Open class actions set to rise following landmark litigation funding decision

In October 2016 the Full Federal Court handed down its decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148. The decision is significant in that it has paved the way for greater judicial oversight of litigation funding regimes, and may result in class actions being brought faster with greater member participation.

What is litigation funding?

Litigation funding is where a third party financier lends money for legal fees to a class of plaintiffs to litigate a matter in exchange for a commission if the plaintiffs are successful.

Class actions may be 'open' or 'closed'. In Australia, most class actions are 'closed' and require litigants to 'opt in' to the proceedings and agree to a funding agreement with the financier before the litigation is commenced. Open class actions are brought on behalf of all persons affected without requiring them to 'opt-in'.

The Money Max Decision

The Money Max decision addresses the tension between class members who agree to pay a commission, and those who receive a portion of the damages without contributing to the litigation funder's fees.

Money Max, a litigation funder, brought proceedings against QBE bank on behalf of a group of shareholders for breach of disclosure obligations. The class action started as being an opt-in action, requiring class members to agree to a funding agreement, but ultimately was run as an open case on behalf of all affected shareholders.

Money Max sought approval from the court for a 'common fund order' to apply to all class members and for all legal and commission fees to be paid from a single common fund order. A common fund order effectively requires all litigants to contribute to the litigation funder, even those who have not consented to a funding agreement.

For the first time, the Court held that common fund orders could be beneficial, but imposed a number of obligations upon Money Max. Most relevantly, the Court would be responsible for determining the commission rates payable, rather than the funder. The Court would have oversight as to when the commission rate would be determined (most likely at the time of resolution) for example settlement or when damages are awarded, rather than pre-trial. It indicated that factors such as the nature of the risk assumed by the funder, the market rate for funding class actions at the time, and the results of the proceedings, would be considered.

Ramifications of the Money Max Decision

The decision allowing judicial oversight in litigation funding may go some way to address the criticisms of litigation funders but at the cost of increased court time necessitated by the supervisor requirement. It endeavours to prevent funders' entitlement to disproportionate commission, encourages potential litigants to join class actions, and discourages multiplicity of proceedings.

By allowing common fund orders, litigation funders can potentially receive commissions from all class members and prevent "free-riders" in open class actions. The effect of this is that an open class action may be brought more quickly once the number of potential affected persons is identified, without needing to sign individual funding agreements with each member before commencing proceedings.

The decision may cause complexities in settlement negotiations, as the court will determine what percentage of the common fund will be payable as commission, rather than the negotiating parties.