Litigation funder’s commission and costs of After the Event insurance for the Opal Tower class action not to exceed 25% of the settlement received.
- With parties agreeing to settle representative proceedings relating to the construction and partial structural failure of a residential building known as “Opal Tower”, the New South Wales Supreme Court was asked to determine firstly whether the settlement was fair and reasonable as a whole and secondly whether deductions for the litigation funder's commission and After the Event (ATE) insurance were fair and reasonable. ATE insurance is a legal expenses insurance policy which can provide protection against an opponent’s costs.
The plaintiffs brought representative proceedings under Part 10 of the Civil Procedure Act 2005 (NSW) (CPA) on behalf of persons who owned units at the Opal Tower. The parties agreed to settle the proceedings and sought an order under section 173 of the CPA approving the settlement.
Black J requested that a contradictor be appointed to assist in determining whether a real contest was had before the court. The parties selected Dr Higgins SC as contradictor, whose role included assessing whether the funder’s commission properly reflected the costs and risks taken by the funder and whether the court should allow a deduction for the costs of ATE insurance.
In approving settlements under section 173 of the CPA, a court must determine whether the proposed settlement was fair and reasonable and in the interests of the group members as a whole. In answering that question, the court will have regard to what group members will ultimately obtain in their hands. This requires an analysis of whether the legal costs incurred were reasonable and proportionate as well as an assessment of the reasonableness of the funding arrangements.
Was the settlement fair and reasonable?
The relevant question was whether the proposed settlement fell within a reasonable range of what is fair and reasonable, considering the alternative risk of the matter proceeding to trial. Black J was satisfied that the settlement was fair and reasonable to group members as a whole. However, he did not approve the settlement to the extent that it provided a 36.4% deduction for the funder’s commission and the ATE costs (which was in excess of what would ordinarily be allowed).
Were the funding arrangements fair and reasonable?
Black J cautioned against weight being given to funding commissions awarded in previous cases in so far as they indicated a market rate. Rather, the court should consider a multifactorial analysis, by evidence, of a reasonable return-on-investment against the risks assumed by the litigation funder.
In these proceedings, the litigation funder’s assumption of risk was qualified by it outsourcing the risk of adverse cost orders through ATE insurance. The litigation funder did not lead any expert evidence addressing issues such as whether the return was reasonable. In the absence of such evidence, Black J was not persuaded that the litigation funder’s claim for commission and ATE costs leading to a deduction of 36.4% from the settlement amount was fair and reasonable.
As to the additional deduction of ATE costs, Black J considered the totality of the commission and the ATE costs, rather than each in isolation. He accepted Dr Higgins’ submission that a fair and reasonable settlement could be achieved if the total deduction for the commission and ATE insurance expenses was reduced to 25% of the settlement amount. Black J approved the settlement so that the commission and ATE costs deducted from the settlement would not exceed 25% of the settlement received.
Regarding the legal costs, Black J accepted Dr Higgins’ submission that there was no reason to doubt that the legal costs and disbursements were proportionate to the outcome. He approved the deduction of these from the settlement sum.
Plaintiffs’ reimbursement and funding equalisation order
Black J also allowed the plaintiffs $20,000 each for their efforts in the prosecution of the proceedings and made a funding equalisation order (the effect of which was to evenly spread the commission across the group members).
Implications for you
Court-appointed contradictors represent the interests of group members and manage potential conflicts of interest. They are becoming common in class actions with significant weight being given to their opinion.
Courts are increasingly scrutinising funding arrangements in recent case law. Against that trend, it would be prudent for litigation funders to lead expert evidence to justify the commission or deductions claimed, particularly if the amounts claimed exceed what would ordinarily be allowed. In the absence of such evidence, courts may be forced to decline approving a proposed settlement.