FEDERAL COURT OF AUSTRALIA

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

ORDERS

UPON THE UNDERTAKING by counsel for the Appellant that, upon the making of the orders below, the Appellant will not seek to enforce any contractual or other entitlement to a funding commission from the applicants and group members in the proceedings.

THE COURT ORDERS THAT:

1.    The appeal be allowed.

2.    Order 20 of the orders of the Honourable Justice O’Callaghan made on 8 March 2023 be set aside.

3.    Pursuant to s 33V(2) of the Federal Court of Australia Act 1976 (Cth), for the purposes of the Settlement Scheme, the amount payable to the Appellant from the Settlement Sum on account of the Appellant’s litigation funding commission in respect of the proceedings be fixed in the amount of $24,500,000 ($24.5 million).

4.    The Appellant’s costs of the appeal, including the costs of the Contradictor, be paid from the Settlement Sum.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MURPHY J:

INTRODUCTION

1    Before the Court are two appeals by a litigation funder, Galactic Seven Eleven Holdings LLC (a US corporation) (Galactic). The appeals arise from two related class actions:

(a)    VID180/2018, a class action brought by Davaria Pty Ltd (Davaria Co) and Kaizenworld Pty Ltd (Kaizenworld) against 7-Eleven Stores Pty Ltd (7-Eleven), Australia and New Zealand Banking Group Ltd (ANZ), and 7-Eleven Inc (a Texas corporation), brought on their own behalf and on behalf of franchisees of 7-Eleven stores (group members); and

(b)    VID182/2018, a class action brought by Pareshkumar Davaria and Khusbu Davaria (the guarantors to the franchise agreement between Davaria Co and 7-Eleven) and Jatinder Singh and Suman Kaur (the guarantors to the franchise agreement between Kaizenworld and 7-Eleven) against 7-Eleven and ANZ, brought on their own behalf and on behalf of the guarantors of 7-Eleven franchisees (group members). Typically, the guarantor group members were directors or shareholders of the corporate franchisee.

2    Galactic funded both class actions. The causes of action pleaded in proceeding VID182/2018 incorporated the pleadings in proceeding VID180/2018, and it did not require proof of additional facts relevant to establishing liability against 7-Eleven. It did though require proof of substantial additional facts relevant to loss suffered by the applicants and group members.

3    In August 2021 the applicants and 7-Eleven reached an in-principle settlement of the proceedings, subject to Court approval, in the sum of $98 million inclusive of costs. Subsequently the applicants filed an application for approval of the proposed settlement under s 33V of the Federal Court of Australia Act 1976 (Cth) (FCA Act). In that application Galactic sought a common fund order (CFO) in the amount of $24.5 million, representing 25% of the gross settlement sum, or such lesser amount as the Court determined to be fair and reasonable.

4    On 8 March 2023 the primary judge made orders to approve the $98 million settlement, and for various other deductions to be made from the Settlement Fund, but refused to make a CFO in the amount sought by Galactic or at all: see Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 (J). The primary judge made those orders on the basis of findings that:

(a)    the Court does not have power under s 33V(2) of the FCA Act or in its equitable jurisdiction to make a CFO (J [179]-[191]);

(b)    if the Court had such a power, it was not appropriate to exercise the discretion under s 33V(2) by ordering a CFO of the type or in the amount sought (J [224]-233]); and

(c)    it was appropriate instead to make a funding equalisation order (FEO) in the amount of $12.005 million (J [236]-[319]).

5    In the appeals Galactic alleged that the primary judge erred in each of those findings. The respondents in the appeals either filed submitting notices or did not participate. It was accordingly appropriate to appoint a contradictor to represent the interests of group members. By orders made on 12 December 2023, Jonathon Redwood SC and Ryan Jameson of counsel, who acted as the Contradictor before the primary judge, were appointed as the Contradictor in the appeals.

6    For the reasons I explain, I consider the primary judge erred in finding that the Court does not have power under s 33V(2) to make a CFO. His Honour also erred in the exercise of the discretion under s 33V(2) by refusing to make a CFO on the basis that he did. In the circumstances it is appropriate to re-exercise the discretion under s 33V(2). Having done so, I consider it to be “just” under s 33V(2) to make a CFO in favour of Galactic in the amount of $24.5 million, representing 25% of the gross settlement sum. I am satisfied that such an amount is commercially realistic and properly reflects the costs and risks Galactic took on by funding the proceeding: Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148; 245 FCR 191 at [82] (Murphy, Beach and Gleeson JJ).

7    Finally, it is necessary to say something about the way in which, below, the settlement approval application went off the rails. The issues in the application were relatively commonplace; essentially, the reasonableness of the proposed settlement; the reasonableness of the legal costs proposed to be charged to the applicants and group members; and the reasonableness of other proposed deductions from the settlement sum, particularly the litigation funder’s commission. The reasonableness of legal costs was dealt with by the appointment of a cost referee, and a Contradictor was appointed to represent group members’ interests in relation to the other issues.

8    Yet the parties relied on 49 affidavits (40 by the applicants, seven by 7-Eleven and two by Galactic), and Galactic and the Contradictor adduced expert evidence in relation to what constituted a reasonable rate of return for Galactic on its investment in the case. As a result of these and other matters the hearing of the approval application occupied six days, and involved a huge expenditure of time and resources by the solicitors for the applicants, the Contradictor, Galactic, and the Court.

9    Much of that work was at the expense of the applicants and group members. By orders made on 9 May 2023, the Contradictor’s costs were approved in the amount of $294,030 and the costs of the solicitors for the applicants in the approval application were approved in the amount of $2.248 million, with those amounts being deducted from the settlement money. I expect that the solicitors for the applicants also incurred substantial costs which were not recoverable. Putting to one side the impost on a busy Court, in a case such as this the approval application should not have been permitted to cost the group members $2.54 million.

10    The parties to settlement approval applications under s 33V, and the Court, must be vigilant to ensure that they are not conducted in this manner, which is plainly inconsistent with the overarching purpose in s 37M of the FCA Act.

THE PRIMARY JUDGE’S REASONS

11    The primary judge noted (at J [10]-[11]) that:

(a)    by its interlocutory application Galactic sought:

(i)    approval of a payment to it in the amount of $24.5 million (being 25% of the $98 million settlement sum) in the form of a CFO;

(ii)    reimbursement for legal costs incurred and paid of approximately $20 million;

(iii)    the return of its security for costs, which was paid into Court; and

(b)    by their further amended interlocutory application the applicants did not oppose a CFO in the form or the amount sought by Galactic, but if the Court declined to make a CFO, the applicants sought an order for a FEO that operated to require group members who had not entered into LFAs with Galactic (Unfunded Group Members) to pay the same percentage of their recoveries under the settlement as that paid by group members who had entered into LFAs (Funded Group Members) which contractually bound them to pay a 35% funding commission.

12    As I have said, the primary judge concluded that the Court does not have power to make a CFO under s 33V of the FCA Act or in equity (J [179]-[191]). The primary judge further held that if he was wrong in that conclusion, he would not as a matter of discretion make a CFO of the type or in the manner sought (J [192]) for the reasons his Honour then proceeded to set out (at J [193]-[232]).

13    At J [194]-[195] the primary judge rejected Galactic’s submission that it should be paid a funding commission of $24.5 million, representing 25% of the settlement sum, “first and principally” because such an amount was “towards the ‘middle of the range of rates offered or accepted by funders for class actions in Australia’” as held in Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd (No 3) [2020] FCA 1885; (2020) 385 ALR 625 at [25] (Lee J). The primary judge did not accept that the funding commission in the case should be determined principally by reference to a fixed or “benchmark” percentage of a settlement sum.

14    At J [193], [196]-[202] the primary judge made findings that:

(a)    Galactic had funded large legal costs and disbursements, provided security for costs, and was exposed to significant risks including the risk of substantial adverse costs orders; that the proceedings were complex, and could not have been brought without Galactic’s funding; that Galactic’s funding permitted the parties to reach a conditional settlement of $98 million, and the funding resulted in the establishment of a fund for the benefit of the applicants and group members (J [193]);

(b)    funding commissions should avoid hindsight bias, and should be approved at levels that are commercially realistic, and which properly reflect the costs and risks taken by the funder: Money Max at [82] (J [196]). But, here, Galactic did not adduce sufficient evidence as to how it assessed its risk at the time it made its investment and committed to fund the proceeding (J [197]);

(c)    group members were provided with information about the existing funding commission arrangements for those group members who had entered into LFAs and were made aware of Galactic’s intention to apply for a CFO, and that group members had expressed no substantive objection to the information or to Galactic’s intention to apply for a CFO. There had been very few objections by group members to the $24.5 million funding commission proposed by Galactic, and that each of the objections “may properly be disregarded because they are inconsequential” (J [198]-[200]);

(d)    prima facie, the security for costs Galactic furnished, the considerable litigation risks Galactic assumed, Galactic’s adverse costs exposure and the large legal costs it had expended in financing the proceeding, were all considerations that warranted a “substantial funding commission”. However, the range of what is “substantial” is broad and, as an example only, a funding commission of $10 million would still be apt to be characterised “as a substantial and handsome reward for the risks it has assumed” (J [201]); and

(e)    Frederick Schulman, the Managing Director of Galactic, believed (based on advice from Stewart Levitt of Levitt Robinson) that Australian courts regularly made CFOs, which weighed in favour of making a CFO if the court had the power to do so (J [202]).

15    The primary judge then turned to consider the competing expert evidence as to the appropriate rate of return for a litigation funder (J [204]-[216]). Galactic relied upon the report of Greg Houston, an economist, dated 2 February 2022, and the Contradictor relied upon the report of Sean McGing, an actuary and an expert in assessing financial rates of return, dated 25 March 2022 (J [204]).

16    The primary judge found Mr Houston’s report to be inadmissible, and in any event irrelevant, and his Honour therefore had no regard to it (J [207]-[208], [210]).

17    The primary judge accepted Mr McGing’s opinion that:

(a)    a reasonable rate of return for a litigation funder should not be determined as a percentage of the settlement sum, including because doing so fails to explicitly consider what the litigation funder actually put in and when. Determining the appropriate funding commission as a percentage of the settlement amount, “is inappropriate for determining a reasonable rate of return as it is inconsistent with investment and insurance principles of assessing risk vs return on capital invested and amount at risk, as the amount of return is unknown, and not directly related to the capital required or at risk” (J [209], [216]);

(b)    determining a fair and reasonable return for a litigation funder should be “linked strongly to the level of funding it provides, together with the time horizon and level of risk undertaken.” The fundamental principle underlying Mr McGing’s opinion was that a fair and reasonable return for a funder should be driven by “inputs” specific to that funder (J [211]);

(c)    in an investment environment, the core inputs that drive the level of return an investor sees as fair and reasonable are:

(i)    the amounts of capital invested, held (notionally or physically) for amounts, potentially at risk, and depleted to cover costs/expenses specifically attributable to the investment;

(ii)    the time horizon over which any capital is invested and/or subject to risk; and

(iii)    the risk undertaken over the time horizon.

The interaction of these elements determines the fair and reasonable investment return, on top of the return of the capital invested. Investors associate low levels of risk with low potential investment returns, and high levels of risk with high potential investment returns, and will make their assessment at the time of making a particular investment, although subsequent events will determine the actual investment returns (J [212]); and

(d)    in an insurance environment, the core inputs that drive the level of return that an insurer sees as fair and reasonable are the amounts of:

(i)    insurance/protection for the amount of loss at risk;

(ii)    risk undertaken;

(iii)    expected claims to be paid; and

(iv)    expenses.

The interaction of these elements determines the fair and reasonable insurance premium, incorporating the profit and risk margin. Insurers associate low/high levels of risk with low/high levels of insurance premiums, and will form their views at the time of taking or not taking an insurance contract, although the actual payout will be determined by subsequent events. Mr McGing referred to the suitable return for an insurer as the “notional insurance premium”, being the suitable amount for an insurer to receive to meet the risks it is taking on (J [213]).

18    The primary judge said that Mr McGing calculated a notional insurance premium and required investment return, and calculated a fair and reasonable return for Galactic by way of a funding commission as a percentage of capital risk. Mr McGing made those calculations in relation to four categories of the capital Galactic invested in the case: (i) legal costs incurred pre- settlement; (ii) legal costs incurred post-settlement; (iii) adverse costs and related security for costs; and (iv) Galactic’s internal expenses incurred in running the case (J [215]).

19    Importantly, the primary judge said that a “central reasonable key assumption” upon which Mr McGing’s central estimates of a reasonable funding commission for Galactic were based was an assumption that the probability of Galactic losing any capital it committed pre-settlement was 15% (with a reasonable range being 10% to 20%) (J [215]).

20    The primary judge then referred to Mr Schulman’s evidence that in deciding to fund the proceeding he took into account various opinions of counsel as to the prospects of success, and the factors that he considered in arriving at the 35% funding rate in the LFAs. His Honour considered that Mr Schulman’s evidence explained some of the factors Galactic considered when deciding to fund the proceeding, but his evidence did not go to Galactic’s expected return on investment ex ante, and Galactic did not adduce any evidence about its return on invested capital or the rate of return on equity that a litigation funder might reasonably expect given the level of risk it assume. His Honour described the evidence regarding the inputs that drove Galactic’s initial investment decision as “unexplained and opaque” (J [217]-[218]).

21    The primary judge then turned to note that Mr Finch, Senior Counsel for Galactic, did not dispute the relevance of Mr McGing’s evidence or his general methodology. He said that Mr Finch’s main point was that it was wrong to assume a 10-20% risk of loss of capital committed pre-settlement because, at the top end of the range, that involved an assumption that the proceeding had an 80% prospect of success, which was in this case (and generally) an unreasonable assumption to make in assessing a reasonable rate of return, and thus in assessing an appropriate funding commission (J [219]).

22    The primary judge noted that Mr Houston and Mr McGing had prepared a joint statement (Exhibit F5) which contained a series of agreed tables which set out the implied fair and reasonable litigation funding commission under a number of different scenarios. Each of the scenarios adopted Mr McGing’s methodology, but altered the assumption as to the risk of Galactic losing the capital it invested pre-settlement from 15% to 20%, 25%, 30%, 35% and 40%, while keeping all other assumptions constant (J [220]). The effect of those different assumptions of risk was that the implied fair and reasonable funding commission became, respectively, $18.7 million, $20.3 million, $22 million, $24.1 million, $26.4 million and $29.1 million (J [220]).

23    The primary judge then set out Mr Finch’s oral submissions regarding the factors relevant in deciding the appropriate quantum of a CFO, including that:

(a)    as a reality check, if Mr McGing’s “bottom up” methodology was used, but with a more reasonable assumption as to the risk of Galactic losing its capital invested pre-settlement, that gives rise to a reasonable funding commission similar to the proposed CFO, or more than that. (J [221]);

(b)    that the applicants and most of the group members who signed LFAs agreed to a funding rate of 35% of the gross settlement, and the proposed CFO was at the reduced rate of 25% (J [221];

(c)    the amount of the proposed CFO was only slightly more than the legal costs of approximately $20 million incurred or paid by Galactic (J [221]);

(d)    the Contradictor had made no reasoned criticism of the amount of $24.5 million, and had not argued that in the context of a $98 million settlement, where Galactic had incurred or paid legal costs of approximately $20 million and faced a risk of substantial adverse costs, that $24.5 million was self-evidently not reasonable (J [222]);

(e)    a funding commission of 25% of the gross settlement was a reasonable rate of return, and is a funding rate which the Court often allows funders (J [222]); and

(f)    each of the assumed risks of loss of 20%, 25%, 30%, 35% and 40% were “within the realms of possibility”, and the outcome of that analysis shows that a CFO of $24.5 million was “in the right ballpark in terms of outcome” (J [223]).

24    At J [224]-[232] his Honour said:

[224]    So much may be accepted, but in my view, however, the following important matters would weigh heavily in the balance against the making of a CFO in the sum of $24.5 million.

[225]    First, as Moshinsky J said in Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Ltd (No 2) [2020] FCA 579 at [73], the majority in Brewster “express[ed] strong reasons for favouring a funding equalisation order over a common fund order. When the observations of Gordon J are added to those of the plurality, a majority of the High Court have indicated strong reasons favouring the making of a funding equalisation order over a common fund order”.

[226]    Secondly, even if the applicant’s late filed evidence in Mr Imlay’s 12 May 2022 affidavit were admitted into evidence (something I decline to agree to – see infra at [307]-[310]), and I accepted (which I do not) that the funder is entitled to total commission of $13.72 million under the funding agreements with the group members, a CFO order in the sum of $24.5 million would mean that the funder would be entitled to receive something approaching double what it would be entitled to under the funding agreements. It is not at all clear to me what rationale would justify the difference ($10.78 million) being paid to the funder, other than under some sort of “windfall gain” theory. (As Moshinsky J said in Vocus at [74], a differential of that order of magnitude goes further than is necessary to deal with the problem of “free riding”).

[227]    And, again as in Vocus at [74], although it can readily be accepted in this case that the funder played an important role in funding the litigation, and thus exposed itself to litigation risk for the benefit of group members, the applicant’s proposal for a FEO recognises that role and the risks it took.

[228]    Mr Levitt gave evidence about book building activities being conducted between mid-2018 and June 2021 in his confidential affidavit sworn on 14 October 2021. The gist of that evidence related to a belief that he held that 7-Eleven had at relevant times endeavoured in some fashion or another to “pressure” franchisees not to “sign up” to the class action, or to seek legal advice from Levitt Robinson, and that such supposed pressure made book building efforts more difficult than they otherwise would be.

[229]    But there was no evidence before me of that in fact occurring (as distinct from Mr Levitt’s state of mind about the matter), so the point goes nowhere.

[230]    As the contradictor submitted, “the fact of the matter is that the funder and Levitt Robinson signed up as many franchisees as were willing to enter into funding agreements with Galactic. There were sustained efforts including after Brewster, which was 18 months prior to the settlement. So this is not a case where Galactic’s contractual rights are insufficient by reason of the proceedings settling early, or it not having a sufficient opportunity to sign up as many group members as possible”.

[231]    The contradictor also submitted, and I agree, that Levitt Robinson had “adequate opportunity over a considerable period of time to build and sign up”, and despite the fact that “every effort was made … the best they could do was 38 per cent [of the number of stores operated by group members] … and that’s simply no reason to depart from the prima facie contractual position”.

[232]    The contradictor continued, and again I agree:

Now, the funder may not like that result, it may wish that more signed up, no doubt it would, but that’s not a reason for making a CFO instead of a … FEO.

Now, so our overall submission, then, on the discretion issue, is that your Honour’s squarely in the kind of territory of Moshinsky J in Vocus, informed by the strong remarks of the … majority of the High Court in Brewster, and that the appropriate order to make here is one pegged to the valid and binding contractual rights of the funder, as aggregated and then spread across the group through an FEO.

25    The primary judge later went on to conclude that it was appropriate to make a FEO which provided for Galactic to be paid a funding commission of $12.005 million, and that a “grossing up” amount on top of that commission should not be permitted (J [313]-[317]).

GROUND 1 - POWER TO MAKE A CFO AT THE POINT OF SETTLEMENT APPROVAL

26    Under Ground 1 of the appeals Galactic contended that the primary judge erred in finding that the Court does not have jurisdiction or power to make a CFO under s 33V(2) of the FCA Act.

27    The issue of power is straightforward, and we did not require the Contradictor to make submissions on this issue.

28    Section 33V of the FCA Act provides:

Settlement and discontinuance - representative proceeding

(1)    A representative proceeding may not be settled or discontinued without the approval of the Court.

(2)    If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.

29    The primary judge held that having regard to statements by the majority of the High Court in BMW Australia Ltd v Brewster [2019] HCA 45; 269 CLR 574, and by reference to Foster J’s analysis in Cantor v Audi Australia Pty Ltd (No 5) [2020] FCA 637 at [310]-[421], the FCA Act does not provide power to make a CFO or an order in the nature of a CFO, whether at an early stage of a class action or at the conclusion of such a proceeding, nor does the Court have such a power under its equitable jurisdiction (J [179]-[191]).

30    The primary judge reached that conclusion notwithstanding that by seriously considered dicta:

(a)    in Brewster v BMW Australia Ltd [2020] NSWCA 272 (Brewster CA) at [28], [30], [41]-[43] (Bell P with whom Bathurst CJ and Payne JA agreed) the NSW Court of Appeal said that:

(i)    the ratio of Brewster in the High Court was limited to the Court’s power under the State equivalent of s 33ZF of the FCA Act;

(ii)    it was “far from obvious” that the majority judgements in Brewster were addressing, still less deciding, any question of power under the State equivalent of s 33V;

(iii)    the majority judgements in Brewster do not say expressly that the State equivalent of s 33V precludes a court from making a common fund order at the point of settlement approval (with the possible exception of the judgment of Gordon J at [141]); and

(b)    in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183; 281 FCR 501 (Davaria FC) at [31]-[42] (Lee J, with whom Middleton and Moshinsky JJ agreed) the Full Court said that no dicta of a majority of the judges in Brewster can be identified for the proposition that there is a want of power in the FCA Act to make a CFO at the point of settlement approval or following a judgment.

31    The primary judge should not have departed from the seriously considered dicta in Davaria FC and in Brewster CA unless persuaded that those decisions were plainly wrong: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89 at [134]-[135] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ). The Contradictor assured us that his Honour was aware of those decisions but, curiously, his Honour made no reference to them.

32    Little, however, turns on that because approximately seven months after the primary judge handed down his decision, the Full Court decided Elliott-Carde v McDonald’s Australia Ltd [2023] FCAFC 162 (Beach, Lee and Colvin JJ) in which their Honours unanimously held (per Beach J at [170], per Lee J at [423] and per Colvin J at [504]) that the Court has power under s 33V(2) to make a CFO at the stage of settlement approval. This Court is bound to follow that decision unless satisfied it is plainly wrong. We are not so satisfied; indeed, we agree with that finding.

33    The primary judge erred in deciding otherwise.

GROUND 2 - ERROR IN THE EXERCISE OF DISCRETION?

34    Ground 2 of the appeals allege as follows:

If the Federal Court of Australia has jurisdiction or power to make a common fund order, the primary judge erred as a matter of discretion in declining to make such an order because:

(a)    as a matter of principle there are not “strong reasons” for favouring a funding equalisation order over a common fund order (J [225]);

(b)    the total amount of funding commission that the Appellant was contractually entitled to receive from those group members who entered into a contract with it was either an extraneous and irrelevant fact or alternatively a fact which was not deserving of decisive weight in the analysis (J [226]-[227], [231]-[232]); and

(c)    on the available evidence, the primary judge ought to have accepted that both a “bottom-up” analysis (based upon Mr McGing’s method assuming litigation risk in the order of 30% to 35%) and a “top down” analysis (of 25% of the gross settlement sum, struck in the light of the actual contractual rate of 35% agreed to by 38% of the group members, numerous communications with group members, the absence of any substantive complaint from group members, and the evidence of market rates) supported the making of a common fund order in the amount sought.

The Contradictor’s submissions

35    The Contradictor contended that it is one thing to conclude that a fair reading of the statements of the majority in Brewster does not foreclose the power to make a CFO under s 33V(2) of the FCA Act, but quite another to suggest that the majority were agnostic as to the circumstances in which such a power should be exercised in favour of a CFO over a FEO. On the Contradictor's argument, the statements of the majority in Brewster leave little room for doubt as to their marked preference for a FEO over a CEO, as recognised by Moshinsky J in Vocus Group Ltd (No 2) [2020] FCA 579 at [71]-[73] and by Colvin J in Elliott-Carde at [496]. Thus, Galactic was wrong in contending that the primary judge erred by reasoning that a majority of the High Court have indicated strong reasons for favouring the making of a FEO over a CFO.

36    The Contradictor submitted, first, that the primary judge’s reasoning was based on a faithful reading of statements of principle from a clear majority of the High Court in Brewster, see also Cantor at [354]-[355], and Vocus at [71]-[73]. It was said to be comfortably within the primary judge’s discretion to treat those considered statements in respect of the Pt IVA scheme as a persuasive and relevant consideration militating in favour of a FEO in the balancing exercise under s 33V(2).

37    On the Contradictor’s argument, the obiter observations of Beach J in Elliott-Carde at [141] go too far if his Honour was suggesting that Brewster is not a persuasive and relevant consideration in the exercise of the power under s 33V(2), and the conclusions of Foster J in Cantor, Moshinsky J in Vocus and Colvin J in Elliott-Carde are to be preferred as more consonant with the explicit statements of the majority in Brewster. It was said that while the better view is that the statements by the majority in Brewster constitute “seriously considered dicta” (Farah Constructions at [134]-[135]), they at least constitute persuasive dicta properly to be taken into account by the Court in the exercise of the power under s 33V(2). While the question is one of statutory interpretation, the considered statements in Brewster directed to the statutory scheme, context and purpose cannot be ignored in the task: McNamara v Consumer Trader and Tenancy Tribunal (2005) 221 CLR 646 at [42].

38    The Contradictor submitted that in Elliott-Carde at [143]-[169] Beach J was setting out the matters that his Honour considered justified considering the matter afresh, rather than interpreting the precedential effect and significance of the statements of the majority in Brewster. And in response to the matters Beach J raised: (a) the policy objections his Honour identified against book building were rejected by the plurality in Brewster at [91]-[94] as a concern that any provision of Pt IVA invited the Court to address; (b) any preference for open classes over closed classes and the negative effect of FEOs on the former (if any) was not adverted to in Brewster as a relevant statutory purpose in the High Court’s assessment of the statutory scheme; and (c) while it may be accepted that in some circumstances a FEO imposes a greater cost on unfunded group members than a CFO, in general that has not been so, and an additional cost to group members has arisen, citing Grave D, Adams K and Betts J, Class Actions in Australia (3rd ed, 2022) p 661.

39    Second, the Contradictor argued that Galactic’s contention that the High Court’s preference for a FEO is not a permissible relevant consideration but instead an impermissible fettering of the power conferred by s 33V(2) is contestable. While s 33V(2) is expressed in expansive terms and confers a wide discretion, the discretion is not at large: Elliott-Carde at [394] (Lee J); Augusta Pool 1 UK Limited v Williamson (2023) 111 NSWLR 378 at [1]-[9] (Bell CJ), [77]-[78] (Ward P) and [168] (Adamson JA). The Contradictor said that the exercise of a wide power and discretion can properly be informed by considerations of context, history and purpose, and it is well accepted that the exercise of discretion requires consideration of the scope, purpose and object of the legislation, rather than merely the text of the particular provision: see FAI Insurances Ltd v Winneke (1982) 151 CLR 342 at 368 (Mason J); Ginnane T, “Indefinite Terms and Broad Discretion: Statutory Interpretation Against an Infinite Variety of Facts” in Barnes J (ed), The Coherence of Statutory Interpretation (2019) p 95 at [107].

40    It was said, as emphasised in Brewster (e.g. at [94], [126]), that the commercial anxieties and interests of litigation funders form no part of the relevant statutory context, history or purpose, and the central concern of Pt IVA is with the interests of group members. It was also said that the interests of third parties like Galactic arise indirectly because it would not be “just” for group members to be distributed all of the settlement money if they had entered into binding LFAs with Galactic in order to bring the proceeding. It is “just” for those amounts to be deducted from the settlement money to be distributed to group members because that construes s 33V(2) harmoniously against the background of the general law by recognising binding contracts and personal covenants. The corollary is that s 33V(2) is not a charter for rewriting bargains contained in contracts between group members and third-party funders, citing Elliott-Carde at [396] (Lee J).

41    At the same time, the Contradictor accepted that the statutory scheme is concerned with access to justice such that (as identified by Beach J in Elliott-Carde at [149]) where: (a) only the representative applicant signs a LFA; (b) only a small number could do so because the majority of the class were unascertainable within a reasonable time frame as to their identity; or (c) where the nature of the characteristics of most members of the class due to their education or other socio-economic factors was such that it was not feasible to expect them to understand let alone sign up to relatively complex LFAs, that may justify departing from a preference for a FEO over a CFO so as to ensure there is a “just” distribution of the settlement money. The Contradictor also accepted that the exercise of discretion under s 33V(2) will necessarily be case specific: Uren v RMBL Investments Ltd (No 2) [2020] FCA 647 at [55] (Murphy J).

42    Even so, the Contradictor said that it is a plainly relevant consideration as to what is “just” under s 33V(2) that: (a) a FEO springs from contractual arrangements entered into by group members recognised at law and in equity whereas a CFO does not; and (b) the statutory context and purpose of Pt IVA is otherwise not directly concerned with the commercial interests of funders, and a FEO is otherwise “just” amongst group members because it addresses the problem of “free riding”. The Contradictor also said that Galactic set up a straw man by invoking the example where only the lead applicant entered into a LFA. This is not that case, and in any event, the significance of that would depend on the reasons why only the lead applicant entered into a LFA.

43    The Contradictor accepted that a FEO may not necessarily reflect the true risk and reward calculus arising from Galactic’s funding of the proceeding. But the Contradictor said that the starting point ought to be that it does, as the terms of the LFAs will usually reflect a funder’s assessment of risk and return, as it did here. And, if in the circumstances of a particular case it can be demonstrated by the funder that a FEO would not adequately reward the funder, because for example, it had been unable to secure the agreement of group members to LFAs, then this could be a powerful reason for departing from a preference for a FEO in favour of a CFO. On the Contradictor’s argument, however, this was not a case where, on the evidence, the FEO resulted in a return to the funder out of proportion to the true risk and reward calculus.

44    Then, in response to various secondary arguments made by Galactic, the Contradictor submitted:

(a)    it is wrong for Galactic to say that a CFO has an intrinsic advantage of certainty over a FEO, and if anything the opposite is so. The fact that the amount of a CFO sought by Galactic can be expressed as a fixed percentage of the gross settlement elides that the judicial enquiry into whether that amount is a fair and reasonable return to it depends on a range of considerations for evaluative consideration by the Court. By contrast, a FEO derives from known, valid and binding contractual entitlements;

(b)    it is not open in the appeal for Galactic to assert that in the absence of a CFO, Galactic would be entitled pursuant to the terms of the LFAs to recover a commission on the additional amounts paid to group members. The asserted entitlement to “gross-up” the funding commission by $3-4 million based on arguments raised as to the effect of certain terms of the LFAs was not pressed before the primary judge, and was otherwise rejected (J [315]-[318]);

(c)    the fact that a FEO is difficult to calculate in the circumstances of this case - because there was a significant dispute about the number and identity of group members who had entered into funding agreements and the total commission that was payable under those agreements (J [247]-[317]) - was largely a problem of Galactic and Levitt Robinson’s making, and Galactic cannot now turn that “sorry saga” to its advantage; and

(d)    Galactic’s reliance upon the hearsay evidence of Mr Levitt that other funders had been unwilling to fund the proceedings, because of a subjectively held concern that pressure would be applied to group members by 7-Eleven was dubious and of limited probative value. Further, the primary judge found that there was no evidence to support any submission that pressure from 7-Eleven inhibited Galactic’s and Levitt Robinson’s ability to secure LFAs with group members (J (229]), and that finding is not challenged on appeal.

45    Nor, the Contradictor submitted, can it be said that treating the preference of the majority in Brewster for a FEO over a CFO as a relevant consideration amounts to an impermissible fettering of the power and discretion conferred by s 33V(2). Even when an unfettered discretion is conferred, courts frequently adopt guidelines or principles for its exercise: Norbis v Norbis (1986) 161 CLR 513 at 519 (Mason and Deane JJ) and 536 (Brennan J). On this argument, adopting such guidelines or principles is permissible as long as the discretion does not become subservient to a controlling, binding legal rule, and the primary judge did not treat the statements of the majority in Brewster in that way. Instead, the primary judge regarded the High Court’s preference for FEOs as weighing heavily in the balance against making a CFO in the amount sought.

46    Third, the Contradictor argued that the primary judge did not give the statements of the majority in Brewster decisive weight at the expense of also considering other relevant considerations. On this argument, read as a whole, the primary judge’s conclusion in favour of ordering a FEO was not only a function of the strong reasons for favouring making a FEO over a CFO which emerged from Brewster. It was said that the primary judge paid careful regard to the evidence as to what constituted a fair and reasonable return for Galactic based on the evidence, including expert evidence, and this was not a case where the evidence established that a FEO would clearly result in a return to Galactic that did not properly reflect the costs and risks taken on by it. The Contradictor noted that Galactic did not appeal the primary judge’s findings as to the insufficiency of Galactic’s evidence (J [197], [210], [217]), his Honour’s acceptance of Mr McGing’s evidence (J [209]), or his Honour’s finding that the funding commission should not be determined by reference to a fixed or “benchmark” percentage of the settlement sum (J [195]).

47    On the Contradictor’s submissions, the primary judge having weighed all of the relevant considerations, it was permissible for him to attach significant weight to the strong reasons expressed by the majority in Brewster for favouring making a FEO over a CFO, and to see that as weighing heavily in the balance against the making of a CFO in the sum of $24.5 million (J [224]). And the primary judge’s reference to Galactic seeking a CFO “approaching double what it would be entitled to under the funding agreements” (J [226]) should be understood in light of the primary judge’s findings, not challenged in the appeal, that Galactic’s evidence did not support an additional payment of more than $10 million above its contractual entitlements under the LFAs it entered into with the applicants and approximately one third of the group members (J [197], [210], [217]).

CONSIDERATION

48    To establish that the primary judge fell into appealable error Galactic must establish that in exercising the discretion under s 33V(2) his Honour acted upon a wrong principle, allowed extraneous or irrelevant matters to guide or affect him, mistook the facts, did not take into account some material consideration; or upon the facts, the primary judge’s decision is unreasonable or plainly unjust: House v The King [1936] HCA 40; 55 CLR 499 at 504-505. For appealable error in the exercise of judicial discretion to be established it is not enough for this Court to find that it would have exercised the original discretion in a different way; the Court must be satisfied what was done by the primary judge amounted to a failure to exercise the discretion entrusted to the Court: Minister for Immigration v SZVFW [2018] HCA 30; 264 CLR 541 at [37]-[38] (Gageler J, as his Honour then was).

49    The primary judge’s reasons at J [224]-[226] are central to Ground 2 of the appeals. His Honour said (at J [224]):

So much may be accepted, but in my view, however, the following important matters would weigh heavily in the balance against the making of a CFO in the sum of $24.5 million.

50    In stating “[s]o much may be accepted” the primary judge can only have been referring to the submissions of Mr Finch SC for Galactic (set out by the primary judge at J [219]-[223]) in favour of the $24.5 million CFO Galactic sought. There, his Honour accepted the following submissions:

(a)    if a more reasonable assumption than the 15% risk of loss of capital invested pre-settlement adopted by Mr McGing is used that gives rise to an assessment of a reasonable funding commission in the ballpark of the $24.5 million sought by Galactic (at J [221]);

(b)    the Contradictor had made no reasoned criticism of the actual amount of $24.5 million, and did not contend that in the context of a $98 million settlement, where Galactic had incurred or paid legal costs approaching $20 million, and faced a risk of a substantial adverse costs order, that $24.5 million was self-evidently not reasonable (J [222]);

(c)    25% of the gross settlement sum, given the size of the settlement, is a reasonable rate of return which is often awarded to funders by the Court, and it is relevant to take into account the legitimate expectations of the investor (J [222]); and

(d)    the altered assumed risk of loss of capital invested pre-settlement from 15% to 20%, 25%, 30%, 35% or 40% (as done in Exhibit F5) should be seen as a reality check. Each of those increased risks were “within the realms of possibility” and show that a funding commission of $24.5 million is “in the right ballpark in terms of outcome” (J [223]).

51    Then, in the balance of J [224] the primary judge said that the “following important matters” “weigh[ed] heavily” against making a CFO in the sum of $24.5 million. His Honour then enumerated two matters:

(a)    first, at J [225], that a majority of the judges of the High Court in Brewster indicated “strong reasons” for favouring the making of a FEO over a CFO; and

(b)    second, at J [226], that a CFO of $24.5 million would mean that Galactic would be entitled to receive “something approaching double” what it would be entitled to receive under the LFAs, and it was not clear what rationale would justify a CFO which would pay Galactic a funding commission $10.78 million more than the amounts otherwise payable to it under the LFAs “other than some sort of ‘windfall gain’ theory”. And a differential of that order of magnitude would go further than is necessary to deal with the problem of “free riding”.

52    The primary judge did not expressly enumerate any other “important matters”, but he went on to say:

(a)    (at J [227]) that he accepted that Galactic played an important role in funding the litigation and thus exposed itself to litigation risks for the benefit of group members. He found, however, that the applicants’ proposal for a FEO recognised that role and the risks Galactic took;

(b)    (at J [228]-[231]), that he did not accept that 7-Eleven had pressured franchisees not to “sign up” to the class action, and found that Levitt Robinson had made “sustained efforts” to have group members enter into LFAs and, had signed up as many franchisees as were willing to enter into LFA’s with Galactic. He said that Levitt Robinson had an adequate opportunity over a considerable period of time to sign up group members and the best they could do was to “sign up” 38% of the franchisees by reference to the number of stores operated by group members. This was not a case where Galactic’s contractual rights under the LFA’s were insufficient by reason of the proceeding settling early, or because Galactic did not have sufficient opportunity to sign up as many group members as possible.

On a fair reading, I do not consider that those findings were amongst the “important matters” to which the primary judge referred at J [224], but as I later explain little turns on that.

53    I consider the primary judge erred in the exercise of the discretion under s 33V(2) in holding that an “important matter” that weighed heavily against making the proposed CFO was that the majority in Brewster expressed “strong reasons” for making a FEO in preference to a CFO.

54    Section 33V(2) of the FCA Act empowers the Court to “make such orders “as are just with respect to the distribution of any money paid under a settlement”. It is plain that the proposed orders for a CFO were orders “with respect to” the distribution of money paid under a settlement.

55    By stipulating that the Court “may make such orders as are just” the language of 33V(2) imports a wide judicial discretion. While the discretion is broad, it is not at large. It is confined by the necessity that any order made is “just”, the general duty to act judicially, and the scope and purposes of Pt IVA of the FCA Act including the protective role of the Court in relation to the interests of group members.

56    The discretion is not, though, to be read down by reference to implications or limitations not found in its express words, construed according to their natural meaning and in their proper context: Owners of “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404 at 421 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ); Wong v Silkfield Pty Ltd [1999] HCA 48; 199 CLR 255 at [11] (Gleeson CJ, McHugh, Gummow, Kirby and Callinan JJ). Powers conferred on courts are not to be construed as subject to limitations which their terms do not require: Commonwealth of Australia v SCI Operations Pty Ltd (1998) 192 CLR 285 at [26] (Gaudron J).

57    Section 33V(2) says nothing about the specific manner in which the settlement monies are to be distributed, other than that the distribution is to be “just”. And there is no textual support in s 33V(2), or in Pt IVA more generally, for approaching the “just” distribution of money paid under a settlement from the basis or starting point that there are “strong reasons” for making a FEO in preference to a CFO. I consider that by taking the approach that he did the primary judge read down the power in s 33V(2) by reference to implications or limitations not found in its express words, construed according to their natural meaning and in their proper context. His Honour thereby impermissibly fettered the exercise of the power under s 33V(2) and fell into appealable error.

58    It is plain that the ratio of Brewster does not provide that s 33V(2) is not a source of power to make a CFO at the settlement approval stage, and the decision does not contain seriously considered dicta of the majority to that effect: Davaria FC at [31]-[41] (Lee J, with whom Middleton and Moshinsky JJ agreed); Brewster CA at [28], [30], [41]-[43] (Bell P with whom Bathurst CJ and Payne JA agreed); Elliott-Carde at [141]-[169] per Beach J, [404]-[407], [412] per Lee J, [484]-[505] per Colvin J.

59    The plurality in Brewster (Kiefel CJ, Bell and Keane JJ) recognised that the asserted power to make a CFO at an early stage of a proceeding under s 33ZF could be contrasted with the power at the conclusion of a proceeding under s 33V. Indeed, their Honours said (at [59]) that one of the reasons to construe s 33ZF as not providing power to make a CFO is that other provisions of Pt IVA “make specific provision apt to accommodate that task but which operate at the conclusion of the proceeding.” In a clear reference to the power under s 33V(2) the plurality said (at [68]):

The provisions of Pt IVA of the FCA and Pt 10 of the CPA expressly provide for the making of orders distributing any proceeds of a representative proceeding. As will be seen, the occasion for the making of such an order is the conclusion of the proceeding. At that stage, if the group members happen to be indebted to a litigation funder for its support of their claims, the value of the litigation funder's support to the group members will be capable of assessment and due recognition. That stage is the appropriate occasion for orders for meeting and sharing the cost burden of the litigation because the value of the litigation and the extent of the burden will have been rendered certain.

(Emphasis added.)

In recognising that the settlement approval stage is the appropriate occasion for orders to meet and share the costs of litigation funding, the plurality said nothing to indicate that in exercising the power under s 33V(2) a FEO is to be preferred to a CFO.

60    It can be accepted that the majority of judges in Brewster expressed a general preference for making a FEO rather than a CFO but they did so in the context of a CFO that had been made on an early, interim basis under s 33ZF of the FCA Act (and its NSW analogue) rather than under s 33V(2) as in this case. It is plain that the majority judges in Brewster were not engaged in a full consideration, either at the stage of power or discretion, with the range of considerations that might inform an order under s 33V(2). 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).

61    The statements of the majority in Brewster were not “seriously considered dicta” that the primary judge was required to follow as provided in Farah Constructions. In Farah Constructions at [134]-[135] the High Court criticised the NSW Court of Appeal for making a decision that was contrary to “long-established authority and seriously considered dicta of a majority of this Court”. In the circumstances of this case where: (a) the CFO is sought at the settlement approval stage, whereas in Brewster the CFO in question was made at an early stage of the proceeding; and (b) the power being exercised is the power under s 33V(2), whereas in Brewster the power exercised was the power under s 33ZF, the statements in Brewster expressing a preference for a FEO are not properly to be treated as binding. Nor were they properly to be treated as an “important matter” weighing heavily against making a CFO in the amount sought. His Honour’s task under s 33V(2) was not “to simply resonate with any vibe emanating from preferences expressed for particular funding expense allocation models” (Elliott-Carde at [140] (Beach J)).

62    In fact, there are not strong reasons, as a matter of principle, for favouring making a FEO over a CFO at the stage of settlement approval. It will depend upon the case. I agree with the remarks of Beach J in Elliott-Carde at [146]-[168] in relation to the difficulties associated with FEOs.

63    To the extent that the obiter remarks of the majority in Brewster can be said to indicate a general preference for making a FEO rather than a CFO at the settlement approval stage, they do not justify exercising the power under s 33V(2) on that basis or from that starting point. Whether or not at the stage of settlement approval it is appropriate to make an order to allocate the expense of litigation funding across the class by deduction from the settlement money must be decided by the Court having regard to what is “just” in all the circumstances, and on the basis of the evidence before the Court, rather than upon the basis of general judicial expressions (made in a different context and under a different power) of preference for a FEO.

64    There is no force in the Contradictor’s submission that the primary judge did not give the remarks of the majority in Brewster decisive weight at the expense of also considering other relevant considerations. Other than the primary judges’ complaint about the inadequacy of Galactic’s evidence (J [197]), and his Honour’s rejection of the submission that the appropriate funding commission should be determined principally by reference to a fixed or “benchmark” percentage of the gross settlement (J [195]), the primary judge’s reasons (at J [192]-[223]) almost entirely favoured making the proposed CFO. Those reasons included that:

(a)    Galactic had funded the large legal costs and disbursements of the proceedings (approximately $20 million), provided security for costs ($6.95 million), and was exposed to the significant risks including the risk of substantial adverse cost orders (which Mr Schulman estimated at $17 million) (J [193]);

(b)    prima facie, the security for costs Galactic provided, the considerable litigation risks it assumed, its adverse costs exposure and the large legal costs it expended in financing the group proceedings, were all considerations that warranted a substantial funding commission reward to Galactic (J [201]);

(c)    group members were provided both with information about the 35% funding rate for those group members who had entered into LFAs and Galactic’s intention to apply for a CFO, and they had expressed no substantive objection to the information, or to Galactic’s intention to apply for a CFO (J [200]);

(d)    there were very few group member objections to the proposed $24.5 million funding commission, and that each of the objections “may properly be disregarded because they are inconsequential” (J [199]); and

(e)    no reasoned criticism can or had been made of the actual $24.5 million amount of the proposed CFO, nor had it been suggested that a CFO in that amount was outside the range of reasonable returns having regard to the $98 million settlement, the incurred or paid legal costs of approximately $20 million, and the substantial adverse costs risk Galactic faced (J [221]-[224]).

65    Further, at J [224] the primary judge accepted Mr Finch’s submissions to the effect that:

(a)    if a more reasonable assumption of risk than the 15% risk of loss of capital invested pre-settlement adopted by Mr McGing is used, that gives rise to an assessment of a reasonable funding commission in the ballpark of the $24.5 million sought by Galactic (at J [221]);

(b)    the Contradictor had made no reasoned criticism of the actual amount of $24.5 million, and did not contend that in the context of a $98 million settlement, where Galactic had incurred or paid legal costs approaching $20 million, and faced a risk of a substantial adverse costs order, that $24.5 million was self-evidently not reasonable (J [222]);

(c)    25% of the gross settlement sum, given the size of the settlement, is a reasonable rate of return which is often awarded to funders by the Court, and it is relevant to take into account the legitimate expectations of the investor (J [222]); and

(d)    the altered assumed risk of loss of capital invested pre-settlement from 15% to 20%, 25%, 30%, 35% or 40% as done in Exhibit F5 operates as a reality check. All of those risks are “within the realms of possibility”, and show that a funding commission of $24.5 million is “in the right ballpark in terms of outcome” (J [223]).

66    The primary judge found that those powerful considerations were overcome because the majority in Brewster expressed “strong reasons” for favouring a FEO over a CFO (J [225]), and that the proposed CFO would provide Galactic with almost double the funding commission to that which it would receive under the LFAs, which would be a windfall gain (J [226]). In my view it is plain that the primary judge gave those matters decisive weight at the expense of other relevant considerations. In oral submissions the Contradictor accepted that the “overwhelming basis” upon which the primary judge decided to order an FEO rather than a CFO was the “strong reasons” of the majority in Brewster. The Contradictor also accepted that, if that consideration was eliminated, it would be “very difficult to defend” a funding commission of $12.005 million as reasonable.

67    An error in the exercise of the discretion under s 33V(2) is also apparent in the primary judge’s finding (at J [226]) that an “important matter” weighing heavily against making a CFO in the amount of $24.5 million was that a CFO in that amount would mean that Galactic would be entitled to receive “something approaching double” what it would be entitled to receive under the LFAs it had entered into with the applicants and group members. His Honour also said it was unclear what rationale would justify Galactic being paid an amount $10.78 million higher than it would be paid pursuant to its contractual entitlements under the LFAs, other than some sort of windfall gain theory, and a differential of that magnitude went further than was necessary to deal with the problem of “free riding”.

68    The Contradictor contended that finding should be understood in light of the primary judge’s finding, not challenged in the appeals, that Galactic’s evidence did not support an additional payment of $10.78 million above its contractual entitlements under the LFAs (J [197], [210], [217]). I do not accept that that finding depended to any material extent upon the sufficiency of Galactic’s evidence. Rather, it reflected his Honour’s view that the starting point or basis for consideration of what would be fair and reasonable was Galactic’s contractual entitlements under the LFAs.

69    The Contradictor correctly accepted that whether a funding commission in a particular amount is “just” involves case specific considerations (Uren at [55]), and that depending on the particular circumstances of a case, a FEO may be insufficient to reflect the true risk and reward calculus arising from a funder’s funding of a proceeding. The Contradictor also correctly accepted that Pt IVA is concerned with access to justice such that where, for example: (a) only the representative applicant signs a LFA; or (b) only a small number could do so because the majority of the class were unascertainable within a reasonable time frame as to their identity; or (c) where the nature of the characteristics of most members of the class due to their education or other socio-economic factors was such that it was not feasible to expect them to understand let alone sign up to relatively complex LFAs (Elliott-Carde at [149] (Beach J)), that may justify a CFO rather than a FEO so as to ensure there is a “just” distribution of the settlement money.

70    Given the Contradictor’s acceptance of those matters, it is difficult to understand the basis for treating Galactic’s existing contractual entitlements under the LFAs as a matter of such significance that any funding commission which exceeded them constituted a windfall gain. If in the circumstances outlined above it may be “just” to make a CFO in an amount substantially greater than a FEO (as the Contradictor accepted) I do not accept that, here, it is appropriate to treat Galactic’s contractual entitlements under the LFAs as a cap. If anything, although it does not take things far, the fact that more than a third of the group members entered into LFAs under which they agreed to pay 35% of their gross recoveries to Galactic is evidence in support of the “justness” of a CFO under which group members will pay a reduced funding rate of 25% of their gross recoveries.

71    Again, there is no textual support in s 33V(2), or in Pt IVA more generally, for approaching the “just” distribution of money paid under a settlement from the basis or starting point of a funder’s contractual entitlements under the LFAs it entered into with group members. By exercising the discretion through the prism of a comparison of the quantum of the funding commission Galactic would receive under the proposed CFO to what it would receive under the LFAs it had entered into, and by treating the amount payable under the LFAs as something of a cap such that any amount above that was a windfall gain, his Honour impermissibly elevated the existence of Galactic’s existing contractual entitlements in the exercise of the discretion under s 33V(2).

72    In this context it is also worth noting that nothing in the statutory scheme of Pt IVA requires group members to enter into LFAs or to retain lawyers. Group members are entitled to take an essentially passive role in the litigation if they wish and commonly many do. Further, in some cases the characteristics of the class make book building and a FEO practicable, and in other cases they do not: Elliott-Carde at [411] (Lee J). In cases like the present where the franchisees were small business people in an ongoing business relationship with 7-Eleven (who might therefore fear the sorts of business disadvantages to which Mr Schulman’s evidence referred) persuading sufficient group members to enter into a LFA to support Galactic’s investment in the case was always going to be difficult.

73    This Court has long said that “book-building” is to be discouraged: Perera v GetSwift Ltd [2018] FCAFC 202; (2018) 263 FCR 92 at [295] (Middleton, Murphy and Beach JJ); Klemweb Nominees Pty Ltd (as trustee for the Klemweb Superannuation Fund) v BHP Group Limited [2019] FCAFC 107; 369 ALR 583 at [69(2)] (Lee J with whom Middleton and Beach JJ agreed); Elliott-Carde at [146]-[148] (Beach J), [411] (Lee J). However, where a funder does seek to have group members enter into LFAs, but informs the group members that it nevertheless intends to seek a CFO at the stage of settlement approval, the funder’s contractual entitlements under the LFAs will not usually carry much weight in deciding what constitutes a “just” funding commission.

74    Here, the evidence shows that from December 2017 Levitt Robinson advised group members by way of bulletins, in response to direct enquiries, by a clause in the various iterations of the LFAs, and in a series of “town hall” meetings, that Galactic intended to later seek a CFO and from February 2018, Galactic funded the proceedings (which were filed on 20 February 2018) notwithstanding the relatively low level of “sign up” because Galactic understood that CFOs were routinely made in class actions in Australia (J [198]). In the circumstances of this case, neither the fact that Galactic entered into LFAs with 38% of group members, nor its contractual entitlements under the LFAs, carry much weight in deciding what constitutes a “just” funding commission. They are not matters of significance.

75    Finally, it is appropriate to say something about the primary judge’s finding, not challenged in the appeals, that Galactic did not adduce sufficient evidence as to what would constitute a reasonable funding commission because it did not put on evidence to explain the return on investment that it was seeking ex ante (J [197], [218]).

76    In my view his Honour was wrong to so find. There is no ideal way in which a funder must adduce evidence relevant to what represents a reasonable funding commission, but I do not accept that in the circumstances of the case it was necessary for Galactic to adduce sophisticated expert evidence (like that of Mr McGing) as to what funding commission would represent a reasonable rate of return on invested capital ex ante. Deciding what amount of funding commission is “just” under s 33V(2) requires a commonsense evaluative assessment by the Court and, ordinarily, that should not require such expert evidence. As Beach J observed in Elliott-Carde at [296] (albeit in the different context of a dispute as to whether setting a funding commission involves the exercise of judicial power) judges set legal costs by scales, rates, individual amounts and total or capped amounts, doing so both ex ante or ex post; and setting a funding commission or funding rate is analogous. Judges also fix the remuneration of external insolvency practitioners doing so both ex ante or ex post, and judges set rates of remuneration for trustees administering trust assets. Usually, that is done without requiring expert evidence.

77    Mr Schulman’s evidence should have been sufficient for the primary judge to undertake the necessary commonsense evaluative assessment, including by his having regard to the considerations in Money Max at [80]. His evidence shows the matters he considered in arriving at a 35% funding rate including: (a) the risks of the proceedings by reference to Mr Schulman’s consideration of counsel’s advice; (b) his assessment that this was a case where Galactic might be at risk of $50 million in legal costs, security for costs and adverse costs; (c) that other litigation funders had declined to fund the proceedings; (d) the risks associated with fluctuations in the exchange rate between USD and AUD, as the amount Galactic would be required to pay and to recover depended on the exchange rate; (e) the risk of legal fees greatly exceeding the estimates Levitt Robinson provided; and (f) the risk of business pressure by 7-Eleven upon franchisees including fears of non-renewals of their franchising agreement, lack of cooperation of 7-Eleven in any sale or financing transaction, the non-approval of new franchise sites, and the reluctance of 7-Eleven to offer new or existing sites to troublesome franchisees.

78    Further, a financial expert’s assessment as to what represents a reasonable rate of return for a funder ex ante is likely to turn on the assessment of the risks on liability and quantum in the case. The assessment of those risks is a matter for the judge hearing the approval application, not for a financial expert.

GROUND 3 - RE-EXERCISE OF THE DISCRETION

79    Having found that the primary judge made an appealable error in the exercise of the discretion under s 33V(2) of the FCA Act, the discretion must be re-exercised.

80    The Contradictor contended that in re-exercising the discretion the Court must decide whether a CFO should be preferred to a FEO, and if so the amount of the CFO. I do not accept that. Section 33V(2) is not to be approached from the basis or starting point that either a CFO or a FEO are to be preferred. Whether or not at the stage of settlement approval some form of funding expense allocation order is appropriate must be decided by the Court having regard to what is “just” in all the circumstances, and on the basis of the evidence before the Court, rather than from the starting point that a particular form of order (whether a CFO or a FEO or some other order) is to be preferred.

81    In the circumstances of the case I am satisfied that it is ‘just’ pursuant to s 33V(2) to make a CFO in favour of Galactic in the amount of $24.5 million.

82    Fundamentally that is because the proceedings were large commercial class actions involving a high level of risk for the applicants (and thus for Galactic); they were “extremely complex and hard-fought” (J [46], [158]) and settlement was reached six days before a trial which was listed for hearing on an estimate of 10 weeks. At that point Galactic had paid or incurred legal costs of approximately $20 million (J [10]) and paid $6.95 million in security for costs. At that point 7-Eleven’s costs from the commencement of the proceeding to 14 May 2021 were in excess of $17 million and its estimated costs to the conclusion of the trial were in the order of $27.9 million (J [158]). I accept Mr Schulman’s evidence that, if the case had not settled, Galactic was committed to pay trial costs and further security for costs of approximately $12.5 million. That may be broken down into to approximately $6-7 million in further security, and approximately $5-6 million in trial costs. Galactic also faced the risk of a substantial adverse costs order if the applicants were unsuccessful in the trial (offset to an extent by the security for costs earlier paid). I accept Mr Schulman’s estimate of $17 million in relation to adverse costs if the applicants were unsuccessful in the trial. The proceedings could not have been brought without litigation funding, and Galactic’s funding of these proceedings allowed the creation of a $98 million fund for the applicants and group members.

83    While Galactic took on the obligation to meet the applicants’ costs on the basis of a cost estimate of $7.5 million, Mr Schulman’s evidence shows that he understood that Galactic could face substantial cost overruns. Galactic took on the obligation to meet the applicants’ legal costs, to pay security for costs and to meet any adverse costs orders from the outset, when the outcome in the case was far from certain, thereby taking on substantial risks.

84    Galactic provided the finance that enabled the proceedings to be run to a successful conclusion, doing so on the basis (at least from February 2018 when it became apparent to Galactic that insufficient group members would enter into LFAs) that it would seek a CFO upon success in the proceedings.

85    It is worth noting that the Contradictor accepted that, if a CFO is to be made, there are convincing reasons why a funding commission of $24.5 million is fair and reasonable.

The Money Max considerations

86    In Money Max at [80] the Full Court set out a non-exhaustive list of considerations relevant to deciding what constitutes a fair and reasonable funding commission in the circumstances of a case, which considerations have been applied or approved in numerous decisions by single judges and intermediate courts of appeal. As I now turn to explain, in the circumstances of this case those considerations point in favour of making a CFO in the amount sought by Galactic.

The funding commission rate agreed to by sophisticated class members

87    Approximately 38% of group members (by reference to the number of franchisees, excluding franchisees who are deregistered or which had entered into releases with 7-Eleven) entered into LFAs under which they agreed to pay a funding commission of 35% of their gross recoveries to Galactic. It is not possible to identify how many of those group members are sophisticated, but they are unlikely to be naïve or gullible. They were all running small businesses and therefore had at least some business acumen. The fact that more than one third of the group members agreed to pay a funding rate of 35% points in favour of concluding that a CFO at a funding rate of 25% is fair and reasonable, but it is not a weighty consideration.

The information provided to group members as to the funding commission

88    The proceedings were commenced on 20 February 2018. The evidence shows that from December 2017 group members were given notice of Galactic’s intention to apply for a CFO including in bulletins, in response to enquiries, in the terms of the LFAs and at a series of “town hall” meetings. Then, following settlement, group members were provided with two Court-approved notices which informed them that Galactic was seeking a $24.5 million funding commission being 25% of the gross settlement sum. The primary judge found that “group members have been provided both with information about the existing funding commission arrangements (for those who have entered into litigation funding agreements) and the intention to apply for a common fund order, and that they had no substantive objection to the information or the intention to apply for a common fund order” (J [200]).

Comparison of the funding commission with other funding commissions in other Pt IVA proceedings and/or what is available or common in the market

89    In Asirifi at [25] Lee J held that a funding rate of 25% of the gross settlement is towards the middle of the range of rates offered or accepted by funders for class actions in Australia. That conclusion accords with Professor Morabito’s empirical research: Morabito V, “An Evidence-Based Approach to Class Action Reform in Australia: Common Fund Orders, Funding Fees and Reimbursement Payment” (January 2019); Morabito V, Remuneration to Litigation Funders in the Post-Money Max Era (14 October 2020). The empirical research shows that many CFO’s have been made at around the range of 25% of the gross settlement sum. For example:

(a)    in Kuterba v Sirtex Medical Limited (No 3) [2019] FCA 1374, the funder’s remuneration was 25% of the gross settlement sum;

(b)    in Clime Capital Limited v UGL Pty Limited [2020] FCA 66, the funder's remuneration was 22.5% of the gross settlement sum;

(c)    in Webster (Trustee) v Murray Goulburn Co-Operative Co Limited (No 4) [2020] FCA 1053, the funder's remuneration was 23% of the gross settlement sum;

(d)    in Uren v RMBL Investments Limited (No 2) [2020] FCA 647, the funder's remuneration was 25% of the gross settlement sum;

(e)    in Court v Spotless Group Holdings Limited [2020] FCA 1730, the funder's remuneration was 22.5% of the settlement sum (net of costs); and

(f)    in Asirifi the funder's remuneration was 25% of the gross settlement sum.

Having said that, it is appropriate to be cautious in comparing the headline funding rates approved in other cases. A comparison of funding rates is only useful when all other things about the funding arrangements are equal, when often that is not the case: Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842 at [210]-[211] (Murphy J).

90    It is relevant that a 25% funding rate represents a discount from the 35% funding rate agreed to by the one third of the group members who entered into LFAs.

The litigation risks of providing funding in the proceeding

91    This 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: Money Max [80(d)].

92    The Contradictor accepted that the proceedings were complex, expensive, hard fought and that the applicants and group members “faced substantial risks of failure at trial”. The primary judge described the proceedings as “extremely complex and hard-fought” (J [158]).

93    I have had regard to those findings and have reviewed the opinion of Mr Castle and Mr Donnellan of counsel dated 23 December 2017 upon which Mr Schulman relied in deciding whether Galactic would fund the proceeding. I have also reviewed the opinion of Dr Kristine Hanscombe QC and Thomas Bagley of counsel dated 31 May 2018 upon which Mr Schulman relied in continuing to fund the proceedings. So as not to breach the confidentiality of those opinions the primary judge said only that, in general terms, counsel opined that the proposed cause of action “had reasonable prospects of success and the like” (J [218]). That is so, but that statement does not capture the complexity and the associated difficulties of the litigation.

94    I have also reviewed the confidential opinion of David Pritchard SC, Philip Tucker, Nathan Li and Ahmed Rizk of counsel dated 18 October 2021 which was provided to the Court for the settlement approval application (the Confidential Opinion). That opinion was provided by counsel not as advocates for the applicant but in their capacity as officers of the Court, with an obligation to candidly expose all relevant matters in relation to the reasonableness of the proposed settlement and the proposed deductions from the settlement sum. It is appropriate to give that opinion substantial weight.

95    Without breaching the confidentiality of the counsels’ opinions or the Confidential Opinion, in my view the proceedings were large, highly complex, strenuously defended, expensive to conduct, and involved substantial risks on liability and quantum. The proceedings involved a high level of risk that for some reason or another they would not be successful, or that they would be successful but not to the extent that justified the huge expenditure and risk needed to obtain such an outcome. This consideration points in favour of approving a funding commission in approximately the quantum that Galactic seeks.

Mr McGing’s evidence

96    In relation to the risks associated with funding the proceeding, it is appropriate that I also deal with Mr McGing’s evidence, which the primary judge accepted. That should not, however, be understood as an acceptance that his evidence was appropriate or necessary to determine the settlement approval application. In my view it was not.

97    Mr McGing opined that determining a fair and reasonable return for a funder must be driven by the inputs specific to that funder, applying ordinary investment and insurance principles. The specific inputs on which Mr McGing based his opinion were: (a) the total legal costs incurred by Galactic; (b) the adverse costs and related security for costs paid by Galactic; and (c) Galactic’s expenses for running the case. Mr McGing assessed the fair and reasonable investment return for Galactic by way of a funding commission as a percentage of capital at risk, under various scenarios. He used four categories of capital invested, being: (i) legal fees incurred before settlement; (ii) legal fees incurred after settlement; (iii) adverse costs and related security for costs; and (iv) Galactic’s expenses for running the case. I have no difficulty with that approach.

98    Mr McGing said that:

(a)    a funder’s remuneration should be linked to the amount of capital invested in the case, the time horizon over which the capital is committed and/or subject to risk, and the level of risk over the time horizon;

(b)    the interaction of those elements is an important consideration in determining what constitutes a fair and reasonable investment return for a funder, including return of the capital invested; and

(c)    a funder will make its assessment at the time of deciding to commit capital to the case, although subsequent events will determine the actual capital that must be committed and the actual investment returns.

99    In Mr McGing’s opinion:

(a)    if a funder incurred legal costs of $17.6 million (being the reasonable costs approved in this case);

(b)    paid security for costs of $6.9 million (being the amount Galactic paid in this case); and

(c)    putting to one side the funder’s internal expenses (as Mr McGing had not been provided with enough evidence with respect to Galactic’s internal expenses),

the funder had capital at risk of $24.6 million. In that scenario (which represented the top end of the range) Mr McGing assessed that the central reasonable return for Galactic was a funding commission of $17.2 million (on top of the return to it of the legal costs, security for costs and expenses it had paid to run the case).

100    At the bottom end of the range Mr McGing opined that if a funder incurred legal costs of $8.8 million (being 50% of the reasonable costs approved in this case) and paid security for costs of $6.9 million (being the amount Galactic paid in this case), and putting to one side the funder’s internal expenses, then the funder had capital at risk of $15.8 million. In that scenario Mr McGing assessed that the central reasonable return for Galactic was a funding commission of $12.6 million (on top of the return to it of the legal costs, security for costs and expenses it had paid to run the case).

101    Mr McGing therefore opined that the range in respect to a reasonable funding commission for Galactic was between $12.6 million and $17.2 million.

102    There were, however, a number of deficiencies in Mr McGing’s analysis:

(a)    first, taking that approach collapsed all of the Money Max factors down into one, being the funder’s rate of return. I have no difficulty in accepting that the funder’s rate of return is a relevant consideration, but it is not the only factor;

(b)    second, although Mr McGing’s model was put forward as an ex ante model it used ex post information. The largest input was $17.6 million, which was the amount approved for reasonable legal costs as part of settlement approval;

(c)    third, the primary judge approved $17.6 million as Levitt Robinson’s reasonable legal costs, but Galactic had in fact incurred or paid Levitt Robinson’s costs of approximately $20 million. Thus, Galactic had more capital at risk than Mr McGing allowed for. There is a question as to where the burden of any unreasonably incurred costs should fall, but in circumstances where Galactic had paid the costs they should have been treated as capital at risk. And it could not be known whether (or when) Galactic would be able to recover any unreasonably incurred costs it had paid to Levitt Robinson;

(d)    fourth, Mr McGing allowed $6.9 million for adverse costs and related security for costs. That was erroneous because, at the time of settlement, Galactic had paid $6.9 million in security and 7-Eleven had an application for further security for costs on foot, which was likely to be decided prior to trial. In those circumstances Galactic likely faced an order for further security for costs in an amount of approximately $7 million. Galactic had not paid that amount, but there was a high risk of it being required to do so. Galactic’s risk in relation to security for costs was at least twice the $6.9 million Mr McGing allowed for; and

(e)    fifth, Galactic also faced a risk of an adverse costs order of approximately $17 million if the applicants were unsuccessful in the proceeding (which would be offset to an extent by the security for costs it had paid).

103    Even with those deficiencies (which operated to underestimate the amount of capital Galactic committed pre-settlement, and thus had at risk) Mr McGing concluded that a reasonable funding commission for Galactic would be between $12.6 million and $17.2 million. That is, notwithstanding that the primary judge accepted Mr McGing’s evidence, his Honour allowed Galactic a funding commission below the range Mr McGing opined was reasonable.

104    Importantly, that opinion depended upon two critical assumptions:

(a)    first, that a reasonable rate of return on capital committed pre-settlement is 25%; and

(b)    second, that the probability of Galactic suffering a loss of invested capital committed pre-settlement was 15% (with a reasonable range being 10% to 20%).

105    No competent litigator would assess the prospects of success in large, extremely complex and strenuously defended commercial litigation such as this at anything like 85%. The Contradictor accepted that doing so would be “absurd”.

106    The Contradictor, however, argued that the assumption of a 15% risk of loss of capital committed pre-settlement was reasonable because it took into account an “essential feature” of the class action landscape - that almost all class actions settle, which was Galactic’s aim. The Contradictor said that 7-Eleven also faced substantial risks, which meant there was a high chance of settlement. Therefore, the Contradictor contended, the assumption of a 15% risk of loss of capital committed pre-settlement could not be conflated with an assessment of the prospects of success in the case of 85%.

107    The Contradictor also submitted that Galactic’s contention that it faced a risk of an adverse cost order of $17 million had “an air of unreality when proper regard is had to historical experience [in class actions], including what invariably occurs even in instances of capitulation at trial.” In support of that submission the Contradictor pointed to the settlement in the Aveo class action where, after the case had run badly for the first six days of trial, the applicants were still able to secure a settlement of $11 million inclusive of costs: see Luke v Aveo Group Ltd (No 3) [2023] FCA 1665. That was said to show that even where the applicants had been forced to near complete capitulation, the funder was still able to recover substantial costs.

108    On the Contradictor’s argument, while the risk that Galactic would lose capital it had committed pre-settlement was difficult to measure, it was unrealistic for Galactic to be speaking about a risk of an adverse costs order in the tens of millions. Broadly, the Contradictor submitted that it was quite unusual for a funder in Pt IVA proceedings to end up losing its invested capital and paying adverse costs, and the risks of this case should be assessed on that basis.

109    In my view the Contradictor’s submissions were insufficiently grounded in the empirical research regarding class action litigation in Australia, and they underplayed the costs and risks that Galactic assumed by funding the proceeding.

110    First, I accept that most funded class actions settle, but that does not take things far. Professor Morabito’s empirical research shows that over the life of the Pt IVA regime and its state analogues there have been 292 funded class actions filed in Australia. Of those that have been concluded 67.6% were settled (two out of three), 12.5% were discontinued by the applicant, 5.6% were permanently stayed, 5.6% were transferred to another jurisdiction and 5.1% were the subject of a post-trial ruling (either at trial or on appeal) which was unfavourable to the applicants (i.e. the case lost): see Morabito V, Empirical perspectives on twenty-one years of funded class actions in Australia (April 2023) 27.

111    Thus, since litigation funding of class proceedings began in 1998, 23.2% of funded class actions have concluded unsuccessfully for the applicants, either because the actions were discontinued by the applicant, permanently stayed or the subject of an unfavourable post-trial ruling. It seems likely that in most of those cases the funder lost the capital it had committed to the case. Contrary to the thrust of the Contradictor’s submissions, that is a not insignificant level of risk.

112    Second, in the last five years there has been a trend where more class actions have run to judgment. That too has increased the risk for funders. I note that the applicants were unsuccessful in the last four funded securities class actions to have run to judgment in this Court. In each of those cases it seems likely that the funder lost the capital it had committed and paid a substantial adverse cost bill.

113    Third, the fact that two out of three funded class actions settle does not show that in all of those settled cases the funder recovered all of the capital it committed pre-settlement. The empirical research shows that since 30 June 2020 there have been six settlements of funded class actions in which the funder received no funding commission: NSD1364/2015 Kenquist Nominees Pty Ltd v Campbell; 2017/294069 Findlay v DSHE Holdings Ltd; NSD1812/2017 Lenthall v Westpac Banking Corporation; NSD580/2018 Webb v GetSwift Ltd; NSD939/2020 J & J Richards Super Pty Ltd v Linchpin Capital Group Ltd; and VID996/2017 Luke v Aveo Group Ltd : see Morabito V, Group Costs Orders and Funding Commission (January 2024) 35-38. It seems likely that in at least four of those cases the funder suffered a loss of capital. That can be seen, for example, in:

(a)    GetSwift in which the funder received no funding commission, and it lost the $5.5 million it had paid for the applicant’s legal costs, $659,130 in upfront insurance premiums it had paid and part of the contingent insurance premium it had paid: see Webb v GetSwift Limited (No 7) [2023] FCA 90; 165 ACSR 560 at [10], [56]-[58] (Murphy J); and

(b)    the Aveo class action. Galactic was the funder in that case, and at the time that settlement was reached it had paid $7.69 million in legal costs and it faced further billed and unbilled legal costs of approximately $3.31 million. Galactic recovered the legal costs that it paid but it received no funding commission, and it lost $5.2 million in interest alone: Luke at [85], [157].

114    The short point is that not all settlements are good, and where the applicants are forced to an unfavourable settlement the funder may have little option but to accept a loss of capital. As Galactic submitted, some cases do not settle, and some cases lead to very bad results for the funder. In those circumstances, it is not reasonable to apply a 10% to 20% probability of loss of capital in any particular case without considering the features of the case which go to its risks. The primary judge did not undertake such an analysis.

115    I am not persuaded that there was a reasonable basis for the assumption that Mr McGing was instructed to make - that the risk of loss of capital committed pre-settlement was 10% to 20%. I assume the Contradictor directed that assumption be made.

116    That then brings us to Exhibit F5 in which Mr McGing and Mr Houston agreed a series of tables which set out the implied reasonable litigation funding commissions under different scenarios (J [220]). The different scenarios adopted Mr McGing’s methodology;

(a)    first, by applying Mr McGing’s “central reasonable return” to:

•    funder’s incurred legal costs of $17.6 million;

•    assumed funder’s internal expenses of $1 million;

•    adverse costs and related security of $6.9 million;

•    the instructed assumptions as to risk of capital committed pre-settlement and post-settlement,

each as set out in Mr McGing’s report; and

(b)    second, by altering the 15% assumption as to the risk of Galactic losing capital committed pre-settlement so as to show the implied fair and reasonable litigation funding commission if that risk is assumed to be 20%, 25%, 30%, 35% and 40% (while holding all other assumptions constant).

117    Under Table 1, which reflected Mr McGing’s baseline assumptions and a 15% risk of loss of capital, the implied reasonable funding was $18.7 million. Under the other scenarios, if the risk of Galactic losing capital committed pre-settlement is assumed to be:

(a)    20%, the implied fair and reasonable funding commission for Galactic is $20.3 million;

(b)    25%, the implied fair and reasonable funding commission for Galactic is $22 million;

(c)    30%, the implied fair and reasonable funding commission for Galactic is $24.1 million;

(d)    35%, the implied fair and reasonable funding commission for Galactic is $26.4 million; and

(e)    40%, the implied fair and reasonable funding commission for Galactic is $29.1 million.

118    As Galactic submitted below, and as the primary judge appeared to accept at J [224]:

(a)    adopting a more reasonable assumption of Galactic’s risk of loss of capital committed pre-settlement gives rise to an assessment of a reasonable funding commission in the ballpark of the $24.5 million sought by Galactic; and

(b)    each of the assumed risks of loss of capital of 20%, 25%, 30%, 35% and 40% in Exhibit F5 fell “within the realms of possibility”, and the outcome of that analysis shows that the proposed funding commission of $24.5 million is “in the right ballpark”.

119    In my view, as the Contradictor accepted before us, Mr McGing’s evidence lends support for a funding commission of approximately $24.5 million.

The quantum of adverse costs exposure

120    The Contradictor contended that the best evidence of Galactic’s adverse cost risk is what it actually put up by way of security for costs for the proceeding, that being $6.95 million. I do not accept that. At the point settlement was reached Galactic had paid $6.95 million and based on Mr Schulman’s evidence I estimate that if the case did not settle Galactic was committed to pay further security for costs of approximately $6-7 million. Galactic was also exposed to the risk of an adverse costs order of approximately $17 million if the applicants were unsuccessful in the proceedings (which amount would be offset to an extent by the amount Galactic had paid in security for costs). This consideration too points in favour of approving a funding commission in approximately the quantum that Galactic seeks.

The legal costs expended and to be expended

121    The Contradictor argued that the best ex ante evidence of the invested capital that Galactic regarded as being put at risk at the time it made its investment decision is the $7.5 million cost estimate provided by Levitt Robinson at that time. I do not accept that. Mr Schulman gave evidence that Galactic funded the proceeding in the knowledge that there could be substantial cost overruns. Once Galactic agreed to fund the proceedings it was committed to pay the costs as they unfolded, unless it decided to walk away from its investment. And if it did walk away from its investment by terminating the LFAs with the applicants that would crystallise its loss of capital and give rise to a substantial risk that the applicants would be unable to proceed (with the result that Galactic would be forced to pay substantial adverse costs).

122    The evidence shows that at the point of settlement Galactic had paid or incurred approximately $20 million in legal costs and, based on Mr Schulman’s evidence, I estimate that if the case did not settle Galactic was committed to approximately a further $5 million in trial costs. Such costs are very substantial even by the standard of large scale multi-party commercial litigation, and this consideration also points in favour of approving a funding commission in approximately the quantum that Galactic seeks.

The amount of any settlement or judgment

123    The case was settled for $98 million. A funding commission of $24.5 million is not disproportionate having regard to the result achieved and the costs and risks that Galactic took on.

Any substantial objections made by group members

124    Only a small number of group members objected to the settlement (there were 8 objections in total) and the primary judge accepted that that each of the objections “may properly be disregarded because they are inconsequential” (J [199]). This consideration points in favour of allowing the CFO Galactic seeks but it carries little weight. The practical realities of class actions and the likely low level of engagement of many class members means that a low level of objections by group members is often weak evidence of their position. It is the Court’s responsibility to protect group members’ interests and the absence of objections or a low level of objections does not relieve it of that task: Money Max at [50].

Group members’ likely recovery “in hand” under any pre-existing funding arrangements

125    It is not possible to specify (and compare against) the likely recovery of group members who have signed LFAs because of the complexities in assessing quantum of losses claimed in the proceedings, including the individualised nature of the losses. It can though be accepted that, in the circumstances of the case, group members are likely to receive more “in hand” if a FEO is made rather than a CFO in the amount sought.

CONCLUSION

126    Having regard to the matters discussed above, I consider a funding commission of $24.5 million (representing 25% of the gross settlement) is commercially realistic and properly reflects the costs and risks that Galactic took on by funding the proceeding. I consider a CFO in the amount of $24.5 million to be “just” pursuant to s 33V(2) of the FCA Act.

Associate:

Dated: 2 May 2024

REASONS FOR JUDGMENT

LEE J:

127    I have had the benefit of reading in draft the reasons of Murphy J.

128    I write separately to emphasise an unusual aspect of this settlement approval application.

129    Settlement approval applications are now commonplace. The legal principles relating to such applications have, over the last 30-odd years, become trite, and those principles have been applied in a broad range of factual contexts. Except in the rare case where a novel issue arises, there is no reason why approval applications should not be determined with alacrity.

130    The Court does not second guess decisions made by a representative applicant unless there is an apparent problem. Settlement approval applications are rarely unsuccessful and usually come at a time where a settlement fund has been realised on behalf of group members, being a fund, which will, in due course, be distributed to group members by a scheme administrator.

131    Usually, the distribution to a group member in satisfaction of an individual claim involves both a compromise and a pro rata deduction for legal and other costs; hence it only partially compensates a group member for the total sum of alleged loss. It follows that for every dollar spent at the terminus of a class action on a settlement approval application, a further dollar comes out of the fund. This necessarily means the group member receives less in exchange for the extinguishment of the group member’s claim.

132    Despite this, one often sees prolix submissions and very lengthy affidavits filed. But this case is an outlier. On this approval application, as Murphy J points out, no less than 49 affidavits were filed, and expert evidence was adduced not only by Galactic, but also a contradictor.

133    A judge needs to be able to rely upon those acting for the applicant (and any funder) to eschew filing unnecessary material. No doubt the primary judge found it unnecessary to consider vast amounts of the material filed in the case which, for understandable reasons, was not referred to in his Honour’s judgment.

134    I have lost count of the number of times on settlement approval applications I have received lengthy submissions telling me things I either already know or have no interest in knowing. Sometimes, of course, it will be necessary for there to be close investigation and articulation of a bespoke legal or factual complication. This might require detailed submissions or an explanation on oath. But, at least in my experience, this is relatively rare.

135    The Court should impress upon those appearing on settlement approval applications that opinions should not canvass well-established authority and, to the extent the opinion canvasses prospects, while all relevant matters are drawn to the Court’s attention, this can usually be done in a way that is short and to the point. Rarely, in my view, will there be a need to file extensive affidavit evidence. In short, solicitors and counsel acting must be astute to ensure that unnecessary costs are not incurred consistently with their duties under Pt IVA of the Federal Court of Australia Act 1976 (Cth), and their duties to assist their client in properly performing the representative applicant’s role.

136    I agree with the orders proposed by Murphy J and the reasons given for the making of those orders.

Associate:

Dated: 2 May 2024

REASONS FOR JUDGMENT

COLVIN J:

137    Galactic Seven Eleven Litigation Holdings LLC (Galactic) funded two class actions brought by representative applicants on behalf of 7-Eleven franchisees (as well as directors and guarantors of the obligations of those franchisees under the terms of their franchise agreements). A judge of this Court approved a settlement of the claims of group members for a global sum of $98 million. Galactic sought an order that it be paid 25% of the settlement amount on the basis that such an order was a just order to be made with respect to the distribution of the settlement monies in the exercise of the power conferred by s 33V(2) of the Federal Court of Australia Act 1976 (Cth). An order of that kind is usually described as a common fund order (CFO).

138    Instead, the judge determined that there should be a form of order broadly determined by reference to the extent of contractual entitlements that Galactic had agreed with about one-third of the group members (funded members) but spread over all group members (including those who had not entered into an agreement with Galactic). An order of that kind is usually described as a fund equalisation order (FEO). The primary judge did so on the basis that the Court did not have power to make a CFO in approving the settlement. Further, the primary judge reasoned that if there was power to make a CFO then, in the exercise of the relevant discretion, a FEO in the terms ordered was appropriate. The amount ordered to be paid to Galactic was $12.005 million.

139    Galactic appeals against the making of the FEO. It says that the primary judge erred both as to the extent of the Court's power (ground 1) and as to the alternative reasoning concerning the exercise of the discretion (ground 2).

140    I have the considerable advantage of reading the reasons for decision of Murphy J in draft. I agree that Galactic has established both of its grounds of appeal and that, upon the re-exercise of the relevant discretion to make such orders as are just with respect to the distribution of money paid under the settlement as approved, it is appropriate to make a CFO in the amount of $24.5 million.

141    Respectfully, and only in certain limited respects, I prefer to express my reasons for that conclusion in somewhat different terms to those of Murphy J.

142    As to ground 1, I prefer to say only that based on the decision in Elliott-Carde v McDonald's Australia Ltd [2023] FCAFC 162, this Court has power to make a CFO upon approving the settlement of a class action. Therefore, his Honour must now be taken to have been in error in reaching a contrary conclusion.

143    As to ground 2, as has been explained by Murphy J, the contradictor advanced submissions which, to some extent, rested upon aspects of my reasons in Elliott-Carde. In that case, I referred to aspects of the reasons of the plurality in BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 269 CLR 574 which, in my view, exposed 'a concern with an approach by which unfunded group members were to be required to agree to terms as to a percentage which was justified on the basis that it had been agreed to by the representative applicant (and any funded members) at the outset of the proceedings': at [488]. However, as I endeavoured to explain in those reasons, at the time of approval of settlement terms, the making of a CFO may be expected to be justified by considerations other than the terms agreed between the funder and funded members: [492]-[494]. Significantly, the funder may propose a different percentage (and other terms) to that agreed with funded members. Further, there are reasons other than the fact of agreement with the funded members why a CFO which reflected the terms agreed with funded members may be considered to be 'just' at the time of settlement: [495].

144    With that explanation in mind, I then expressed agreement with the view expressed by Moshinsky J in Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Limited (No 2) [2020] FCA 579 at [72] that the observations of the plurality in Brewster 'clearly favour the making of a funding equalisation order over a common fund order (implicitly at the conclusion of a proceeding)'. That is to say, I sought to explain that the plurality's preference for a FEO over a CFO was expressed in circumstances where the CFO was proposed to reflect the terms agreed with funded members and to express my agreement with Moshinsky J on that basis. To be clear, I did not intend to suggest that, at the time of approving a settlement, the Court, in exercising the discretion whether to make a CFO which departed from the terms agreed with funded members, should approach its task with some preference for a FEO. As has been explained by Murphy J, there is no foothold in the language of s 33V of the Federal Court of Australia Act 1976 (Cth) for the adoption of any such starting point.

145    Nor does the reasoning adopted by the plurality in Brewster point to a different conclusion. In the section of their reasoning headed 'Common fund orders and funding equalisation orders', Kiefel CJ, Bell and Keane JJ began at [85] by saying:

To the extent that one aspect of the motivation for seeking a CFO is said to be to facilitate the equitable sharing of the costs of a representative proceeding, Part IVA of the FCA and [the New South Wales equivalent] recognise that the representative party ought not (necessarily) bear the entire costs of the proceeding. These provisions allow the courts to prevent the practice of 'free riding' by unfunded group members who might seek to take the benefit of the costs and risks assumed by the representative party and funded group members.

146    The plurality then said that such equitable sharing 'may be achieved by the making of a FEO that reduces unfunded group members' awards by an amount equivalent to that paid by funded group members to the litigation funder': at [86].

147    Their Honours then said (at [87]) that:

…there is no reason why the amount taken from unfunded group members' awards should be directed to the litigation funder, much less that an order to that effect should be made at the outset of the proceeding [rather than at a time when damages had been awarded in the representative proceedings and the Court was making such other order it thinks just].

148    That statement was buttressed by the following:

Unfunded group members have no contractual or other relationship with the funder. Nor have they any liability to the funder. The funder has no right to that money under contract or under equitable principles.

149    The above statement expresses no view concerning the power to make a CFO at the time of approving a settlement of representative proceedings brought under Part IVA. It is concerned only with whether there are rights to which the funder may be able to resort outside the terms of Part IVA (or its equivalent in New South Wales).

150    Having made the point concerning the rights of the funder outside the legislation, the plurality then said:

A CFO is thus not the obvious solution to the problem of 'free riding'. A CFO is apt to impose an additional cost on the group by requiring more money to be paid to the litigation funder than would otherwise be the case. The equitable spreading of the cost is, in fact, better achieved by the making of a FEO, which takes, as its starting point, the actual cost incurred in funding the litigation. While it must be accepted that the burden of the amounts that funded group members have agreed to pay to the funder under their agreements with the funder must be distributed fairly, a FEO is apt equitably to distribute those amounts whereas a CFO seeks to impose an additional cost by imposing new obligations on the unfunded group members.

151    Implicit in the logic of the above reasoning is the existence of a funder who is willing to fund the representative proceedings on the basis of the agreement by some but not all group members that they will pay an amount determined as a percentage of their entitlement to share in the proceeds. It reflects, no doubt, the context in which the High Court was deliberating in Brewster. It was dealing with an instance where a funder was seeking to apply terms agreed with some group members to all group members as the certain terms of funding that will apply (possibly subject to the making of orders in the exercise of the power to refuse to approve a settlement - assuming there was power to do so) and to have that position established from a very early stage of the proceedings.

152    Their Honours concluded by saying (at [89]):

A FEO is clearly available where a settlement is reached. A settlement must be approved by the court, and, in approving a settlement, the court must be satisfied that it is 'fair and reasonable to all group members'. A settlement that allows some group members to ride for free would not be fair and reasonable to the other group members.

(footnotes omitted)

153    The reasoning at [89] is the only point at which the plurality addresses the circumstance of an order made at the time of settlement. Plainly, the plurality stopped short of expressing the view that a CFO would not be a fair and reasonable order to be made when the Court is considering whether to approve the settlement. It said only that a FEO is 'clearly available' at that time.

154    Further, the whole of the plurality's analysis was undertaken in circumstances where the High Court did not have a case like the present case in view. Significantly, as Murphy J has explained, in the present case Galactic as the funder made clear that it would seek a CFO if the proceedings were resolved on terms that produced a fund for distribution to group members. Further, and significantly, Galactic does not seek an order that would require unfunded group members to pay the percentage that it had agreed with funded members. Rather, it proposes the lesser amount of 25% and thereby provides some allowance for the fact that it is seeking a share of the settlement proceeds payable to all group members that will be borne by all of the group members (including unfunded members). It does so on the basis of an undertaking that it will not seek to recover from funded members its contractual entitlements beyond the terms of the order.

155    For those reasons, in my respectful view, the reasoning of the plurality in Brewster provides no guidance as to what may be a 'just' form of order in those instances where a funder does not seek to justify an order that would require unfunded members to pay the same percentage as has been agreed with funded members, but instead seeks the payment of a lesser percentage from all group members at a time when the amount of the fund is known and the Court is able to form a view as to what is just by reference to the course of the litigation and the proposed terms of settlement. That is so even if the view is taken that there is a majority view to support the matters expressed by the plurality by way of obiter dicta because of the separate reasoning of Gordon J in Brewster.

156    However, the reasoning in Brewster does expose reasons for concern about using the terms agreed with some group members as the basis for an order as to payment to a funder that, in effect, will apply those terms to all group members. It follows, in my view, that little support for the making of the order sought by Galactic in the present case can be found in the fact that about one-third of the group members agreed to pay Galactic 35% of the proceeds of any settlement even if it be concluded that they were sophisticated. Nor does an assessment as to whether the proposed order was 'just' depend upon some notion of a market benchmark. Whether a particular percentage for a CFO is 'just' for the purposes of s 33V mostly depends upon the other factors referred to by Murphy J. Of course, it may be different in a case where more of the group members have agreed to the figure (and have done so in an informed way) or where there has been, in effect, a competitive tender for the opportunity to fund the proceedings.

157    Further, as to those other factors, when it comes to whether a payment out of settlement proceeds to a funder is 'just' for the purposes of the exercise of the power conferred by s 33V(2), the Court recognises the important role of litigation funding in providing access to justice. It is for that reason that the Court brings to account matters of commercial reality and the need to properly reflect the nature and extent of the costs and risks taken on by the funder in the particular case: Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148; 245 FCR 191 at [82] (Murphy, Gleeson and Beach JJ). However, commercial aspects of funding are to be viewed through the lens of what is reasonable in order to fulfil the purpose of providing access to justice.

158    It is unlikely that regard to some notion of a broader market for litigation funding will indicate a measure of the risk that has been assumed by a funder because that risk will be so dependent upon the particular circumstances that pertain to the individual proceedings. Nor will evidence of the subjective assessment that may have been undertaken by the funder at the time of entering into agreements with funded members assist. Therefore, putting to one side the case where there is, in effect, a competitive tender for the opportunity to fund the particular proceedings, in considering whether a payment out to a funder is 'just' it will be necessary for the Court to form its own broad view as to the nature of that risk and I agree that reports of the kind prepared by Mr McGing will not assist in undertaking that task. In most cases, the Court will be assisted by an opinion given by independent counsel providing advice in the interests of all group members which exposes the objective circumstances which bear upon an assessment of the nature of the risks associated with bringing the proceedings. Where, as here, that advice is provided by experienced independent counsel and, as noted by Murphy J, candidly exposes all relevant matters concerning the risk that was assumed, the Court may act upon that advice in forming a view as to the nature of the risk assumed by the funder for the purposes of determining whether a CFO (or other order) is just. Of course, the funder may also wish to support the making of the order by pointing to objective aspects concerning the nature of the risk assumed.

159    Otherwise, substantially for the reasons given by Murphy J, the appeal must be allowed and an order should be made for a CFO in the amount of $24.5 million.

Associate:

Dated: 2 May 2024

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