COVID-19 Toolkit – Common fund order made in increasing class action market
On 6 May 2020, Justice Murphy of the Federal Court of Australia made a common fund order in favour of a litigation funder on settlement, despite the High Court having generally rejected the notion of common fund orders as recently as December 2019. This will unquestionably act as a fillip for litigation funders in an environment, caused by the increasing economic impact of the COVID-19 pandemic, that was already primed for an increase in class actions.
We review the background to, and effect of, this decision in the light of the current COVID-19 environment.
Common fund orders
Common fund orders have generally been made at the early stage of class action proceedings and provide for the quantum of a litigation funder’s remuneration to be fixed as a proportion of any payment ultimately made in the proceedings, for all group members to bear a proportionate share of that liability, and for that liability to be discharged as a first priority from any payment made. This has had the tendency to skew the allocation of the eventual payment to be favourable to funders.
High Court decision
In December 2019, the High Court in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall  HCA 45 held, by majority, that common fund orders are not in fact available in the two major class action forums, being the Federal Court and the NSW Supreme Court, pursuant to section 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCA) and section 183 of the Civil Procedure Act 2005 (NSW).
This decision was made in relation to the making of common fund orders at the early stage of proceedings and is not clear, as the joint reasons do not explicitly state, whether the Federal and NSW Supreme Courts have the power to make a common fund order at judgment or settlement. That said, in separate, still majority reasoning, Justice Gordon rejected the Courts’ ability to make a common fund order at any time and one reading of the joint reasons is that such order cannot ever be made.
The majority considered that a common fund order required more money to be paid to the litigation funder than might otherwise be the case, with its preference instead being for the making of funding equalisation orders. An equalisation order distributes the costs that the funded group members (those that have signed an agreement with the litigation funder) have agreed to pay the funder across the whole class, that is, across both funded and unfunded group members.
This decision was seen as a blow to litigation funders seeking to litigate in the Federal Court and in NSW as it appeared that funders would have to return to the old ways of “book building”, that is, having to undertake a more diligent investigation and signing up process of many group members as possible to funding agreements, and to block a guaranteed level of recovery. The thought was that litigation funders may be less enthusiastic about funding, say, product liability and consumer class actions, given their high volume/low value nature.
Federal Court reaction
Shortly after the High Court decision in Brewster, the Federal Court updated its class actions practice note to state that the parties to a class action may expect the Court to:
make an appropriately framed order to prevent unjust enrichment and equitably and fairly to distribute the burden of reasonable legal costs, fees and other expenses, including reasonable litigation funding charges or commission, amongst all persons who have benefited from the action.
This change appears to be directed at funding equalisation orders, but also seems to leave open the possibility of common fund orders being made at settlement.
On 4 May 2020, Justice Moshinsky of the Federal Court refused to made a common fund order in favour of a litigation funder on settlement, on the basis that, although, in his view, the High Court in Brewster had not prohibited the making of common fund order under section 33V of the FCA at the settlement of class action proceedings, it had expressed strong reasons for favouring a funding equalisation order over a common fund order.
Only two days later, in Uren, Justice Murphy granted a common fund order under section 33V of the FCA on the settlement of a class action, finding that the High Court decision in Brewster did not remove the Court’s power to made a common fund order at the conclusion of class action proceedings, section 33V gave the Court a broad discretionary power as to costs orders and that such an order was just in circumstances where the litigation funder had agreed to fund the proceedings at a time where common fund orders were regularly made by the Courts. The common fund order provided the funder with a commission that was equivalent to 25% of the settlement payment.
A boost for funders in dire times for class action defendants
The increasing economic impact of the COVID-19 pandemic will have considerable effects in the corporate and insurance space for a number of years. We have reported on some of those effects here. However, one of the most inevitable effects will be that distressed businesses, consumers, litigation funders and/or plaintiff law firms will be looking for opportunities to bring class actions.
Australia has a mature, yet generally unregulated, third-party litigation funding market. Its lack of regulation is alluring to many overseas funders. In 2015, funded litigation was estimated to make up about 14% of the total Australian litigation market, and it has unquestionably grown since then.
Although, on 12 May 2020, the Federal Government committed to establishing a parliamentary committee to examine, amongst other things, the “extraordinary profits being made by the booming litigation funding industry” to determine whether group members were getting a sufficient portion of class action settlements, the report of the committee is not due until 7 December 2020, and it is not yet know how widespread or interventionist its conclusions will be. This follows recent state and Commonwealth Law Reform Commission reports on class actions, which have had little impact in stemming the flow of funders’ involvement and interest in class actions.
The current lack of conclusion (and effect) of the parliamentary committee, Justice Murphy’s 6 May 2020 decision in Uren to allow a common fund order and the increasingly dire economic impact of the COVID-19 pandemic, will together undoubtedly open the already battered gates to litigation funders to look for opportunities to grow their portfolio and their profits in the current unstable market.
All of this has happened at a time where the year was already looking to be a significant one for class actions, given the recent acceptance of market-based causation and event studies in shareholder class actions; the successful Queensland Floods and Transvaginal Mesh cases; the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission); and contingency fee developments (see below).
Historically, every significant recent financial crisis in Australia has seen a dramatic increase in class actions being issued. This one is unlikely to be any different.
Although some limited solace has been provided by the Federal Government’s relaxation of the insolvent trading preclusions, boards of listed companies are still required to effect their continuous disclosure obligations, and/or will need to make forecast revisions, in circumstances of severe market instability. Companies are otherwise having to regularly make critical and instant decisions on matters they have not had to previously address and have the potential to impact a number of people. Such companies include those in the industries most affected by the COVID-19 pandemic, such as transport, tourism, leisure, aged care and hospitality. There is little doubt that litigation funders and, possibly more so, plaintiff law firms, who themselves need to survive in a legal environment that has dried up for many, will be on the lookout for even the slightest dip in share prices or evidence of loss that could be seen to derive from pressurised decisions or disclosures (including on the business risks of COVID-19), or forecast revisions not solely attributable to COVID-19.
For listed entities, the wipe-out of company value, and subsequent need for capital raising, combined with the recent acceptance of market-based causation, make them prime targets. This, in turn, may provide the final nail in the coffin of the already critically-ill “Side C” cover market in Australia. The cyclical effect of the death of “Side C” cover would be to add pressure on uninsured companies and their directors, in turn leading to greater exposure to claims being made. It is the ultimate confluence of bad circumstances.
As above, although the relaxation of the insolvent trading preclusions will provide some limited reprieve, directors are also in the gun. Directors are the decision-makers in determining, for example, the disclosures and forecast revisions to be made. Particularly where “Side C” cover may not be available, pursuing the directors, and potentially available (albeit increasingly-expensive) “Side A” cover, will become more and more attractive.
Auditors may similarly face issues (both in civil suits and from ASIC) from having provided their audits in such highly pressured and remote environments.
Other than shareholder class actions, those otherwise potentially in the crosshairs of an increase in class actions are:
- Travel operators
This may be caused by the potential lack of ability to refund arranged travel due to government restrictions or the effect of the recent High Court decision in Moore v Scenic Tours Pty Ltd  HCA 17 that awarded damages for disappointment as a result of disruption changes to holiday itineraries
Issues arising out of remote workplace environments, underpayment and termination are bound to increase.
- Cyber risk
The rapid deployment of mass remote working systems is exposing many businesses and even governments to unique systems and policy risks. Cyber criminals and state-sponsored attackers have adapted their tools and attacks to exploit the fear, interest and exposures generated by COVID-19. There is a heightened risk of privacy breaches.
- Banks and lenders.
There is a potential for more scrutiny to be applied to lenders and their lending practices in such a financially-strained environment. This follows on directly from the Banking Royal Commission.
The COVID-19 pandemic has solicited an unparalleled level of direct intrusion by the Federal and State governments into the operations of private businesses, often with catastrophic results. The decisions made by the governments have no doubt ameliorated the effects of a near shutdown for many; however, there is little doubt that the adverse effects will interest both litigation funders and plaintiff law firms.
Plaintiffs’ solicitors: Contingency fees
Legislation allowing contingency fees for lawyers in class actions should be passed in Victoria this year. This will undoubtedly see an increase in class action claims filed in Victoria, albeit likely at the lower end of the financial scale. Whereas litigation funders have little appetite for smaller value class actions, due to the small profit margin and (for them) disproportionate costs to risk ratio, mid-sized plaintiff law firms, particularly in the current environment, will see this as a real opportunity to press such claims and run class actions with a small amount of group members.
Whether contingency fees are worthwhile is something that is to be considered by the Federal Committee inquiry into class actions. However, with the likely increase in litigation funder interest in higher value shareholder class actions, and the real possibility that, despite the Federal Committee inquiry/report, the Commonwealth jurisdiction (and other states) may also allow contingency fees, at least for the meantime, there is a real probability of an increase in class actions at all levels.
Justice Murphy’s decision in Uren, the impacts of the COVID-19 pandemic and the likely approval of contingency fees in Victoria mean that, more than ever, litigation funders and plaintiff law firms will be on the lookout for class actions.
That said, we appreciate that the risk of class actions is not a primary concern for Australian businesses at the moment; the focus is instead on what to do to try to safeguard immediate survival. No doubt, we will all by now have experienced, or been the source of, seemingly instant business decision-making caused by the current environment. It is of course necessary. Yet this focus, and the effect of such fast and bold decisions, combined with an unpredictable market and hungry class action proponents, actually feeds into the real risk of class actions increasing.
Gilchrist Connell frequently defend class actions and trustee actions for both listed and private companies in Federal and State Courts. Please contact Alex Haslam if you or one of your insureds is faced with such an action.