Federal Court re-confirms settlement common fund orders are available to funders (and paves the way for simpler applications)
07 May 2024
07 May 2024
A CFO allows a commission to be paid to the funder from the settlement proceeds (including from group members who have not contracted to that). We recap the journey to settlement CFOs in our article here.
A FEO caps the total amount payable to the funder to what it is contractually entitled to receive through the funding agreements it has signed with individual group members (but then makes adjustments to share that payment among all group members).
The primary judge made orders approving a $98 million settlement, but refused to make a CFO giving $24.5 million of it (25%) to the funder. The basis for that decision was that (a) the Court does not have the power under s33V to make a CFO; (b) even if it did, it was not appropriate to exercise its discretion to make a CFO; and (c) it was appropriate, instead, to make a FEO.
The funder appealed. (The other parties did not participate, and a contradictor was appointed to represent the interest of group members.)
In the interim, the Full Court in Elliott-Carde had held that there is power under s33V(2) to make a CFO – and re-confirmed that in this case.
The Full Court found it was "just" to make a $24.5 million CFO in favour of the funder because the amount was commercially realistic and properly reflected the costs and risks the funder took on by funding the proceeding.
The Full Court considered that deciding what amount of funding commission is "just" under s33V(2) requires a common sense evaluative assessment by the court, and should not ordinarily require sophisticated expert evidence as to what funding commissions would represent a reasonable rate of return on invested capital.
The non-exhaustive list of considerations relevant to deciding what constitutes a fair and reasonable funding commission are well established from Money Max. In this case, the considerations that pointed in favour of making a CFO included:
These were powerful considerations in finding that the CFO sought was "just" under s33V(2). The primary judge was wrong to find that the majority in Brewster expressed "strong reasons" for favouring a FEO over a CFO. (Relevantly, Brewster dealt with CFOs under a different power and at a different stage of the proceeding.) In any event, the Full Court considered the primary judge's analysis impermissibly treated the funding arrangement as a "cap" above which any amount was considered to be a "windfall gain". This was wrong, particularly in circumstances where "[t]his Court has long said that "book-building" is to be discouraged" (at [73]).
The Full Court considered that the settlement approval process "went off the rails" – there were 49 affidavits (40 by the applicants) and expert evidence on what constituted a reasonable rate of return for the funder. As a result, the settlement approval hearing took six days and "involved a huge expenditure of time and resources by the solicitors for the applicants" to the tune of $2.5 million (reducing recovery for group members).
The Court cautioned parties to be vigilant to ensure that settlement approval applications do not incur unnecessary costs and that solicitors act consistently with their duties under the Federal Court Act. In particular, Justice Lee commented that there will rarely be a need to file extensive affidavit evidence.
Galactic Seven Eleven Litigation Holdings LLC v Davaria [2024] FCAFC 54
Authors: Ian Bolster, Partner; John Pavlakis, Partner; Lucinda Hill, Partner and Sally-Anne Stewart, Senior Associate.
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