What is a reasonable funding commission in the circumstances of the case?
123 Pursuant to the funding agreement the Funder and Mr Webster executed on 10 October 2016 the Funder is entitled to be paid "up to a maximum of 40%" of any settlement or judgment. The Funder sought Court approval of a funding rate of 28% of the $37.5 million gross settlement, thereby allowing a $10.5 million funding commission.
124 Amongst other things, the Funder submitted that:
(a) the proceeding could not have been undertaken without the funding he provided. He notes that at the time he agreed to fund the case, Murray Goulburn had not been prosecuted by or reached a settlement with ASIC, had not stated publicly that it was putting aside $195 million to deal with potential costs from class action litigation, and that the present case was the first proceeding brought against the MG Parties in respect of the relevant events;
(b) a funding commission of $10.5 million, together with Court-approved legal costs of $5.2 million along with the other priority distributions, would mean that registered class members will share in a settlement of just over $20 million;
(c) the proposed funding commission was proportionate to the amount sought and recovered in the proceeding and the risks he assumed (see Money Max at [80(g)]; Petersen at [232]), and that it represented only a modest premium on the amount he stood to lose if an adverse costs order was made and he lost the security for costs he had advanced;
(d) the return per class member in the present case was better than that achieved in the Endeavour River proceeding, and that the present case was commenced more than two years before that proceeding and in circumstances where the risks taken on were substantially greater. He argued that it would be anomalous if he did not receive a funding commission at a meaningfully higher rate than the 25% funding rate approved by the Court in Endeavour River No 2;
(e) the quantum of the adverse costs exposure the Funder assumed is an important consideration: Money Max at [80(e)]; Petersen at [245]. Mr Crothers deposed that when he entered into the funding agreement he understood that security for costs would be approximately $6 million, and that he would lose that security if the case was unsuccessful;
(f) the quantum of legal costs expended and to be expended in the litigation and the security for costs paid are important considerations: Money Max at [80(f)]; Petersen at [250]; Blairgowrie at [149]. At the time settlement was reached the Funder had spent $7,429,764.20 in legal costs and security for costs, to which must be added; (a) the additional professional charges of $2,691,190 allowed by the Costs Referee in respect of Elliott Legal which are yet to be invoiced and paid; and (b) the balance of the security for costs which had been ordered to be paid within 21 days of the mediation, being $1,209,000;
(g) it is relevant to compare the funding commission sought with those allowed in other Part IVA proceedings and what is available or common in the market: Money Max at [80(c)]; Petersen at [255]. The Funder contended that a funding rate of 28% is within the broad parameters of the funding commission rates available in the Australian market, and that funding commission rates offered within that market should not become a race to the bottom: Kuterba at [12]; Rushleigh at [50]. He argued that a funding rate above the median funding rate of 26% was appropriate given the risk involved in funding the proceeding;
(h) class members had been informed through the Opt Out and Registration Notices sent to them on or about 11 January 2019 and the Class Member Registration Notice sent to them on or about 9 August 2019 that the Funder intended to apply for a common fund order at a funding rate of no more than 28%. Class members had ample and fair opportunity to opt out of the proceeding or notify their concerns in relation to the funding arrangements. Those persons that chose to become registered class members did so in that knowledge; and
(i) class members were informed through the Notice of Proposed Settlement that a common fund order at the rate of 28% would be sought, and no class member objected to that funding rate.
125 There was no dispute between the parties as to the relevant considerations for the Court in assessing the reasonableness of a proposed funding commission, and each relied on the factors set out by the Full Court in Money Max at [80]. Where the parties differed was in the application of those factors to the facts of the present case. For the reasons I now explain I concluded that a funding rate of 28% of the gross settlement to would be excessive, and a funding rate of 23%, being $8,625,000, was just and fair; that is, $1,875,000 or 18% less than the funding commission the Funder sought.
126 First, contrary to the thrust of the Funder's submissions, I considered the quantum of the legal costs the Funder expended, and was liable to expend, fell at the low end of the spectrum. Further, much of the expenditure on and liability for legal costs occurred after the settlement was known or at least imminent. As I have said:
(a) the first costs agreement between Elliott Legal and the plaintiff dated 9 May 2016, provided that its professional fees and disbursements were only payable upon a successful outcome in the proceeding, as defined. Under that cost agreement which was in force until 30 May 2019, that is, until about five months before the settlement was reached, there was nothing for the Funder to pay in relation to legal costs as they were all to be carried by Elliott Legal;
(b) the second costs agreement between Elliott Legal and the plaintiff dated 30 May 2019 provided that its professional fees were only payable upon a successful outcome, but that the plaintiff was required to pay any disbursements incurred regardless of the outcome of the case. It was only after 30 May 2019 that the Funder had any legal obligation to pay invoices rendered by Elliott Legal to the plaintiff and such liability was limited to disbursements. While a substantial amount of counsel's fees were incurred prior to 30 May 2019 they were not invoiced then; and
(c) the third costs agreement dated 22 October 2019 was relevantly the same as the second agreement, but with higher hourly rates.
127 Mr Crothers gave evidence in the settlement approval application and he was cross-examined by the Contradictor. In his first affidavit he deposed that while he was discussing with Mr Elliott the costs and risks associated with bringing a class action against Murray Goulburn:
… I received verbal advice from Mr Elliott that his costs in conducting the class action could be between $3 million and $5 million but that I would only have to pay those costs if the case was successful, as he was agreeable to a "no win, no fee" arrangement which included a 25% uplift. Further, Mr Elliott advised me that in the event that the plaintiffs were unsuccessful, I could be exposed as funder to substantial liabilities on account of Murray Goulburn's legal costs as well as unrecoverable plaintiff disbursements (including the fees charged by the Plaintiff's counsel). Mr Elliott also advised me that I should expect to be required to pay into court up to $6 million by way of security for Murray Goulburn's costs and that security would be enforced in favour of Murray Goulburn if the litigation was unsuccessful. During 2019, Mr Elliott advised me that the estimate of my potential exposure to adverse costs had increased to between $5 million and $6 million in addition to the risk of being unable to recover disbursements of approximately $1 million.
128 In his third affidavit Mr Crothers said that it was his understanding throughout the proceeding that he was liable for counsel's fees regardless of the outcome of the proceeding. He said that he was not aware of and was not provided with a copy of the first costs agreement. To reinforce his evidence that he understood that he was liable for disbursements during the period of the first costs agreement he pointed to a payment schedule he adduced which showed that he had paid disbursements totalling $364,438.08 prior to the second costs agreement coming into force on 30 May 2019, including $62,743.75 of Mr Symons fees.
129 Against that, the evidence shows that prior to 29 October 2019, only a few days before the settlement agreement was executed, the Funder had been invoiced and paid only a small proportion of the counsel's fees that had been incurred. Mr O'Bryan invoiced the entirety of his fees for the case ($1,369,375) on 29 October 2019, and Mr Symons invoiced the majority of his fees for the case ($425,911.75 out of a total of $498,156) on 31 October 2019. The settlement agreement was executed on 1 November 2019 and such agreements are commonly more than a week in the drafting and execution. I infer that as at 29 October 2019 Mr O'Bryan and Mr Symons knew that the case had settled or believed that it would settle imminently.
130 On 14 March 2017 Mark Elliott sent an email to the Funder and Mr O'Bryan stating as follows:
Hi Will
Can I please get a transfer from you to Elliott Legal P/L…of say AUD $50,000 on account of costs and disbursements already incurred in this matter?
I have an invoice to pay our junior barrister Michael Symons of approx..$40,000
In addition, I have outstanding Court fees and transcript costs to pay
Of course, I confirm that Norman and I are on a no win/no fee arrangement and therefore remain hungry!
Talk soon
cheers
(Emphasis added.)
131 Mr Elliott said that he and Mr O'Bryan were on no win no fee arrangements, as the first costs agreement provided. But, somewhat inconsistently with the first costs agreement, the email tends to show that: Mr Symons was not engaged on a no win no fee basis as Mr Elliott was asking the Funder to put him in funds so as to pay Mr Symons' invoices as well as for Court fees and transcript.
132 Mr Crothers denied that the case was run on a no win no fee basis so far as the disbursements Elliott Legal incurred on the plaintiff's behalf were concerned. He deposed that from the date Mr Webster executed the litigation funding agreement on 10 October 2016:
…my understanding was that I was and would be liable for counsel's fees. I am not aware of whether or not what is said in Mr Elliott's email of 17 March 2017 (as to the capacity in which Mr O'Bryan SC was acting) is in fact true.
He was cross-examined and was not shaken in his testimony. I found his evidence credible.
133 Mr O'Bryan was not a witness and he appeared for the plaintiff in the settlement approval application. When the Contradictor sought leave to cross-examine Mr Crothers in relation to the 14 March 2017 email, Robert Craig SC, senior counsel for the Funder said the following:
MR CRAIG: Your Honour, the only observation I would make is this, in the context of paragraph 14 [of Mr Crothers affidavit]: Mr O'Bryan is in the court. He's an officer of the court. And paragraph 14 deposes as to Mr Crothers not understanding or not being aware as to whether or not Mr O'Bryan was acting on a no-win, no-fee basis. In my respectful submission, before Mr Crothers is cross-examined, Mr O'Bryan ought to identify for your Honour the basis on which he was retained.
(Emphasis added.)
134 Mr O'Bryan responded as follows:
MR O'BRYAN: I'm happy to do so, your Honour. I was retained on the basis that my fees would be paid and not on a no-win, no-fee basis.
HIS HONOUR: And so how does that sit with the fact - or I presume it's a fact - that you don't render any bills until October 2019, when the case starts in 2016 or 2017?
MR O'BRYAN: Your Honour - - -
HIS HONOUR: I'm not trying to cross-examine you, Mr O'Bryan.
MR O'BRYAN: I didn't render bills on the - - -
HIS HONOUR: I'm trying to understand.
MR O'BRYAN: No, no, no, no. I appreciate that, your Honour. I didn't render bills in those years, because I didn't desire to be paid in those years. But had I desired to be paid, I could have and would have rendered bills in those years. And I did not agree with anybody that I would not do so. Had I been on a no-win, no-fee basis, your Honour, like Elliot Legal, I would have formally recorded and sought an uplift in respect of it, which I did not do.
135 Later Mr O'Bryan said further:
MR O'BRYAN: Well, this case had other unusual features about it, your Honour, which your Honour would not be familiar with, having come to it at approval time. But we did, for some time, in the early years, face a number of vigorous applications including, from memory, a summary judgment application in 2017. And so survival, in the sense of the case as a whole, was the highest priority in that time. And if it was, as it were, my fault that we started something that had no prospects such that it couldn't survive a summary judgment application, then, of course, whatever fees I may have rendered would have been very different.
HIS HONOUR: Yes. Okay.
MR O'BRYAN: But it was not a no-win, no-fee case, your Honour. It just would have been a very different looking bill if our learned friends from Murray Goulburn had succeeded and knocked us out in the early days.
136 Mr O'Bryan did not give sworn evidence but I considered it appropriate to give some weight to an explanation provided to the Court by senior counsel. In my view his explanation was credible. If Mr O'Bryan was motivated to delay invoicing his fees because of, for example, tax reasons, he would not be the first barrister to have taken that course. Further, the evidence shows that he knew the Funder well and had recommended the class action to him. His explanation that he was therefore motivated to see whether the case survived the early stages before invoicing his fees was readily understandable, although it does not explain why he did not invoice them until 29 October 2019.
137 There are difficulties in reconciling, on the one hand:
(a) Mr Elliott's 14 March 2017 email to the Funder and Mr O'Bryan stating that he and Mr O'Bryan were on no win no fee arrangements and "remain hungry";
(b) the first costs agreement which provided that the case was to be conducted on no win no fee basis in relation to Elliott Legal's fees and disbursements; and
(c) the fact that Mr O'Bryan did not invoice any of his fees until 29 October 2019, and Mr Symons invoiced the great bulk of his fees on 31 October 2019 when, as I infer, they knew that the case had settled or believed that it would settle imminently;
and on the other hand:
(a) the Funder's sworn evidence that his understanding throughout the proceeding was that he was liable for disbursements including counsel's fees, and that he paid $364,438.08 in disbursements prior to 30 May 2019, including $62,743.75 of Mr Symons fees; and
(b) Mr O'Bryan's explanation to the Court that he was not acting on a no win no fee basis.
138 It is open to infer that Mr O'Bryan was engaged on a no win no fee basis, but the Contradictor did not seek such a finding and I need not decide that issue. The Contradictor did not contend that the Court should not accept Mr O'Bryan's explanation nor that the Court should find that the Funder was not telling the truth. Instead the Contradictor relied upon the evidence to show that the costs and risks that the Funder actually took on in funding the case were substantially lower than the Funder contended. I accept that submission.
139 Contrary to the Funder's submissions, his erroneous understanding that he was obligated under the funding agreement to pay disbursements, including counsel's fees, incurred by Elliott Legal on the plaintiff's behalf during the term of the first costs agreement, is not central to the Court's task in assessing the reasonableness of the claimed funding commission. The more central considerations include that:
(a) upon Mr Webster and Elliott Legal entering into the first costs agreement on 9 May 2016 until 30 May 2019 (when it was superseded by the second costs agreement) the plaintiff had no legal obligation to pay any disbursements incurred in the proceeding by Elliott Legal, nor any of the firm's professional fees. Thus the Funder had no legal obligation under the funding agreement to pay such amounts. In that period, comprising the great majority of the time the class action was on foot, Elliott Legal had agreed that it was acting for the plaintiff on a no win no fee basis and that it would not charge either professional fees or disbursements unless there was a successful outcome;
(b) until only a few days prior to execution of the settlement agreement the Funder had paid only a small proportion of the counsel's fees that had been incurred. The great bulk of counsel's fees ($1,795,286) were not invoiced until, as I infer, counsel knew that the case had settled or believed it would settle imminently. The plaintiff had no legal obligation to pay those counsel's fees until they were invoiced. Thus the Funder had no legal obligation to pay those disbursements until the case no longer carried any risk;
(c) putting to one side the security for costs the Funder advanced, prior to the delivery of a raft of invoices by counsel in late October 2019 the Funder had only paid approximately $971,398.79 in fees and disbursements; and
(d) the plaintiff had no legal obligation to pay Elliott Legal's professional fees unless the case had a successful outcome. Thus the Funder had no legal obligation to pay those professional fees until the case no longer carried any risk.
140 In summary, the legal costs the Funder was legally obliged to pay and in fact paid were lower than his submissions sought to portray, as were the risks he assumed. He had no legal obligation to pay professional fees until after the case was successful. His legal obligation to pay disbursements did not commence until 30 May 2019, and counsel did not invoice most of their fees until 29 and 31 October 2019, after they knew the case had settled or believed it would settle imminently. Until 29 October 2019 the Funder had only paid approximately $971,398.79 in legal costs.
141 Second, another relevant consideration is the quantum of the security for costs expended by a funder. Here, the Funder paid $4,836,000 in security and was obliged to pay a further $1,209,000 within 21 days of the mediation. That is a substantial amount, but monies advanced as security for costs do not have the same risk profile as monies paid for legal fees and disbursements. Experience shows that very few securities class actions proceed to judgment, and it is very rare for a funder to lose the security for costs it has advanced. It was always much more likely than not that those monies would be returned to the Funder at the conclusion of the case. That was recognised by Elliott Legal in the first costs agreement which said:
…it is possible, although highly unlikely, that an order for you to pay the Defendant's costs of all or part of this proceeding could be made by the Court. I confirm that [the Funder] has agreed to indemnify you in respect of any liability you may incur as a result of such a costs order being made against you.
(Emphasis added in italics.)
142 Third, I do not accept the Funder's submission that a funding commission of 28% of the gross settlement represents "only a modest premium" on the amount the Funder stood to lose. Of course, if the plaintiff lost the case at trial the Funder could have been required to pay, say, $8-$9 million in adverse costs, plus the disbursements which had been expended; although it would not be liable for the professional fees of Elliott Legal. That was the investment risk the Funder took. However, the Funder had only paid approximately $971,398 in legal costs up to the point of settlement, or just prior to it, on top of the security it advanced of $4,836,000, being a total of $5,807,398. It was always likely that the case would settle, particularly once the Endeavour River proceeding had settled. Upon settlement approval, at a funding rate of 28% the Funder would receive the return of the security advanced and the costs he had paid, plus a funding commission of $10.5 million. I would not describe that as a modest return.
143 Fourth, I do not accept the Funder's contention that it would be anomalous if he did not receive a funding commission at a meaningfully higher rate than the 25% funding rate approved by the Court in Endeavour River No 2. I accept that the present case was commenced at an earlier point in time and that at the time it was commenced it faced a higher level of risk than that faced by the Endeavour River proceeding. But that is not to say that a funding rate of 28% would be fair and reasonable. There are a number of indicators that Elliott Legal and the Funder saw the case as involving only a moderate risk, therefore justifying a lower funding rate, including that:
(a) in the first costs agreement Elliott Legal agreed to undertake the case on a no win no fee basis such that the firm would not be paid professional fees or disbursements unless the case had a successful outcome. I infer that it would not have done so unless it was reasonably confident of a successful outcome. Section 182 of the Uniform Law states that a costs agreement must not provide for an uplift fee unless the law practice "has a reasonable belief that a successful outcome of the matter is reasonably likely". The same can be said of the second and third costs agreements, when the firm agreed that it would not be paid professional fees unless the case had a successful outcome; and
(b) the Funder deposed that in April and May 2016 he received preliminary opinions from Mr O'Bryan, as well as a preliminary expert opinion, that the class action enjoyed reasonable prospects of success.
144 Further, unlike the class members in the present case, class members in the Endeavour River proceeding had positively agreed to a much higher funding commission of 30% or 35% depending upon the number of units in the MGUT they had acquired. That was a material consideration in allowing a funding rate of 25% in the Endeavour River proceeding.
145 The salient considerations in the two cases are somewhat different, including the no win no fee arrangement in the present case, and the headline funding rates cannot be so simplistically compared.
146 Fifth, a funding rate of 23% of the gross settlement falls within the range of funding commission rates approved for cases commenced during roughly the same time period, and in that way broadly accords with the relevant market of litigation funding. In Re Banksia Securities Ltd (Rec & Mgr Apptd) (in liq) (No 2) [2018] VSC 47 at [90] Croft J tabulated the gross and net funding rates approved in six relevantly similar class actions in 2016 and 2017, which ranged from 17% to 27% of the gross settlement (excluding one idiosyncratic case which can be excluded for the purposes of comparison: see Blairgowrie at [156]). Keeping in mind that it is appropriate to be cautious in comparing headline funding rates, I nevertheless note that:
(a) in Money Max Settlement Approval I approved a funding commission of 23.3% of the gross settlement and noted that it was within the broad parameters of the funding rates available in the market and lower than the funding rate in many funding agreements available in 2015/16;
(b) in Hall v Slater & Gordon [2018] FCA 2071 Middleton J approved a funding rate of 21.92% of the gross settlement;
(c) in Rushleigh I approved a funding rate of 23.9% of the gross settlement; and
(d) in Clime Capital Limited v UGL Pty Limited [2020] FCA 66 (Clime Capital), Anastassiou J approved a funding rate of 22.5% of the gross settlement.
147 Finally, according to Professor Morabito's research, the median funding rate in funded class actions settled in the federal jurisdiction in the period January 2013 to December 2018 was 26% of the gross settlement, and for all Australian class actions (not just in the federal jurisdiction) settled during that period the median funding rate was 25.5% of the gross settlement: Prof. Morabito V, An Evidence-Based Approach to Class Action Reform in Australia: Common Fund Orders, Funding Fees and Reimbursement Payments, Monash University, January 2019.
148 The Funder contended that the present case was one where a commission above the median of 26% was warranted. I can see little basis for that contention. It was a relatively standard securities class action.
149 Sixth, I give little weight to the submission that no class member objected to the proposed 28% funding rate. Both the Opt Out and Registration Notice sent to class members on or before 11 January 2019 and the Class Member Registration Notice sent to them on or before 9 August 2019 advised that "the Court will set the amount of the commission at a level that it considers to be reasonable and the amount sought may vary depending on the circumstances surrounding any settlement or award of damages." The Notice of Proposed Settlement informed class members that "the Court will decide whether to make a common fund order and, if so, the amount of the funding commission which is fair and reasonable and therefore allowed to be deducted." Class members were entitled to understand that the Court would protect their interests by considering the reasonableness of the proposed litigation funding charges.
150 Seventh, I do not accept the Funder's contention that the funding commission should be "plus GST". Adding GST to the funding commission would increase the impost on group members by 10% in circumstances where the settlement sum was GST inclusive. To the extent that the Funder is liable to remit any GST in respect of the funding commission, it should bear that cost.
151 Taking the above features of the case into account, I concluded that it was 'just' pursuant to s 33V(2) to order that the Funder be paid $8,625,000 (incl. of any applicable GST) from the settlement, representing a funding rate of 23% of the gross settlement.