7. Settlement of class actions

 

Introduction

  1. 7.1 In a class action, settlement represents the point at which the liability of the defendant and the compensation of the class members are agreed upon. While class actions may proceed to judgment, settlement is the most common way of resolving class actions in Australia. As at 1 June 2017, 65 per cent of all class actions commenced in Victoria since the introduction of part 4A of the Supreme Court Act 1986 (Vic) have settled.1
  2. 7.2 Despite the high settlement rates, the representative nature of class actions creates challenges not present in other litigation. For example, unrepresented class members are bound by the outcome of the proceedings, yet they do not appear before the court. The interests of class members may not directly align with those of the representative plaintiff. Further differences may exist between the individual claims of class members, requiring settlement of common issues as well as individual ones.
  3. 7.3 Much of the controversy surrounding class actions has been focused on the amounts recovered by class members at settlement, when compared to the amounts received by lawyers and litigation funders. The way the settlement amount has been distributed, particularly the timeframe for distributing it, has also been criticised.
  4. 7.4 In Victoria, approval from the Supreme Court is required for settlement to have legal effect. While this is stipulated under section 33V of the Supreme Court Act, the factors that the Court must take into account are not included in the legislation. The Commission has been asked to consider whether specified criteria for the Court’s approval of a settlement under section 33V should be drafted, and if so, what they might be.
  5. 7.5 The Commission recognises that the courts, in particular the Federal Court, have been active in responding to the challenges of class action settlement. Recent innovations such as the use of common fund orders reveal a trend toward increased judicial supervision of settlement. The options outlined in this chapter seek to reinforce these innovations.
  6. 7.6 The Commission recognises that each class action’s settlement will involve different considerations, challenges and possible outcomes. It is therefore important to ensure that the court maintains a strong role in supervising settlement, has access to the appropriate resources and support, and the flexibility to respond appropriately.
  7. 7.7 This chapter provides an overview of the guidelines that the Supreme Court has issued for approval of settlements and discusses whether these guidelines, or other guidance material, should set out the approval criteria. The chapter then turns to the issues and challenges presented by, and during, settlement:
  • the interests of unrepresented class members
  • assessment of legal costs
  • assessment of funding fees
  • sharing the cost burdens
  • settlement distribution schemes
  • notice of settlement and registration.

Court approval of settlement

  1. 7.8 The powers of the Supreme Court in relation to settlement are contained in part 4A of the Supreme Court Act. Guidance as to what matters the Court takes into account during settlement is provided in the practice note for class actions (Supreme Court Practice Note).2 The overarching obligations contained in the Civil Procedure Act 2010 (Vic) set out the broad duties of parties in attempting to resolve a dispute.

Part 4A of the<strong_em> Supreme Court Act 1986 (Vic)

  1. 7.9 Under part 4A, approval by the Court is required for settlement of class actions to have legal effect. The Court’s power is provided by section 33V, which states that:

(1) A group proceeding may not be settled or discontinued without the approval of the Court.

(2) If the Court gives such approval, it may make such orders as it thinks fit with respect to the distribution of any money, including interest, paid under a settlement or paid into court.

  1. 7.10 Section 33ZF gives the Court the power to make any order it thinks appropriate or necessary to ensure that justice is done. The broad power provided under section 33ZF is the basis for some of the Court’s innovations, discussed later in this chapter.
  2. 7.11 The draft legislation proposed by the Australian Law Reform Commission (ALRC) in its 1988 report on grouped proceedings set out factors for the court to take into account when approving a settlement:

(a) the nature and likely cost and duration of the proceedings if approval or leave were not given;

(b) the amount offered and the likelihood of success in the proceeding;

(c) whether the discontinuance, compromise, settlement or acceptance of money is in the interests of the group member having regard to the views, if they are made known to the court, of the group member; and

(d) whether satisfactory arrangements have been made for the distribution of money to be paid to the group members.3

  1. 7.12 These draft provisions were not incorporated into part IV of the Federal Court of Australia Act 1976 (Cth). Consequently, they do not appear in part 4A of the Supreme Court Act and section 33V does not specify the factors that the Court should take into account when approving a settlement.

 

Class action practice note

  1. 7.13 The criteria that the courts consider relevant to settlement approval have developed through case law.4 In Victoria, they have been consolidated into the Supreme Court Practice Note.5
  2. 7.14 When applying for Court approval, the parties will usually need to persuade the Court that:
  • The proposed settlement is fair and reasonable having regard to the claims made on behalf of the class members.
  • Settlement has been undertaken in the interests of class members as well as those of the representative plaintiff, and not just in the interests of the representative plaintiff and the defendant.6
  1. 7.15 The Supreme Court Practice Note contains a list of specific factors that the parties are usually required to address when making application for approval:
  • the complexity and likely duration of the litigation
  • the reaction of the group to the settlement
  • the stage of the proceedings
  • the likelihood of establishing liability
  • the likelihood of establishing loss or damage
  • the risks of maintaining a class action
  • the ability of the defendant to withstand a greater judgment
  • the range of reasonableness of the settlement in light of the best recovery
  • the range of reasonableness of the settlement in light of all the attendant risks of litigation
  • the terms of any advice received from counsel and/or from any independent expert in relation to the issues which arise in the proceeding.7
  1. 7.16 The courts have noted that there is rarely one single or obvious way in which settlement of a class action should be framed, whether between the representative plaintiff/class members and the defendant (inter partes) or in relation to sharing the proceeds among class members (inter se). Reasonableness is considered a range, and the appropriate question is whether the proposed settlement falls within the range.8
  2. 7.17 Further, it is not the task of the court to guess or interpret the tactical or other decisions made by the lawyers, but rather to satisfy itself that the decisions are within the reasonable range of decisions, having regard to the circumstances and risks.9

 

<strong_em>Civil Procedure Act 2010 (Vic)

  1. 7.18 In addition to the criteria set out in the Supreme Court Practice Note, litigation funders and lawyers involved in class actions are subject to the obligations contained in the Civil Procedure Act. In facilitating the ‘just, efficient, timely and cost-effective resolution of the real issues in dispute’,10 parties are under the obligation to use reasonable endeavours to resolve a dispute by agreement.11

Interests of unrepresented class members

  1. 7.19 Under Australia’s opt out regime, where a class action is commenced on an open basis, all persons who have suffered damage of the type specified in the claim are considered to be participants in proceedings, even if they have not identified themselves as class members or consented to participation.12 Unless they choose to opt out, class members are bound by the outcome of proceedings, which means that they cannot pursue litigation on the same issue at a later stage.
  2. 7.20 Class members who remain in proceedings will not necessarily have their interests presented to the Court at settlement. While the representative plaintiff will have their interests advanced by lawyers, this is not the case for all class members. Some class members will not have entered into a legal retainer, or have legal representation. It is unlikely that they will appear before the Court. If they do, they are unlikely to possess the legal knowledge to enable them to adequately communicate their interests. It is therefore important that their interests are protected during settlement.
  3. 7.21 In exercising its power under section 33V of the Supreme Court Act to approve settlement, the Court assesses whether the settlement is fair and reasonable. In doing so, the Court ensures that the interests of the representative plaintiff and the class members who have signed a retainer with the lawyers and/or a funding agreement are not being preferred over the interests of other class members, ‘absent strong and compelling reason(s) for any such preferential treatment’.13
  4. 7.22 In the Federal Court decision of Lopez v Star World Enterprises Pty Ltd,14 Justice Finkelstein explained the Court’s role in safeguarding the interests of unrepresented class members:

With regard to the application under s 33V, my principal task is to assess whether the compromise is a fair and reasonable compromise of the claims made on behalf of the group members. I am not so much concerned with the position of Mr Lopez [the representative plantiff] who, after all, has solicitors and counsel to advise him as to how his interests will best be served in the litigation. The group members are not protected in this way.15

  1. 7.23 The difficulty of the court’s task in protecting class members’ interests in settlement is heightened by the non-adversarial format of settlement approval. By the time that court approval is sought, the representative plaintiff and defendant have generally negotiated and consented to the terms of the settlement.
  2. 7.24 An application for settlement approval is a joint application by the representative plaintiff and defendant, with the court having to rely on the evidence of the representative plaintiff’s lawyers. Active opposition to, or dissatisfaction with, the terms of settlement is not usually provided. There is no stipulated means by which the evidence is subjected to an adversarial process.16 For the court, its role in assessing the settlement can be exacting, as Justice Finkelstein has described:

the task of the court in considering an application under s 33V is indeed an onerous one especially where the application is not opposed. It is a task in which the court inevitably must rely heavily on the solicitor retained by, and counsel who appears for, the applicant to put before it all matters relevant to the court’s consideration of the matter.17

  1. 7.25 The risk that all class members’ interests are not represented by the representative plaintiff’s lawyers is reduced by the requirement that the lawyers submit an affidavit including evidence, to the extent relevant, of the following matters:
  • how settlement complies with the criteria for approval
  • why the proceedings have been settled on particular terms
  • the effect of the terms on class members (the amount of damages they are to receive and whether class members are treated the same or differently and why)
  • how the settlement process will be administered, supervised, monitored or audited
  • the terms of fee and retainer agreements including the reasonableness of legal costs
  • a response to any arguments against approval raised by class members
  • any issues that the court directs be addressed
  • a hearing of the application for settlement approval, including consideration of any class members’ objections and an order dealing with costs.18
  1. 7.26 One way for the court to assess the desirability of settlement for all class members is to consider any objections they have made to settlement and how many have opted out. If a number of class members ‘vote with their feet’ and opt out, it may be an indication that settlement is not fair or reasonable for all class members.19 A lack of objection to a particular proposition or a low opt out rate, however, does not necessarily represent class members’ assent and may carry little weight.20 Whether it is a relevant indicator will depend, among other factors, whether timely and comprehensible notice has been given to class members, and whether there is evidence that they actually understand the notice.21 This issue is discussed in Chapter 4.

Reform options

  1. 7.27 The Commission has identified two main options to assist the Court in ensuring that the interests of unrepresented class members are protected:
  • the appointment of a third-party guardian or contradictor
  • the increased involvement of defendants in the settlement hearing.

Court appointment of a third-party guardian or contradictor

  1. 7.28 Under this option, a third-party guardian or contradictor would be appointed by the Court in class actions to assess the strengths and weaknesses of the settlement from the perspective of unrepresented class members.
  2. 7.29 There is currently no specific provision for this in legislation or the Supreme Court Practice Note. However, the courts have used a third-party guardian or contradictor on a case-by-case basis, and the Supreme Court has expressed a preference for this approach over the existing practice where lawyers submit affidavit evidence.22
  3. 7.30 Michael Legg has also expressed support for this proposal as a means of assisting the Court:

This reform deserves to be reiterated because it allows for the Court to create an adversary contest which would otherwise be lacking, for representation of the interests of absent group members, monitoring of the parties, and assistance to the Court in understanding the mechanics and ramifications of the settlement.23

  1. 7.31 Although this practice has already been followed in some class actions, its case-by-case use does not resolve the practical questions of who pays for the guardian, who instructs the guardian, and how confidential information is made available to the guardian.24
    These issues could be set out in Court guidelines.

Increased involvement of defendants in settlement

  1. 7.32 A second option is for the Court to require the defendant’s lawyers to submit evidence relating to the strengths and weaknesses of the terms of settlement. While this does not directly promote the interests of the unrepresented class members, it may provide a useful means of cross-checking the affidavit evidence submitted by the representative plaintiff’s lawyers.
  2. 7.33 As defendants rarely make submissions in relation to settlement, the evidence contained in the representative plaintiff’s lawyer’s affidavit may be ‘untested and uncontradicted’.25 The Federal Court has noted that it is desirable, and in some cases may be necessary, for the defendant to adduce evidence regarding strengths and weaknesses of settlement.26

Question

  1. 17 How could the interests of unrepresented class members be better protected during settlement approval?

 

Assessment of legal costs

  1. 7.34 Where settlement is reached in a class action, the settlement amount may be expressed as an amount inclusive or exclusive of costs. Where it is expressed as an amount inclusive of costs, the legal costs incurred by the class in bringing the proceedings will be deducted from any settlement amount. Where is it exclusive of legal costs, the defendant separately pays these legal costs under the cost-shifting rule.
  2. 7.35 Generally, if a litigation funder is involved, it will have paid the lawyers during the proceedings, and the funder will be reimbursed upon settlement. Otherwise, legal costs are recovered directly by the lawyers.
  3. 7.36 Legal costs that are not recoverable from the defendant under the cost-shifting rule, such as any costs charged above the court scale, are deducted from the settlement amount.

Independent costs expert

  1. 7.37 Because the lawyers for the class action seek costs for themselves (with no contradictor), the amount they are to be paid, including disbursements, must be approved by the court.27 The Supreme Court of Victoria has a general power to oversee legal costs in class actions, which arises from section 33ZF of the Supreme Court Act.
  2. 7.38 In overseeing legal costs, the Court is assisted by an independent costs expert, who provides expertise on the reasonableness of the legal costs incurred during the class action. The involvement of a costs expert in class action proceedings raises two issues that may affect the fairness of the outcome:
  • how the reasonableness of legal costs is assessed
  • how the independence of the costs expert is ensured.

Reasonableness of legal costs

  1. 7.39 Evidence relating to the terms of fee and retainer agreements must be submitted at settlement, including evidence of reasonableness.28 It is common practice for a costs expert to provide an affidavit establishing whether, in their opinion, the costs are reasonable.
  2. 7.40 The Supreme Court Practice Note is silent as to how the costs expert is to assess the reasonableness of legal costs in a class action. In comparison, the Federal Court Practice Note states that it will usually be sufficient that an independent expert:
  • has examined a sufficient sample of the legal work recorded to clarify whether the work was properly costed in accordance with applicable costs agreements
  • expresses an expert opinion, by reference to the sample and the expert’s experience of comparable litigation, as to whether the total legal costs claimed are fair and reasonable.29
  1. 7.41 In Federal Court class actions, a more extensive sampling of legal costs may be required where:

(a) the class members include persons who are not clients of the applicant’s lawyers or of the litigation funder;

(b) the deduction per class member constitutes a significant proportion of the settlement amount otherwise payable to each class member; or

(c) the litigation funder imposes charges beyond the percentage commission set out in the litigation funding agreement (e.g. project management fees).30

  1. 7.42 In considering whether the legal costs incurred on behalf of the class members are reasonable, the Federal Court may have regard to the corresponding legal costs incurred by the defendant, and make such orders for the confidentiality of legal costs as may be appropriate.31

 

Independence of the expert

  1. 7.43 The Federal Court Practice Note requires that the reasonableness of the lawyers’ costs be determined by an ‘independent expert’. It does not specify whether this is to be a court-appointed expert, or someone appointed by the parties. It is common practice for the lawyers seeking the fees to appoint the costs expert.
  2. 7.44 Legg has observed that there is a risk of adversarial bias in such a situation.32 Where the lawyers seeking the fees appoint the costs expert (and give repeat work to the costs expert) the expert may be less likely to reduce the legal costs charged by the lawyers.
  3. 7.45 A preferred situation may be one in which the costs expert is appointed by the court. However, the Commission has been told that only a limited number of costs experts are experienced in class actions. This means that, in practice, court appointment would not necessarily increase the size of the pool from which the costs expert is appointed.

Question

  1. 18 What improvements could be made to the way that legal costs are assessed in class actions?

 

Assessment of funding fees

  1. 7.46 The fee charged by litigation funders to class members for financing the class action (funding fee) is usually the largest single deduction from any settlement or judgment amount.33 The reasonableness of the funding fee is therefore an important consideration for the court during settlement. Indeed, in Money Max Int Pty Ltd v QBE Insurance Group Ltd (Money Max), the Federal Court stated that the ‘central benefit’ to class members of the proposed common fund order was court approval of a reasonable funding fee.34
  2. 7.47 Until recently, courts have been willing to reject settlement under section 33V where an unreasonable funding fee has been charged, but reluctant to intervene further and state what a reasonable funding fee would be in the circumstances.35
  3. 7.48 The courts have generally considered they should not express a view about the amount paid to the litigation funder in situations where the class member is aware of the fee and has agreed to pay.36
  4. 7.49 In Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd,37the High Court noted:

to ask whether the bargain struck between a funder and intended litigant is ‘fair’ assumes that there is some ascertainable objective standard against which fairness is to be measured and that the courts should exercise some (unidentified) power to relieve persons of full age and capacity from bargains otherwise untainted by infirmity.38

  1. 7.50 In recent judgments, however, the Federal Court has stated that the Court has the power, in certain circumstances, to set or modify the rate of the funding fee agreed to by the parties in the litigation funding agreement. The Court may also order all class members to pay this amount, regardless of whether they have executed a funding agreement.39

Greater scrutiny by the Federal Court

  1. 7.51 Recent decisions from the Federal Court reveal that the Court has changed its views on the role it plays in assessing a litigation funding fee. This is particularly evident in the judgment of Money Max, as well as the later decisions of Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (Allco)40 and Earglow Pty Ltd v Newcrest Mining Ltd (Earglow).41
  2. 7.52 These judgments indicate a trend towards a greater degree of judicial scrutiny of litigation funding fees during settlement. They also reveal a reform in the scope of this supervision. The use of common fund orders, which requires all class members sharing in settlement to pay a proportion of a court-determined funding fee regardless of whether they have executed a funding agreement, represents a fundamental reform in settlement approval.
  3. 7.53 The Federal Court has provided a number of reasons for this changed role. In Money Max, it expressed the view that class actions give rise to a unique set of issues that mean court supervision of the funding fee—including the ability to set or modify a contractually agreed funding fee—will be justified in certain circumstances because:
  • the largest single deduction from the recoveries of class members in funded class actions is usually the funding fee (or an equivalent amount under a funding equalisation order)
  • there is often a significant information asymmetry between the funder and the class members in relation to the costs and risks associated with the action
  • at least for some claimants the only opportunity they have to recover losses suffered through alleged breaches of the law is through the funded class action
  • for small shareholders the opportunity for negotiation of the funding fee is limited or non-existent.42
  1. 7.54 In Money Max, the applicant had requested a common fund order with the litigation funder’s consent. It was in this context that the decision to modify the funding fee was made. The discretion to modify the funding fee has since been extended by the Federal Court beyond these circumstances.43 For example, in Earglow, Justice Murphy found that court modification of the funding fee would be appropriate, even though orders to this effect were not sought.44
  2. 7.55 In addition to the interests of justice, the Federal Court has considered the following policy considerations favouring an increased degree and scope of court supervision:
  • The changing landscape of class action proceedings since the introduction of class actions under part IVA of the Federal Court of Australia Act 1976 (Cth), and particularly the entry of litigation funders. The Federal Court has stated that the only reason part IVA does not provide for court supervision of funding fees is because there is ‘no sign’ that the drafters of the 1988 ALRC report or Parliament foresaw the inception and development of litigation funding.45
  • The frequent involvement of litigation funders in class actions has meant that funding fees have become a ‘standard’ cost of such proceedings and are analogous to legal costs.46 The Federal Court has stated that, as courts have the power to set legal costs, the setting of funding fees is a suitable issue for the exercise of judicial power.47
  • The ability of the courts to assess funding fees on a case-by-case basis may place the courts in a better position to regulate funding fees than other forms of regulation. In Allco, Justice Beach noted that courts are able to bring ‘flexibility and nuance to that role in an individual case (including supervising funding terms generally and confirming capital adequacy), as compared with, say, regulation under idiosyncratic State legislation’.48
  • The Federal Court has observed that, by rejecting a settlement under section 33V because a funding fee is unreasonable but refusing to proactively set a reasonable fee, courts are nurturing form over substance, which is undesirable.49

Statutory sources of power for setting the funding fee

  1. 7.56 In setting a funding fee, either at a similar rate to that agreed in the funding agreement or another rate, the Federal Court has relied on several statutory sources of power. In Earglow, Justice Murphy stated that the Federal Court’s power to do so arose from four statutory sources: sections 23, 33V, 33Z and 33ZF of the Federal Court Act.50 Sections 33V, 33Z and 33ZF are mirrored in the Victorian Supreme Court Act.51

Criteria for court assessment of a ‘fair and reasonable’ fee

  1. 7.57 The Federal Court has articulated criteria that it is likely to consider in assessing, and potentially modifying, a fair and reasonable funding fee. In doing so, the Court has recognised that it ‘cannot predetermine’ relevant considerations for approval of a reasonable fee, which will depend upon the circumstances of the individual case.52
  2. 7.58 The Court has noted that such an assessment should involve wider considerations than merely whether the funding fee is ‘so disproportionate’ to the funder’s risk and expenses in undertaking the litigation.53
  3. 7.59 While the Court has abstained from providing a comprehensive list of criteria, relevant factors were listed in Money Max, including:
  • the rate agreed by sophisticated class members and the number of such class members who agreed
  • the information provided to class members regarding the funding fee
  • a comparison of the funding fee with other class actions and/or what is available in the market
  • the litigation risks of providing funding
  • the amount of adverse costs exposure that the funder assumed
  • the legal costs expended and the security for costs provided by the funder
  • any amount of settlement or judgment
  • any substantial objections made by class members in relation to any litigation funding charges
  • class members’ likely recovery ‘in hand’ under any pre-existing funding agreements.54
  1. 7.60 The Federal Court also set three ‘safeguards’ in Money Max that were critical to its decision to modify the funding fee as part of a common fund order.
  2. 7.61 The first safeguard was that the approval of a reasonable funding fee was to be left to a later stage of proceedings when more probative and complete information would be available to the Court (likely at settlement or distribution of damages).55
  3. 7.62 The second safeguard was a ‘floor condition’ that no class member (funded or unfunded) could be worse off under the order than he or she would be if the order were not made.56
  4. 7.63 The third safeguard was the notice provided to class members. Before the deadline by which they were required to decide whether or not to opt out, class members were to be adequately informed of the proposed orders and the fact that a court-approved funding fee would be deducted from any settlement or judgment.57

Total amount received by a litigation funder

  1. 7.64 The percentage of any settlement amount paid to the litigation funder by each class member is an important consideration for the courts in determining reasonableness of a funding fee and fairness to class members.
  2. 7.65 Equally important is the total amount received by a litigation funder. The Court must determine whether this amount is fair and reasonable in light of the risks and obligations taken on, and the settlement amount.
  3. 7.66 The terms of reference ask whether any limits should be placed on the funding fees that a litigation funder can charge. The use of a cap or sliding scale may provide a useful check to ensure that the total amount is not disproportionate.

Caps and sliding scales

  1. 7.67 In Money Max, the Federal Court considered that setting a cap on the total amount received by the litigation funder may be useful in certain circumstances, including where:
  • there is no cap on the aggregate dollar amount receivable under the litigation funding agreement
  • a larger than expected settlement is received, which does not result in increased risk to the litigation funder.58
  1. 7.68 While the Court did not comprehensively examine the structures that could be adopted in limiting the total amount recoverable by a litigation funder, it noted that setting a funding fee by a sliding scale is one way of doing so.59
  2. 7.69 In Allco, Justice Beach discussed the use of a sliding scale as a device to ensure that litigation funders receive a share of settlement proportionate with the risk and investment.60 He observed that if the settlement amount had been ‘substantially higher’, he would have set a lower funding fee rate to ensure that the amount paid to the litigation funder remained proportionate to the investment and risk.61
  3. 7.70 In relation to possible amounts for sliding scales, Justice Beach observed:

I venture to suggest that a 30% rate would be difficult to justify on a net settlement sum above $50 million. But valuable services such as that which a funder provides have a commercial cost and if it can be justified, so be it.62

  1. 7.71 Justice Beach further observed that courts are adept at setting legal costs by ‘scales, rates, individual amounts and total or capped amounts, whether ex ante or ex post’, and that a funding fee could be viewed as a relevant analogue.63
  2. 7.72 In the United States, lawyers can charge contingency fees (similar to the approach taken in Australia to litigation funding fees). These fees are determined by a common fund approach, where court-approved amounts are determined by the judge at settlement or judgment.64 In determining the amount to be paid to lawyers, the courts often specify that fees are to be paid according to a percentage of the amount received, but with a ‘lodestar cross check’ to prevent the overcompensation of lawyers.65 Under this approach, the court assesses the percentage amount awarded by reference to the number of hours that the lawyers should reasonably have spent on the case, calculated according to a reasonable hourly rate, and adjusted up or down to ensure proportionality with the amount available under the common fund order.
  3. 7.73 The difficulty of developing firm principles in relation to capped or predetermined amounts has been noted in commentary, particularly given the case-by-case analysis of funding fees adopted by the Federal Court to date, and the unique risks, costs and fee structures associated with each case.66

Assistance for the court

  1. 7.74 If funding fees are considered analogous to legal costs in class actions, the court’s ability to assess reasonableness may be assisted by the appointment of a costs expert.
  2. 7.75 In Federal Court class actions, provision is now made for independent expert assessment of the funding fee in a similar manner to legal costs.
  3. 7.76 In determining whether a funding fee is reasonable, the Federal Court Practice Note states it will usually be sufficient that an independent expert has examined the records and can provide assurance that the litigation funding charges are appropriate, having regard to the terms of the funding agreement.67
  4. 7.77 As with legal costs, the Federal Court Practice Note states that more extensive examination of the litigation funding agreement may be required in certain circumstances.68
  5. 7.78 Under these guidelines, the determination of reasonableness of the funding fee by the expert is dependent on the contractual arrangements entered into by the parties. The recent decisions discussed above indicate that, when assessing a funding fee, the Federal Court may be placing less reliance on these contractual arrangements.
  6. 7.79 The details of the appointment of the independent expert (whether court-appointed or party-appointed) is not addressed in the Federal Court Practice Note; nor is the question of which party should bear the costs of engaging an independent expert.

Assessment of fee prior to settlement

  1. 7.80 When assessing a funding fee, the Federal Court has deferred consideration until settlement, or at distribution of settlement amounts. For example, in Money Max, although a common fund order was made at the commencement of proceedings, the determination of the size of the fee was delayed until a later stage, to enable the Federal Court to gather the relevant information.69
  2. 7.81 Such an approach enables the courts to gather the necessary information to properly assess whether the fee is fair and reasonable.70
  3. 7.82 The Federal Court, however, has observed the danger of hindsight bias in assessing the risk adopted by the litigation funder at the end of proceedings (when the risk may appear certain) as compared to assessing the risk at the commencement of proceedings (when risks are uncertain). It is considered desirable that the risks posed by the litigation be assessed at the commencement of proceedings.71
  4. 7.83 The Federal Court in Money Max also recognised that litigation funders may be ‘discomforted’ by the obligation to fund proceedings even though the funding fee is uncertain and subject to court approval.72 The Court considered that this uncertainty would diminish as the jurisprudence develops.73 It was stated that there is ‘little sign’ that the requirement to obtain court approval of contingency fees in the United States has so reduced these fees that lawyers are reluctant to bring class actions.74

Transparency of funding fee

  1. 7.84 As part of settlement approval, orders may be sought requesting that the legal costs and/or the amount received by the litigation funder remain confidential. Accordingly, most settlement approval judgments do not reveal the funding fee. It is therefore difficult for the court, or any other party, to assess the fees typically charged by litigation funders.
  2. 7.85 As noted by Justice Murphy in Earglow:

It is difficult to see why the funding commission rate and quantum should be treated as confidential when the funding commission is a standard cost and in funded class proceedings it is usually the single largest deduction from the settlement.75

  1. 7.86 Justice Murphy observed that while class members may be aware of the different funding fee rates in a proceeding, they will have limited insight into the aggregate amount charged. He expressed the view that disclosure would assist the Court in deciding whether the funding fee is fair and reasonable, including by allowing comparison with rates charged in other cases.76

Questions

  1. 19 Should the following matters be set out either in legislation or Court guidelines?
  2. (a) criteria to guide the Court when assessing the reasonableness of a funding fee
  3. (b) criteria for the use of caps, limits, sliding scales or other methods when assessing funding fees
  4. (c) criteria or ‘safeguards’ for the use of common fund orders by the Court.
  5. 20 Is there a need for an independent expert to assist the Court in assessing funding fees? If so, how should the expert undertake this assessment?

 

 

Questions

  1. 21 At which stage of proceedings should the Court assess the funding fee? What, if any, conditions should apply to this?
  2. 22 In class actions, should lawyers and litigation funders be able to request that the total amounts they receive in settlement be kept confidential?

 

Sharing the cost burdens

  1. 7.87 Australia’s class action regimes are designed on the basis that proceedings are undertaken on an open basis. This means that unless class members opt out of proceedings, they are considered part of the class for the purposes of sharing in settlement. In this way, class members may be ‘passive beneficiaries of the action brought on their behalf’.77
  2. 7.88 In practice, funded class actions commenced on an open basis rarely continue as such.78 Open classes are commonly converted to what is, in effect, a closed class, as class members are required to either opt out or register by a particular date.79 Only class members who register are entitled to any benefit under settlement (although all class members, including those who neither register nor opt out, will be bound by settlement or judgment).80
  3. 7.89 Closed classes are a means of ensuring that only class members who contribute to the costs of proceedings share in the settlement. While closed classes have been used in proceedings that do not involve litigation funders,81 they are particularly prevalent in class actions involving a litigation funder, where the funder wishes to limit the number of ‘free riders’ who do not contribute to the costs of litigation but who receive proceeds of the settlement.
  4. 7.90 Free riders create economic disincentives for litigation funders.82 A litigation funder has an interest in maximising the number of class members who execute a funding agreement and agree to pay a percentage of any settlement to the litigation funder if they win. If class members choose not to execute funding agreements yet can still share in settlement, the size of the class from which the litigation funder can obtain a funding fee becomes smaller or less certain, making pursuit of proceedings a less attractive investment.83
  5. 7.91 Accordingly, litigation funders are generally only prepared to fund class actions that exclude free riders.84
  6. 7.92 The advantages of giving class members an incentive to contribute to costs85 and the benefits provided through funded class actions86 has resulted in three main approaches being adopted by Australian courts to limit the number of class members who share the proceeds of settlement:
  • closed classes
  • funding equalisation orders
  • common fund orders.

Closed classes

  1. 7.93 In a closed class,87 the class is not open to all persons who have suffered loss of the type sought to be recovered in the proceedings. Instead, it is limited to those who have suffered loss and who meet additional criteria.88 For present purposes, the additional criterion is the execution of a litigation funding agreement.
  2. 7.94 Closed classes may reduce the inequality introduced by free riders, as all class members who wish to benefit from the recovery must register with the litigation funder and agree to contribute to the costs. Similarly, in reducing the different categories of class members (those who have signed funding agreements and legal retainers and those who have not), the potential conflicts of interest faced by lawyers may be reduced.89
  3. 7.95 From the perspective of the litigation funder, a closed class also has the advantage of certainty in that the number of class members paying the funding fee is quantifiable.90 It has also been suggested that greater finality is provided to the defendant, as all class members are identified and any settlement amount is capped by reference to a precise number of potential claimants.91
  4. 7.96 Yet closed class actions have also been held to give rise to a number of problems.92
  5. 7.97 It is widely considered that the use of closed classes is inconsistent with the policy underpinning the Australian opt out regime.93 In requiring class members to take affirmative steps in recognising and pursuing a cause of action, closed classes may subvert the access to justice principle intended by Parliament.94 In referring to a closed class proceeding, Justice Jacobson observed in Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd and Another (Multiplex):95

It is difficult to see how this can be reconciled with the goals of enhancing access to justice and judicial efficiency in the form of a common binding decision for the benefit of all aggrieved persons.96

  1. 7.98 Further, while the risk of competing class actions exists under any opt out regime, closed class proceedings may exacerbate their incidence.97 If a class action is successful, potential claimants who did not register may bring subsequent proceedings. This can potentially result in increased legal costs, wastage of court resources, delay, and unfairness to defendants, particularly where proceedings are commenced in different courts.98

Funding equalisation orders

  1. 7.99 Where class actions include both funded and unfunded class members, a funding equalisation order may be made by the court at settlement.
  2. 7.100 This orders deductions to be made from the amounts recovered by unfunded class members, which are then distributed back pro rata across the funded class members. Essentially, it means that the costs of funding are shared equally by every class member, but it does not affect the quantum of a litigation funder’s return, if involved.99
  3. 7.101 While the Supreme Court Practice Note does not address funding equalisation orders, provision has been made in the Federal Court Practice Note, which states that notice of proposed settlement should include, among other things:

Information as to any ‘funding equalisation payment’ which affects the ultimate settlement amount received by class members who have not entered into a litigation funding agreement.100

  1. 7.102 It appears that funding equalisation orders are generally made in the Federal Court at the applicant’s request and without opposition by the respondent or a contradictor.101 As such, they may represent an ad hoc innovation agreed to by the parties as opposed to an overarching court solution.102 The Federal Court has also stated that use of a funding equalisation order assumes that the powers of the Court in approving settlement do not extend to modifying or setting a reasonable rate for the funding fee.103 As discussed above, the Federal Court has recently considered such an assumption questionable.
  2. 7.103 It has been noted that litigation funders may assert that they are contractually entitled to a percentage of the incremental amount added to class members’ recoveries under a funding equalisation order.104 Accordingly, such an order may result in the litigation funder actually receiving a higher amount than that agreed to under the funding agreement.

Common fund orders

  1. 7.104 A common fund order is one in which the class remains open, yet the court at a set point requires all class members to contribute an equal percentage of any judgment or settlement amount to the party covering the costs, regardless of whether they have signed an agreement or retainer. In Australia, the party covering the costs is often, but not always, a litigation funder.
  2. 7.105 In making a common fund order, a court may order that class members pay a comparable amount to the amount agreed to in the funding agreement. Alternatively, the Federal Court has also held that a common fund order may set a different rate to that agreed.105
  3. 7.106 Unlike a funding equalisation order, the court is not merely redistributing the funding fee set under the funding agreement, but assessing the reasonableness of the funding fee under the contractual arrangement. Thus, the funding fee set by the court under a common fund order may not necessarily be comparable to that under a funding equalisation order or funding agreement.106

Use of common fund orders

  1. 7.107 The use of common fund orders in class actions has been addressed by the ALRC107 and the Commission,108 and has also been extensively discussed in commentary.109
  2. 7.108 Until recently, common fund orders have only been made at a late stage of proceedings, either at settlement or with a view to promoting settlement.110 Common fund orders have been refused where insufficient notice has been given to class members, not affording them sufficient opportunity to opt out.111
  3. 7.109 Similarly, until recently, the amounts that the courts have ordered unregistered class members to pay under common fund orders have been comparable to those agreed to under the funding agreements.
  4. 7.110 However, in Money Max, the Federal Court held that it had the discretion to make a common fund order at the start of proceedings (although the specific funding rate would be set at a later stage of proceedings), which would impose the terms of the litigation funding agreement on all class members. The Court also determined it had the power, when ordering a common fund, to vary the funding fee and impose a lower rate for all class members.
  5. 7.111 The approach of the Federal Court in Money Max and subsequent decisions reflects the advantages of common fund orders, which are said to include the following:
  • Common fund orders encourage the use of open class proceedings over closed classes, thereby being more consistent with the legislative opt out regime recommended by the ALRC and created as part IVA of the Federal Court Act.112
  • Common fund orders contribute to the aims of efficiency and certainty intended by part IVA of the Federal Court Act by increasing the speed with which class actions can be commenced (as litigation funders are not required to sign up numerous class members before instituting proceedings).113
  • Common fund orders reduce conflicts of interest faced by lawyers in class actions. Conflicts of interest are introduced by the practice of opening and closing classes and creating various categories of class members. Making a common fund order that all members are to pay a funding fee means there will be less need to encourage class members to enter a funding agreement or sign a legal retainer.114
  • Common fund orders provide greater protection to class members by allowing judicial supervision of fees.115
  1. 7.112 Concerns raised in relation to the use of common fund orders include that they may create a ‘race to the courts’, as litigation funders will no longer be required to sign up numerous class members before instituting proceedings.116
  2. 7.113 The Federal Court in Money Max noted that uncertainty may be created for litigation funders under a common fund order.117 Even if it is made at the commencement of proceedings, the determination of the funding fee—under the current approach of the Federal Court—will be left until a later stage of proceedings. This means that the expected rate of return will not be certain until settlement, and the litigation funder may face the risk that a lower fee (or a capped amount) will be set by the court.118 The Federal Court considered that this concern on the part of litigation funders would diminish as the jurisprudence develops.119

Statutory sources of power for common fund orders

  1. 7.114 In Money Max, the Federal Court stated that its powers to make a common fund order modifying the funding fee arose pursuant to sections 23 and 33ZF of the Federal Court Act. Section 33ZF is replicated in the Supreme Court Act.
  2. 7.115 In Allco, Justice Beach did not consider recourse to section 33ZF necessary. Rather, he considered that section 33V(2) provides the Federal Court with sufficient power to modify any contractual arrangement dealing with the funding fee payable out of any settlement amounts.120
  3. 7.116 Legg has argued that, while the legislation enables courts to make common fund orders, the basis for the power is very broad and therefore introduces an element of uncertainty as to how and when common fund orders should be made. He proposes that a specific legislative mandate be created to provide some certainty, rather than have common fund orders dealt with piecemeal by judicial decisions.121

Settlement distribution schemes

  1. 7.117 In considering the fairness and reasonableness of a settlement, courts are required to consider not just the overall settlement sum, but also the structure and workings of the scheme by which that sum is proposed to be distributed among class members.122
  2. 7.118 The means by which the settlement amount is distributed among class members is known as a settlement distribution scheme. Typically, it involves five steps, set out by the Federal Court in Jarra Creek Central Packing Shed Pty Ltd v Amcor Ltd:

There are five critical features of the [Settlement Distribution] Scheme. The first is the appointment of MBC [the applicant’s lawyers] as Court appointed administrator. The second is the establishment of a procedure for the identification and verification of Group Members who are entitled to participate in the Settlement. The third is the assessment of claims by Participating Group Members and the identification of the formula by which claims are to be assessed and determined. The Fourth is the establishment of a dispute resolution mechanism. The fifth is the provision for supervision of the Scheme by the Court.123

  1. 7.119 Legg has identified two competing objectives of settlement distribution schemes:
  • Individual compensation reflects the merits of each individual claim.
  • The distribution process is completed in a manner that minimises cost and delay.124
  1. 7.120 Settlement distribution should attempt to ‘achieve a broadly fair division of the proceeds, treating like group members alike, as cost effectively as possible’.125
  2. 7.121 The Supreme Court sets out the procedure to be followed when making an application for settlement. It states that the application should include orders approving any scheme for distribution of any settlement payment.126
  3. 7.122 Evidence addressing how the settlement process will be administered, supervised, monitored or audited is required to be included in the affidavit(s) in support of settlement.127

Merits of individual claims

Inter se fairness

  1. 7.123 Approval of the settlement distribution scheme requires the Court to consider the fairness and reasonableness of the settlement inter se, that is, between class members.128
  2. 7.124 Evidence of the effect of the settlement on class members is required as part of court approval of settlement.129 This includes evidence of the amount of damages and whether class members are to be treated the same or differently, and why.130
  3. 7.125 In considering the amount received by class members under a settlement distribution scheme, the Court will compare the amount individual class members will recover under settlement to the amount they might have recovered after a trial. Such a comparison will, by necessity, be broad.131
  4. 7.126 In considering inter se fairness, the interests of the representative plaintiff or registered class members should not be preferred over the interests of other class members.132
 

Individual claims

  1. 7.127 In addition to the differences between class members arising from their registration status, differences will also arise from individual claims. Under section 33C, a class is likely to contain class members with marked differences between claims, in terms of both strength of claim and factual basis. Specific provision is made for determination of these individual claims under part 4A of the Supreme Court Act.133 These differences may be particularly evident where the class is very large, or where the subject matter lends itself to unique damage or loss (such as medical or pharmaceutical class actions).
  2. 7.128 While settlement distribution schemes operate according to broad rules of thumb, they should not ignore material differences in class members’ claims. Any differentiation in distribution of proceeds must reflect substantive differences, such as the strength of the claim, rather than arbitrary differences.134
  3. 7.129 Australian courts have determined that strong and weak claims should not be treated alike; rather, the courts should aim to achieve vertical equity (more deserving claimants should receive more than less deserving claimants) and horizontal equity (similarly situated claimants should receive similar awards).135

Efficiency and cost

  1. 7.130 The Supreme Court Practice Note requires evidence relating to the administration, supervision, monitoring and auditing of the settlement process to be provided to the Court.136 This is required when applying for Court approval of settlement.
  2. 7.131 The approach recently taken by the Supreme Court in the settlement of the Kilmore East and Kinglake Bushfire trials illustrates that the Court may use a range of methods, including:
  • requiring the administrator to appear at case management conferences and file reports through affidavit and viva voce evidence
  • publication of the settlement distribution scheme rulings online
  • allowing class members to raise concerns directly with the Court
  • appointment of an independent costs assessor as special referee.137
  1. 7.132 The level of court supervision of settlement distribution schemes remains discretionary. The Supreme Court Practice Note does not provide detail about how court supervision is to be undertaken. In comparison, the Federal Court Practice Note requires evidence to be submitted to the Court detailing the expected time for payment of settlement amounts to class members, and the frequency of any post-approval report(s) to be provided to the Court regarding the distribution of settlement funds.138
  2. 7.133 Further provision is made in the Federal Court Practice Note for the Court to be notified about the performance of the settlement distribution scheme:

The Court will require to be advised at regular intervals of the performance of the settlement (including any steps in the settlement distribution scheme) and the costs incurred in administering the settlement in order that it may be satisfied that distribution of settlement monies to the applicant and class members occurs as efficiently and expeditiously as practicable.139

  1. 7.134 Justice Forrest has indicated support for the appointment of a contradictor or amicus curiae to assist the Supreme Court in identifying any issues that may arise during settlement distribution schemes. In discussing the administration of the settlement distribution scheme in the Kilmore East and Kinglake Bushfire class actions, he noted:

upon reflection, I think it would have been best to have engaged the services of either a contradictor or a friend of the court to appear at the approval hearing, as has been done in some class action approvals since KEK [Kilmore East–Kinglake] … Usually, the contradictor’s primary role is to ensure that there is no unfair discrimination between group members but, given the growing experience of class action administration, it may extend further. A contradictor should be able to identify issues that may arise in the course of the administration of the scheme.140

  1. 7.135 Justice Forrest has also commented on the legal and administrative costs of administering settlement distribution schemes. He observed that much of the administration work in the Bushfire trials was done by paralegals and the cost of this work was based on the Supreme Court scale. While it was quite proper for paralegals to perform administrative work of this type, Justice Forrest queried whether there is scope to apply a different scale or measure for such costs.141
  2. 7.136 He also observed that, while the Court does not have the capacity to monitor the settlement distribution process closely, and nor would it want to be involved in reviewing individual assessments, it could have played a limited role in reviewing decisions by the administrator. The review role could have covered matters such as:
  • late registration
  • a final assessment where the result was legally wrong
  • where necessary, in considering an interim distribution of funds.142

Question

  1. 23 How could the management of settlement distribution schemes be improved to:
  2. (a) ensure that individual compensation reflects the merits of individual claims
  3. (b) ensure that it is completed in a manner that minimises costs and delays?

 

Notice of settlement and registration

  1. 7.137 Under section 33X, notices must be given at particular points of proceedings, including settlement.143 Notice may be given by media advertisement or by any other means.144
  2. 7.138 Unless the Court is satisfied that it is just to do so, settlement of a class action will not proceed unless a notice of settlement, approved by the Court, has been given to the class members.145 This provides class members with the ability to opt out should they wish to do so.
  3. 7.139 In addition to notifying class members of the ability to opt out of settlement, it is now common practice for a notice of settlement to require class members to take a positive step to share in any amount recovered.146 This will typically involve electronic registration with the representative plaintiff’s lawyers, which involves entering into a legal retainer and, if proceedings involve a litigation funder, a litigation funding agreement.147
  4. 7.140 The Supreme Court Practice Note sets out a list of matters to be included in the notice of settlement to class members, as follows:

(a) a statement that the group members have legal rights that may be affected by the proposed settlement;

(b) a statement that an individual group member may be affected by a decision whether or not to remain as a group member (where the opt out date has not already passed or where there is a further opportunity to opt out);

(c) a brief description of the factual circumstances giving rise to the litigation;

(d) a description of the legal basis of the claims made in the proceedings and the nature of relief sought;

(e) a description of the group on whose behalf the proceedings were commenced;

(f) information on how a copy of the statement of claim and other legal documents may be obtained;

(g) a summary of the terms of the proposed settlement;

(h) information on how to obtain a copy of the settlement agreement;

(i) an explanation of who will benefit from the settlement;

(j) where all group members are not eligible for settlement benefits­—an explanation of who will not be eligible and the reasons for such ineligibility;

(k) an explanation of the Court settlement approval process;

(l) details of when and where the Court hearing will be and a statement that the group member may attend the Court hearing;

(m) an outline of how objections or expressions of support may be communicated, either in writing or by appearing in person or through a legal representative at the hearing;

(n) an outline of any steps required to be taken by persons who wish to participate in the settlement (in the event that affirmative steps are required);

(o) an outline of the steps required to be taken by persons wishing to opt out of the settlement if that is possible under the terms of the settlement; and

(p) information on how to obtain legal advice and assistance.148

  1. 7.141 The Federal Court Practice Note also requires a settlement notice issued under the Commonwealth class action regime to include information about any funding equalisation payment which affects the ultimate settlement amount received by class members who have not entered into a litigation funding agreement to be included in settlement notice.149
  2. 7.142 In addition, where a proposed settlement contemplates that any part of the settlement amount will be used to cover unrecovered legal costs or for litigation funding charges, the Federal Court will usually require evidence at settlement approval that indicates:

(a) that reasonable steps were taken to alert class members to the likelihood of such deductions as soon as practicable after that became apparent, so that class members were, at the relevant time, able to take such steps as may have been practicably available to them to negotiate as to legal costs or as to litigation funding charges as applicable, or to remove themselves from the class action; and

(b) that the amounts to be deducted have been calculated in accordance with the terms of the costs agreement and any litigation funding agreement.150

  1. 7.143 As outlined in Chapter 4, the Federal Court also provides a sample opt out notice in non-technical language for use by the parties during proceedings.

Comprehension of notice

  1. 7.144 It is accepted that the effectiveness of notice depends on class members’ ability to understand the obligations contained in the notice. Notice must be accurate151 and expressed in as plain and simple language as is consistent with the information sought to be communicated.152 Factors such as the clarity of language used, how widely notice is sent, and the ease or accessibility of response options can all affect how effective the notice is.153
  2. 7.145 For example, in reviewing the opt out forms sent to class members in Federal Court class actions, Morabito noted that many class members evidently did not understand them:

I found that the opt out decision, made by a not insignificant number of those class members who wrote comments on their opt out forms, was most likely the product of a total misunderstanding, on their part, regarding the essential characteristics of class action litigation and/or the opt out device. In fact, some class members felt that the fact that the lawyers made them parties to the litigation, without seeking their prior permission, meant that they, and/or the legal system, could not be trusted.154

  1. 7.146 The comprehension of court-approved notices by class members, and possible reforms for improving this, are discussed in detail in Chapter 4.

Questions

  1. 24 How could Court-approved notice for opt out and settlement be made clearer and more comprehensible for class members?
  2. 25 Are there other ways the process for settlement approval and distribution could be improved?

 

Footnotes

Main menu

Back to top