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Ferris, Kaitlin --- "The increasing role of class actions: Developments in litigation funding" [2019] PrecedentAULA 48; (2019) 153 Precedent 36

THE INCREASING ROLE OF CLASS ACTIONS

DEVELOPMENTS IN LITIGATION FUNDING

By Kaitlin Ferris

In an historic move, the Full Court of the Federal Court of Australia sat jointly with the NSW Court of Appeal earlier this year to respectively hear an appeal of, and substantive application for, common fund orders in two class action proceedings.

Common fund orders fulfil the promise of the Australian Law Reform Commission’s (ALRC’s) proposal to introduce class actions in its 1988 Report on Grouped Proceedings in the Federal Court, enabling individuals to bring proceedings to obtain compensation for loss arising from multiple wrongs in circumstances where it might not otherwise be possible to do so.

This emerging funding mechanism promises greater access to justice, particularly for victims of wrongdoing who have relatively small claims, and has therefore sustained ongoing attack from defendants now taking the test of their legality to the High Court.

CLASS ACTIONS IN AUSTRALIA

The basic purpose of class actions is well understood – where individuals have been affected in similar ways by the conduct of a wrongdoer, common sense dictates that a collective action offers an efficient mechanism to prosecute those claims.

Class actions assume particular relevance where the claims of each individual are relatively small, and the cost involved in issuing separate proceedings outstrips any compensation which might be obtained. In these cases, victims would have no means of redress without a mechanism for aggregating their claims.

Access to justice is undeniably enhanced by the existence of the class actions regime. However, the costs typically involved in class actions continue to pose a barrier for claimants wishing to pursue redress on a collective basis. In Money Max Intl Pty Ltd v QBE Insurance Group Ltd (Money Max)^[1] the Full Court of the Federal Court of Australia (FFC) observed that ‘the costs and risks associated with class action proceedings have placed such litigation beyond the resources of ordinary and even most wealthy Australians’.^[2]

In particular, a representative applicant in a class action faces the prospect of an adverse cost order if the claim is unsuccessful. Given that the costs of running a class action tend to range between $5m to $20m, this is a financial risk which few individuals can assume.

Funding options for class action litigation have therefore evolved to meet this challenge and fulfil the promise of the ALRC’s proposal to introduce the class actions regime in 1988. Third party litigation funding has become one of the most common mechanisms for financing class actions in Australia. The role of litigation funders in securing access to justice has been endorsed by several courts, including the FFC in Westpac Banking Corporation v Lenthall (Westpac),^[3] where it was held that:

‘to the extent that the presence of a funder for litigation can be seen to facilitate the bringing forward of legitimate claims, in particular where claimants are numerous and the claims small or modest, such can be seen to conform with, and not be antithetical to, the evident statutory policy of Pt IVA of increasing access to justice’.^[4]

BACKGROUND TO LITIGATION FUNDING OF CLASS ACTIONS

A typical litigation funding arrangement involves a funder paying the applicant’s legal costs, including professional fees and disbursements. The litigation funder also agrees to meet any adverse costs order awarded against the applicant, and to provide security for costs. If the claim is unsuccessful, the litigation funder is not entitled to recover any funds from group members. In exchange, if the matter resolves successfully, the litigation funder is entitled to recover both the costs invested in the litigation and a commission payment.

Historically, a litigation funder’s entitlement to claim those payments from group members was contractual in nature. A funder would offer funding agreements to potential group members, which prescribed that the group member would pay a pro rata amount of legal costs and a commission in the event of a successful outcome. This process of signing up group members is known as ‘bookbuilding’. A litigation funder’s obligation to meet the costs of any given proceeding was usually conditional on the aggregate value of the claims of all group members who executed funding agreements reaching a target quantum, so as to render the claim financially viable.

It therefore became commonplace for litigation funded class actions to be commenced on a ‘closed’ basis – that is, participation was limited to those who had entered into a funding agreement. This limited the utility of the regime in providing a mechanism for the resolution of all claims arising from the same or similar circumstances. As a result, the courts developed mechanisms to align funded class actions with the principles and purpose of the opt-out regime – by ordering that classes be ‘opened’ to all group members at some point during the litigation, and allowing group members to simply register their claims rather than enter complex funding agreements in order to participate.

While this approach was consistent with the objectives of the opt-out regime, by limiting the active steps required by group members to participate in a class action and expanding the relevant class, it created a further problem. Those group members who had executed funding agreements would be contractually obliged to contribute to the costs associated with their proceeding – while those group members who had not executed a funding agreement had no such obligation.

Various courts fashioned an ad hoc solution to this problem in the settlement approval context, by making orders applying what became known as a funding equalisation mechanism. The effect of such orders was to deduct an equivalent amount from all group members’ compensation in respect of legal costs and litigation funding charges, regardless of whether they had entered into a funding agreement. However, whereas a funded group member’s commission was paid directly to the litigation funder pursuant to contract, an unfunded group member’s commission was paid back into the pool of funds to be re-distributed to all group members. That is, the funder did not receive a direct payment of commission from unfunded group members. Funders therefore had to set their contractual commission rates at a level sufficient to ‘carry’ the cost of the likely unfunded group.

COMMON FUND ORDERS

Against that background, the rest of this article considers the most recent evolution of funding in class actions – namely, the court’s power to make ‘common fund orders’ which require all participating group members to directly contribute from any resolution sum to the legal costs and litigation funding charges of a class action.

In the analysis of the decisions which follows, it is apparent that courts have recognised that the utility of the class actions regime and access to justice depends on the endorsement of new funding mechanisms. Common fund orders have therefore been approved as being appropriate to ensure that justice is achieved in various proceedings, on the basis that they:

• avoid the costs and time associated with ‘bookbuilding’;

• encourage litigation funders to fund class actions on an ‘open basis’;

• are easier to understand for group members than complex funding agreements;

• ensure that all group members contribute equally to the costs of the litigation; and

• ensure a degree of court oversight in respect of the amount payable to the funder.

MONEY MAX

The Supreme Court of Victoria made what were ostensibly common fund orders in both Farey v National Australia Bank^[5] and Pathway Investments Pty Ltd v National Australia Bank.^[6] However, those orders were made to facilitate settlement,^[7] and subsequent decisions^[8] had left practitioners and funders alike uncertain as to the court’s power to make such orders.

The successful application for a common fund order in Money Max v QBE therefore marked the first time that the FFC confirmed that its powers extended to requiring all participating group members to contribute to the costs of the litigation, by directly paying the litigation funder an amount of costs and commission from any resolution sum – regardless of whether group members had executed a funding agreement.

The substantive proceeding was brought by the applicant on behalf of all shareholders who had purchased shares in QBE in a period during which it was alleged that QBE was in breach of its continuous disclosure obligations. The respondent opposed the common fund order on the basis that, inter alia, the court did not have power to make such an order.^[9]

Prior to Money Max, courts were increasingly taking a more interventionist role in overseeing this emerging cost to group members on a case-by-case basis.^[10] In Money Max, the FFC more generally recognised that litigation funding charges had become a standard cost in shareholder class actions,^[11] and held that it was ‘appropriate that the Court exercise some oversight over litigation funding charges to group members’.^[12]

The decision was therefore a turning point in the level of supervision courts exercise in respect of litigation funding in class actions in Australia. It confirmed that the court’s protective jurisdiction in respect of group member interests extends to close interrogation of the reasonableness of litigation funding charges. The principle that emerged from the case was that access to justice may be enhanced by litigation funders and common fund orders, but only insofar as the court maintains the ability to regulate the charges ultimately payable by group members.

As to the question of power, the Court held that the orders were within power and were appropriate pursuant to ss33ZF and 23 of the Federal Court of Australia Act 1976 (Cth).^[13] In reaching this view, the Court gave particular consideration to the scope of the power granted by s33ZF, which provides that in any representative proceeding, ‘the Court may, of its own motion or on application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding’.

The applicant contended only that the orders were appropriate to ensure that justice was done in the proceeding. The following factors led the Court to the conclusion that this test had been met.

First, a large number of group members had executed funding agreements at the time the application was heard. The applicant sought a form of common fund order which would charge all group members a lower commission (30 per cent of the gross resolution sum) than what the funder was entitled to pursuant to the funding agreements (32.5 per cent before trial, or 35 per cent if resolved once trial commenced). The Court therefore held that one of the reasons the proposed orders were appropriate to ensure that justice was done in the proceeding was that ‘it is likely that upon approval the applicant and funded class members will enjoy a lower funding commission rate’,^[14] so that access to justice provided by the funding arrangements did not come at an unreasonable price.

The Court, however, declined to set the final commission rate payable, preferring to make a general order which deferred the question of the amount to a time when more information was available.^[15] This information included the quantum of the settlement or damages, so that if a very large amount was obtained, the Court could take that into account when approving the funding commission rate and avoid a windfall payment to the funder.^[16] In exercising its power pursuant to s33ZF, it was in group members’ interests that there be court scrutiny of the funding terms and court approval of the ultimate funding commission rate.^[17]

One critical aspect of the Court’s decision, echoed in the cases which followed,^[18] was that if ‘any unfunded group members are unhappy with the obligation to pay a reasonable court-approved funding commission it will be open to them to opt out and bring separate proceedings (either individually or in another class action)’.^[19] Group members were therefore protected not only by the requirement for the court to make decisions consistent with their interests, but by their own autonomous capacity to opt out of the proceeding if they opposed the requirement to contribute to the costs of the litigation.

Since the decision in Money Max, several common fund orders have been made – including in cases other than shareholder class actions.

PEARSON

In Pearson v State of Queensland (Pearson)^[20] the applicant, Hans Pearson, brought a proceeding on his own behalf and on behalf of class members claiming stolen wages in respect of work performed pursuant to legislation which provided for wages to be taken by the Protector of Aborigines or the superintendents of land defined as missions or reserves. The proceeding was funded by Litigation Lending Services Ltd (LLS). The applicant sought a funding commission at a rate of 20 per cent, which Murphy J held compared favourably with the rates generally offered in the litigation funding marketplace, and which was partly offered by LLS ‘because of its interest in the social justice aspect of the case’.^[21]

The common fund application was brought alongside an application to open the proceeding to all affected group members, not just those who had signed funding agreements with LLS. By making those orders, and guaranteeing a return to the funder from all group members’ recoveries, the approximately 4,500 group members who had not been included in the claim obtained access to justice through automatic inclusion in the class action. For reasons including that the persons affected by the wrongdoing lived in relatively isolated communities, and were likely to be elderly, poorly educated and lack commercial sophistication,^[22] the prospect of those further approximately 4,500 individuals signing funding agreements was low.

Justice Murphy held that Money Max had confirmed that the court has power to make a common fund order in an appropriate case, and the question was whether such an order was appropriate in the interests of justice in the proceeding before him.^[23]

In determining that it was, his Honour reiterated the principle that group members should equally bear the costs of the litigation: ‘it is in the interests of justice in the proceeding that the burden of the legal costs and litigation commission charges incurred in achieving any favourable result falls equally upon all class members who stand to benefit from the proceeding’.^[24]

Justice Murphy went one step further than the Court in Money Max, by approving a funding commission rate of 20 per cent or such lower percentage as the court considers reasonable at a point when the court is armed with more complete information.^[25] In doing so, his Honour provided a greater degree of certainty to LLS and group members as to the likely ultimate commission charge – but preserved the court’s ability in the future to reduce the commission payable if a very large settlement was achieved. Following Money Max, his Honour noted that by deferring the ultimate determination of the commission rate until a later point, ‘class members will have the protection inherent in judicial oversight of the funding commission charged’.^[26]

Notably, the lawyers for the class argued that a common fund order would reduce the complexity of the outreach program to class members.^[27] By eliminating the need to explain the operation of a complex funding agreement for the purpose of signing affected claimants up to the closed class action, bookbuilding costs were likely to be reduced.^[28]

This factor offered a further basis on which to make the order which was not raised in Money Max. Plainly, it is in the interests of group members for the funding arrangements attending a proceeding they are affected by to be as clear as possible – Murphy J recognised that a common fund order offered a clearer articulation of the funding position than lengthy funding agreements.

This decision demonstrated that common fund orders are not the sole domain of shareholder class action litigation. To the contrary, this evolving funding mechanism is likely to create a pathway to justice for more diverse types of claims, as litigation funders expand their horizons encouraged by the greater certainty offered by common fund orders. Just as the order in the Pearson litigation offered a broader group of Aboriginal and Torres Strait Islander people a more secure footing to pursue remedies for the historical injustice of stolen wages, the advent of common fund orders is likely to broaden the scope of proceedings that litigation funders are prepared to support more generally.

WESTPAC

In Westpac, the respondent appealed the decision of Lee J at first instance to make a common fund order. In an historic step, the FFC sat together with the NSW Court of Appeal to hear both the Westpac matter and the referral of the application for a common fund order made in the proceeding Brewster v BMW Australia Ltd.^[29] Both Courts decided each of the respective matters separately, but with reference to the submissions of the parties to the other proceeding where adopted by the parties before it.

The substantive class action against Westpac alleges that financial advisers breached their fiduciary duties to group members along with the statutory best interests and no-conflict obligations.^[30] It is estimated that there are in excess of 80,000 group members, and that each claim may be worth up to $15,000.^[31]

The case before the Court provided an example of the difficulties presented by a bookbuilding exercise where a large number of claimants with small value claims are involved. The Court observed that it would be both uneconomic to prosecute the claims individually, and costly to persuade enough members to enter a funding agreement with the relevant funder in order to render it economic for the funder to fund the proceedings.^[32] In other words, the circumstances of this case were typical of a claim which would be unlikely to proceed in the absence of a common fund order.

The critical question for the Court was the sc66ope of the power in s33ZF. The Court held that Westpac’s submissions, which sought, inter alia, to limit the power by reference to the principle of legality and other provisions of Part IVA which regulate the distribution of funds to group members, unjustifiably approached the power too narrowly.

The Court held that the Parliament plainly intended for the power to be wide, and for its use to evolve in a manner which allowed the Court to address novel and unforeseen issues as they inevitably arose in individual class actions.^[33]

The Court also rejected Westpac’s submissions that the principle of legality required that common fund orders be viewed as outside the scope of s33ZF. The Court held that the very nature of the order ‘is rooted in a view that it is appropriate to ensure the ends of justice in a way that equitably and fairly distributes the burden of a proper and legitimate funding cost to vindicate and realise the common rights’.^[34] The Court therefore recognised that the ultimate cost of access to justice secured by litigation funding must be distributed fairly among class members, to ensure that claims that would otherwise be uneconomic to vindicate can be pursued.

The Court ultimately upheld Lee J’s decision to make the common fund order, although the High Court of Australia has since granted leave to appeal to Westpac. The appeal reflects the investment defendants are prepared to make to shut down this emerging funding mechanism, which opens the door to access to justice to more victims of wrongdoing, fulfilling the promise of the class actions regime as contemplated when the ALRC recommended its introduction.

It therefore remains to be seen whether common fund orders are here to stay – but if the procedural funding tool survives appeal, we can expect to see more diverse litigation funded on behalf of victims of a broader range of wrongdoing in future. The Pearson case is one example of common fund orders working to secure access to justice outside of the shareholder class action space. If the High Court confirms their legality, it is likely that common fund orders will create a pathway to justice and remedies for those whose claims would otherwise go unheard.

Kaitlin Ferris is a Senior Associate in Slater and Gordon’s class actions team, predominately working on large commercial class action litigation on behalf of shareholders. PHONE (03) 8644 8474 EMAIL Kaitlin.Ferris@slatergordon.com.au.

^[1] [2016] FCAFC 148; (2016) 245 FCR 191 (Money Max).

^[2] Ibid, 226.

^[3] [2019] FCAFC 34 (Westpac).

^[4] Ibid, 12 [18].

^[5] [2014] FCA 1242.

^[6] [2012] VSC 625.

^[7] Money Max, 218 [134].

^[8] Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626; Blairgowrie Trading Ltd v Allco Finance Group Ltd (in liq) [2015] FCA 811; (2015) 325 ALR 539.

^[9] Money Max, 225-226.

^[10] See, eg, Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433, 2 [7].

^[11] Money Max, 207 [71].

^[12] Ibid, 208 [72].

^[13] Ibid, 194 [7].

^[14] Ibid, 224 [167].

^[15] Ibid, 209 [79].

^[16] Ibid, 211 [89].

^[17] Ibid, 224 [167].

^[18] Pearson v State of Queensland [2017] FCA 1096, 14 [25].

^[19] Money Max, 219 [142].

^[20] [2017] FCA 1096 (Pearson).

^[21] Ibid, 25 [24].

^[22] Ibid, 23 [15].

^[23] Ibid, 24 [21].

^[24] Ibid, 24 [22].

^[25] Ibid, 24 [23].

^[26] Ibid, 24 [23].

^[27] Ibid, 27 [29].

^[28] Ibid.

^[29] [2019] NSWCA 35.

^[30] Lenthall v Westpac Life Insurance Services Ltd [2018] FCA 1422, [7].

^[31] Westpac, 8 [6].

^[32] Ibid, 13 [19].

^[33] Ibid, 32 [88].

^[34] Ibid, 34 [94].