Correcting the record – litigation funding and returns to group members in Australian funded class actions
The Australian Parliamentary inquiry into litigation funding and class actions announced earlier this year seeks to ensure fair and equitable outcomes for claimants and group members. As a pioneer of the industry and largest funder in Australia, Omni Bridgeway fully supports these aims. Part of our business is to provide finance and access to justice to claimants and group members in class actions who lack the resources to pursue complex and costly disputes.
We have welcomed the inquiry and look forward to a balanced debate. It also gives us the opportunity to address some of the criticism of the industry being played out in the media recently. Much of this criticism is based on misinformation.
Funded vs unfunded class action returns
One example relates to the returns received by group members in funded class actions compared with returns in cases that were not backed by a litigation funder. The figures often quoted by the media – and used to suggest litigants would be far better off eschewing the support of a litigation funder – show median returns of 51 per cent to group members in cases when funders were involved, compared with 85 per cent when the actions were unfunded.
There are two substantial problems with these figures:
- They are an attempt to compare apples and zebras; and
- They are based on flawed conclusions reached by the Australian Law Reform Commission (ALRC).
Apples and Zebras
Stating that returns to group members are higher in unfunded cases is a statement of the obvious. Funders recover their costs and fees from any recoveries, reducing overall returns for claimants.
Like any asset, the return on disposal will be less if a financier is required to be paid, than if there is no finance to be paid. For example, take a house bought for cash compared with one that is purchased with a mortgage from a bank. On disposal of the house, the return to the homeowner will be less in circumstances where the bank needs to be repaid.
The question is: can the would-be homeowner buy a house for cash, or does the homeowner need a mortgage to finance it?
This is the same consideration a potential claimant in a class action must consider. Can they fund the action – and take on the associated risks and potential adverse costs – themselves, ensuring a bigger share of any recoveries? Or do they require the support of a litigation funder to ameliorate those risks and potentially lessen their overall recovery. In an environment of increasingly expensive litigation, and even more so in the context of class actions, we are finding that claimants will often need finance to have access to justice and pursue their rights. Otherwise, there is no class action and, as a result, zero recoveries.
In one recent case – the Omni Bridgeway-funded class action over the use of toxic firefighting chemicals on Defence facilities in Williamtown in NSW, Oakey in Queensland and Katherine in the Northern Territory – the Federal Court said the matter would have been “impossible to bring without a funder”.
“A case that has real complexity, and a case where there was real risk and it could – I think it’s fair to say, it could not be brought without a funder.” 1
In an observation about the current debate over the role of litigation funders, Justice Lee said:
“The reality of these cases … is that without funding, the claims of group members would not have been litigated in an adversarial way, but rather the group members would likely have been placed in a situation of being supplicants requesting compensation in circumstances where they would have been the subject of a significant inequality of arms…
It seems to be a testament to the practical benefits of litigation funding that these claims have been able to be litigated in an efficient and effective way, and have produced a settlement.”
The Australian Law Reform Commission’s flawed figures
The median return figures often cited by the media were contained in the ARLC’s report on class actions and litigation funders, handed to the Attorney General in 2019. Unfortunately, the figures were based on a small sample size and flawed analysis.
The overall conclusions reached by the ALRC were drawn from a small sample size of only 30 cases that had finalised in the Federal Court (in the period between 2013 and October 2018). They comprised 19 funded and 11 unfunded class actions. Due to confidentiality orders and incomplete data, these were the only cases on which the ALRC held enough information about legal and funding fees to calculate the returns to group members in that period. The ALRC’s report acknowledged it was aware of the limitations of small sample sizes.
We know that in one case, the ALRC misinterpreted the data – a class action funded by Omni Bridgeway (then known as IMF Bentham), Farey v National Australia Bank Limited  FCA 340. This case resolved successfully for $6.6 million but was part of a wider set of actions brought on behalf of approximately 130,000 customers over bank fees. The actions included a test case, which was unsuccessful on appeal and resulted in Omni Bridgeway paying approximately $30 million in costs and adverse costs. Omni Bridgeway had been entitled to all of the proceeds of the NAB settlement to defray some of our costs on the other bank fees cases, including the test case. However, we waived that right and returned approximately 25 per cent of the settlement proceeds to the NAB group members. Contrary to the ALRC’s conclusions, Omni Bridgeway did not receive a funding commission of 62 per cent of the settlement proceeds and in fact received no funding commission at all for that case.
Further, while we do not have complete information about the 11 unfunded class actions included in the ALRC’s calculation of median returns, it is apparent from court and other documents that some of these cases were conducted on a no win/no fee basis with a so-called ‘person of straw’ as the representative plaintiff, that is, someone who has no assets. For example, the representative plaintiff in two class actions against Cash Converters was described as “a pensioner and grandmother from western Sydney”. This means, in effect, that there is no way that a defendant who is successful in an action could recover their costs unless the representative plaintiff has taken out sufficient “after the event” insurance cover.
This is relevant because in no win/no fee cases, there are often significant risks for both the representative plaintiff and the defendant if the case is lost and adverse costs are ordered. In the settlement approval decision in the unfunded DePuy hip implants class action (one of the 11 unfunded class actions included in the ALRC’s calculation), the judge said:
“To put it bluntly, the risk of the applicants failing completely could not be excluded. That would have meant no recovery by the applicants and group members at all, and the likelihood of an adverse costs order against the applicants for potentially many millions of dollars.” 2
In a class action against the Royal Bank of Scotland in relation to financial products sold to a group of investors (another of the 11 unfunded class actions), the judge in the settlement approval decision said:
“The reason why his Honour makes reference to an external litigation funder is that it is invariably the case that when a funder is involved, an indemnity is given by that funder to an applicant against adverse costs. Here there was no litigation funder, and the applicants were exposed, in a difficult and highly expensive proceeding, to the prospect of financial damnation in the event that the proceeding failed.” 3
These situations are very different to the majority of cases in which a funder is involved and, as explained in the above quote, indemnifies the claimant for any adverse costs on an uncapped basis. Funded cases provide not only the representative plaintiff, but also the respondent and the court, with comfort that, if the claim is lost, adverse costs will be paid.
Finally, some of the unfunded class actions included by the ALRC were self-funded by a subset of group members in those cases. However, the judgments approving the settlement in some of those actions indicated that the court considered that the group members may not be able to continue to fund the litigation as a factor in approving a settlement in those cases.4 Commercial funding also provides group members with comfort that the case will be pursued to its maximum possible return, and not settled early because of financial constraints.
Omni Bridgeway’s returns to group members
The true level of returns to group members from all of Omni Bridgeway’s funded class actions that have resolved since we listed on the ASX in 2001 is on average 62.1 per cent of settlements or court-ordered recoveries.5 We have recovered more than $1.6 billion, from which we have returned approximately $1 billion to group members. The balance of the proceeds covered the legal fees and other costs to run the cases and approximately 24.5 per cent6 was paid to Omni Bridgeway as its funding commission.
Omni Bridgeway is proud of this record. Many of these group members would not have been able to access the legal system and secure any compensation at all without the support of litigation funding.
Critics of funding say that the returns that funders can earn in successful cases are too large. However, these returns must be balanced against the significant risks taken in funding lengthy litigation with uncertain outcomes against powerful, well-financed defendants.
Litigation funding is usually provided on a limited-recourse basis – meaning if the case is lost, the funder loses the capital invested in the case on legal fees and other costs – frequently tens of millions of dollars – and faces potential adverse costs representing up to 70 per cent of total costs.
Of course, these real risks must be assessed when they are assumed – before the matter has commenced and the costs, duration and outcome are unknown – and not with the comfortable benefit of hindsight too often practised by critics of litigation funding.
In the Murray Goulburn class action, Justice Murphy discussed the considerations for assessing the “reasonableness of a funding commission”:
“The litigation risks of providing funding in the proceeding … is a critical factor and the assessment must avoid the risk of hindsight bias and recognise that the funder took on those risks at the commencement of the proceeding.” 7
Funders must also price their fees so that they can earn enough returns on successful cases to offset the losses on unsuccessful cases. The Federal Court has recognised this portfolio approach to managing risk.
All settlements of class actions must be approved by the court and the court will only approve a settlement if it considers it to be fair and reasonable and in the interests of group members. This includes an examination of what the group members will receive after costs and the funder’s commission. This is one of the many checks and balances in the system that protect plaintiffs from unreasonable fees.
Fair and equitable outcomes
Omni Bridgeway agrees with the views expressed by both the Australian Government and the Opposition that the class action system must deliver fair and equitable outcomes for all participants, particularly claimants. We have advocated for a number of measures that we believe would enhance the integrity of, and improve confidence in, the class action system. These measures include increased regulation of funders in Australia and the introduction of legislation to guarantee a minimum return to group members of no less than 50 per cent of the proceeds of funded Australian class actions.
We look forward to engaging in a balanced debate on the fundamental role of the litigation funding industry in both protecting claimants’ rights and providing access to justice.
This article was also published by Lawyerly.
- Transcript of Proceedings, Smith & Others v Commonwealth of Australia (Federal Court, NSD 1908 of 2016/ NSD 1155 of 2017/ NSD 1388 of 2018, Justice Lee, 5 June 2020), page 36.
- Stanford v DePuy International Ltd (No 6) (DePuy Hip Implants)  FCA 1452 at .
- Dillon v RBS Group (Australia) Pty Limited (No 2)  FCA 395 at .
- For example, see Robert William Lee & Anor v Bank of Queensland Limited  FCA 1376 at .
- This statistic is based on the amount of project costs paid by Omni Bridgeway. In some circumstances the lawyers may have been paid additional amounts out of the settlement monies and the settlement amount may have earned interest before distribution to group members.
- These statistics are based on 71 actions won, settled or lost. The balance were withdrawn.
- Endeavour River Pty Ltd v MG Responsible Entity Limited  FCA 1719, para 27.