Federal Court Makes First Common Fund Order
On 26 October 2016 the Full Federal Court made its first potential "common fund order" in the class action Money Max Pty Ltd (Trustee) v QBE Insurance Group Limited. Provided the funder, applicant and solicitors for the applicant undertake to comply with the court sanctioned funding terms, the Court will make orders, including that the applicant and all group members pay the funder a Court approved funding fee from any recoveries. IMF Bentham’s Chief Executive – Australia and Asia, Clive Bowman examines this development and the ramifications for litigation funders.
"Common Fund" orders
Whilst the Court said that it had no real difficulty accepting that the rate proposed by the funder (30% - which was below the funder’s contractual entitlement) was within the range commonly offered by funders, it decided to defer approving a fee to "an appropriate time" (which the court said was "probably at the stage of settlement approval or at the point of distribution of damages"). A likely range of factors relevant to the court approving a reasonable fee is set out in the judgment, including the amount of any settlement or judgment.
What this means for litigation funders
The ramifications of this development, whilst generally positive, need to be viewed in light of the realities.
First, irrespective of whether a common fund order is made, most class actions will ultimately end up being conducted on an open class basis (i.e. open to all who have a claim). This is because most defendants want to ensure that any settlement brings them finality.
That finality is gained by ensuring that all potential claimants are bound by a settlement (even if they do not participate in it). This is done by opening and then closing the class (if the proceeding is started as closed, for example because the group member definition included a criteria that group members must have entered into a funding agreement) or closing it (if started as open). It is often "closed" by requiring all potential claimants to register by providing information relevant to determining their loss. If they do not register they are advised that they will be excluded from any settlement, but will be bound by it.
The exception will be in closed class cases, where the limitation period has expired for all but the current group members. There would be no utility in opening the class in those circumstances.
Accordingly, common fund orders are unlikely to result in more open class, class actions but the availability of such orders might result in more class actions commencing on an open basis.
Second, historically it appears that in many funded class actions, when started on a closed basis and then opened and closed with a registration process described above, a relatively insignificant proportion of new claimant’s register. This may be because the process at the start of the case of having claimants sign funding agreements has attracted those most interested in participating, and the lapse of time from start of the case to implementation of registration process, may mean claimants have written the matter off, lost their records, moved addresses and so become uncontactable, or died, or it may be that their claim sizes are not sufficient for them to be motivated to register.
It is also possible that the lawyers and funder, for a variety of reasons, are not particularly motivated to go beyond their obligations and responsibilities to encourage non funded claimants to register.
Nevertheless, it cannot be said with any degree of certainty that the introduction of common fund orders will result in larger claims (in terms of quantum) being faced by defendants, at least not at the stage of any settlement discussions.
Third, a common fund order does nothing to make a case more likely to succeed, or on the flipside, diminish the adverse costs order exposure. There is no reason to think that common fund orders will result in an increase in unmeritorious cases being backed by funders. In contrast to the American position, in Australia, the prevalence of adverse costs orders is a significant deterrent to speculative litigation.
The future of Class Actions
There is no reason to think there will be a "race to the court door" to file class actions.
However, there is reason to think that there will continue to be competing open class actions filed. How the Court will deal with these is yet to play out. It seems likely that there will be a "beauty parade" where the legal and funding team with the most experience, financial capacity, claimant support, and offering the most benefits, prevails as the preferred lawyer and funder to conduct and fund the class action.
As to whether funders will be better off under a common fund order, it depends on a comparison involving two variables (the court approved fee and the quantum of recoveries) unknown to the funder at the start of the case. It will also involve making estimates in order to weigh up the fee the court will sanction under a common fund order applied across the recoveries of all group members, versus, the funding fee attainable (contractually) applied across the recoveries of a subset of all group members.
As to whether group members will be better off under a common fund order, it also depends. If the common fund order does result in more participants registering to participate in a settlement under a class closure process (than would have been the case absent a common fund order), then a lower court approved funding fee (than one payable under a funding agreement) may not compensate for each group member having to share any settlement sum with a larger group.
"Common Fund" orders
Whilst the Court said that it had no real difficulty accepting that the rate proposed by the funder (30% - which was below the funder’s contractual entitlement) was within the range commonly offered by funders, it decided to defer approving a fee to "an appropriate time" (which the court said was "probably at the stage of settlement approval or at the point of distribution of damages"). A likely range of factors relevant to the court approving a reasonable fee is set out in the judgment, including the amount of any settlement or judgment.
What this means for litigation funders
The ramifications of this development, whilst generally positive, need to be viewed in light of the realities.
First, irrespective of whether a common fund order is made, most class actions will ultimately end up being conducted on an open class basis (i.e. open to all who have a claim). This is because most defendants want to ensure that any settlement brings them finality.
That finality is gained by ensuring that all potential claimants are bound by a settlement (even if they do not participate in it). This is done by opening and then closing the class (if the proceeding is started as closed, for example because the group member definition included a criteria that group members must have entered into a funding agreement) or closing it (if started as open). It is often "closed" by requiring all potential claimants to register by providing information relevant to determining their loss. If they do not register they are advised that they will be excluded from any settlement, but will be bound by it.
The exception will be in closed class cases, where the limitation period has expired for all but the current group members. There would be no utility in opening the class in those circumstances.
Accordingly, common fund orders are unlikely to result in more open class, class actions but the availability of such orders might result in more class actions commencing on an open basis.
Second, historically it appears that in many funded class actions, when started on a closed basis and then opened and closed with a registration process described above, a relatively insignificant proportion of new claimant’s register. This may be because the process at the start of the case of having claimants sign funding agreements has attracted those most interested in participating, and the lapse of time from start of the case to implementation of registration process, may mean claimants have written the matter off, lost their records, moved addresses and so become uncontactable, or died, or it may be that their claim sizes are not sufficient for them to be motivated to register.
It is also possible that the lawyers and funder, for a variety of reasons, are not particularly motivated to go beyond their obligations and responsibilities to encourage non funded claimants to register.
Nevertheless, it cannot be said with any degree of certainty that the introduction of common fund orders will result in larger claims (in terms of quantum) being faced by defendants, at least not at the stage of any settlement discussions.
Third, a common fund order does nothing to make a case more likely to succeed, or on the flipside, diminish the adverse costs order exposure. There is no reason to think that common fund orders will result in an increase in unmeritorious cases being backed by funders. In contrast to the American position, in Australia, the prevalence of adverse costs orders is a significant deterrent to speculative litigation.
The future of Class Actions
There is no reason to think there will be a "race to the court door" to file class actions.
However, there is reason to think that there will continue to be competing open class actions filed. How the Court will deal with these is yet to play out. It seems likely that there will be a "beauty parade" where the legal and funding team with the most experience, financial capacity, claimant support, and offering the most benefits, prevails as the preferred lawyer and funder to conduct and fund the class action.
As to whether funders will be better off under a common fund order, it depends on a comparison involving two variables (the court approved fee and the quantum of recoveries) unknown to the funder at the start of the case. It will also involve making estimates in order to weigh up the fee the court will sanction under a common fund order applied across the recoveries of all group members, versus, the funding fee attainable (contractually) applied across the recoveries of a subset of all group members.
As to whether group members will be better off under a common fund order, it also depends. If the common fund order does result in more participants registering to participate in a settlement under a class closure process (than would have been the case absent a common fund order), then a lower court approved funding fee (than one payable under a funding agreement) may not compensate for each group member having to share any settlement sum with a larger group.