Australia: Attempts To Constrain The ‘Free Riders': Common Fund And Equalisation Orders In Australian Class Actions

Last Updated: 15 November 2017
Article by Janette McLennan

Co-authored by Alexa Williams



Litigation funders have recently sought to improve their financial recoveries by applying to Australian Courts for 'common fund orders' in class actions. Common fund orders require all class members who seek to benefit from the proceeds of settlement or judgment to contribute equally to the cost of legal representation and litigation funding costs, regardless of whether or not they had entered into a funding agreement.

Despite initial reluctance to make such orders,1 a litigation funder finally achieved success in the Full Federal Court decision of Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd (Money Max)2 in late 2016. You can read more about our commentary on that case here.

Since then, there have been at least two important decisions, being Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgrs apptd) (in liq) (No 3),3 (Allco) in which another common fund order was made and Earglow Pty Ltd v Newcrest Mining Ltd4 (Newcrest) in which an equalisation order was made. These decisions demonstrate the willingness of Australian Courts to modify and interfere with litigation funding arrangements.

The Opt-Out Model

Australia has an opt-out procedure in representative proceedings, such that every group member that falls within the class description is automatically part of the proceedings unless they affirmatively exclude themselves.5 The adoption of an opt-out model encourages "free-riding", whereby group members may intentionally refrain from entering into a litigation funding agreement and wait until a successful outcome before coming forward to collect a proportion of the proceeds without having reimbursed the funder.

Funders have sought to prevent "free riders" from sharing in litigation proceeds by restricting class actions to a 'closed class' group6, typically only brought on behalf of a subset of group members who contractually enter into a funding agreement.7 The existence of closed classes has resulted in multiple class action proceedings financed by different litigation funders against the same respondents. This has been criticised by commentators as it gives rise to difficult case management considerations and creates uncertainty over the finality of the subject matter of proceedings.

Common fund orders

Given that funders want to maximise their profits from litigation, funders have instead sought to reduce "free-riding" and increase access to justice by applying the United States common fund approach to funding fees.8

In Money Max,9 the Full Federal Court of Australia held for the first time that the funder in that particular case could be the beneficiary of a common order fund without needing to privately contract with all group members. This means that the entire class in that case will be liable to pay the funder a commission out of any proceeds recovered in the litigation through either a settlement or a judgment. Some uncertainty still remains for the funder, as the 2016 decision 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.

Since that decision, a single judge of the Federal Court in Allco also made a common fund order on 31 March 2017,10 identifying how the Court may set a commission rate as a necessary consequence of approving a class action settlement. The Court was invited to approve a settlement distribution scheme which provided the funder with 30% of the net settlement sum (i.e. after deduction of the Class Applicants' legal costs) which in reality equated to 22% of the gross settlement sum of $40 million (being $8.85 million).

In approving the settlement, his Honour Justice Beach observed that generally speaking the percentage a funder will receive varies from case to case in Australia, but most commonly falls within a range of 25% to 40% and this was at the lower end of that range.11 Had the gross settlement sum been substantially higher, Beach J would have applied a "sliding scale" to the commission rate and accordingly set a lower rate "so that the amount paid to the funder would have remained proportionate to the investment and risk undertaken by the funder."12 His Honour considered that the Court was empowered to "modify any contractual bargain dealing with the funding commission payable out of any settlement proceeds".13

Equalisation orders

As an alternative, Courts have sought to address the perceived unfairness which exists between funded and unfunded members by making 'equalisation orders' following settlement or judgment. An equalisation order is when the Court orders unfunded group members to have their recovery deducted by an amount equivalent to the funding commission that would otherwise have been payable under a funding agreement. This amount is then redistributed back pro rata amongst the funded members.14

The Newcrest decision delivered on 28 November 2016 provides one recent example of a Court approved 'equalisation order', which operated as a redistribution recovery mechanism to all funded members. In approving the order, the Court observed:15 'This mechanism is fair and reasonable because it achieves equality of treatment between class members. I can see no good reason why funded RCMs should carry the litigation funding costs of the proceeding alone and unfunded RCMs should be permitted to take the benefit of the proposed settlement...'

Whilst the approval of an equalisation order ensures equality between all group members, it generally does not affect or increase the amount of a litigation funder's fee (subject to the "Court's power to reduce the funding commission to be deducted pursuant to the terms of the settlement")16. This means that all group members share equally in the balance of the settlement sum, but the funder's recovery is capped at their contractual entitlement to commission fees.17

Implications for insurers

Together the cases of Money Max, Allco and Newcrest confirm the willingness of Australian Courts to modify and interfere with litigation funding arrangements where it is fair and reasonable to do so. The decisions are significant, but they are not of general application to all current and future class actions which will always be determined on the particular facts.

Whilst the potential availability of common fund and equalisation orders may give funders comfort that proceedings are commercially worthwhile in the absence of a requisite pool of signed up group members at the outset of a matter, there also remains uncertainty for the funder as to the commission rate that they will ultimately receive. This typically will not be determined until the Court approval process at the end of the proceedings. Moreover, the decisions do not extinguish or reduce the need for funders to do appropriate due diligence before commencing proceedings, nor do they otherwise turn cases with limited prospects of success into attractive funding propositions.

Insurers and financial institutions should be cognisant that these developments may result in more open class actions being brought in Australia, which could reduce multiplicity of actions and create certainty of outcome. It is equally worth noting that even if a common fund or equalisation order is made, this does not affect a respondent's liability, nor will it affect the quantum of damage which an insurer may be required to indemnify the respondent for in satisfaction of a judgment (in the event that an insurance policy responds to the claim). Rather, these orders go to how settlement monies are to be distributed among class members and litigation funders.

Footnote

1 Blairgowrie Trading Ltd v Allco Finance Group Ltd [2015] FCA 811.

2. [2016] FCAFC 148.

3. [2017] FCA 330.

4. [2016] FCA 1433.

5. See s33J Federal Court of Australia Act 1976 (Cth).

6. See Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275.

7. See s33C Federal Court of Australia Act 1976 (Cth).

8. Michael Legg, 'Reconciling Litigation Funding and the Opt Out Group Definition in Federal Court of Australia Class Actions – The Need for a Legislative Common Fund Approach' (2011) 30 Civil Justice Quarterly 52, 63.

9. Ibid.

10. [2017] FCA 330.

11. Ibid at [125] .

12. Ibid at [157]-[160].

13. Ibid at [101].

14. See P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd [No 4] [2010] FCA 1029 at [26]-[29].

15. [2016] FCA 1452.at [157] per Murphy J.

16. Ibid at [101].

17. See Re Banksia Securities Limited (Rec & Mgr Apptd) [2017] VSC 148 at [100].

18. See Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd [2016] FCAFC 148 at [69].

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Janette McLennan
Similar Articles
Relevancy Powered by MondaqAI
Colin Biggers & Paisley
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Colin Biggers & Paisley
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions