Australia: Common fund order made in QBE class action

In brief - Court's order may encourage open class proceedings

In the matter of Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148 (QBE class action), a Full Court of the Federal Court was prepared to make orders requiring all class members to pay the same pro rata share of legal costs and the funding commission from the common fund of any amounts they receive in settlement or judgment in the case. The Court required the funder, the applicant and the applicant's solicitors to undertake to agree to be bound by the litigation funding terms the Court annexed to its judgment before making the orders.

In other words, in a proceeding where the applicant (Money Max) had already agreed with a funder, International Litigation Funding Partners (ILFP) and its solicitor regarding terms on which litigation funding would be provided, the applicant sought orders which in essence would have the effect of applying litigation funding terms to all class members (not just the funded class members) and varying the rate of commission it had agreed with that funder.

The funder has been given the choice as to whether or not it wishes to proceed to fund the case where a common fund would be established but the rate of commission payable to it would be determined by the Court at a later time in the proceedings - probably at settlement approval or distribution of any judgment sum.

Allco class action case in 2015 saw Court decline common fund order

In our article of 13 August 2015 "Common Fund" application dismissed by Federal Court in Allco class action, we wrote on the reasoning of His Honour Justice Wigney of the Federal Court in the case of Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers and Managers Appointed) (in Liq) [2015] FCA 811 where His Honour dealt with an application to impose obligations on group members to pay the litigation funder even though they had not entered into a funding agreement. Only the applicants in that case had entered into a funding agreement with ILFP.

Justice Wigney did express the view that many of the issues raised by the applicants in their submissions in support of an order made out "a fairly compelling case for reform" of litigation funding, including possible introduction of Court approval of funding agreements.

As reported, Justice Wigney was concerned about the far reaching operation and effect of the proposed orders. The Court was being asked to declare the reasonableness of what were, at that stage of the proceeding, indeterminable or inestimable amounts. His Honour declined to make the order imposing the funder on the group.

Money Max brings open class action proceedings against QBE

When QBE made an ASX announcement on 9 December 2013 (which the applicant calls a corrective disclosure), QBE's share price declined $4.63 per share over that and the following day.

The proceeding brought by the applicant is an "open class" action. That is, the applicant brings the class action on its own behalf and on behalf of all persons who acquired an interest in QBE shares in the defined period and who claim to have suffered loss as a result of QBE's conduct.

The QBE class action is also funded by ILFP. Not all class members had entered into a funding agreement.

Interlocutory application for a common fund order

The Court, comprising Murphy, Gleeson and Beach JJ, stated (at [1]-[2]) that:

  • At the date of hearing of the interlocutory application for a common fund to be imposed upon the class, the applicant and 1,290 class members had each entered into a litigation funding agreement with ILFP. The balance of the class members had not.
  • The funded class members had agreed to reimburse ILFP the legal costs paid and also to pay ILFP a percentage commission of either 32.5% or 35% (depending on how many QBE shares they acquired in the defined period).
  • Accordingly, it was the funded class members who were collectively bearing the cost of the action against QBE as they had agreed to pay a funding commission and to reimburse the legal costs paid by the funder, out of any settlement or judgment.

Money Max's expert evidence estimated unfunded class members had a shareholding falling in the range of approximately 53% to 75% of shares acquired during the relevant period and held at the close of the period. Those unfunded class members would benefit from the commercial arrangements undertaken by the funded class members unless an order was subsequently made at the time of settlement approval or judgment, in the nature of a "funding equalisation order" in respect of those who did not opt out.

Such an order allows deductions from settlement amounts payable to unfunded class members of amounts equivalent to the funding commission that would otherwise have been payable by them had they entered into a funding agreement, and such amounts are then distributed pro rata across all class members. In this way both funded and unfunded class members receive the same proportion of the settlement or judgment amount. Thus, while unfunded class members under such a regime would not pay a funding commission to the funder, equality of treatment is achieved between class members because the unfunded class members do not receive any more "in the hand" than funded class members.

In the common fund proposed in the QBE class action, application was made to apply litigation funding terms to all class members at a reduced rate of 30%, from the common fund of any settlement or judgment in favour of the class.

Funding commission rate considered too high by some objectors to the order

All class members were notified of the application.

There were only two active objectors when the application was heard and both objections were on the basis that the funding commission rate of 30% was too high, especially when legal costs were required to be paid on top of the funding commission. Those objectors were minor participants in the proceeding given one only acquired ten shares in the relevant period and the other thirty shares.

Their objections to the commission rate were said (at [44]) to be of little significance to the Court's decision as under the Court's proposal, they would have the opportunity to be heard at a later stage when the Court approved a reasonable funding commission rate.

Common fund order includes three safeguards

A common fund order was made.

It was a little like the curate's egg for ILFP. If it wishes to continue to fund the action on the basis of a common fund, it has the expected commercial advantage of having a funding rate applied to the whole settlement or judgment amount and not just to the proportion due to its clients who had signed funding agreements. It has the disadvantage of not knowing the rate until the Court approves it, most likely at the settlement approval stage.

Accordingly, when a settlement is being negotiated, the funder will not know the rate that will apply.

Indeed, in making a common fund order, the Court stated (at [11]) that it had included three safeguards, namely:

  1. It did not approve the funding commission at the rate of 30% as the applicant sought or indeed at any percentage rate.
  2. Court approval of a reasonable funding commission rate was to be left to a later stage when more probative and complete information would be available to the Court - probably at the stage of settlement approval or the distribution of damages.

    The Court made no attempt to bind the court hearing the relevant application at a later time as to the appropriate rate of funding commission but did state it was highly likely that the funding commission would be approved at a rate lower than 32.5% or 35%.

    The absence of a cap on the aggregate funding commission that funded class members may be contractually obliged to pay could have a consequence that the funder is entitled to an excessive or disproportionate amount in the event of a very large settlement. Under the Court's proposed orders, that consequence would be significantly ameliorated if not avoided - because the commission rate is set when the settlement or judgment amount is known.

    Unfunded class members faced the prospect through a funding equalisation order (absent a common fund) that they would be saddled with a deduction from any settlement or judgment of an amount equivalent to the funding commission rate charged to funded class members as fixed in the funding agreement. Now, they and the funded class members would have the protection inherent in judicial approval of the rate of commission.

    Indeed, the Court stated that judicial oversight of the funding commission charged by the funder is central to its decision.

  1. The Court's proposed orders contained a floor condition that no class member could be worse off under the orders than he or she would be if such orders were not made.
  2. It is contemplated that before class members are required to choose whether or not to opt out, they would be informed of the proposed orders and the fact that they would have deducted from any settlement or judgment a reasonable funding commission at a Court approved rate. The rate may not have been approved at that stage, but the group member knows judicial approval of the rate is required.

Common fund approach and open class proceedings consistent with Part IV(A) of Federal Court of Australia Act

The Court observed that a common fund approach to litigation funding charges and legal costs was consistent with the aims of Part IV(A) of the Federal Court of Australia Act 1976 which deals with representative proceedings.

The Court saw a common fund approach as enhancing access to justice by encouraging "open class" representative proceedings as a practical alternative to the "closed class" representative proceedings which are prevalent in funded shareholder class actions. Open class proceedings were seen as more consistent with the opt out representative procedure envisaged by the legislature in enacting Part IV(A).

Finally, the Court said that by encouraging open class proceedings, a common fund approach may reduce the prospects of overlapping or competing class actions and reduce the multiplicity of actions that sometimes occurs with class actions.

The Court considered it appropriate that it supervise litigation funding charges.

What will be the effect of encouraging open class proceedings?

The trade-off in encouraging open class proceedings will be whether it leads to a race to file.

Due diligence in relation to prospective claims prior to filing may suffer. However, plaintiff solicitors will argue that there is still required the Genuine Steps Statement under rule 8.02 of the Federal Court Rules 2011 (Cth), a proper basis certification under section 42 of the Civil Procedure Act 2010 (Vic) or verification of certain pleadings by Part 14 Rule 23 of the Uniform Civil Procedure Rules 2005 (NSW).

The setting of funding commission rates

The Court's expectation is that courts will approve funding commission rates that:

  • avoid excessive or disproportionate charges to class members
  • still recognise the important role of litigation funding in providing access to justice
  • are commercially realistic
  • properly reflect the costs and risks taken by the funder
  • avoid hindsight bias

A court is likely to approve commission rates which produce a figure that is not excessive or disproportionate to the risk taken by the funder. A court may cap the aggregate funding commission. A court may adopt a sliding scale which decreases as the judgment or settlement amount increases.

Whilst it was stated that the Court had no real difficulty in accepting that a 30% funding commission rate is within the range of rates commonly offered, it will be interesting to see if an approved rate of say 10% for a common fund by one court will set the floor or the ceiling for rates considered by others. As is often the case, it is likely to depend on the circumstances.

Paul Bannon
Insurance and reinsurance
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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