The Money Max decision will make commencing class actions for and on behalf of all class members more attractive to a litigation funder - with some caveats.
The Full Federal Court has given a green light to a "common fund" type order which has the effect of requiring all group members to pay a funding commission to the litigation funder, including those who do not sign up to the funding agreement (Money Max Int Pty Ltd v QBE [2016] FCAFC 148).
At first pass the Money Max decision sounds like a game changer and it certainly has the potential to be one. However, we will need some time to assess the ultimate effect of the order, both in the Money Max case and the class action industry more generally.
How the Court crafted the common fund order
In Money Max the Court has allowed the litigation funder to recover a litigation funding fee from all class members, including those who do not sign up to an agreement with the funder. The funded applicant proposed that both funded class members (who had agreed to a funding commission of 32.5% to 35%) and unfunded class members should have a deduction of 30% from any settlement or damages to be payable to the funder.
While the Full Court rejected the percentage commission at this stage of the litigation, it approved the payment by all group members to the funder of a "reasonable funding commission" to be determined by the Court at a later date when "more probative and more complete information will be available to the Court, probably at the settlement stage.
The Court also imposed two further conditions. First, there is a "floor condition" that no class member is to be worse off under the equalisation formula than if the orders had not been made. Second, all class members are to be informed of the proposed orders and be given an opportunity to opt out of the class action.
A new approach to fairness between group members
Recent decisions have recognised the need to ensure that the costs associated with commencing and prosecuting class action proceedings are borne equally and fairly amongst the group members. Where the courts have differed is in the way in which fairness should be imposed.
Money Max introduces a new approach to the imposition of fairness amongst group members and is significant because it is the first decision to approve the concept of a common fund at the commencement of the proceedings.
Previously, courts have made common fund type orders at the time of, or in order to facilitate settlement of proceedings. In Pathways Investments v National Australia Bank [2012] VSC 625, the Victorian Supreme Court approved a class action settlement that required all group members to pay a portion of their distribution to the litigation funder ranging from 30 to 40%.
Similarly, in Farey v National Australia Bank [2014] FCA 1242, the parties indicated their intention to settle the class action proceeding and the Federal Court made orders to facilitate settlement negotiations. The orders involved deducting 25% from each group member's "resolution sum" plus an amount equal to the group member's share of costs and expenses as determined under the funding agreement.
However, in Blairgowrie Trading Ltd v Allco Finance Group [2015] FCA 811 the Federal Court refused to make an order which would have entitled a litigation funder to a commission of approximately 35% of any money recovered in the proceedings. The Court rejected the application because:
- the proceedings were at an early stage - the applicant's prospects of success were hard to gauge and so it was not even clear that there would be a fund from which the funder's commission could be paid;
- group members who did not enter a funding agreement at an early stage should not have one imposed on them; and
- the main motivation for the application appeared to be to make the class action financially viable for the funder.
Money Max and the importance of access to justice
While the Court disavowed broader policy considerations as the basis for its decision, it is clear that the desire to enhance "access to justice" was a significant driver in the Court's decision. At the heart of the desire to promote "access to justice" was the Court's view that an environment that promoted open class actions funded by litigation funders is one that enhances access to justice.
The Court noted that closed class actions had become popular with litigation funders (commenced only on behalf of those who had signed a funding agreement) but provided remedy for fewer people, created barriers to settlement, had the potential to promote overlapping or competing class actions and could generate conflicts of interest.
By permitting a common fund order at the commencement of the proceedings, the Court said:
What does the Money Max decision mean for class actions in Australia?
The Money Max decision has rightly been reported as a significant progression in judicial acceptance of common fund applications. The basis of the decision is the promotion of access to justice by creating an environment which will encourage the commencement of open class actions rather than closed class actions.
It is too early to assess all of the implications for the class action industry, but the decision will make commencing class actions for and on behalf of all class members more attractive to a litigation funder. After all, that was a significant factor in the decision.
There are, however, two critical conditions that the Court has imposed on the common fund order.
First, the Court included an order that no class member will be worse off. This presents curious scenarios and raises the question - compared to what? If the common fund application in Money Max had not been made, then class members who had not signed up the funding agreement would be entitled to their full recovery (if one becomes payable), less legal fees. In that scenario, there is no way that the class member could not be worse off from the common fund order. However, if a funding equalisation order would otherwise be made (an order which means that the costs of funding the litigation is equally borne by the group members and then redistributed amongst all group members on a pro-rata basis), then the question will be which class members are worse off under the alternative scenario. Much will depend on the future direction of the litigation.
Secondly, the return on investment that the funder will be entitled to recover is uncertain. The percentage commission will be determined at a later point in time. We will need to see whether the final funding commission payable in Money Max will be an attractive return on investment for the litigation funding industry. If Money Max survives a High Court appeal, it will take a number of further class action decisions before there is some certainty in the market about the rate of return that funders can expect from their investment.
Given the policy underpinnings of the decision, it seems likely that the Court will ultimately permit a funding commission which generates a sufficient return on investment to make the noble virtue of providing "access to justice" an attractive investment for the litigation funding industry.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.
