What happened
Caason Investments Pty Limited and Wise Plan Pty Ltd commenced representative proceedings in 2012 and 2013 against the former directors and the auditors of Arasor International Ltd. The claims alleged contraventions of continuous disclosure obligations under s 674 of the Corporations Act 2001 (Cth), misleading or deceptive conduct under ss 728, 1041E, 1041H of that Act, s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and state fair trading legislation. The relevant period ran from 11 October 2006 to 12 May 2008 and encompassed five disclosure documents. The proceeding was funded by International Litigation Partners No 3 Pte Ltd (ILP). After more than four and a half years, two unsuccessful mediations in 2016, a third mediation in April 2017 and preparation for a July 2017 trial, the parties executed a settlement deed on or about 17 July 2017. The active respondents agreed to pay $19.25 million inclusive of costs in full and final settlement. The deed contained a condition precedent requiring the Court to make a common fund order.
The settlement approval application under s 33V and s 33ZF of the Federal Court of Australia Act 1976 (Cth) raised multiple satellite disputes. The applicants sought approval of legal costs of approximately $7.8 million (later refined to $7,814,026.06), a common fund order at 35-40% plus a project management fee of approximately $756,402, and reimbursement payments to Caason of $80,073.88 and to Wise Plan of $76,708.27 (less $9,163 already paid). ILP sought a common fund order at 30% with no project management fee. Caason had received $397,251.51 in GST refunds from the Australian Taxation Office on legal costs paid by ILP but had not remitted them as required by cl 15 of the funding agreement. Both applicants had entered into undisclosed variation letters at the time they became lead applicants. Those letters reduced their funding commission rate to 20%, removed the project management fee obligation, and entitled them to payment of their reasonable legal, accounting and administrative costs (including nominated officers' time) at agreed hourly rates. Caason claimed approximately $760,000 under its variation letter; Wise Plan claimed approximately $76,763.50. Caason asserted an equitable set-off of its variation letter costs against its obligation to remit the GST refunds. Only one class member objected to the settlement. A referee appointed under s 54A delivered reports dated 4 October 2017 and 31 October 2017 recommending disallowance of $690,000 of costs; the applicants and ILP disputed the adequacy of the referee's reasons.
On 6 December 2017 Murphy J made orders approving the settlement and the revised settlement distribution scheme, imposing a common fund order at 30%, approving legal costs at $7,564,026.06 (a $250,000 reduction), approving reduced reimbursement payments, requiring Caason to pay the GST refunds to the scheme administrator to be held on trust, refusing equitable set-off, and listing the variation letter costs claims for hearing on 19 February 2018. Written reasons were delivered on 16 April 2018 after further confidential material had been considered.
Why the court decided this way
Murphy J began from the protective role the Court assumes under s 33V. At [12] his Honour repeated the principles set out in Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323: the Court must ensure the settlement is fair and reasonable both as between the parties and as between class members, recognising that the interests of the parties before the Court may have merged in the settlement. The $19.25 million sum was assessed against the factual and legal complexities (missing records, offshore accounting, untested market-based causation, competing loss methodologies), the stage reached (evidence from five experts filed, trial imminent), the risks on liability and quantum, counsel's confidential opinion, and the mediation position papers. Only one objection was received and it was directed at proportionality rather than the headline sum. The settlement therefore fell within the range of reasonable outcomes. [39]-[88]
The common fund condition precedent was rejected in strong terms. At [32]-[38] the Court held that the clause operated solely for ILP's benefit, allowed the applicants to walk away from an otherwise fair settlement if no common fund order was made, and was inconsistent with s 37M. The condition was waived, rendering it unnecessary to refuse approval on that ground alone, but the judgment contains clear obiter that such clauses should be strongly discouraged.
A common fund order at 30% (no project management fee) was made because funded members represented only 33% of aggregate claims and would otherwise bear the entire funding burden. The 30% rate reduced the contractual rates of 35-40%, removed the $756,402 project management fee, had been notified to the class (albeit at a higher rate), fell within the range observed in the market, and produced a low but not commercially unrealistic return for ILP given the adverse costs exposure, $7.56 million in funded costs and $2.4 million security. The Money Max factors were expressly applied. [159]-[174]
Legal costs were scrutinised through the s 54A referee. The referee's reports were not adopted in full because they lacked sufficient reasons for the specific quantum of each disallowance and did not adequately engage with the evidence explaining the sequence of events, the retainers' contemplation of concurrent attendances, and the specialised nature of the expert work. [131]-[140] Nevertheless the Court independently concluded that $250,000 should be disallowed for inefficiencies in pleading amendments and excessive concurrent attendances. The hourly rates of the two senior solicitors were approved on this occasion but flagged as high. Scheme administration costs were approved subject to later review and repayment if overestimated. [10], [146]-[156]
Reimbursement claims were reduced from approximately $157,000 to $49,243 because neither applicant had maintained contemporaneous records. The claims rested on post hoc word counts and standard reading and writing speeds applied to thousands of emails. Many short emails were routine; it was unrealistic to assume every document had been read in full. The applicants had also received collateral benefits under the variation letters (20% funding rate, payment of their own costs). Class members had not been told of the reimbursement claims or the side agreements. A cautious approach was therefore required. [191]-[211]
The Court held it had jurisdiction over the GST refunds and variation letter costs disputes because they formed part of the single justiciable controversy. The quantum and timing of GST remittal directly affected the net settlement fund available for distribution. The variation letter costs overlapped factually with the reimbursement claims already before the Court and risked inconsistent findings if remitted to another court. Section 22 and the overarching purpose in s 37M required the disputes to be resolved without further multiplicity or delay. [239]-[250]
Equitable set-off was refused on several grounds. The claims were not sufficiently connected: Caason's obligation to remit GST refunds arose from cl 15 of the funding agreement independently of the variation letter, which made the costs entitlement contingent on remittal. Caason had delayed substantiating its costs claim. Case management considerations under ss 37M and 33ZF favoured prompt distribution to class members. The email exchange on 6 December 2012 showed the parties had considered and rejected an express right of set-off. Payment to the scheme administrator rather than directly to ILP addressed Caason's concern about possible non-repayment if the ATO review went against it. [262]-[272]
Confidentiality orders were narrowed because blanket claims are inconsistent with open justice. Voluminous and largely irrelevant material was criticised as inconsistent with s 37M. [8]-[10]
Before and after state of the law
Before this judgment the principles governing settlement approval were well established in Kelly at [62]-[77] and the factors listed in Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR 459. Common fund orders had been endorsed by the Full Court in Money Max at [161]-[168] but the Full Court had not addressed a settlement condition precedent requiring such an order. Reimbursement payments were routinely made but Modtech Engineering Pty Ltd v GPT Management Holdings Ltd (No 2) [2013] FCA 1163 had warned that claims could not be reconstructed after the event. The use of referees under s 54A for costs assessment had been explored in Victorian Supreme Court decisions (Matthews, Downie, Rowe) but was not standard federal practice. Undisclosed side agreements between funders and lead applicants had not been the subject of express judicial criticism.
After the judgment several points are clearer. First, a condition precedent requiring a common fund order will ordinarily render a settlement inappropriate. Second, where a referee is appointed under s 54A the Court will examine the adequacy of reasons; a quantitative-then-qualitative approach without item-by-item explanation may not be adopted. Third, reimbursement claims based on post-event email reconstructions will be substantially discounted; contemporaneous records are expected. Fourth, undisclosed variation letters conferring preferential terms on lead applicants are to be deprecated and may breach the solicitors' duty to class members. Fifth, disputes between applicants and funders that affect the net amount available for distribution are likely to be treated as part of the single justiciable controversy for s 33V purposes. Sixth, the judgment endorses the utility of referees for costs in appropriate cases while emphasising proportionality. Seventh, settlement administration costs may in some shareholder class actions be the subject of a limited tender process.
The GST treatment confirms that input tax credits on funded legal costs belong beneficially to the funder and must be remitted promptly; failure to do so can be managed by payment into a controlled trust account pending ATO review.
Key passages with plain-English translation
Paragraph [12]: "The Court's fundamental task is to decide whether the settlement is fair and reasonable having regard to the interests of the class members who will be bound by it, including as between class members."
Plain English: The judge's job is not to rubber-stamp the deal the lawyers and the funder have struck. The Court must stand in the shoes of all class members (funded, unfunded, registered, unregistered) and ask whether the split of the money is fair.
Paragraph [32]: "I consider the Common Fund Condition Precedent and the clauses which operate in support of it to be completely inappropriate. ... The use of such a condition precedent in the settlement of class action proceedings should be strongly discouraged."
Plain English: You cannot force the Court to make a common fund order by writing a clause that lets everyone walk away if the judge refuses. That tactic benefits only the funder and wastes court time; do not do it.
Paragraph [8]: "It is wrong to assume that confidentiality or non-publication orders will be routinely or automatically made. ... the starting point for consideration of such orders, and it is mandatory under s 37AE for the Court to take into account that a primary objective of the administration of justice is to safeguard the public interest in open justice."
Plain English: Do not expect the Court to seal every costs affidavit and counsel opinion just because you ask. Open justice is the default; confidentiality must be shown to be necessary.
Paragraph [202] (adopting Gordon J in Modtech (No 2)): "If a claim of this nature is to be made, then the claim cannot be reconstructed after the event. Consideration needs to be given at the commencement of the litigation as to how the claim might be made and, in particular, how the work undertaken might be contemporaneously recorded."
Plain English: If you want to be paid for your time as a lead plaintiff, keep proper time sheets from day one. You cannot wait until settlement and then count emails and guess how long each one took.
Paragraph [216]: "Undisclosed side agreements between a litigation funder and a representative applicant must be deprecated."
Plain English: Secret deals that give the lead plaintiffs a better funding rate or extra payments are not acceptable. Class members are entitled to know if their representatives have been given a sweeter deal.
Paragraph [123]: "In my view referees are likely to be a useful tool in assessing the reasonableness of costs charged in class actions. If a panel of competent and reputable independent costs consultants can be developed and the Court chooses an expert from that panel, the reasons for conscious or unconscious bias are reduced."
Plain English: Using an independent referee picked by the Court rather than an expert always hired by the plaintiff's firm helps avoid the risk that the expert unconsciously favours the lawyers who pay their invoices.
What fact patterns trigger this precedent
The judgment is triggered by any funded open class action in which (a) a settlement is reached close to trial after substantial costs have been incurred, (b) the proposed deductions for legal costs exceed 35-40% of the settlement sum, (c) lead applicants seek reimbursement without contemporaneous time records, (d) the funding agreement contains a condition precedent requiring a common fund order, (e) the funder and lead applicants have entered into undisclosed variation letters conferring preferential terms, or (f) the representative applicant has received and retained GST refunds on legal costs paid by the funder. It is particularly relevant where unfunded class members comprise a large majority of claim value (here 67%) and where the referee's report on costs is challenged for inadequacy of reasons. The emphasis on open justice and proportionate filing of material applies to every settlement approval application.
The GST and equitable set-off analysis applies whenever input tax credits on funded legal costs have been claimed by the representative applicant rather than the funder and the funding agreement contains a remittal obligation. The criticism of side agreements applies whenever a funder offers improved terms to induce a corporate lead applicant to front the proceeding.
How later courts have treated it
The judgment itself carefully applies and extends earlier authority rather than being treated by later courts within the provided text. Murphy J followed the protective test in Kelly at [62]-[77] and applied the Money Max factors at [174]. The Court adopted the single justiciable controversy analysis from Fencott v Muller and Re Wakim; Ex parte McNally when asserting jurisdiction over the variation letter and GST disputes. The treatment of the referee's report follows the principles in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 concerning adequacy of reasons. The requirement for contemporaneous records expressly adopts the observation of Gordon J in Modtech (No 2) at [10]. The strong statement on open justice follows Hogan v Australian Crime Commission at [30]. The discouragement of common fund condition precedents builds on the Full Court's discussion in Money Max of the discretionary nature of s 33ZF orders. The judgment therefore operates as a detailed working out of existing doctrine rather than a radical departure, while supplying concrete guidance on the consequences of inadequate record-keeping, undisclosed side deals and attempts to dictate common fund orders through settlement conditions. No subsequent treatment appears in the judgment itself.
Still-open questions
Several questions are expressly left for later determination. The quantum of the variation letter costs claims was listed for hearing on 19 February 2018; the judgment notes at [212] that different considerations may apply to that contractual claim than to the reimbursement claims. The outcome of the ATO review of Caason's entitlement to the GST refunds remains unknown; the orders provide a mechanism for repayment to Caason, remittal to the ATO or distribution to class members once that review is finalised. The judgment flags at [144] that the hourly rates charged by senior solicitors may require further scrutiny in future matters where lower rates are charged by equally experienced practitioners. The utility of referees under s 54A is endorsed but the judgment acknowledges that the cost of such processes must remain proportionate; the circumstances in which a referee will be appointed rather than an independent expert remain case-specific. The appropriateness of tendering settlement administration work is left open for appropriate cases. Finally, the judgment does not set a hard rule on the weight to be given to low objection rates, merely stating that it carries little weight; the precise circumstances in which a low objection rate might assume greater significance are not spelled out. These matters will require further judicial elaboration in subsequent approval applications.