Federal Court seeks to limit High Court’s ban on Common Fund Orders

Tensions have intensified as the Federal Court experiments with alternative funding arrangements to revive common fund orders that were rejected by the High Court in certain circumstances.

On 13 March 2020, the Federal Court in McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3) [2020] FCA 461 (Justice J Beach) (Bellamy’s No 3), applied a funding equalisation mechanism to guarantee funding and commission recovery for class action litigation funders towards the end of a proceeding in the settlement approval phase.  This decision effectively challenged the breadth of the High Court’s judgment in BMW Australia Ltd v Brewster & Anor and Westpac Banking Corporation & Anor v Lenthall & Ors [2019] HCA 45 (Brewster).  In Brewster, a majority of 5:2 restricted the power of inferior courts, under section 33ZF of the Federal Court of Australia Act 1976 (Cth) (the Act), from making common fund orders at or near the commencement of class action proceedings.

The Common Fund Order (CFO) has been regarded both as desirable for the purposes of motivating funders to fund otherwise very risky actions and to eliminate expensive book-building costs; but also as undesirable in that it gave funders a windfall in collecting commission from people who had not agreed to funding (unfunded group members).  However, CFOs eliminated the so-called free rider group members from getting a benefit without paying for the privilege.  The CFO also gave maximum flexibility to the Court to fashion a fair outcome because it gave full power to set both costs and funding remuneration as it saw fit.[1]

Brewster was regarded by some as a principled but impractical approach to handling difficult and often competing, class actions.

Decision

Bellamy’s No 3 consists of two competing proceedings against the respondent Bellamy’s Australia Limited (BAL): McKay Super Solutions Pty Limited (as Trustee for the McKay Super Solutions Fund) v Bellamy’s Australia Limited (VID163/2017) (McKay Action) and (Basil v Bellamy’s Australia Limited FCA VID213/2017) (Basil Action).  In Bellamy’s No 3, Justice Beach had the difficult task of approving settlement orders that would fall within the newly interpreted ambit of section 33ZF of the Act, by the High Court in Brewster.

The Federal Court made funding equalisation orders for the following reasons:

1. 1. Pursuant to s 33V of the Act, Justice Beach did not have the power to change the commission rates set by litigation funders and was restricted to either approving or discontinuing the settlement. Therefore, to ensure that the settlement was approved, the litigation funders in both the McKay Action and the Basil Action agreed to reduce their commission rates lower than both the contractual rates and the benchmark that was accepted for common fund orders.
   2. If Justice Beach had to discontinue the settlements by virtue of s 33V of the Act, he would have made an expense sharing or costs equalization order which may not have been an equitable outcome for the parties.

Further observations from Justice Beach indicated that common fund orders provided the Courts flexibility in setting commission rates and the authority to impose them on the litigation funder.  This has changed post Brewster and Justice Beach has called upon the legislature to regulate funding arrangements to allow the courts the flexibility to tailor their solutions.

Funding Equalisation Mechanism

The Federal Court considered the following variables while relying on the funding equalisation mechanism:

1. 1. The percentage of group members who have signed funding agreements as compared with the percentage of group members who have not.
   2. The comparison between two commission rates where one of them imposes a cost based on the risks of third party finance and the other is a rate stipulated in the funding agreements, and whether the rate in each case is on the net settlement sum or gross settlement sum.
   3. Where a judge is unable to modify the commission rates set by litigation funders on a s 33V application as it only allows them to either distribute the settlement sum or discontinue proceedings.
   4. Whether a reliance on the funding equalisation mechanism would allow the litigation funder to recover a greater share of commission when the percentage amount is deducted from the unfunded group members and added back pro rata across all group members.
   5. The funding equalisation mechanism was not a result of judicial deliberation but was introduced by practitioners to expediently resolve practical problems.

Pricing Model

In the McKay Action, the litigation funder proposed to charge varying commission rates based on the timing of settlement and the gross amount recovered by the applicants.  Whereas, in the Basil Action, the funder proposed a 3 x Multiple Model which allowed it to recover three times the applicant’s share of project costs.  The Court however observed that the funder’s commission fees specified by various rates was lower than what was specified in the 3 x Multiple Model and the rates of the funder in the McKay Action.

The willingness of litigation funders in both the McKay and Basil Actions to amend their commission rates was regarded favourably by the Court while approving settlement.

Orders

In the McKay Action the settlement was approved and pursuant to sections 33V(2) and 33ZF of the Act, the settlement terms included payments the Applicant’s Legal Costs in the amount of $3,561,421.13 which were ‘apportioned on a pro rata basis between all participating Group Members (being those who are to receive a distribution from the Scheme) and deducted from the settlement sum’[2]; and the Administration Costs in the amount of $203,264.70.

In the Basil Action the settlement was approved and pursuant to sections 33V(2) and 33ZF of the Act, the settlement terms included the payments of the Applicant’s Legal Costs in the amount of $3,592,118 and the Administration Costs in the amount of $135,793.

Key Lessons

The Funding Equalisation Mechanism has essentially replicated the outcome achieved by a common fund order.  However, it does not provide the court the same flexibility in changing the commission rates set by litigation funders.  It also defers the guarantee of financial recovery that litigation funders seek at the start of a proceeding to ensure their funding viability.

Litigation Funders may need to reconsider their commission rates prior to settlement to ensure that the courts are in a position to approve them during settlement.

Bellamy’s No 3 has revived the pressure on the legislature to introduce reforms that provide the courts statutory power to make common fund orders.  This is in line with the Australian Law Reform Commission’s inquiry into Class Action Proceedings and Third Party Litigation Funders, which supports the view that ‘courts have an express statutory power to reject, vary or amend the terms of a third-party litigation funding agreement’.[3]

Authored by:

Glenn McGowan QC, Partner & Chief Counsel

[1] Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148.

[2] McKay Super Solutions Pty Limited (as Trustee for the McKay Super Solutions Fund) v Bellamy’s Australia Limited (VID163/2017) [6].

[3] Australian law Reform Commission, Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third Party Litigation Funders, Report No 134 (2019) Recommendation 4, 99.