Class Action & Litigation
Funding FAQs

A class action is a special type of Court proceeding or litigation in which one person, or a very small group of people, bring a claim on behalf of a much larger group of people who have similar claims because they have all been affected in a similar way by conduct of the same party or parties. Generally, in order for a class action to be commenced in Court, all that is required is:

1. at least 7 people exist with claims against the same party;
2. the claims of those 7 or more people arise out of the same, similar or related circumstances; and
3. the claims of those 7 or more people give rise to at least one substantial common issue of law or fact.

The key feature of a class action is the representative nature of the Court proceeding. In a class action, one or a small number of persons, known as the “representative parties”, commence a Court proceeding against one or more Defendants.

While the representative party brings their claim in the interests of all members of the class, the class (known as ‘group members’) usually plays a passive role, at least until the common issues are resolved. In a class action, the representative party’s claim is used to resolve as many factual and legal issues common to the group members as possible, meaning that these issues don’t have to be determined individually for each group member. Each group member will be bound by the Court’s judgment on the common issues.

The Court manages the proceedings closely to ensure the common issues are dealt with in the most efficient and expeditious manner, and the Court will make a judgment about the common issues unless the claim is settled prior to this judgment.

There may be circumstances which relate to individual group members that are different and not determined by the common issues judgment, and these individual issues may need to be determined, or actions may need to be pursued, following resolution of the common issues.

Every class action will have a group definition, which will be set out in the Court documents that are filed when a case is started (usually called the ‘Statement of Claim’). The group definition will specify who is entitled to participate in the class action by describing the characteristics of the class, or group of people on whose behalf the claim is being brought.

If you have suffered a loss of the type that is being alleged in the class action, you should consider whether you wish to participate. If you are unsure as to whether you are a potential group member, you should contact the lawyers who are running the class action.

A class action may be commenced as an open class action or a closed class action.

In an open class action everyone who falls within the description of the class of people on whose behalf the claim is being brought are included in the class action automatically once it is filed, regardless of whether they are aware of the action or whether they have signed any agreement with the Lawyers or Litigation Funder. When this type of class action is commenced, the identity of each group member may not be known by the Lawyers and Litigation Funder. If you are a group member in an open class action, you will at some point in the litigation be given an opportunity to opt out of the action (see below) if you are capable of being identified.

By contrast, in a closed class action part of the class definition will include a requirement that each claimant within the class has signed an agreement with the Lawyers for the Lawyers to act for them in the Court proceeding and/or an agreement with the Litigation Funder to provide funding for the claim to be brought. All members of a closed class action should be known to the Lawyers and Litigation Funder (as they will need to sign an agreement with them), but their identities will typically not be known to the Defendant or Court until a point much later in the proceedings when this is necessary, such as for settlement or following a successful judgment.

The Australian class action regime is based on an ‘opt-out’ model, in which all claimants who meet the group definition automatically become members of the class when the claim is commenced in Court, regardless of whether they are aware the claim.

All claimants who fall within the group definition will be bound by the judgment of the Court or any Court-approved settlement unless they take positive action to remove themselves from the Court proceeding. This is called ‘opting out’ and during the proceedings, the Court will require that all class members are notified of their right to opt-out, and the process for doing so.

If a group member elects to opt-out, they will no longer be bound by the outcome of the
proceedings (whether settlement or judgment) and will be able to pursue whatever claim they may have in separate proceedings, subject to any applicable limitation periods.

The Court will also typically ask group members who do not opt out, and who remain in the proceedings, to notify the Court that they want to receive compensation from any settlement or judgment. This is called ‘registration’ and it is usually by way of written notice to the Court.

The Representative Party will be named as the Plaintiff or Applicant in the Class Action and will carry on the litigation in their own name. Other parties may be named as representative parties from time to time, if the Lawyers think that is appropriate or necessary for the litigation.

All other group members will be affected by the decisions made by the Representative Party.

The Representative Party has the right and obligation to give certain instructions to the
Lawyers who are conducting the litigation however, at the same time, they have obligations to the broader group of group members that they represent, to ensure that their instructions are in the interests of all group members in the case. The instructions provided by the Representative Party will include settlement offers or negotiating to resolve a claim.

From a practical perspective, it is not possible for all group members to give ongoing instructions to the Lawyers in respect of the conduct of the Class Action, which is why the Representative Party is given the right to give these instructions.

If you are the Representative Party, the Lawyers will assist you to perform your role in the Class Action and you will have a more active role in the proceedings than the other group members who you are representing. Whilst the Representative Party may be ordered to pay the Defendant’s costs if the Class Action is unsuccessful, they will typically be indemnified by the Litigation Funder, who will pay those costs on their behalf.

If you are not the Representative Party, the instructions you may be asked to give to the
Lawyers may be limited to instructing them to include you as a claimant in the Class Action and the extent of the losses that you have suffered.

Much thought and analysis go into whether a class action settles and, if so, on what basis and for what amount (if any).

Any settlement must be agreed between the parties to the Class Action, being the
Representative Party on the one hand (under the guidance and advice of their Lawyers), and the Defendant on the other hand.

If the Class Action is being funded by a commercial Litigation Funder then, in recognition of the Litigation Funder’s investment in the Class Action, the Litigation Funder also has a right to say what it thinks is an appropriate settlement. If there is a difference of opinion between the Representative Party and the Litigation Funder regarding any potential settlement, the difference of opinion will usually be resolved by a senior barrister.

If you are a claimant, but not the Representative Party, you are not entitled to participate in any settlement discussions. However, if you are unhappy with the settlement reached, you will be entitled to lodge an objection (at your own cost) at a settlement approval hearing to let the Court know that you disagree, and the reasons why you disagree, with the settlement.

The Court ultimately decides whether a settlement is fair and reasonable for the claimants overall and therefore whether it should be approved. The Court also decides what deductions should be made from the settlement funds, to pay any fees and costs which may be claimed by the Lawyers or the Litigation Funder.

The length of time a Class Action takes to resolve depends on a number of factors, including the complexity of the issues, the amount of evidence required to determine the claim and the actions or strategy adopted by the Defendant in defending the proceedings.

If the Class Action is unsuccessful, you will pay nothing and you will receive nothing. The
Representative Party may be ordered to pay the Defendant’s costs, however the Litigation
Funder will have agreed to pay for those costs, unless the funding agreement has been
terminated.

If the Class Action is successful (either by way of a judgment or a Court-approved settlement), a distribution scheme is typically established to distribute the claim proceeds as required by the Court judgment and/or any settlement. Typically, an administrator of the distribution scheme is appointed by the Court, and this may be the Lawyer, or an independent third-party such as a major accounting firm. The administrator will distribute to the Litigation Funder and the Lawyer what the Court has ordered be paid to them and the remainder of the claim proceeds will be distributed amongst the group members who have registered to receive compensation.

Each claimant’s share of the claim proceeds will depend on the merits of each of their claims in the class action and the Court will have typically agreed a process for the administrator to work out what each claimant is entitled to receive. The Lawyer and the Litigation Funder are not responsible for determining the value of each claimant’s share of the claim proceeds as the calculations and methodology are set and approved by the Court.

Typically, all the costs of running the Class Action will be met by the Litigation Funder or the Lawyers. You will not have to pay anything upfront if you are eligible and remain as a group member of the Class Action.

Usually the Litigation Funder will pay all or part of the Lawyer’s professional fees (depending on what has been agreed with the Lawyers), the costs of the barristers, any experts or other expenses related to the case, and the Court costs. The Litigation Funder will also provide an indemnity to the Representative Party so that if the claim is unsuccessful, the Litigation Funder will pay the costs of the Defendant if those costs are ordered to be paid by the Representative Party.

All of the costs paid by the Litigation Funder will only be payable by group members if the claim is successful (either by way of settlement or judgment) and the Court approves that payment to the Litigation Funder. The Litigation Funder will also seek a fee to compensate it for funding the costs of the Class Action, and that fee will only be payable if the Court approves it.

The claim may be unsuccessful, the Litigation Funder might cease funding or you might receive nothing.

Litigation is risky and outcomes are often not as expected. The claim may be unsuccessful which means that you will have lost the time and effort you put into the litigation. This is mainly a risk for the Representative Party more than the other group members, who typically are passive and are not required to take an active role in the proceedings.

Litigation can take a number of years to conclude and be subject to multiple levels of appeal. The costs, including legal expenses, to fund the proceedings may exceed any monetary award or judgment, in which case you may not receive any proceeds from the judgment or any settlement ultimately achieved.

Even if the claim is successful, the Defendant may be unable to pay the entire, or part of, the settlement or judgment sum.

The Litigation Funder may in its absolute discretion decide to terminate its funding of the claim, if it considers that the claim is no longer commercially viable. If the claim is unsuccessful, the Litigation Funder may determine not to provide funding in respect of any appeals, in which case it will be necessary to appoint a replacement Litigation Funder for any such appeals.

The Litigation Funder agrees to pay the costs along the way but may become insolvent or
otherwise unable to meet its payment obligations.

If the Litigation Funder terminates its funding or becomes unable to pay the ongoing costs of the proceedings, and no replacement Litigation Funder is available, the claim may not proceed.

Conflicts of interest may arise.

Whilst the Lawyers and Litigation Funder are obliged to disclose any conflicts of interest that arise, and to manage any such conflicts in the best interests of group members, there is the potential for conflicts to arise in class actions for a number of different reasons:

Pre-existing relationships and potential future arrangements

There may be a pre-existing legal or commercial relationship between the Litigation Funder, the Lawyer, one or more claimants and one or more Defendants.

The Lawyer may see the Litigation Funder as a source of future work for the Lawyer, to be
paid for by the Litigation Funder.

Interests of the Parties

The interests of the Litigation Funder are not necessarily the same as claimants and although you may have certain rights to provide a direct instruction to the Lawyer, there is a risk that the Litigation Funder gives instructions that are not instructions the claimants would provide.

The Lawyer may be entitled to cease acting on the Class Action and the Funder may be entitled to cease funding the Class Action in certain circumstances. Either of these events would potentially cause significant disruption to the Class Action.

Providing instructions to the Lawyer

Usually the Litigation Funder is entitled to provide instructions to the Lawyer in connection with the day-to-day carriage of the Class Action. Those instructions might differ from the instructions individual claimants might otherwise give.

Differences in individual claim merits

Potential conflicts may arise where:

1. some claimants have stronger claims than other claimants which may result in issues in relation to the allocation of claim proceeds or claimants with stronger claims bearing a share of the costs of the weaker claims; and
2. adding additional claimants may not be in the interests of existing claimants.

Differing views on settlement

Some claimants may want to settle the claim and the Litigation Funder may not, or vice versa. This may happen for many reasons, including:

1. differing views on the prospects of success;
2. the Litigation Funder is financially exposed if the claim is lost (because the Litigation Funder has paid the legal costs) whilst claimants, other than the Representative Party, in Class Actions are not;
3. the Litigation Funder wants to make a certain return on the time and money it has invested in the claim;
4. a claimant may consider his/her potential entitlement to a portion of the claim proceeds to be too low; or
5. potentially higher funding fees may be payable if the claim resolves later than earlier.

Litigation funding, also known as legal financing, is when a party involved in a dispute or litigation, is provided with funds to pay some or all of their litigation costs. The party providing the funds typically has no direct role in the dispute or litigation other than the provision of the funds.

Whilst Litigation Funding can take different forms (including funding provided by a commercial Litigation Funder, an arrangement with the law firm that it will defer certain costs which will only be paid at the end of the (successful) case and insurance for certain aspects of the litigation), it usually refers to an arrangement with a commercial Litigation Funder, called ‘Third Party Litigation Funding’.

Third Party Litigation Funding involves a third party, the Litigation Funder, providing funds to a claimant to fund the costs of their involvement in a Court case. In return for providing these funds, the Litigation Funder will typically seek return of its funding plus an agreed portion of what the funded party receives from the case, but only if it is successful.

Usually, litigation funding is ‘non-recourse’, meaning that if the funded party is not successful the Litigation Funder will not receive repayment of its funding or any return on this investment. This is the primary difference between litigation funding and a loan- whereas a loan must be repaid, the litigation funder will not receive any payment, including return of its funding, unless the funded claim is successful.

Once a Litigation Funder has determined that it is prepared to offer funding for a claim, it will provide the claimant with a Funding Agreement which will set out the rights and obligations of each party. Typically, that will include:

• The amount of funding being offered and the fee/commission which the Funder seeks to charge (in addition to repayment of its funding).
• The indemnity which the Funder is prepared to offer the claimant so that if the claim is unsuccessful, the Funder will pay the costs of the other side. This may be an unlimited indemnity or it may be capped at a certain sum. If the indemnity is capped then the claimant needs to bear in mind the risk that if the clam is unsuccessful and the other side’s costs are higher than the indemnity, the claimant might have to pay the amount above the cap.
• The services which the Funder will provide in addition to providing the funding for the litigation. This might include consulting with the Lawyers and claimant in relation to strategy, facilitating reports to the claimant, reviewing the Lawyer’s costs on an ongoing basis.
• Acknowledgment by the claimant that it will cooperate with the Lawyers and Funder and follow reasonable legal advice given to it by the Lawyers, that it will not attempt to deal directly with the defendant and that in a class action, the Representative will provide instructions to the Lawyers in relation to the management of the class action on behalf of the other group members.
• Authority provided by the claimant for the Funder to provide day-to-day instructions to the Lawyers to progress the claim (usually in a class action context).
• The circumstances in which the claimant and the Funder, respectively, can terminate the funding agreement and the consequences of any termination.
• Processes for dealing with complaints and disputes between the claimant and the Funder, which might include referring complaints and/or disputes to external parties for resolution.
• Acknowledgments by the parties that the funding arrangement and information conveyed between the parties in relation to the claim are to be kept confidential.

After the parties have agreed the terms of the funding arrangement, they will sign the funding agreement and the Litigation Funder will commence paying the legal costs associated with the litigation.

The Litigation Funder typically maintains a monitoring role, which will vary from case to case. In a class action context, the Litigation Funder is usually empowered to provide day to day instructions to the Lawyers, with the Representative (the claimant who is representing the entire class and who is named in the Statement of Claim) also providing instructions to the Lawyers.

The fees charged by a Litigation Funder will depend on a number of factors, including the strength of the claim it is being asked to fund, the value of the claim, the amount of funding required for the claim, where the claim is up to (for example, have proceedings been commenced, is the claim close to a mediation or trial), and the time it is likely to take to achieve a resolution of the claim.

Timing of resolution is important because the longer it takes for a claim to resolve, the longer the Litigation Funder must wait for its funding to be repaid and to receive any return on its investment. Unlike a standard loan, the Litigation Funder does not receive any interest on its funding whilst it is waiting for the claim to resolve.

Third Party Litigation Funders typically enter into funding agreements in which they undertake to fund a claim on the condition that if the claim is successful, they will be repaid their funding in full, plus be paid a fee or commission equivalent to a certain percentage of the amount the claimant (funded party) receives at the end. Most Litigation Funders charge a commission in the range of 20%-40% of claim proceeds received. Sometimes, a Litigation Funder might charge the fee/commission based on a multiple of the amount of funding it has agreed to provide, rather than a percentage of claim proceeds.

If a Litigation Funder is involved in funding a class action, and it settles or is successful at a trial, the Litigation Funder may ask the Court to make an order which requires all members of the class to contribute to the repayment of the Funder’s costs (the monies it has paid to fund the cost of the class action), plus pay the Funder a fee/commission equivalent to a certain percentage of total claim proceeds, regardless of whether each claimant has signed a funding agreement with the Funder. This is typically called a common fund order, or CFO. It may also be referred to as a Distribution Order.

However, in a class action which has been commenced in Court, ultimately any deductions from a settlement or judgment can only be paid if the Court approves them as being fair and reasonable.

Removal or mitigation of financial risk

Litigation is expensive and often the course it takes and the outcomes are unpredictable. If a Litigation Funder agrees to fund a case it will pay all or some of those costs and if the claim is unsuccessful in Court, the funded party will typically owe the Litigation Funder nothing. If the Litigation Funder has also agreed to provide an indemnity to the funded party, then this also protects the funded party from having to pay the other side’s costs if the claim is unsuccessful. In this way, the involvement of a Litigation Funder can remove most of the financial risks associated with the litigation.

Objective assessment of the claim

A Litigation Funder will assess an application for funding using various criteria, including the strength of the case, the value of the claims, how much it will cost to run the case, and whether the other side will be able to pay the claim if it is successful. This means that an external third party has considered the claim and, if it has entered into an agreement to fund the claim, that is an indication that it considers the claim is a good investment. The funded party has the benefit of that independent review having been conducted by the Litigation Funder.

The Litigation Funder will often continue to assist with strategy as the case progresses and will bring to the claim the benefit of its experience in litigation, not just in relation to the legal issues, but also commercial factors which may be involved.

Equality of arms for class actions

In a class action context, often it will not be practical for an individual claimant to bring only their claim because the costs and risks of litigating an individual claim will usually outweigh the value of the claim itself.

Importantly, the involvement of a litigation funder in a class action addresses the risk that the defendant may outspend the plaintiffs in pursuing their legal defence; equality of arms is important to achieve justice in the adversarial civil justice system and the costs of a class action are significant and typically in the millions of dollars. In this way, it can be said that a litigation funder may ‘level the playing field’, ensuring these claims are considered on their legal merits rather than how much money the parties may have to spend on the litigation.

Psychologically, the involvement of a Litigation Funder can signal to the other side that an independent third party has determined that the claim is a good investment and is prepared to back it.

Financial risks

If the Litigation Funder has provided an indemnity to the funded party against adverse costs (the costs of the other side) but it is capped, then there is the risk that if the claim is unsuccessful, the funded party might have to pay the amount of the other side’s costs which exceed any cap.

Even if the claim is successful, the costs of the litigation might be so high that after repaying the Litigation Funder its funding and paying its commission, there is not much left for the claimant. However, this risk is generally offset by the Court having to provide approval of all fees payable to the Litigation Funder in any class action.

Funder terminates the funding agreement

The Funder may terminate the funding agreement if certain circumstances arise during the course of the litigation (typically if the prospects of the case succeeding diminish significantly or the value of the claim falls below a certain level) and the funded party will need to find a replacement funder. If it cannot do so, then the case may need to be discontinued.