Steven Friel: 'Justice Moshinsky's judgment suggests that we would have been better off agreeing a funding agreement with only the lead applicant'
On 4 May, in the Federal Court of Australia in Victoria, Justice Moshinsky approved a settlement of a major class action against Sydney headquartered telecoms business Vocus.
This was a case in which Woodsford funded the law firm Slater & Gordon in a securities claim in which it was alleged that Vocus, represented by Herbert Smith Freehills, made false and misleading disclosures to the stock market in respect of its 2017 profit guidance.
Following a mediation in December 2019, the parties reached an agreement in principle to settle the claim in the amount of A$35 ($23m). That settlement remained subject to approval by the court. Approval was duly granted by Justice Moshinsky.
Sting in the tail
Woodsford is delighted to have helped shareholders achieve redress. Both institutional and retail investors will benefit, recovering the bulk of the settlement sum, without having taken any financial risk in the litigation. This case is a great example of the huge benefits of litigation funding in modern class action regimes.
However, Justice Moshinsky’s approval of the settlement came with a sting the tail.
As part of the application for approval of the settlement, the lead applicant in the case sought a common fund order (CFO), which applies the contractual funding commission to all group members, including those group members that have not signed a funding agreement.
CFOs have been granted in a relatively large number of cases since the 2016 decision in Money Max v QBE. However, the more recent decision of the High Court of Australia in BMW v Brewster has led to confusion as to the circumstances in which a CFO will be ordered.
Having referred to the BMW case in his judgment, Justice Moshinsky did not grant a CFO. The court instead opted to make a funding equalisation order (FEO), which spreads the cost incurred by the funded group members across the whole group. This results in a lower payment to the funder.
There are a number of reasons why this outcome should be of concern to those to care about access to justice generally, and the success of Australian class actions in particular.
First, there is the issue of certainty or, more worryingly, the lack thereof. Woodsford agreed to take on significant financial risk in the pursuit of justice for shareholders in this case, in the reasonable belief that a CFO would be granted.
The refusal to grant a CFO in this case means that litigation funders can no longer be certain whether or not a CFO will be granted at the end of a successful case. You might get a CFO, you might not. You might get a FEO, you might not. Such uncertainty can only be a bad thing. Uncertainty affects a litigation funder's willingness to support a case in the first place, and it affects pricing.
Woodsford continues to be committed to the Australian jurisdiction, including in the case recently filed by the law firm Phi Finney McDonald against Westpac relating to alleged breaches of anti-money laundering and counter-terrorism financing legislation.
However, we suspect that the Vocus judgment will have a chilling effect on some funders’ appetite to finance certain representative actions, particularly where the value of the claim is smaller or where book building might be more challenging. This, in turn, will likely hinder access to justice for the potential group members in those actions.
Second, there is the issue of shareholder wishes.
There are approximately 9,800 group members who will benefit from the Vocus settlement. Approximately 5,660 of these group members signed a funding agreement in which they consented to a CFO. The remaining group members did not enter into a funding agreement, but were given ample opportunity to object to a CFO.
Not a single group member objected. Indeed, not a single party with any interest in the litigation, whether on claimant side or on defendant side, objected to a CFO. And yet the lead applicant’s application for a CFO was refused.
Third, and perhaps most worrying of all, Justice Moshinsky’s decision could lead to perverse incentives in relation to book building.
The judge took the view that, as Woodsford will get some return from a FEO, he was less inclined to give us a better return from a CFO. An FEO works only because we had gone to the time and effort of entering into funding agreements with thousands of group members.
We consider that shareholder engagement in this way is a good thing. However, Justice Moshinsky’s judgment suggests that we would have been better off agreeing a funding agreement with only the lead applicant. This would have meant that a FEO would not work, perhaps increasing the likelihood of a CFO.
The Australian approach to class actions, litigation funding and access to justice is, in many ways, world leading. However, confusion and uncertainty of the type set out above detracts from an otherwise positive environment.
Urgent clarification, whether through legislation or otherwise, is needed.
Steven Friel is chief executive officer of Woodsford Litigation Funding