Federal Court re-confirms settlement common fund orders are available to funders (and paves the way for simpler applications)

Game well and truly on for common fund orders

What you need to know

• The Full Federal Court has re-confirmed its earlier decision that it has the power to make a common fund order ("CFO") at settlement. 
• The Court needs to decide whether a CFO is "just" in the circumstances and on the evidence before it. The court does not start with a preference for either common fund orders or funding equalisation orders ("FEO").
• Settlement approval hearings should be approached in a reasonable and cost effective way – extensive evidence is rarely required.
• Many of the factors in this case will apply to most commercial class actions – suggesting a simpler way forward for funders seeking CFOs in the Federal Court.

Common fund orders and funding equalisation orders

A CFO allows a commission to be paid to the funder from the settlement proceeds (including from group members who have not contracted to that). We recap the journey to settlement CFOs in our article here.

A FEO caps the total amount payable to the funder to what it is contractually entitled to receive through the funding agreements it has signed with individual group members (but then makes adjustments to share that payment among all group members).

What was this case about?

The primary judge made orders approving a $98 million settlement, but refused to make a CFO giving $24.5 million of it (25%) to the funder. The basis for that decision was that (a) the Court does not have the power under s33V to make a CFO; (b) even if it did, it was not appropriate to exercise its discretion to make a CFO; and (c) it was appropriate, instead, to make a FEO. 

The funder appealed. (The other parties did not participate, and a contradictor was appointed to represent the interest of group members.)

In the interim, the Full Court in Elliott-Carde had held that there is power under s33V(2) to make a CFO – and re-confirmed that in this case. 

The Full Court found it was "just" to make a $24.5 million CFO in favour of the funder because the amount was commercially realistic and properly reflected the costs and risks the funder took on by funding the proceeding. 

When are CFOs "just"?

The Full Court considered that deciding what amount of funding commission is "just" under s33V(2) requires a common sense evaluative assessment by the court, and should not ordinarily require sophisticated expert evidence as to what funding commissions would represent a reasonable rate of return on invested capital. 

The non-exhaustive list of considerations relevant to deciding what constitutes a fair and reasonable funding commission are well established from Money Max. In this case, the considerations that pointed in favour of making a CFO included:

• The funder had paid legal costs and disbursements of approximately $20 million, provided security in the amount of $6.95 million, and was exposed to significant risks including a substantial adverse costs order.
• Group members were provided both with information about the initially agreed 35% funding rate (for those group members who had entered into a funding agreement), as well as the funder's intention to apply for a CFO. Very few group members objected to the proposed CFO.
• The CFO was not outside the range of reasonable returns (although the Court cautioned that comparisons of headline funding rates are only useful when all other things about the funding arrangements are equal). Further, the 25% commission was a discount to the agreed 35% funding rate.
• The proceedings were "large, highly complex, strenuously defended, expensive and involved substantial risks on liability and quantum". These were the litigation risks of providing funding in the proceeding (assessed at the time the funder took on the risks at the start of the proceeding). 
• The funding commission was not disproportionate to the settlement sum.

These were powerful considerations in finding that the CFO sought was "just" under s33V(2). The primary judge was wrong to find that the majority in Brewster expressed "strong reasons" for favouring a FEO over a CFO. (Relevantly, Brewster dealt with CFOs under a different power and at a different stage of the proceeding.) In any event, the Full Court considered the primary judge's analysis impermissibly treated the funding arrangement as a "cap" above which any amount was considered to be a "windfall gain". This was wrong, particularly in circumstances where "[t]his Court has long said that "book-building" is to be discouraged" (at [73]). 

Guidance on approach to settlement approval hearings

The Full Court considered that the settlement approval process "went off the rails" – there were 49 affidavits (40 by the applicants) and expert evidence on what constituted a reasonable rate of return for the funder. As a result, the settlement approval hearing took six days and "involved a huge expenditure of time and resources by the solicitors for the applicants" to the tune of $2.5 million (reducing recovery for group members).

The Court cautioned parties to be vigilant to ensure that settlement approval applications do not incur unnecessary costs and that solicitors act consistently with their duties under the Federal Court Act. In particular, Justice Lee commented that there will rarely be a need to file extensive affidavit evidence. 

What next?

1. The "powerful considerations" in favour of a CFO in this case will apply in most commercial class actions.  This case will likely be seen by funders as settling the last of the first instance debate, and smoothing the way for simpler and cheaper applications for CFOs with less concern by courts about "windfall gains". 
2. We expect applications for FEOs to now be rare – given CFOs generally provide better returns for funders.
3. This is all subject to potential review by the High Court at some stage – both as to power and any preference for FEOs.  But that won't happen in this case given the other parties did not contest the issue in the Full Court. 
4. The Full Court did not weigh in on the conversation about whether the Court has power to make common fund orders involving payments to solicitors (effectively enabling contingency fees to solicitors, which are currently only available in Victoria).  This is a controversial area – see our article here. Justice Lee has previously said he thinks there is power and the Full Federal Court may consider this issue further in the Blue Sky class action later this month, so watch this space.

Galactic Seven Eleven Litigation Holdings LLC v Davaria [2024] FCAFC 54

Authors: Ian Bolster, Partner; John Pavlakis, Partner; Lucinda Hill, Partner and Sally-Anne Stewart, Senior Associate.