Key Points:

Although they did not succeed in Allco, litigation funders will continue to seek common fund orders, and it is not impossible that they will eventually succeed.

There has been a set-back for litigation funders and their business model in Australia. In the Allco Finance Group class action, the Federal Court of Australia has refused to make an order which would have entitled a litigation funder to a commission of approximately 35 percent of any amount of money recovered in the proceedings (Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In liq) [2015] FCA 811).

The failure of the applicants to get a common fund order in this case, however, does not mean one will never be made. Given their potential to turbo-charge the class action industry in Australia, it's worth understanding how they work and why they are so attractive to litigation funders.

How common funds work in US class actions

Plaintiff lawyers and funders are taking their lead from North America, and common fund orders have a long history in the United States.

Ordinarily, a litigation funder is permitted to retain a percentage of moneys payable from only those group members who have entered into a litigation funding agreement. On the other hand, an order for a "common fund" requires all group members to pay the litigation funder a portion of any damages or settlement received, even if they have not entered into a funding agreement.

There are however a few important differences in the US system which make it a more amenable jurisdiction for common fund orders. First, and principally, US class actions have a procedure called certification. At the outset of the class action the court has to certify that four prerequisites (numerosity, commonality, typicality and adequacy of representation) have been satisfied. This way, the US court knows how many people are in the group and the extent to which they have common issues. In contrast, a court in Australia will have a very limited knowledge of group member claims, the potential number of group members and their potential loss.

The other difference is the rules relating to costs. In the US the general rule is that each party bears its own costs of the proceedings, whereas in Australia the unsuccessful party usually bears some of the successful parties' legal costs.

The structure of the Allco class action

Shareholders in the failed Allco Finance Group have brought a class action against Allco, its former chairman and its auditors for misleading them about Allco's financial position.

International Litigation Funding Partners (ILFP) is funding the class action. If they are successful, some - but not all - group members have agreed to pay ILFP all of its costs (including legal fees) plus a commission ranging between 32.5-35% of the amount recovered.

The applicants sought an order from the Court imposing that commission payment arrangement on all group members, whether or not they:

  • enter into a funding agreement with ILFP;
  • know about the class action; or
  • participate in it.

The Federal Court refuses to make a common fund order

The applicants relied on the Court's general power to make orders in class actions which the Court "thinks appropriate or necessary to ensure that justice is done in the proceeding" (section 33ZF of the Federal Court Act). They advanced six reasons, but their arguments essentially boiled down to the proposition that without the order, the class action might not be financially viable from ILFP's and the lawyers' perspectives.

The Court refused to make the order:

  • the proceedings are at a very early stage and the applicants' prospects of success are hard to gauge - it's not even clear that there will be a common fund from which ILFP's commission could be paid;
  • the main motivation for making the application appeared to be to make the class action financially viable, so it was in the interests of the lawyers and the funder, not the interests of justice; and
  • group members who do not enter a funding agreement should not, at an early stage, have one imposed on them by the court through a common fund order.

Is it just a matter of timing?

The Court recognised that there was a tension between the proposed order and the more usual practice where costs orders are made at the end of a case. It has a specific power to make orders about the costs incurred by ILFP and the applicants' lawyers (under sections 33V and 33ZJ of the Federal Court Act). The advantage in making an order at the end of a case is that the Court knows:

  • how large the common fund will be;
  • what ILFP's costs and commission will be;
  • what the lawyers' costs will be; and
  • how much will be left for group members.

The Court thought it undesirable to make an order fixing the costs and commission regime in stone, when it did not have all of that information, and could not assess if the commission was reasonable.

However, the Court has made common fund type orders at later stages in the proceedings. For example, in Pathway Investments v National Australia Bank Ltd [2012] VSC 625 the Court approved a settlement that required all group members to pay a portion of their distribution to the litigation funder.

More recently in Farey v National Australia Bank Ltd [2014] FCA 1242, in a situation where both parties had indicated their intention to settle the proceeding, Justice Jacobson made common fund-type orders (which ultimately mean that any group member who receives a benefit from the settlement will be required to pay a fee to the litigation funder) in order to facilitate settlement negotiations. The difference in both of those cases was that the order were made where a settlement had been reached - or at least mooted.

Caution rather than optimism

Given these previous decisions, the Allco decision sounds a note of caution. The Court left open whether it should make a similar order in other circumstances or cases.

What does this mean for the Australian class action industry - and the large companies that are its usual target?

The major reason that litigation funders seek common fund orders is that they can improve their return from their investment in a class action - or even make a class action financially viable.

Litigation funders are certainly reading this decision very carefully, and adding its findings to their store of knowledge. They will continue to seek common fund orders, and it is not impossible that they will eventually succeed.

Should that come to pass, it will likely drive up the number of class actions, especially in shareholder and other financial matters.

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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.