“Common Funds” In Australia – The Court Has Its Say On Litigation Funding.

 

31 October, 2016

 

In a landmark decision this week, the Full Federal Court of Australia has recognised litigation funders as an integral part of the class action landscape, paving the way for more cases to be commenced, of a size larger than previously seen and at a faster rate than ever before.

 

The Court accepted that claimants who choose to be part of a class action ought to be compelled to contribute to the litigation funder a percentage of any monies they receive as a result of the proceeding. Such a contribution will be required regardless of whether or not the claimant has entered into a funding agreement with the litigation funder.

 

THE MONEY MAX V QBE INSURANCE DECISION1

 

The QBE class action was commenced on behalf of all persons who acquired QBE shares during a defined period. Although it was a funded class action, it did not require as a pre-requisite, that claimants sign a litigation funding agreement to be permitted to participate in the proceeding. In this sense it is an “open” class action.

 

Instead the applicant sought orders that the Court require that all claimants contribute a fixed percentage of any monies they receive to the funder in return for taking the benefit of the funder’s willingness to fund the pursuit of those claims.

 

Recognising the extent to which litigation has played a role in recent class actions, the Court agreed that this principle was valid and ought to be applied. The Court considered that by doing so, it would encourage open class actions and thereby enhance access to justice.

 

However, it was not all one way for funders.

 

The Court also stated that it would exercise its supervisory role and it would be the Court, not the funder, that would determine how much the funders would receive. Such “judicial oversight of the funding commission charged by the Funder [was] central to [the Court’s] decision.”2 The factors to which the Court will likely have regard when setting the commission rate include the:3

 

• market rate available for funding class actions of a similar kind;
• nature and scope of the risks assumed by the funder in the litigation;
• result obtained for the claimants in the litigation.

 

As a result, funders who choose to fund an open class action will do so without knowing in advance what rate of return they may receive in the event of a settlement or damages award.

 

RAMIFICATIONS OF THE DECISION

 

1. More “open” (and therefore larger) class actions, but fewer competing class actions

 

The removal of the need for funders to enter into funding agreements eliminates one of the key obstacles for funders in the decision as to whether or not to fund a class action. As a result we would expect to see more “open” (and therefore larger) class actions and fewer competing class actions being pursued against the same defendant in relation to the same conduct.

 

2. Increase in the speed with which a class action is commenced

 

Removal of the need to sign up claimants may also lead to an increase in the speed with which funders seek to commence a class action as funders seek to get in prior to their competitors. Without the need to sign up a minimum number of claimants to funding agreements to make the case financially viable, funders instead will be incentivised to make a quick decision as to both the merits of the potential case, and the number of affected persons.

 

Such a decision will necessarily need to be made without the certainty of knowing that a particular funding commission rate will be achievable upon settlement or a successful trial. The ultimate return received by the funder will remain to be determined by the Court some months, or perhaps even a few years, after the decision to fund the proceeding.

 

3. Added complexity in settlement negotiations

 

In this decision, the Court indicated that the appropriate time at which to determine the funding commission rate is as part of any settlement approval hearing. Among other things, the factors to be considered by the Court as part of that approval will likely be the amount which claimants will recover ‘in hand’.

 

As a result, parties will now be required to conduct settlement discussions in the knowledge that any agreement which involves a reasonable expectation of a particular return to funders and claimants, may subsequently be altered as part of the Court’s determination of what is fair and reasonable for claimants.

 

This decision is likely the first of many in which the Court will have an increasingly vocal say about the role and value of litigation funders in class actions in Australia.

 

ENDNOTES

 

1. Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148.
2. Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148 at [11].
3. For a non-exhaustive list of potential factors likely to be considered by the Court, see Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148 at [80].

 

 

For further information, please contact:

 

Ruth Overington, Partner, Herbert Smith Freehills

ruth.overington@hsf.com