Full Court finds for CFO approval

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This decision related to an appeal filed by the litigation funder, Galactic Seven Eleven Litigation Holdings LLC, from the decision in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84. In that decision the primary judge, O’Callaghan J, relevantly approved a $98 million settlement of the proceeding, but refused to make a common fund order (CFO) at a funding rate of 25% (in the amount of $24.5 million) as sought by Galactic. The primary judge ruled that the Court does not have the power to make a CFO, and that even if it did, it was appropriate instead to make a funding equalisation order (FEO) in the amount of $12.005 million. Galactic had, to date, paid or incurred approximately $20 million in legal costs in the proceeding.

Galactic relied on three grounds of appeal: first, that the primary judge erred in finding that the Court does not have power to make a CFO; secondly, that the primary judge erred as a matter of discretion in declining to make such an order; and finally, that the Court in re-exercising its discretion, free of appealable errors, should make the CFO applied for.

Regarding the first ground, the primary judge considered the majority view of the High Court in BMW Australia Ltd v Brewster (2019) 269 CLR 574; [2019] HCA 45, that the Court did not have power to make a CFO at any stage of a class action proceeding. Justices Murphy, Lee and Colvin unanimously considered that no dicta of the majority in Brewster supported that proposition, and that in interpreting the judgment to stand for that proposition, the primary judge fell into appealable error (at [29]-[31]). Relevantly, following the primary judgment, the Full Court handed down its decision in Elliott-Carde v McDonald’s Australia Ltd (2023) 301 FCR 1; [2023] FCAFC 162, confirming that the Federal Court does have power under s 33V(2) of the Federal Court of Australia Act 1976 (Cth) to make a CFO during settlement approval. Justices Lee and Colvin were on the bench for that decision and affirmed their prior reasons; Murphy J also agreed (at [32]).

In respect of the second ground, the contradictors submitted that even if Brewster did not foreclose the power to make a CFO, the “majority of the High Court have indicated strong reasons for favouring the making of a FEO over a CFO” (at [35]). Their Honours similarly considered this a misinterpretation of the reasoning in Brewster. In their Honours’ view, Brewster was decided in the context of a CFO made on an early interim basis: “[i]Importantly, and contrary to the Contradictor’s submissions, they were not making statements of principle or doctrine in relation to the exercise of the power under s 33V(2)” (at [60]). Their Honours considered Brewster as expressing a preference as to the appropriate timing for orders to meet and share the costs of litigation funding (at [59]). In that respect, it was accepted that Brewster expressed a preference against CFOs being made early in the proceeding. Accordingly, their Honours found that Brewster should not be given any decisive weight, the CFO in the present proceedings being sought at the point of settlement approval (and thereby distinguishable from Brewster).

Their Honours emphasised that the primary judge was required to engage with the factual matrix of the present application and assess those circumstances against the well-established factors for what constitutes a fair and reasonable funding commission (at [77]) (see Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Ltd (2016) 245 FCR 191; [2016] FCAFC 148). Those key factors set out in Money Max include, inter alia: the funding commission rate agreed by astute class members; a comparison of the funding commission against comparable representative proceedings; the litigation risks of the particular proceeding; the quantum of adverse costs exposure; the legal costs, disbursements, and security for costs funded; and the quantum of the settlement achieved. Ultimately, their Honours found that the primary judge had erred in the exercise of his discretion.

Finally, in re-exercising the discretion to make a FEO or CFO, their Honours unanimously found that a CFO at a funding rate of 25% (in the amount of $24.5 million) was appropriate. Key factors underpinning that conclusion included:

• sophisticated class members who ran small businesses had agreed to a funding rate of 35%, being materially above the rate of the CFO sought;
• a 25% funding rate is in the middle of the range of rates offered by class action funders in Australia;
• there was significant litigation risk associated with the proceedings (in this respect their Honours relied on a confidential opinion of the applicants’ counsel);
• to date Galactic had incurred $20 million in legal costs and $6.95 million in security for costs – the CFO represented a modest gain given that expenditure; and
• Galactic was exposed to an estimated $17 million adverse costs risk.

Having reached the above conclusion, Murphy and Lee JJ made a number of comments with respect to the conduct of the settlement approval application. Their Honours considered that the settlement approval process is one in which well-established principles aptly guide applicants and contradictors, and so applications of this kind should be made with a conscious eye to limit costs.

Galactic Seven Eleven Litigation Holdings LLC v Davaria [2024] FCAFC 54

Federal Court of Australia, Murphy, Lee and Colvin JJ, 2 May 2024
Solicitors for the Appellant: Morris Mennilli Pty Ltd
Solicitors for the Respondents: N/A
Contradictors: Mr J Redwood SC and Mr R Jameson

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