The costs and risks assumed by the Funders
83 In class action litigation the fundamental obligations of a commercial third-party litigation funder (usually) include paying the applicant's legal costs and disbursements, putting up security for costs, and indemnifying the applicant and group members in relation to any adverse costs order. In return the funder is entitled, upon success in the proceeding, to: (a) reimbursement of the legal costs and disbursements it has paid; (b) the return of the security for costs it has advanced; and (c) a funding commission in consideration of the costs and risks it took on.
84 The arrangement under the Funding Terms in the present case is no exception. Clause 3 of the Funding Terms is headed "Funders' Obligations". It provides:
[The Funders] must fund the Project Costs of the Applicant and Group Members, by:
(a) paying the Lawyers the Legal Costs and Disbursements charged by the Lawyers for all Legal Work (whether incurred before or during the Funding Period) up to the Funding Limit;
(b) paying the costs of any insurance covering an Adverse Costs Order;
(c) paying and indemnifying the Applicant and any Group Member against any Costs Order which the Court makes in the Proceeding against the Applicant or a Group Member in favour of the Respondent, in so far as the costs the subject of the Costs Order were incurred either before or during the Funding Period; and
(d) providing any security for costs in the Proceeding, in the form that the Court orders, or in the absence of any order, in such form as the Applicant and the Funders agree and the Respondent accepts.
85 Clause 7 of the Funding Terms provides for the Funders to be repaid all "Project Costs" paid or payable, and cl 8 provides that in consideration for performing the obligations under the Funding Terms the Funders shall be paid an amount as determined by the Court which shall not exceed 25% of the net settlement.
86 "Project Costs" is broadly defined to include all costs and expenses incurred in relation to the proceeding. It includes:
(a) the actual costs and expenses paid or payable in connection with the prosecution, defence, appeal or appeals of the proceeding and the collection of the recoveries;
(b) the legal costs and disbursements incurred;
(c) any payment of adverse cost orders by the Funders or AmTrust;
(d) administration project costs;
(e) the cost of an independent costs assessor;
(f) all of the Funders' out of pocket costs and expenses paid or incurred in relation to the project; and
(g) any GST payable on any taxable supply made by any entity as a result of the above costs or expense being incurred.
Most relevantly for present purposes, Project Costs includes "the costs involved in the provision by [the Funders] of any security for costs, including but not limited to any premium charged for provision of an after the event insurance policy and/or the cost of obtaining any deed of indemnity related to security for costs in the Proceeding."
87 The materials show that on 31 October 2017 the Funders acquired an ATE Policy from AmTrust to insure against the risk of having to satisfy any adverse costs order made against the applicant. The terms of the ATE Policy required the Funders to pay premiums totalling $974,950 comprised of the following:
(a) an initial premium in the amount of $125,800. Therium and ICP Capital each paid 50% of that amount in or around November 2017; and
(b) a contingent premium up to $1,132,200. At the point of settlement the Funders became liable for 75% of that amount, being $849,150, subject to settlement approval,
(together, the ATE Premiums). Mr Purslow also deposes that it is likely that stamp duty will be payable to the State Revenue Office (Victoria) in respect of the ATE Premiums, at the rate of 10%, being $97,495 in total.
88 Security for Spotless' party-party costs in the proceeding was provided in two tranches; an initial tranche of $2,020,000 on 22 January 2018 and a second tranche of $2 million on 29 April 2019 for the period up to the conclusion of a five week trial. Both tranches were provided by way of an unconditional and irrevocable deed of indemnity executed by Amtrust in favour of Spotless (the Deeds of Indemnity). The ATE Policy was a pre-requisite to obtaining the Deeds of Indemnity. Amtrust charged the Funders $150,000 for the provision of each Deed of Indemnity, and Mr Chuk's affidavit annexes copies of invoices totalling $300,000.
89 The Funders seek payment of $1,372,445 from the Settlement Fund comprising:
(a) $974,950 for the premiums paid or to be paid for the ATE Policy;
(b) $97,495 for stamp duty on the ATE Policy premiums. The Funders agreed to refund those monies if stamp duty was not ultimately levied; and
(c) $300,000 for the Deeds of Indemnity.
Having regard to the broad definition of Project Costs in the Funding Terms, it is plain that the Funders are entitled to reimbursement of those amounts.
90 The parties to an LFA or to Court-approved Funding Terms may, of course, structure their arrangements as they wish. But the fact that the Funding Terms so provide is relevant to the costs and risks that the Funders assumed in agreeing to fund the proceeding, and thus to the funding rate that is fair and reasonable. Money Max provides (at 80) that the quantum of adverse costs exposure that the funder assumed is an important consideration, and that the legal costs expended and to be expended by the funder and the security for costs provided are also important considerations (at 80).
91 In the present case the Funders were commercially savvy enough, and I infer in a sufficiently strong bargaining position with Slater & Gordon, to obtain the following funding arrangements through the Funding Terms, (and through the LFAs that preceded those terms).
92 First, the Terms of Engagement entered into with Slater & Gordon meant that the Funders' obligation to pay the legal costs and disbursements incurred in the proceeding were capped at the Funding Limit of $6.65 million which was well short of any reasonable assessment of the amount of costs and disbursements likely to be incurred if the proceeding went to trial. The Funding Limit was reached, as I infer, approximately 9 months before the trial was listed to start. From that point on, unless the Funders elected to continue funding beyond the Funding Limit, (which they did not) they had no obligation to pay Slater & Gordon's fees, or the substantial disbursements including counsel's fees that were incurred. If the case continued (as it did) those fees and disbursements would be carried by Slater & Gordon. That arrangement substantially reduced the costs and risk that the Funders took on in funding the proceeding.
93 Second, the Funders agreed to indemnify the applicant and group members against any adverse costs liability in the proceeding, but they did so primarily through the ATE Policy. This is not a case like Clarke v Sandhurst Trustees Limited (No 2) [2018] FCA 511 at [5] in which the Funders carried the cost of the ATE premiums as a cost of their business. Instead, through the Funding Terms, the Funders passed most of the cost of that indemnity on to the applicant and group members. That is so because:
(a) the Funders paid the initial non-contingent premium, which was at-risk for the Funders as it would be lost if the case was unsuccessful, but that was only $125,800, which is not a material amount in a case of this size. And that premium is to be reimbursed to the Funders by deduction from the Settlement Fund upon success in the case. That is quite different to the position where the funder puts up security for costs; and
(b) the Funders were not required to pay the contingent premium of $849,150 as that was not due and payable unless the case was successful, and then by deduction from the Settlement Fund. The Funders did not have to advance it and that is quite different to the position where the funder puts up security for costs.
That arrangement also reduced the costs and risk that the Funders took on in funding the proceeding.
94 I note however that, under the ATE Policy, AmTrust's liability for an adverse costs order was capped at $4 million, which is well short of what I would expect to be Spotless' party-party costs by the conclusion of a five week trial. The Funders were therefore exposed to the risk of an adverse costs order for any amount above $4 million, which I estimate would be in the order of a further $6 million.
95 Third, the Funders provided security for costs through the Deeds of Indemnity it procured from AmTrust at a cost of $300,000. That amount was at-risk for the Funders as it would be lost if the case was unsuccessful, but if the case was successful it would be reimbursed by deduction from the Settlement Fund. Again, that is quite different to the position where the funder puts up security for costs. This too reduced the costs and risks that the Funders assumed.
96 During the settlement approval hearing I expressed a preliminary view that if Funders wished to recover the expenses associated with providing an adverse costs indemnity (the ATE premiums and stamp duty) and providing security for costs (the Deeds of Indemnity) by deduction from the Settlement Fund, they should not be permitted at the same time to rely upon the cost of putting up security for costs and their exposure to the risk of an adverse costs order to justify the percentage funding rate they sought. In my view the Funders should not be able to have it both ways. I considered that those aspects of the Funding Terms reduced the costs and risks which the Funders assumed, and pointed towards allowing a funding rate lower than the 22.5% funding rate the Funders' seek.
97 As it eventuated, during the hearing, the Funders withdrew their claim for reimbursement of $1,372,445 from the Settlement Fund for the ATE premiums, stamp duty on the ATE premiums and the Deeds of Indemnity. In my view that abandonment was appropriate.
98 I also had a concern in relation to ICP's claim for GST on services provided to group members. The Initial and Amended ICP LFAs provided for ICP to provide "services" to those persons who entered into those agreements, and for ICP Capital to provide the funding, as did the Co-Funding Agreement. In return, upon success in the proceeding ICP became entitled to 3% of the claim proceeds of ICP funded claimants, and ICP Capital became entitled to the greater of 22% of the net settlement or three times the funded claimant's share of Project Costs.
99 The relevant services include ICP making any decision or doing any act necessary and incidental to commence, progress, resolve or settle the claims, including to provide day-to-day instructions to the lawyers, as well as other services. To my mind, the services to be performed by ICP are things usually provided by a funder as a cost of business, in consideration for which the funder is paid a funding commission. Mr Walker's affidavit includes a complex calculation in which he attributes the amount of $55,132 to GST applicable to the services provided by ICP in relation to group members who are Australian residents and are funded by the ICP Entities. Mr Walker deposes that:
The services provided by ICP are separated from the funding services of ICP Capital, to ensure that if ICP considers that circumstances have arisen such that ICP may be in a position of conflict between any obligation ICP owes to ICP Capital and the obligation it owes to Claimants, ICP will act in the claimant's interest.
It is not clear to me how that separation assists in relation to any conflict of interests when Mr Walker is both CEO of ICP and the Managing Director of ICP Capital. To my mind it is more likely that the split recognises that ICP found and developed the case and then, through ICP Capital, investors put money in to fund the case with Mr Walker being obliged to watch over that investment. That is a commercial matter between the ICP Entities rather than directly for the group members' benefit.
100 During the hearing I expressed 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. One of the benefits of a percentage Expense Sharing Order is that it is transparent for group members, and the imposition of such charges in addition to an order in the nature of a CFO tends to opacity. I indicated that another way to address the claim for reimbursement was to allow it but reduce the funding rate to reflect the lower costs the Funders took on. In the course of the hearing ICP withdrew its claim for reimbursement of the GST. In my view that was appropriate.