Court Intervention in Funding Arrangements: An Australian Template

On 26 October 2016, the Full Court of the Federal Court in Australia delivered its judgment in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited. For the first time, this approved an application to conduct class actions on a common fund basis. It paves the way for litigation funders in open class actions to obtain fees from class members, but without needing to enter into funding agreements.

Some litigation funders have expressed concerns as to the uncertainty created when they will not know whether their fees will be calculated according to the percentage agreed in their litigation funding agreements, but the general view following the decision seems to be that the development is favourable for funders and will increase rather than decrease class action activity generally.One of the judges in Money Max has since gone a bit further in a first instance decision, Earglow Pty Ltd v Newcrest Mining Limited. That judge is Murphy J, a very experienced class action lawyer who went to the Federal Court bench from partnership in the leading Australian class action firm Maurice Blackburn. In Money Max, Murphy J had observed generally (without binding effect) that the court could review and reduce the funder’s commission at the end of the case where a common fund order was sought.

In Newcrest, Murphy J considered an application for court approval of a settlement. There was opposition to the court unilaterally interfering with the contractual terms agreed between the class members and the funder, and doing anything more than approving or rejecting the proposed settlement. The judge held that:

“…if in a settlement approval application the Court considers the proposed settlement is fair and reasonable except that the funding commission is excessive or exorbitant, the Court has power to approve the settlement and reduce the funding commission to be deducted pursuant to the terms of the settlement. … I do not accept that the Court’s powers are limited to a binary choice between approving or rejecting the proposed settlement. In such circumstances it may be ‘just’, ‘appropriate’, or ‘appropriate or necessary to ensure that justice is done in the proceeding’ that the Court make orders approving the settlement but reducing the funding commission to be deducted under the settlement.”

Murphy J also rejected the suggestion that if the court reduced the commission to be deducted from the settlement sum, the funder could turn around and collect the difference from the funded class members under the terms of the funding contracts, warning that if this is what a commercial third party funder sought to do, “the Court could move to require that funders undertake to do so before class actions are permitted to continue.”

The court approached the issue of reducing a funder’s commission as analogous to the court’s powers to reduce the amount in legal fees charged by the applicant’s lawyers. To determine whether the percentage the funder claimed was unreasonable or excessive, Murphy J considered detailed research on market rates charged by funders, and ultimately concluded that the percentage claimed (between 26% and 30%) was probably at the low end of what one could expect given the risks, complexity and costs in the matter. In all the circumstances, the settlement was approved including the funder’s commission.

Although Newcrest reinforces the court’s ability to scrutinise funding arrangements and reduce funding commission, it is not likely in practice to discourage class action activity or funding as it encourages a flexible commercial approach to evaluating proposed settlements and funding commissions.

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