Court opens the way to a class action rush

Wednesday, 14 December 2016

Ruth Overington photo
Ruth Overington
Partner, Herbert Smith Freehills

    A landmark court decision could usher in another wave of class action litigation with cases to be larger and more complex than ever before.

    Court opens the way to a class action rush1:18

    In a recent landmark decision, the Full Court of the Federal Court of Australia has recognised litigation funders as an integral part of the class action landscape, paving the way for more cases to be commenced, of a size larger than previously seen and at a faster rate than ever before.

    The decision

    In Money Max v QBE Insurance, the Court accepted that claimants who choose to be part of a funded class action, ought to be compelled to contribute to the litigation funder a percentage of any monies they receive as a result of the proceeding. Such a contribution will be required regardless of whether or not the claimant has entered into a litigation funding agreement.

    However, the precise return to be received by the funder will no longer be dictated by the funder and instead will be a matter for the Court to determine at an appropriate stage of the proceeding.

    Ramifications of the decision

    1. More “open” (and therefore larger) class actions, but fewer competing class actions

    The removal of the need for claimants to enter into funding agreements eliminates one of the key obstacles for funders in the decision as to whether or not to fund a class action. As a result we would expect to see a greater number of larger class actions and fewer competing class actions being pursued against the same defendant in relation to the same conduct.

    2. Increase in the speed with which a class action is commenced

    Removal of the need to sign up claimants may also lead to an increase in the speed with which funders seek to commence a class action as funders seek to get in prior to their competitors. Without the need to sign up a minimum number of claimants to funding agreements to make the case financially viable, funders instead will be incentivised to make a quick decision as to both the merits of the potential case, and the number of affected persons.

    Such a decision will necessarily need to be made without the certainty of knowing that a particular funding commission rate will be achievable upon settlement or a successful trial. The ultimate return received by the funder will remain to be determined by the Court some months, or perhaps even a few years, after the decision to fund the proceeding.

    3. Added complexity in settlement negotiations

    In this decision, the Court indicated that the appropriate time at which to determine the funding commission rate is as part of any settlement approval hearing. Among other things, the factors to be considered by the Court as part of that approval will likely be the amount which claimants will recover ‘in hand’.

    As a result, parties will now be required to conduct settlement discussions in the knowledge that any agreement which involves a reasonable expectation of a particular return to funders and claimants, may subsequently be altered as part of the Court’s determination of what is fair and reasonable for claimants.

    This decision is likely the first of many in which the Court will have an increasingly vocal say about the role and value of litigation funders in class actions in Australia.

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