make a more limited common fund order, with additional protections for class members' interests. The order provided for commission to be paid from a common fund, but in an amount to be approved by the Court at the time of settlement or decision. The Court also ordered that the class members could not be worse off as a result of the common fund orders being made.
This means for example that class members who had not signed up with the Funder (unfunded class members) could not be liable to pay more by way of commission than they would have been liable to pay, had an equalisation order been made. (An equalisation order, which has been made in a number of previous class actions, is made at the time of resolution and involves deducting from the return to unfunded class members an amount equivalent to the Funder's commission and redistributing that amount across all class members. Under such an order, unfunded class members do not get a free ride, but the Funder only gets its commission from funded class members.)
The Court clearly signalled its expectation that, in the case before it, the commission ultimately awarded to the Funder upon resolution was unlikely to be as high as the 32.5% or 35% provided for in the Funding Agreements. It suggested (without deciding) that a return in excess of $100m on a hypothetical $400m settlement might well be regarded as excessive. The Full Court's order will apply to all class members and will override the Funding Agreements with the funded class members. The Court gave the Funder the option of entering a common fund on these terms or continuing under the Funding Agreements.
As a condition of the approval, the Court also required the Funder, solicitors and applicant to give undertakings binding them to the arrangements already in place under the Funding Agreements to protect the interests of class members. The Court viewed this regime as more likely to be favourable to class members as a whole, because of the Court's discretion as to the total amount and the cap on total recoveries. The court will now regulate returns to class action funders This is a significant decision which – assuming there is no appeal to the High Court – will impact on the market for litigation funding and therefore on the number and kind of class actions commenced in Australia. Common fund orders had only previously been made in two cases, at the point of settlement of a class action, and there was some doubt about the correctness of those decisions.
The Court has paved the way for judges to regulate the returns to funders in future cases where there is a common fund. It is likely that Courts will begin to develop an indicative range of returns that will be permitted, depending on the nature of the case. In setting the level of commission, the Court will consider the agreed rate in the Funding Agreements and the level of information provided to class members before entering them; benchmarking against other cases; litigation and costs risks assumed by the funder; and the amount of the settlement or judgment.
The Court will therefore play a role in ensuring that litigation funding operates fairly to class members. This is a significant change. Traditionally, funding arrangements have been relevant to the decision on whether to approve a settlement, but the courts have been reluctant to re-write agreements to ensure a fair outcome and it has been uncertain whether they have the power to do so. The Court stated that its decision was based on the particular circumstances of the case before it. While the decision is authoritative, it does not necessarily mean that common fund orders will be approved in every future case.
For example, if there are few or no funded class members, or little or no evidence that a commission has been agreed upon at arm's length with sophisticated parties, the courts may be less willing to make a common fund order at an early stage of proceedings. Will this encourage more open class actions? The Court considered that its approach was consistent with the policies underlying the "opt out" class action regime in Australia. In its view, the inability of funders to bind all class members into a common fund had led to the proliferation of closed class actions, which hindered access to justice, encouraged overlapping class actions, and had the potential to create conflicts between class members' interests at the settlement stage. It remains to be seen whether this kind of common fund will be attractive to funders. It creates the risk for them of a lower return than the funding agreements would provide, because of the court's supervision, but caps their return at the level set by the funding agreements. On the other hand, funders will know at an early stage in proceedings that they will be able to derive commission from the whole class, and will not be left to speculate about whether, at the end of the case, their recovery will be limited to funded class members only. In our view, the Court's judgment is a game changer on litigation funding.
Once judicial supervision of funding arrangements is recognised in a common fund context, it may well lead the court towards exercising more of a supervisory role in other cases (and, possibly, closed class actions). As the courts' jurisprudence develops, it may have an important impact on funders' appetite for class action litigation in Australia. It will also be interesting to see whether parliament will now seek to regulate third party litigation funding arrangements.
For further information, please contact:
Ian Bolster, Partner, Ashurst
ian.bolster@ashurst.com
