CONSIDERATION
48 To establish that the primary judge fell into appealable error Galactic must establish that in exercising the discretion under s 33V(2) his Honour acted upon a wrong principle, allowed extraneous or irrelevant matters to guide or affect him, mistook the facts, did not take into account some material consideration; or upon the facts, the primary judge's decision is unreasonable or plainly unjust: House v The King [1936] HCA 40; 55 CLR 499 at 504-505. For appealable error in the exercise of judicial discretion to be established it is not enough for this Court to find that it would have exercised the original discretion in a different way; the Court must be satisfied what was done by the primary judge amounted to a failure to exercise the discretion entrusted to the Court: Minister for Immigration v SZVFW [2018] HCA 30; 264 CLR 541 at [37]-[38] (Gageler J, as his Honour then was).
49 The primary judge's reasons at J [224]-[226] are central to Ground 2 of the appeals. His Honour said (at J [224]):
So much may be accepted, but in my view, however, the following important matters would weigh heavily in the balance against the making of a CFO in the sum of $24.5 million.
50 In stating "[s]o much may be accepted" the primary judge can only have been referring to the submissions of Mr Finch SC for Galactic (set out by the primary judge at J [219]-[223]) in favour of the $24.5 million CFO Galactic sought. There, his Honour accepted the following submissions:
(a) if a more reasonable assumption than the 15% risk of loss of capital invested pre-settlement adopted by Mr McGing is used that gives rise to an assessment of a reasonable funding commission in the ballpark of the $24.5 million sought by Galactic (at J [221]);
(b) the Contradictor had made no reasoned criticism of the actual amount of $24.5 million, and did not contend that in the context of a $98 million settlement, where Galactic had incurred or paid legal costs approaching $20 million, and faced a risk of a substantial adverse costs order, that $24.5 million was self-evidently not reasonable (J [222]);
(c) 25% of the gross settlement sum, given the size of the settlement, is a reasonable rate of return which is often awarded to funders by the Court, and it is relevant to take into account the legitimate expectations of the investor (J [222]); and
(d) the altered assumed risk of loss of capital invested pre-settlement from 15% to 20%, 25%, 30%, 35% or 40% (as done in Exhibit F5) should be seen as a reality check. Each of those increased risks were "within the realms of possibility" and show that a funding commission of $24.5 million is "in the right ballpark in terms of outcome" (J [223]).
51 Then, in the balance of J [224] the primary judge said that the "following important matters" "weigh[ed] heavily" against making a CFO in the sum of $24.5 million. His Honour then enumerated two matters:
(a) first, at J [225], that a majority of the judges of the High Court in Brewster indicated "strong reasons" for favouring the making of a FEO over a CFO; and
(b) second, at J [226], that a CFO of $24.5 million would mean that Galactic would be entitled to receive "something approaching double" what it would be entitled to receive under the LFAs, and it was not clear what rationale would justify a CFO which would pay Galactic a funding commission $10.78 million more than the amounts otherwise payable to it under the LFAs "other than some sort of 'windfall gain' theory". And a differential of that order of magnitude would go further than is necessary to deal with the problem of "free riding".
52 The primary judge did not expressly enumerate any other "important matters", but he went on to say:
(a) (at J [227]) that he accepted that Galactic played an important role in funding the litigation and thus exposed itself to litigation risks for the benefit of group members. He found, however, that the applicants' proposal for a FEO recognised that role and the risks Galactic took;
(b) (at J [228]-[231]), that he did not accept that 7-Eleven had pressured franchisees not to "sign up" to the class action, and found that Levitt Robinson had made "sustained efforts" to have group members enter into LFAs and, had signed up as many franchisees as were willing to enter into LFA's with Galactic. He said that Levitt Robinson had an adequate opportunity over a considerable period of time to sign up group members and the best they could do was to "sign up" 38% of the franchisees by reference to the number of stores operated by group members. This was not a case where Galactic's contractual rights under the LFA's were insufficient by reason of the proceeding settling early, or because Galactic did not have sufficient opportunity to sign up as many group members as possible.
On a fair reading, I do not consider that those findings were amongst the "important matters" to which the primary judge referred at J [224], but as I later explain little turns on that.
53 I consider the primary judge erred in the exercise of the discretion under s 33V(2) in holding that an "important matter" that weighed heavily against making the proposed CFO was that the majority in Brewster expressed "strong reasons" for making a FEO in preference to a CFO.
54 Section 33V(2) of the FCA Act empowers the Court to "make such orders "as are just with respect to the distribution of any money paid under a settlement". It is plain that the proposed orders for a CFO were orders "with respect to" the distribution of money paid under a settlement.
55 By stipulating that the Court "may make such orders as are just" the language of 33V(2) imports a wide judicial discretion. While the discretion is broad, it is not at large. It is confined by the necessity that any order made is "just", the general duty to act judicially, and the scope and purposes of Pt IVA of the FCA Act including the protective role of the Court in relation to the interests of group members.
56 The discretion is not, though, to be read down by reference to implications or limitations not found in its express words, construed according to their natural meaning and in their proper context: Owners of "Shin Kobe Maru" v Empire Shipping Co Inc (1994) 181 CLR 404 at 421 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ); Wong v Silkfield Pty Ltd [1999] HCA 48; 199 CLR 255 at [11] (Gleeson CJ, McHugh, Gummow, Kirby and Callinan JJ). Powers conferred on courts are not to be construed as subject to limitations which their terms do not require: Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 at [26] (Gaudron J).
57 Section 33V(2) says nothing about the specific manner in which the settlement monies are to be distributed, other than that the distribution is to be "just". And there is no textual support in s 33V(2), or in Pt IVA more generally, for approaching the "just" distribution of money paid under a settlement from the basis or starting point that there are "strong reasons" for making a FEO in preference to a CFO. I consider that by taking the approach that he did the primary judge read down the power in s 33V(2) by reference to implications or limitations not found in its express words, construed according to their natural meaning and in their proper context. His Honour thereby impermissibly fettered the exercise of the power under s 33V(2) and fell into appealable error.
58 It is plain that the ratio of Brewster does not provide that s 33V(2) is not a source of power to make a CFO at the settlement approval stage, and the decision does not contain seriously considered dicta of the majority to that effect: Davaria FC at [31]-[41] (Lee J, with whom Middleton and Moshinsky JJ agreed); Brewster CA at [28], [30], [41]-[43] (Bell P with whom Bathurst CJ and Payne JA agreed); Elliott-Carde at [141]-[169] per Beach J, [404]-[407], [412] per Lee J, [484]-[505] per Colvin J.
59 The plurality in Brewster (Kiefel CJ, Bell and Keane JJ) recognised that the asserted power to make a CFO at an early stage of a proceeding under s 33ZF could be contrasted with the power at the conclusion of a proceeding under s 33V. Indeed, their Honours said (at [59]) that one of the reasons to construe s 33ZF as not providing power to make a CFO is that other provisions of Pt IVA "make specific provision apt to accommodate that task but which operate at the conclusion of the proceeding." In a clear reference to the power under s 33V(2) the plurality said (at [68]):
The provisions of Pt IVA of the FCA and Pt 10 of the CPA expressly provide for the making of orders distributing any proceeds of a representative proceeding. As will be seen, the occasion for the making of such an order is the conclusion of the proceeding. At that stage, if the group members happen to be indebted to a litigation funder for its support of their claims, the value of the litigation funder's support to the group members will be capable of assessment and due recognition. That stage is the appropriate occasion for orders for meeting and sharing the cost burden of the litigation because the value of the litigation and the extent of the burden will have been rendered certain.
(Emphasis added.)
In recognising that the settlement approval stage is the appropriate occasion for orders to meet and share the costs of litigation funding, the plurality said nothing to indicate that in exercising the power under s 33V(2) a FEO is to be preferred to a CFO.
60 It can be accepted that the majority of judges in Brewster expressed a general preference for making a FEO rather than a CFO but they did so in the context of a CFO that had been made on an early, interim basis under s 33ZF of the FCA Act (and its NSW analogue) rather than under s 33V(2) as in this case. It is plain that the majority judges in Brewster were not engaged in a full consideration, either at the stage of power or discretion, with the range of considerations that might inform an order under s 33V(2). Importantly, and contrary to the Contradictor's submissions, they were not making statements of principle or doctrine in relation to the exercise of the power under s 33V(2).
61 The statements of the majority in Brewster were not "seriously considered dicta" that the primary judge was required to follow as provided in Farah Constructions. In Farah Constructions at [134]-[135] the High Court criticised the NSW Court of Appeal for making a decision that was contrary to "long-established authority and seriously considered dicta of a majority of this Court". In the circumstances of this case where: (a) the CFO is sought at the settlement approval stage, whereas in Brewster the CFO in question was made at an early stage of the proceeding; and (b) the power being exercised is the power under s 33V(2), whereas in Brewster the power exercised was the power under s 33ZF, the statements in Brewster expressing a preference for a FEO are not properly to be treated as binding. Nor were they properly to be treated as an "important matter" weighing heavily against making a CFO in the amount sought. His Honour's task under s 33V(2) was not "to simply resonate with any vibe emanating from preferences expressed for particular funding expense allocation models" (Elliott-Carde at [140] (Beach J)).
62 In fact, there are not strong reasons, as a matter of principle, for favouring making a FEO over a CFO at the stage of settlement approval. It will depend upon the case. I agree with the remarks of Beach J in Elliott-Carde at [146]-[168] in relation to the difficulties associated with FEOs.
63 To the extent that the obiter remarks of the majority in Brewster can be said to indicate a general preference for making a FEO rather than a CFO at the settlement approval stage, they do not justify exercising the power under s 33V(2) on that basis or from that starting point. Whether or not at the stage of settlement approval it is appropriate to make an order to allocate the expense of litigation funding across the class by deduction from the settlement money must be decided by the Court having regard to what is "just" in all the circumstances, and on the basis of the evidence before the Court, rather than upon the basis of general judicial expressions (made in a different context and under a different power) of preference for a FEO.
64 There is no force in the Contradictor's submission that the primary judge did not give the remarks of the majority in Brewster decisive weight at the expense of also considering other relevant considerations. Other than the primary judges' complaint about the inadequacy of Galactic's evidence (J [197]), and his Honour's rejection of the submission that the appropriate funding commission should be determined principally by reference to a fixed or "benchmark" percentage of the gross settlement (J [195]), the primary judge's reasons (at J [192]-[223]) almost entirely favoured making the proposed CFO. Those reasons included that:
(a) Galactic had funded the large legal costs and disbursements of the proceedings (approximately $20 million), provided security for costs ($6.95 million), and was exposed to the significant risks including the risk of substantial adverse cost orders (which Mr Schulman estimated at $17 million) (J [193]);
(b) prima facie, the security for costs Galactic provided, the considerable litigation risks it assumed, its adverse costs exposure and the large legal costs it expended in financing the group proceedings, were all considerations that warranted a substantial funding commission reward to Galactic (J [201]);
(c) group members were provided both with information about the 35% funding rate for those group members who had entered into LFAs and Galactic's intention to apply for a CFO, and they had expressed no substantive objection to the information, or to Galactic's intention to apply for a CFO (J [200]);
(d) there were very few group member objections to the proposed $24.5 million funding commission, and that each of the objections "may properly be disregarded because they are inconsequential" (J [199]); and
(e) no reasoned criticism can or had been made of the actual $24.5 million amount of the proposed CFO, nor had it been suggested that a CFO in that amount was outside the range of reasonable returns having regard to the $98 million settlement, the incurred or paid legal costs of approximately $20 million, and the substantial adverse costs risk Galactic faced (J [221]-[224]).
65 Further, at J [224] the primary judge accepted Mr Finch's submissions to the effect that:
(a) if a more reasonable assumption of risk than the 15% risk of loss of capital invested pre-settlement adopted by Mr McGing is used, that gives rise to an assessment of a reasonable funding commission in the ballpark of the $24.5 million sought by Galactic (at J [221]);
(b) the Contradictor had made no reasoned criticism of the actual amount of $24.5 million, and did not contend that in the context of a $98 million settlement, where Galactic had incurred or paid legal costs approaching $20 million, and faced a risk of a substantial adverse costs order, that $24.5 million was self-evidently not reasonable (J [222]);
(c) 25% of the gross settlement sum, given the size of the settlement, is a reasonable rate of return which is often awarded to funders by the Court, and it is relevant to take into account the legitimate expectations of the investor (J [222]); and
(d) the altered assumed risk of loss of capital invested pre-settlement from 15% to 20%, 25%, 30%, 35% or 40% as done in Exhibit F5 operates as a reality check. All of those risks are "within the realms of possibility", and show that a funding commission of $24.5 million is "in the right ballpark in terms of outcome" (J [223]).
66 The primary judge found that those powerful considerations were overcome because the majority in Brewster expressed "strong reasons" for favouring a FEO over a CFO (J [225]), and that the proposed CFO would provide Galactic with almost double the funding commission to that which it would receive under the LFAs, which would be a windfall gain (J [226]). In my view it is plain that the primary judge gave those matters decisive weight at the expense of other relevant considerations. In oral submissions the Contradictor accepted that the "overwhelming basis" upon which the primary judge decided to order an FEO rather than a CFO was the "strong reasons" of the majority in Brewster. The Contradictor also accepted that, if that consideration was eliminated, it would be "very difficult to defend" a funding commission of $12.005 million as reasonable.
67 An error in the exercise of the discretion under s 33V(2) is also apparent in the primary judge's finding (at J [226]) that an "important matter" weighing heavily against making a CFO in the amount of $24.5 million was that a CFO in that amount would mean that Galactic would be entitled to receive "something approaching double" what it would be entitled to receive under the LFAs it had entered into with the applicants and group members. His Honour also said it was unclear what rationale would justify Galactic being paid an amount $10.78 million higher than it would be paid pursuant to its contractual entitlements under the LFAs, other than some sort of windfall gain theory, and a differential of that magnitude went further than was necessary to deal with the problem of "free riding".
68 The Contradictor contended that finding should be understood in light of the primary judge's finding, not challenged in the appeals, that Galactic's evidence did not support an additional payment of $10.78 million above its contractual entitlements under the LFAs (J [197], [210], [217]). I do not accept that that finding depended to any material extent upon the sufficiency of Galactic's evidence. Rather, it reflected his Honour's view that the starting point or basis for consideration of what would be fair and reasonable was Galactic's contractual entitlements under the LFAs.
69 The Contradictor correctly accepted that whether a funding commission in a particular amount is "just" involves case specific considerations (Uren at [55]), and that depending on the particular circumstances of a case, a FEO may be insufficient to reflect the true risk and reward calculus arising from a funder's funding of a proceeding. The Contradictor also correctly accepted that Pt IVA is concerned with access to justice such that where, for example: (a) only the representative applicant signs a LFA; or (b) only a small number could do so because the majority of the class were unascertainable within a reasonable time frame as to their identity; or (c) where the nature of the characteristics of most members of the class due to their education or other socio-economic factors was such that it was not feasible to expect them to understand let alone sign up to relatively complex LFAs (Elliott-Carde at [149] (Beach J)), that may justify a CFO rather than a FEO so as to ensure there is a "just" distribution of the settlement money.
70 Given the Contradictor's acceptance of those matters, it is difficult to understand the basis for treating Galactic's existing contractual entitlements under the LFAs as a matter of such significance that any funding commission which exceeded them constituted a windfall gain. If in the circumstances outlined above it may be "just" to make a CFO in an amount substantially greater than a FEO (as the Contradictor accepted) I do not accept that, here, it is appropriate to treat Galactic's contractual entitlements under the LFAs as a cap. If anything, although it does not take things far, the fact that more than a third of the group members entered into LFAs under which they agreed to pay 35% of their gross recoveries to Galactic is evidence in support of the "justness" of a CFO under which group members will pay a reduced funding rate of 25% of their gross recoveries.
71 Again, there is no textual support in s 33V(2), or in Pt IVA more generally, for approaching the "just" distribution of money paid under a settlement from the basis or starting point of a funder's contractual entitlements under the LFAs it entered into with group members. By exercising the discretion through the prism of a comparison of the quantum of the funding commission Galactic would receive under the proposed CFO to what it would receive under the LFAs it had entered into, and by treating the amount payable under the LFAs as something of a cap such that any amount above that was a windfall gain, his Honour impermissibly elevated the existence of Galactic's existing contractual entitlements in the exercise of the discretion under s 33V(2).
72 In this context it is also worth noting that nothing in the statutory scheme of Pt IVA requires group members to enter into LFAs or to retain lawyers. Group members are entitled to take an essentially passive role in the litigation if they wish and commonly many do. Further, in some cases the characteristics of the class make book building and a FEO practicable, and in other cases they do not: Elliott-Carde at [411] (Lee J). In cases like the present where the franchisees were small business people in an ongoing business relationship with 7-Eleven (who might therefore fear the sorts of business disadvantages to which Mr Schulman's evidence referred) persuading sufficient group members to enter into a LFA to support Galactic's investment in the case was always going to be difficult.
73 This Court has long said that "book-building" is to be discouraged: Perera v GetSwift Ltd [2018] FCAFC 202; (2018) 263 FCR 92 at [295] (Middleton, Murphy and Beach JJ); Klemweb Nominees Pty Ltd (as trustee for the Klemweb Superannuation Fund) v BHP Group Limited [2019] FCAFC 107; 369 ALR 583 at [69(2)] (Lee J with whom Middleton and Beach JJ agreed); Elliott-Carde at [146]-[148] (Beach J), [411] (Lee J). However, where a funder does seek to have group members enter into LFAs, but informs the group members that it nevertheless intends to seek a CFO at the stage of settlement approval, the funder's contractual entitlements under the LFAs will not usually carry much weight in deciding what constitutes a "just" funding commission.
74 Here, the evidence shows that from December 2017 Levitt Robinson advised group members by way of bulletins, in response to direct enquiries, by a clause in the various iterations of the LFAs, and in a series of "town hall" meetings, that Galactic intended to later seek a CFO and from February 2018, Galactic funded the proceedings (which were filed on 20 February 2018) notwithstanding the relatively low level of "sign up" because Galactic understood that CFOs were routinely made in class actions in Australia (J [198]). In the circumstances of this case, neither the fact that Galactic entered into LFAs with 38% of group members, nor its contractual entitlements under the LFAs, carry much weight in deciding what constitutes a "just" funding commission. They are not matters of significance.
75 Finally, it is appropriate to say something about the primary judge's finding, not challenged in the appeals, that Galactic did not adduce sufficient evidence as to what would constitute a reasonable funding commission because it did not put on evidence to explain the return on investment that it was seeking ex ante (J [197], [218]).
76 In my view his Honour was wrong to so find. There is no ideal way in which a funder must adduce evidence relevant to what represents a reasonable funding commission, but I do not accept that in the circumstances of the case it was necessary for Galactic to adduce sophisticated expert evidence (like that of Mr McGing) as to what funding commission would represent a reasonable rate of return on invested capital ex ante. Deciding what amount of funding commission is "just" under s 33V(2) requires a commonsense evaluative assessment by the Court and, ordinarily, that should not require such expert evidence. As Beach J observed in Elliott-Carde at [296] (albeit in the different context of a dispute as to whether setting a funding commission involves the exercise of judicial power) judges set legal costs by scales, rates, individual amounts and total or capped amounts, doing so both ex ante or ex post; and setting a funding commission or funding rate is analogous. Judges also fix the remuneration of external insolvency practitioners doing so both ex ante or ex post, and judges set rates of remuneration for trustees administering trust assets. Usually, that is done without requiring expert evidence.
77 Mr Schulman's evidence should have been sufficient for the primary judge to undertake the necessary commonsense evaluative assessment, including by his having regard to the considerations in Money Max at [80]. His evidence shows the matters he considered in arriving at a 35% funding rate including: (a) the risks of the proceedings by reference to Mr Schulman's consideration of counsel's advice; (b) his assessment that this was a case where Galactic might be at risk of $50 million in legal costs, security for costs and adverse costs; (c) that other litigation funders had declined to fund the proceedings; (d) the risks associated with fluctuations in the exchange rate between USD and AUD, as the amount Galactic would be required to pay and to recover depended on the exchange rate; (e) the risk of legal fees greatly exceeding the estimates Levitt Robinson provided; and (f) the risk of business pressure by 7-Eleven upon franchisees including fears of non-renewals of their franchising agreement, lack of cooperation of 7-Eleven in any sale or financing transaction, the non-approval of new franchise sites, and the reluctance of 7-Eleven to offer new or existing sites to troublesome franchisees.
78 Further, a financial expert's assessment as to what represents a reasonable rate of return for a funder ex ante is likely to turn on the assessment of the risks on liability and quantum in the case. The assessment of those risks is a matter for the judge hearing the approval application, not for a financial expert.