The Federal Court of Australia has found that it has power to make a common fund order in approving the settlement of a class action under section 33V of the Federal Court of Australia Act 1976 (Cth) ("Federal Court Act"). It has, however, declined to make such an order in the case at hand.
This decision approving the settlement of the Vocus class action was highly anticipated after the High Court ruled, in December 2019, that section 33ZF of the Federal Court Act does not empower the Federal Court to make a common fund order (see our alert here). It provides important guidance about the lengths to which a court may go, as a matter of discretion, in protecting the interests of litigation funders at the expense of litigants.
The class action was commenced in April 2019, alleging that Vocus contravened its statutory continuous disclosure obligations and misleading or deceptive conduct provisions following its 2016 Annual General Meeting on 29 November 2016, and in a release to the ASX of the presentation made at the AGM. It was said that the contraventions (which concerned the company's FY17 performance guidance) subsisted until Vocus released announcements to the ASX on 2 and 3 May 2017, causing loss and damage to group members who acquired Vocus shares between 29 November 2016 and 2 May 2017.
After an abridged interlocutory history, which saw Vocus being required to give only limited discovery by agreed categories after having been relieved of the need to file a defence, the matter settled at a mediation on 2 December 2019. The settlement terms included the payment of $35 million by Vocus, including legal costs, interest and a litigation funding commission of approximately $6.1 million (plus applicable GST).
Two days later, the High Court handed down its landmark judgment to the effect that common fund orders – which oblige all group members, whether funded or not, to pay their recoveries into a common fund from which a funder's commission is taken before distribution to group members – cannot be made under section 33ZF of the Federal Court Act. While this may have been thought to stymie any intention by the funder of the Vocus class action to obtain a funding commission from unfunded group members who had not agreed to pay it one, attention instead turned to section 33V of the Federal Court Act.
The role of the Court in approving class actions
Section 33V provides:
- A representative proceeding may not be settled or discontinued without the approval of the Court.
- If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.
The central question for the Court, as Justice Moshinsky reiterated in approving the settlement in this case, is "whether the proposed settlement is fair and reasonable in the interests of the group members considered as a whole". Where a settlement scheme makes provision for the sharing of legal costs, the court is to be satisfied that the costs agreements "have been applied reasonably according to their terms". Where provision is made for deduction of a funding commission, the Court must again be satisfied as to the justice of such a term.
In the settlement notice published in February 2020, group members were told that the applicant would seek a common fund order in the amount of $6.1 million, representing a funding commission of 17.43% of the Settlement Sum, to be borne by all group members regardless of whether they had chosen to sign a funding agreement. They were also told that, if a common fund order were not made, approval would be sought for a funding commission from funded group members subject to a funding equalisation order (which would distribute among all group members only the commission agreed to be paid by funded group members – a lesser impost).
This proposal required Justice Moshinsky to consider whether the decision of the High Court in BMW Australia Ltd v Brewster  HCA 45 precluded the Court from making the common fund order.
Did common fund orders survive the BMW decision?
In the BMW case, the High Court considered whether the Federal Court had power to make a common fund order at an early stage of a proceeding under section 33ZF of the Federal Court Act. A majority of the High Court said that it did not have that power.
Justice Moshinsky observed that the issue before the Court in the Vocus case was different. No order was sought under section 33ZF. Rather, the common fund order was sought under section 33V as part of a settlement approval application – not at an early stage of the proceeding. His Honour considered that, in light of this, many of the concerns expressed by the majority in BMW had no or little application in Vocus. By way of example, his Honour observed:
"Kiefel CJ, Bell and Keane JJ expressed a concern that an application for a common fund order 'invites the court to order the establishment of a complex relationship between group members and a litigation funder with whom the group members would otherwise have no relationship at all' (at ). Their Honours also indicated a concern that '[t]he court, in attempting to fix, even provisionally, a rate of remuneration at the outset of the proceeding must necessarily engage in a speculative exercise' (at ). These concerns have little or no application at the conclusion of the proceeding."
His Honour also referred to the contrast between the powers available at the conclusion of a proceeding and the asserted power to make a common fund order at an early stage. In relation to this, Kiefel CJ, Bell and Keane JJ had said:
"The provisions of Pt IVA of the [Federal Court Act]… expressly provide for the making of orders distributing any proceeds of a representative proceeding. As will be seen, the occasion for the making of such an order is the conclusion of the proceeding. At that stage, if the group members happen to be indebted to a litigation funder for its support of their claims, the value of the litigation funder's support to the group members will be capable of assessment and due recognition. That stage is the appropriate occasion for orders for meeting and sharing the cost burden of the litigation because the value of the litigation and the extent of the burden will have been rendered certain. In contrast, an application for a CFO at an early stage of a proceeding necessarily involves speculation on the part of the parties and the court in respect of these matters; and attention to matters of concern to the litigation funder which may not be shared by, and may well be contrary to the interests of, group members."
Justice Moshinsky also considered the differences between common fund orders and funding equalisation orders, as described in the BMW case, noting that "[t]hese observations clearly favour the making of a funding equalisation order over a common fund order (implicitly, at the conclusion of a proceeding)". Nevertheless, his Honour did not consider that the High Court had expressed a concluded view that there is no power under section 33V to make a common fund order. This was because:
- the plurality in the High Court contrasted the making of a common fund order at an early stage of the proceeding with the powers available at the end of a proceeding. His Honour said that this indicated that their focus was on the issue of whether a common fund order could be made at an early stage;
- although the plurality stated expressly that a funding equalisation order is "clearly available" where a settlement is reached, their Honours did not say expressly that a common fund order is not Justice Moshinsky thought it likely that, had this been the intention, it would have been stated.
In BMW, Justice Gordon – who was among the majority but wrote a separate judgment – had observed that section 33V(2) "does not envisage a Court making orders with respect to the economics of a proceeding by ensuring that a litigation funder obtains a particular return on funds invested" and that section 33V does not "envisage a Court being engaged in making a common fund order". Justice Moshinsky said that such observations "may, at least on one view, go further, and express an opinion that s 33V would not support the making of a common fund order". His Honour also noted that Justice Nettle – the other member of the High Court majority – did not directly address the point. His Honour concluded that there is not a "clear majority view expressed" by the High Court "to the effect that there is no power under s 33V to make a common fund order".
Importantly, however, Justice Moshinsky said:
"While the observations of the majority may not represent a concluded view on the question of power, they nevertheless express strong reasons for favouring a funding equalisation order over a common fund order. When the observations of Gordon J are added to those of the plurality, a majority of the High Court have indicated strong reasons favouring the making of a funding equalisation order over a common fund order."
Thus, while his Honour found that common fund orders survived – in a limited way – the High Court's decision in BMW, the circumstances of the Vocus case did not warrant the making of a common fund order as a matter of discretion. Instead, Justice Moshinsky approved the applicant's alternative proposal in the nature of a funding equalisation order. His Honour did so for the following reasons (which outweighed the fact that no group member had objected to the proposed common fund order despite disclosure having been made in the settlement notice):
- the common fund order would have imposed an additional cost on the group by requiring more money to be paid to the litigation funder than the litigation funder had contracted to receive;
- the alternative, however, took as its starting point, the actual cost incurred in funding the litigation;
- a common fund order would go further than is necessary to address the problem of 'free riding' by unfunded group members, and the alternative proposal "sufficiently ensures that unfunded Group Members who obtain the benefit of the litigation contribute to the cost of the proceeding"; and
- while the funder had an "important role" in funding the litigation and taking on the risk of doing so for the benefit of registered group members, the alternative proposal "sufficiently recognised" this contribution by providing for the funder to receive "the funding commission to which they are entitled under the contracts with funded Group Members".
Not a funder's bonanza
The Vocus case (and obiter remarks in McKay Super Solutions Pty Limited (as trustee for the McKay Super Solutions Fund) v Bellamy's Australia Limited  FCA 461 at  per Beach J) show that the Federal Court does not consider the High Court to have closed the door on common fund orders entirely – in that section 33V remains a vehicle for making them at the end of a proceeding.
Justice Moshinsky's decision demonstrates, however, that the Court need not go beyond the minimum necessary in order to address the "free rider" problem inherent in funding disparities within a group. Section 33V of the Federal Court Act does not give litigation funders licence to expect an undue reward at the expense of unfunded group members, particularly in circumstances where funders have made a commercial decision to build a limited book while assuming the risks of funding an open class.