Court puts funders’ conduct and expenses under the microscope

On 30 November 2020, Murphy J published his reasons for approving the $95 million settlement of the Spotless Group Holdings Ltd (Spotless) class action. As is the case with most judgements in this class action space, it is important as it provides further support for the Court’s power to make orders in the nature of a “common fund order” (CFO) or, as Murphy J has confirmed his preference for, an “expense sharing order” at the point of settlement approval. It also provides critical guidance on the involvement of funders in settlement negotiations and appropriate costs to be recovered by litigation funders from settlement proceeds.

CFOs or “Expense sharing” orders

The High Court’s judgment in Brewster[1] not only ruled out the making of CFOs early on in proceedings but also cast considerable doubt over the fate of CFOs made at the end of proceedings.

The decision in Spotless, however, adds to the growing list of considered judgments which have been supportive of the power to make CFOs or expense sharing orders at either the settlement or judgment stage of proceedings,[2] providing welcome relief for litigation funders. Unlike the cases which have dealt with early CFOs and which have gone on to appeal, it is hard to see who will appeal the making of CFOs at the end of proceedings once the case has agreed to be settled by all parties. Perhaps an aggrieved shareholder?

Involvement of funders in settlement negotiations

In the course of deciding whether to approve the Spotless settlement, Murphy J had cause to consider the level of involvement of funders in settlement negotiations. 

While accepting that it was appropriate for the risks funders face to be reflected in settlement discussions and for the funders real input to be provided, Murphy J did not consider it appropriate for the funders to be directly involved in settlement negotiations, particularly in the absence of the applicant’s lawyers. Murphy J further indicated that:

• there may be circumstances where there is an identifiable advantage for the applicant and group members in having negotiations conducted through a funder, but that will be the exception rather than the rule, and great care must be taken to manage any potential conflict of interest; and
• the Class Action Practice Note (GPN-CA) should be amended to provide guidelines in relation to the appropriate lines of demarcation between the applicant’s lawyers and the funder in relation to settlement negotiation.

Increased scrutiny of funder costs and risk

Prior to the settlement approval hearing, the funders sought to recover certain expenses associated with providing an adverse costs indemnity and security for costs, whilst also using their exposure to the risk of an adverse costs order to justify the percentage funding rate sought.

It proved a matter which was unnecessary to determine given that the funders withdrew their claim for reimbursement of those costs during the hearing, but Murphy J expressed the view that this abandonment was appropriate.

The funders also abandoned a claim for GST on services provided to group members, following Murphy J expressing a preliminary view that such charges were not transparent for group members, or indeed for the Court, and group members should not be required to pay GST on such services in addition to the percentage funding rate.

This judgment clearly signposts the close attention that is and will be paid to funder reimbursement payments sought at settlement approval, and the relationship between those costs, the level of risk assumed by the funder, and appropriate commission rates.