THE ECONOMICS OF CLASS ACTIONS: ‘BOOK BUILDING’, FREE RIDERS, COMMON FUND ORDERS AND FUNDING EQUALISATION ORDERS.
A snapshot of the evolution of class action proceedings in recent times – from Money Max to Brewster and beyond.
Decision of Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016).
Common Fund Orders (CFOs) could be made at the beginning of proceedings under Federal Court of Australia Act (s 33ZF) and its State-based equivalents.
The effect of a common fund order:
Required group members to contribute to the litigation funder a percentage of their entitlement under any settlement or judgment, whether or not the group member had entered into a funding agreement with the funder, to ensure the economic viability of a class action.
High Court decision in Australia BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall  HCA 45, 2019.
This decision means courts cannot rely on Federal Court of Australia Act (s 33ZF) and its State-based equivalents to make common fund orders at the outset of class action proceedings.
Central to the case was whether section 33ZF of the Federal Court Act and section 183 of the Civil Procedure Act (NSW) empower the court, in representative proceedings, to make a common fund order. The court, by a 5:2 majority, said that the sections do not.
In the lead judgment, Chief Justice Susan Kiefel, Justice Virginia Bell, and Justice Patrick Keane said that both section empower the courts to make any appropriate or necessary order “to ensure that justice is done,” but the power does not extend to making common fund orders.
“These sections empower the making of orders as to how an action should proceed in order to do justice. They are not concerned with the radically different question as to whether an action can proceed at all,” the justices said. “It is not appropriate or necessary to ensure that justice is done in a representative proceeding for a court to promote the prosecution of the proceeding in order to enable it to be heard and determined by that court. The making of an order at the outset of a representtative proceeding, in order to assure a potential funder of the litigation of a sufficient level of return upon its investment to secure its support for the proceeding, is beyond the purpose of the legislation.”
Consequently, absent any statutory intervention, common fund orders of this kind will no longer feature in the Australian class action landscape.
It remains to be seen whether the government will take the ALRC’s recommendation to pass legislation giving courts the express statutory power to make common fund orders.
Even if such legislation is introduced, it remains susceptible to the constitutional challenges which were not determined by the High Court in Brewster.
CONSEQUENCES OF BREWSTER, A RETURN TO A 2016, PRE-MONEY MAX ENVIRONMENT.
1. Book-building is back -
The prior practice of seeking to sign individual funding agreements with as many group members as possible (a process known as “book-building”). Group members are asked to sign a funding agreement which lists the percentage commission payable to the funder if the action succeeds.
2. Consequence of insufficient group participation - funders reconsider the economic viability of any class actions currently on foot -
- Funders are deterred from from funding (and therefore lawyers from seeking to run) proceedings where the anticipated judgment amount per group member is low.
3. Funders likely to prefer ‘Opt In’ rather than ‘Opt Out’ class actions -
Opt-In class actions with “closed classes” that excludes group members who do not sign a funding agreement.
“Funded cases will not be filed unless or until they have built a sufficiently strong book, which means that litigation will not be commenced as quickly,” he said. “It will be far more expensive to get cases off the ground due to the high costs associated with building a book, creating real challenges for less well-resourced funders.”
4. Funding Equalisation Orders
Made at the end of an action, a funding equalisation order spreads the commission the funder is contractually entitled to receive across all participating group members (so that the funded group members are not worse-off from their decision to help fund the claim).
Victoria as the new preferred forum for Class Action proceedings:
- Victoria is in the midst of overhauling its class action regime to allow for contingency fees to be charged by lawyers to all group members. The change could attract future proceedings to the Supreme Court of Victoria.