In brief
A potential game changer that sought to test the boundaries of the class action regime has been averted after the Federal Court refused to make a 'common fund' order in the shareholder class action against Allco Finance. The court has, however, questioned whether legislative reform is required to deal with the role played by litigation funders in class actions. Partners Ross Drinnan and Jenny Campbell report on this latest development in class action law.
There are few areas of law more dynamic than class actions. Accepted practice has changed substantially as the entrepreneurial methods of class action lawyers and litigation funders test the boundaries of the class action regime, most recently in the form of applications for common fund orders.
Common fund orders explained
Common fund arrangements have been proposed in various forms, but in essence they entitle a litigation funder to receive a court-endorsed funding commission from all class members who participate in a settlement or judgment, rather than just those members who have signed funding agreements.
They are a departure from the well-established 'funding equalisation' approach that spreads across all participating class members the funding commission payable by class members who have signed funding agreements. This approach was developed to ensure that funded class members were not disadvantaged vis-à-vis the so-called 'free riders'.
Before the application in the Allco case, applications for common fund orders had come before the courts on four occasions with varying results. NAB consented to common fund orders in the course of settlement negotiations on two occasions (most recently, in the bank fees class action). In the settlement of the shareholder class action against GPT, Justice Gordon rejected the proposition as inappropriate. In the shareholder class action against Leighton Holdings, Justice Jacobson questioned the court's power to make a common fund order, but the matter was settled before the application was determined.
Importantly, none of those occasions required the court to undertake a thorough analysis following a contested hearing. That is, however, what happened in the application made in the Allco case.
The common fund application in Allco
Justice Wigney of the Federal Court heard the case for and against the common fund proposal that was put forward in the Allco case over two days in late December 2014.
The funder of the Allco case is International Litigation Funding Partners Pte Ltd (ILFP), which has previously funded shareholder class actions against Multiplex, NAB and Leighton Holdings.
In a departure from the usual course, only the representative applicants (the applicants) entered into funding agreements with ILFP.
In essence, the 'common fund' proposal involved an arrangement under which the applicants would:
- recover a fund on behalf of all class members – the so-called 'common fund'; and
- deduct from that fund the costs of the litigation and the funding commission payable to ILFP.
The commission payable to ILFP was said to be in the range of 32.5 per cent and 35 per cent of each class member's share of the 'resolution sum', depending on the number of Allco shares the class member held at the relevant time.
By the application, the court was asked to approve:
- the amounts the applicants had committed to pay to ILFP (on behalf of all class members) as 'reasonable consideration' for ILFP funding the proceedings; and
- the applicants retaining those amounts from the 'resolution sum' collected on behalf of all class members, and having a first charge on those amounts, for the purpose of satisfying their obligations to ILFP under the funding agreement.
The application was brought at a relatively early stage of the proceedings – after the close of the pleadings and before class members were invited to opt-out. This was said to be so that class members would be on notice of the proposal at an early stage of the proceedings and, most importantly, before the court set a deadline for opting-out of the proceedings.
The judgment
Justice Wigney refused the application on the basis that it was not appropriate nor in the interests of justice to make orders in respect of the reasonableness of the funding arrangement at this early stage of the proceedings.
His Honour held that the order sought was not in the interests of class members as a whole. He said that the real rationale for the application was to secure the commercial viability of the proceedings for the funder, and that 'that has nothing to do with ensuring that justice is done in the proceeding'.
A core aspect of his Honour's reasoning was that it is neither necessary nor appropriate to impose the applicants' commercial bargain in relation to the payment of a funding commission on the class members as a whole, at least at this early stage of the proceedings. Among other things, this was because it 'could not be appropriate' to make an order effectively approving and authorising the payment of a funding commission to ILFP in circumstances where the amount payable 'cannot even be estimated'.
His Honour also expressed a number of concerns about the mechanics of the proposed arrangements, including that it wrongly assumed that the recovery of a 'common fund' was the only way in which class members might recover in the proceedings.
His Honour did not consider it necessary to make the order to ensure equality among the class members. To the extent that there was any inequality at this stage, he said that was a problem of the applicants' own making, and that it was likely the court would be able to deal with any possible unfairness or inequity arising at the time the applicants' obligations under the funding arrangements crystallised.
Although his Honour recognised the broader implications of these issues for other cases, his judgment focused on the facts and circumstances of the application (including the point in the proceedings at which it was made). He expressly left open the possibility that an application at a later stage of the proceedings (when a settlement is contemplated or a settlement approval sought) might succeed, but said that it was neither necessary or appropriate to indicate whether a common fund order might be made at that time.
A case for law reform?
Having regard to his Honour's findings, it was not necessary for him to determine whether the court actually had the power to make the orders sought and he did not do so. He did, however, question whether there was a need for reform to specifically address the role of litigation funding in class actions, and suggested this might occur through legislative reform rather than through the courts dealing with the facts of individual cases on a piecemeal basis.
What next?
The decision is unlikely to be the last word on the issue. There may be an application for leave to appeal. If not, it is almost certain that a funder will try again with a different proposal that seeks to navigate around the court's concerns.
That said, the fact that the court held that the application was premature puts the funders in a difficult position, particularly given that one of the reasons the common fund application in the GPT proceedings was rejected was that it was made too late in the proceedings. This must raise the question as to whether there is ever a point in the life of a class action when a common fund order would be in the interests of class members.
The question of reform is one that will clearly be the subject of debate. While reform might be appropriate, in our view the focus should be on the interests of the parties to class action proceedings and not the furtherance of the interests of litigation funders. This would require a substantially different approach than the model put before the court in the Allco case.