Steven Friel: ‘Judge Moshinsky’s assessment shows that we would be better off agreeing to a funding agreement with only the main applicant’
Vocus’s ruling will have a dire effect on litigation funds that block access to justice, said Steven Friel
On May 4, at the Australian Federal Court in Victoria, Judge Moshinsky approved the settlement of a large class suit against Sydney which is headquartered in the Vocus telecommunications business.
This is a case where Woodsford funded law firm Slater & Gordon in a securities claim in which he was accused that Vocus, represented by Herbert Smith Freehills, made a false and misleading disclosure to the stock market in connection with his 2017 earnings guidelines.
After mediation in December 2019, the parties reached an agreement in principle to settle a claim of A $ 35 ($ 23 million). The settlement must still be approved by the court. Approval has been given by Judge Moshinsky.
Sting on the tail
Woodsford is happy to have helped shareholders achieve compensation. Both institutional and retail investors will benefit, recovering most of the settlement amount, without taking any financial risk in litigation. This case is a good example of the great benefits of litigation funds in the modern class action regime.
However, Judge Moshinsky’s approval of the settlement came with a tail sting.
As part of the application for settlement approval, the main applicant in this case is seeking a joint funding order (CFO), which applies contract funding commissions for all group members, including group members who have not yet signed a funding agreement.
CFOs have been awarded in a relatively large number of cases since the 2016 decision in Money Max v QBE. However the latest decision of the Australian High Court in BMW v Brewster has caused confusion regarding the situation in which the CFO will be ordered.
After referring the BMW case in his judgment, Judge Moshinsky did not give a CFO. The court instead chose to make a funding equalization order (FEO), which spreads the costs incurred by group members who are funded throughout the group. This results in lower payments to funders.
There are a number of reasons why this outcome should be of concern to those who care about access to justice in general, and the success of Australian class action in particular.
First, there is the problem of certainty or, more worrying, its absence. Woodsford agreed to take significant financial risks in pursuing justice for shareholders in this case, with reasonable confidence that CFOs would be given.
Refusal to award a CFO in this case means that the litigation funder can no longer ascertain whether the CFO will be given at the end of a successful case or not. You might get CFO, you might not. You might get FEO, you might not. Uncertainty like that can only be a bad thing. Uncertainty affects the willingness of litigation funders to support a case, and it affects the price.
Woodsford continues to be committed to Australian jurisdiction, including in a case recently filed by law firm Phi Finney McDonald against Westpac over alleged violations of anti-money laundering and anti-terrorism funding laws.
However, we suspect that Vocus’s assessment will have a terrible effect on the tastes of some funders to finance certain representative actions, especially where the value of claims is smaller or where the construction of books may be more challenging. This, in turn, is likely to impede access to justice for potential group members in such actions.
Second, there is the problem of the wishes of shareholders.
There are about 9,800 group members who will benefit from completing Vocus. Around 5,660 members of this group signed a funding agreement in which they agreed to the CFO. The remaining group members did not enter into the funding agreement, but were given many opportunities to reject the CFO.
No group members objected. Indeed, no party with an interest in litigation, whether on the claimant’s side or on the defendant’s side, objected to the CFO. But the main applicant’s application for CFO was rejected.
Third, and perhaps most alarming of all, Judge Moshinsky’s decision can lead to bad incentives in relation to book development.
The judge took the view that, because Woodsford would get some returns from FEO, he was less likely to give us a better return from CFO. FEO functions only because we have gone to the time and effort to enter into a funding agreement with thousands of group members.
We consider that involvement of shareholders in this way is a good thing. However, Justice Moshinsky’s assessment shows that we should agree to a funding agreement with only the main applicant. This means that FEO will not function, possibly increasing the possibility of CFO.
Australia’s approach to class action, litigation funding and access to justice, in many ways, leads the world. However, the confusion and uncertainty of the types specified above subtracts from an otherwise positive environment.
Urgent clarification is needed, whether through law or not.
Steven Friel is the chief executive officer of Woodsford Litigation Funding
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