Common Fund Orders and Access to Justice

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Our shareholder class action series continues in this post with a look at how Australian courts approach the question of ‘common fund orders’.

As outlined in our post on competing class actions[1], there are several different stakeholders in this type of litigation including insurers and litigation funders. These interests are necessary in order to ensure that the litigation commences and is adequately resourced. Indeed, it is a fact of life that class actions are extremely costly and that, without litigation funding, most actions would never be commenced[2].

Given this, courts are increasingly seeing litigation funders as a means of providing access to justice. However, of concern to courts and plaintiff’s alike is the method by which funders are compensated.

Normally, a member of a ‘class’ will agree to enter into a funding agreement with a litigation funder. That agreement will oblige the funder to pay for legal costs, adverse costs orders, and orders for ‘security for costs’[3]. In exchange for taking on this risk, the funder will receive a percentage of any settlement or damages award. The figure is usually around 35%[4].

A significant issue arises where some class members choose to sign funding arrangements and others do not. This happens in the context of ‘open classes’ where all affected persons are eligible to join a class action irrespective of how they are funded. In such cases, inequitable results are reached as those who have signed litigation funding agreements receive a smaller propotion of any settlement than those who have not (once the funder’s commission is taken into account).

Courts have developed several ways to fix this inequality, including the use of ‘common fund orders’.

The Common Fund Approach

A common fund order is an order requiring all class members to pay the funder’s commission for funding the action irrespective of whether or not they have entered into a litigation funding agreement. Effectively, this equalises the amount recoverable in any settlement or damages award between both funded and unfunded plaintiffs. If the court grants such an order they will set the court approved funding commission mandating the percentage recoverable by the funder.

In Australia, these orders have not been popular due to the fact that they force unfunded class members to agree to a bargain that they did not strike. However, the recent case of Money Max International Pty Ltd (Trustee) v QBE Insurance Group Limited (“Money Max”)[5] demonstrates that common fund orders are increasingly popular.

In Money Max, the Full Federal Court (Murphy, Gleeson and Beach JJ) decided to grant a common fund order subject to a number of judicial ‘safeguards’ including[6]:

  • The court will determine the percentage of fees received by the funder at a later stage closer to settlement or approval of any damages award;
  • The orders are subject to a ‘floor condition’ that no class member is to be worse-off under the common fund order than under a ‘funding equalisation order’[7] or some other order; and
  • Affected members will be given notice of the proposed order and given a chance to opt-out and bring their own proceeding.

In making this order, the court has indicated a shift in judicial attitude that is more accepting of litigation funders. As the Full Court noted:
[82] “We expect that the courts will approve funding commission orders that avoid excessive or disproportionate changes to class members but which recognise the important role of litigation funding in providing access to justice, are commercially realistic and properly reflect the costs and risks taken by the funder and which avoid hindsight bias.”

The common fund approach therefore gives the court more control over the fees charged by funders. This demonstrates a shift toward a U.S style approach to the funding of class actions[8].

Furthermore, orders of this sort have the additional benefit of encouraging open class representative proceedings which reduce the risk of competing class actions and a multiplicity of proceedings[9]. As previously noted, competing class actions increase cost and place extra burdens on the judicial system.

In the months that follow, the amount of common fund applications should start to increase. Presently, there is at least one case with overlapping classes currently before the NSW Supreme Court[10] and it will be interesting to see the approach taken by state courts on this issue.

Certainly, each case will be assessed on its own merits and a common fund order is by no means a certainty. The Federal Court has declined to make such orders on two previous occasions[11].

Litigation Funders

The implications of common fund orders for litigation funders are uncertain. On the one hand, these orders allow funders to draw commission from a larger pool. On the other hand, courts retain the discretion in determining the exact amount the funder will receive.

The Full Court in Money Max indicated that the time at which the commission will be determined will usually be toward the end of a case, at settlement approval or at the assessment of damages[12]. The problem facing funders is that they effectively have to incur large defence costs and other costs before actually finding out how much commission they are entitled to. However, given the large margins still available, this is unlikely to dissuade funders from entering into agreements.

In future, the usual funding commission of 30 – 35% is likely to change under these orders. The Full court has considered that it is “highly likely” that the ultimate amount recoverable will be less than 35% with steeper decreases as the amount of the settlement increases[13].

Nonetheless, these orders are positive as they represent greater flexibility in the class actions regime and tend to remove the technical aspects of funding equalisation orders whilst recognising the important role that funders play in this large scale litigation.

 

[1] The preferred expression is now ‘Representative Proceeding’ as opposed to ‘Class Action’ in accordance with PN SC Gen 17 although the vernacular expression is still widely used

[2] Morabito V, ‘An Empirical Study of Australia’s Class Action Regimes’, Fourth Report July 2016, p 7-8

[3] An order requiring a plaintiff to pay a sum of money into court as security for the defendant’s costs in case the plaintiff is not successful

[4] Waye V and Morabito V: “Financial arrangements with litigation funders and law firms in Australian Class Actions” (2015)

[5] [2016] FCAFC 148

[6] At [11]

[7] A funding equalisation order is an order that the deducts amounts payable to unfunded class members equivalent to the funders commission they would have paid and re-directs them to funded class members to ensure that they all receive the same amounts ‘in-hand’

[8] E.g. the Private Securities Litigation Reform Act (1995) (US) provides that a litigation funders fee award should not exceed a reasonable percentage of the award of any damages

[9] As the Full court noted at [205] in Money Max

[10] Smith v Australian Executor Trustees; Creighton v Australian Executor Trustees

[11] Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626; Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers and Managers Appointed) (in liq) [2015] FCA 811

[12] See Money Max at [11]

[13] Again, this moves toward a U.S style approach. ‘Percentage fee awards generally decrease as the amount of the award increaes’; In re Prudential Insurance Co of America Sale Practice Litigation [1998] USCA 622

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