Common fund orders: are they part of the Australian class action landscape?

On 26 October 2016, for the first time in Australian legal history, a common fund order was made by the Full Federal Court.

The Full Federal Court in the Money Max Int Pty Ltd (as trustee for the Goldie Superannuation Fund) v QBE Insurance Group Ltd (Money Max) case.¹

The decision will certainly be welcomed by funders. It provides the funder in this case with certainty that all of the claimants in the class, rather than only those who have signed up to the funding arrangements with the funder, will be liable to pay the funder a commission out of any proceeds recovered in the litigation, or as a result of settlement. It casts the net much wider in capturing who is liable to pay the funder, regardless of whether they sign up with the funder.

It also may mean it is possible for a funded class action to be commenced sooner as the focus on the initial "book build" and signing up participants to the class before commencement may no longer be so fundamental. The funders will still need to apply rigour about which cases to take on and assess the prospects of success - but there may be more clarity earlier about whether or not an action is likely to be brought. In response to this shift, the law will also need to develop further regarding competing class actions as discussed below.

However, it will not necessarily result in a doomsday scenario of class action floodgates opening in Australia, so insurers and corporate Australia need not be unduly alarmed just yet.

The funding of class actions

In exchange for funding a class action, litigation funders are permitted to retain a funding commission from group members who have entered into a litigation funding agreement.

Typically, such agreements include commission payments to the funder of between 30 per cent and 40 per cent of the amount recovered on resolution of the proceedings (either from settlement or judgment moneys received), after the funder has been reimbursed for the legal fees incurred in the litigation. As the funding commission can only be recovered from group members who have entered into a litigation funding agreement, there is potential for group members who have not entered into a litigation funding agreement to receive a windfall.

The common fund is a mechanism by which a funder can secure a court order at an early stage of proceedings that prescribes an identified recovery rate for the funder from all group members. If an application is granted, a percentage of any settlement or judgment sums received by group members will be paid to the funder, irrespective of whether the group members enter into individual contracts with the funder. Such orders are commonly utilised in class actions in the United States, but not so in Australia.

The "common fund" application in the Money Max decision

Until now, the most recent attempt to obtain common fund orders was in the Allco class action.² In that matter, the common fund application ultimately failed because the Court considered that the application was in the commercial interests of the funder, rather than in the best interests of the group members as a whole. The Court also commented upon the difficulty in assessing the reasonableness of the funding agreement at such an early stage of the proceeding, when there is insufficient information about the size of the class, the value of the claim and the amount ultimately payable to the funder.

In a case involving the same litigation funder, the Full Federal Court has now determined that a "common fund" order is within its power and appropriate pursuant to legislative objectives including "what is appropriate or necessary to ensure that justice is done in the proceeding".

The recent Money Max case concerned an open class of investors acquiring shares in QBE in a particular defined period, some 1,290 of which had signed up to a litigation funding agreement when the balance of the class members had not. The agreement included an obligation that funded class members pay a commission to the funder and reimburse the funder for legal costs out of any settlement or judgment. The funder filed an interlocutory application and sought to have all of the terms of the funding agreement applied to all class members.

The decision does not reflect the entire relief sought by the funder, as the commission rate payable to the funder is to be later set by the Court at the appropriate time. This acts as an important safeguard to the interests of members of the class.

Key Messages

The decision will certainly be welcomed by funders but there are many reasons not to be apprehensive by this developing jurisprudence.

Firstly, the decision although undoubtedly ground breaking, is not of general application to all current and future class actions. It is based on the particular facts of the matter; and is intended by the Court to do justice and achieve a proper balance of interests in the circumstances of the matter.

Secondly, Australia already has one of the world’s most liberal, developed and active class action and litigation funding environments. This is not a seismic change to the existing landscape.

Thirdly, not all Australian class actions are funded, and even where they are, the dominant consideration for funders is the relative prospects of successfully bringing the proceeding – although the rate of return on the investment is undoubtedly also an important consideration. This decision will not of itself turn cases with limited prospects of success into an attractive funding proposition. There is of course a risk that if similar orders are made in other claims over time, this may cause funders to fund cases that previously would have been considered marginal and would not have secured funding.

Fourthly, some uncertainty remains for the funder, as the order provides that it is the Court, and not the funder, that will set the commission rate; and that the rate will only be set later, at the end of the proceedings.

Fifthly, if this and other subsequent common fund type orders result in the proportion of recoveries available for distribution to claimants decreasing relative to the funds going to funders, this could in fact have a longer term suppressing effect on the appetite of claimants to participate in class actions – and possibly even a reduction in the number of funded class actions.

Finally, we anticipate a movement away from closed class actions with a focus on an open class. If this happens, it should reduce multiplicity of actions and that can only help in providing finality and certainty for those stakeholders facing a class action claim.

The authors acknowledge the assistance of Casey Williamson and Scott Castledine of Clyde & Co in preparing this article.

¹ Money Max Int Pty Ltd (as trustee for the Goldie Superannuation Fund) v QBE Insurance Group Ltd [2016] FCAFC 148
²Blairgowrie Trading Ltd v Allco Finance Group Ltd [2015] FCA 811