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Client Update: Acceptance of class action funding reaches new heights

21 August 2013

In brief: The Full Federal Court signalled a new level of acceptance of class action funding when it recently required that security for costs be provided in a series of related (and unfunded) class actions. Of particular interest is the court's finding that a failure by the representative applicants to provide evidence as to why their claims were not commercially funded was a factor in favour of ordering that they provide security. This is the first time an order for security has been made in a class action that is not commercially funded and is another indication of the growing acceptance of third-party funding by the courts. Partner Jenny Campbell (view CV) and Lawyer James Ebert report.

Background

The applications for security for costs were made by the respondents in a series of class actions related to the failed forestry plantation schemes associated with the Willmott Forests Group. The combined amount of security sought for the respondents' costs was approximately $8 million.

There were numerous issues raised by the applications for security at both first instance and appeal. Here we have focused on the comments made about the relevance of third-party funding to the question of whether security should be granted.

First instance decision

At first instance, Justice Bernard Murphy dismissed the applications on the basis that orders for security for costs would stultify the proceedings.1 This was because the representative applicants and group members were 'relevantly impecunious' – that is, although not completely impecunious, they would not be able to meet the adverse costs orders likely to be made in the event that their claims were unsuccessful. In reaching this conclusion, his Honour considered the respondents' submissions and evidence as to the potential availability of third-party funding to be of 'little relevance'.

The Full Court's decision

In overturning Justice Murphy's decision, the Full Court took a different view on a number of issues including the relevance of the availability of third-party funding.2 Importantly, their Honours reiterated that the onus of proving that the proceedings would be stultified rests with the party resisting the order for security (in this case, the representative applicants).

The Full Court (in two separate judgments) considered that the potential availability of funding was a significant factor to be considered when approaching the question of whether the proceedings would be stultified by any order for security for costs. Their Honours gave considerable weight to the fact that the representative applicants had not provided evidence as to whether they had sought to obtain funding and the outcome of any such attempt, or, alternatively, the reasons for not having made any such attempt. In the absence of such evidence, their Honours concluded that it could not be said that the proceedings would be stultified by any order for security for costs.

In reaching that conclusion, Chief Justice Allsop and Justice Middleton said the following in recognition of the commercial context in which the proceedings had been commenced:

This, however, when all is said and done, is a piece of commercial litigation. Investors with sufficient income or assets to protect entered commercial arrangements, many for hoped for taxation advantages. They now seek to engage in commercial litigation to repair perceived wrongs attending the entry into the arrangements. It is not unreasonable to want to understand, in the balancing of the interests of the parties, what has been done, if anything, about commercial funding of the litigation. Without that knowledge, at least in a case such as this, one cannot conclude that the proceedings would be stifled by any order for security.

Their Honours did, however, make it clear that their comments 'should not be taken as advocating that a step such as retention of litigation funding should always be taken to avoid an order for security'.

The courts' growing acceptance of third party funding

Since the High Court's decision in Fostif in 2006, there have been indicators of the courts' growing acceptance of third-party funding as an important and legitimate feature of the class actions they administer.

The most obvious sign is that some court-issued practice notes now expressly address the involvement of third-party funders. It is also now generally accepted that funders are entitled to have access to the information necessary to assess the commercial viability of the class actions they are funding – this is most often seen in the funder being granted access to discovered documents. Further, the Federal Court recently held that it was in the interests of justice and in keeping with its supervisory role in class action proceedings to require that class members be informed that there was a risk that funding for the proceedings in question would be withdrawn if sufficient class members did not enter into an agreement with the third-party funder.

In our opinion, however, the Full Court's decision in Madgwick v Kelly takes things a step further by, in the circumstances of that case, finding that it could not be said that an order for security would stultify the proceedings in the absence of an explanation as to why the proceedings were not funded.

Footnotes
  1. Kelly v Willmott Forests Ltd (in liquidation) [2012] FCA 1446.
  2. Madgwick & Ors v Kelly & Ors [2013] FCAFC 61.

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