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Focus: Commercial Litigation – February 2008

Multiplex litigation funding decision upheld

In brief: The Full Federal Court has upheld Justice Finkelstein's decision at first instance that a represented group in class action proceedings in the Federal Court can be defined by the entry of group members into litigation funding agreements with a litigation funder. Partner Peter O'Donahoo (view CV), Senior Associate Duncan Travis and Articled Clerk Emily Austin report on the decision and its implications.

• Background to the Multiplex decision
• The Multiplex appeal decision
• Conclusions

Background to the Multiplex decision

The legitimacy of defining a class of represented group members with reference to their retainer of a particular firm of solicitors, or their entry into funding agreements with a litigation funder, has been at issue since Justice Stone's decision in the Aristocrat shareholder class action proceeding in 2005.¹ In Aristocrat, Justice Stone held that it was an abuse of the court's processes and against the policy of the representative proceeding procedure set out in Part IVA of the Federal Court Act 1976 (Cth) (the FCA) to restrict membership of the represented group to persons who had entered into a retainer agreement with the firm of solicitors Maurice Blackburn Cashman (now Maurice Blackburn). A particular problem identified by her Honour was that the retainer agreement permitted members to join the represented group after the proceeding had begun.

Justice Stone's decision was subsequently followed by Justice Hansen in the Victorian Supreme Court in Rod Investments (Vic) Pty Ltd v Clark,² another case where a prerequisite to membership of the group represented by the plaintiff was the entry into a retainer agreement with Maurice Blackburn.

In the Multiplex shareholder class action proceeding, membership of the represented class is defined not by the retainer of a particular firm of solicitors, but instead with reference to whether group members had entered into a litigation funding agreement with the litigation funding firm, International Litigation Funding Partners, Inc., before litigation began (the ILF criterion).

Multiplex brought an application seeking orders that the proceedings be discontinued as representative proceedings under Part IVA of the FCA on the basis that the ILF criterion imposed an 'opt in' obligation on members of the represented group. This was said by Multiplex to be inconsistent with the terms and policy of Part IVA. More specifically, Multiplex alleged that the ILF criterion was 'inefficient' or 'otherwise inappropriate' under section 33N of the FCA and that for either or both of these reasons it was in the interests of justice that the representative proceeding be discontinued.

In a judgment handed down on 19 July 2007³, Justice Finkelstein declined Multiplex's application, finding that the ILF criterion was consistent with the requirements of Part IVA. His Honour's judgment, analysed in an earlier report, criticised and rejected the approach taken by Justice Stone in Aristocrat for, among other things, failing to consider why it was inconsistent with Part IVA for a class action to be commenced by a group that excluded other potential group members. Multiplex appealed against Justice Finkelstein's judgment.

On 12 December 2007, after the Multiplex appeal had been heard by the Full Federal Court, but before judgment was handed down, Chief Justice Young delivered judgment in the New South Wales Supreme Court in Jameson v Professional Investment Services Pty Ltd.⁴ In considering what he described as 'limited representative actions', Chief Justice Young reviewed the judgments of Justice Stone in Aristocrat and Justice Finkelstein in Multiplex. His Honour concluded that Justice Finkelstein had over-emphasised the exclusion of 'free riders' by the funder, and that the key focus must be on the overriding purpose of the statute. In his Honour's view, the 'more orthodox approach' of Justice Stone was to be preferred.

At the time, therefore, of the Multiplex appeal judgment, inconsistent views had been reached by members of the judiciary in the Federal, Victorian and New South Wales jurisdictions as to the validity of defining a represented group with reference to the entry by group members into retainer and/or funding agreements.

The Multiplex appeal decision

On 21 December 2007, the Full Court of the Federal Court dismissed Multiplex's appeal.⁵ The court held that membership of a represented group in Part IVA proceedings could be defined by reference to entry into a litigation funding agreement.

Justice Jacobson delivered the leading judgment (with which Justices French and Lindgren agreed). Justice Lindgren, despite generally agreeing with Justice Jacobson, delivered separate observations on the issues in the Multiplex appeal.

In its judgment, the Full Federal Court considered the appropriate way to construe Part IVA. It held that it was not correct, when determining whether a representative proceeding was inefficient or otherwise inappropriate, to have regard to policy considerations that were not 'expressed or apparent from the language and scheme of Part IVA'. The question had to be resolved with reference to the text and structure of Part IVA. Justice Finkelstein was criticised for taking into account policy questions and weighing them against the public interest in favour of class actions. The court accepted that legitimate policy questions existed, but did not consider that it was the court's responsibility to resolve them in determining whether representative proceedings were 'otherwise inappropriate' under Part IVA. Justice French, in a short judgment, suggested that the legislature may need to consider the policy questions related to the role of litigation funders in representative proceedings.

Justices Lindgren and Jacobson also suggested that the court should be cautious in relying on the Australian Law Reform Commission report that preceded the implementation of Part IVA, and Parliament's intention with respect to Part IVA, in determining questions concerning litigation funding, as it did not exist then as it does today.

Having regard to these broad interpretative principles, the Full Federal Court concluded as follows:

• To discontinue proceedings under s33N, the court must find – having regard to all of the circumstances of the proceeding – that one of the grounds in that section (including inefficiency or inappropriateness) exists, and that by reason of that ground or grounds, it is in the interests of justice that the representative proceedings should be discontinued.
• The court may look to the purpose served by continuing the proceeding as a representative proceeding. This includes consideration of the way in which the represented group is defined. The mere fact, however, that the group does not include every member of the class who may have claims against the respondent does not resolve the question.
• On its terms, Part IVA does not preclude the definition of the represented group by reference to the entry by group members into a litigation funding agreement with a named funder. Part IVA expressly provides that a representative plaintiff may represent 'some' of the group members.
• Group members must be entitled under the litigation funding agreements to opt out of the proceeding. Provided this condition is met, it is not relevant to consider any practical disincentives to group members opting out contained in the litigation funding agreements. In this case, notwithstanding that practical disincentives existed, group members were entitled to opt out.
• The court may examine the availability of other proceedings, but not other Part IVA proceedings (such as proceedings with a differently constituted represented group). Nonetheless, nothing in Part IVA mandates a detailed examination by the court of a comparator 'non-representative' proceeding. The focus is on the efficiency and appropriateness of the claims in the existing representative proceeding. Justice Finkelstein had not undertaken this approach, but did not fall into appellable error.
• The risk of a respondent facing multiple representative proceedings is inherent in Part IVA, which expressly allows for representative proceedings limited to 'some' members of the class. This risk, of itself, is insufficient to produce a finding that the representative proceeding is inefficient or inappropriate. A different finding might be reached if there is evidence of other proceedings that may cause real inefficiency or inappropriateness. No such evidence existed here.

In addition, Justices Lindgren and Jacobson considered Justice Stone's decision in Aristocrat. Justice Jacobson held that this decision was correct because the relevant criterion in Aristocrat brought within the definition of the group people who retained Maurice Blackburn Cashman after proceedings had commenced, which clearly contravened Part IVA. Aristocrat was distinguishable from Multiplex as the ILF criterion did not operate in this way.

Justice Lindgren agreed with Justice Jacobson that Aristocrat was distinguishable on that basis. His Honour went further, however, and held that a criterion requiring a group member to have entered a funding agreement with a particular funder and retained a particular firm of solicitors was permissible under Part IVA. Justice Lindgren added that, on that point, he 'appear[ed] to be in disagreement with the view expressed by her Honour Stone J in [Aristocrat ]'.

Justice Lindgren also mentioned Jameson, where Chief Justice Young had preferred the approach of Justice Stone in Aristocrat over that of Justice Finkelstein in Multiplex. Justice Lindgren gave no express view on Jameson, but implicitly criticised the approach taken by Chief Justice Young, stating that it was necessary 'to be wary of such notions as "the overriding purpose of the statute", and to attend closely to the terms of the statute.'

Conclusions

The court will consider the way in which a represented group is defined when assessing whether a representative proceeding should be discontinued in the interests of justice because it is inefficient or otherwise inappropriate. The Multiplex appeal determined that in the federal jurisdiction a represented group under Part IVA may be defined by reference to the entry by group members into a litigation funding agreement with a named litigation funder.

It follows that the position taken by Justice Stone in Aristocrat is clearly in doubt: although only Justice Lindgren expressly disagreed with Justice Stone, the approach taken by Justice Jacobson (with whom Justice French agreed) is, it seems, at odds with that taken in Aristocrat. The Multiplex appeal decision would therefore appear to be inconsistent with current jurisprudence in Victoria (Rod Investments) and New South Wales (Jameson) on the legitimacy of limiting a class to those who have entered an agreement with a particular litigation funder. Multiplex may decide to seek special leave to appeal to the High Court to resolve the inconsistency.

These differing approaches demonstrate the current uncertainty concerning the limits of the role of litigation funders in proceedings, particularly representative or class action proceedings, to which they are not a party. The Full Federal Court in the Multiplex appeal commented that Part IVA was enacted before the advent of modern litigation funding. The text of the FCA therefore does not directly address the issue, and the use to which sources of legislative interpretation contemporary to the enactment of Part IVA can be put is limited.

In the Multiplex appeal, Justice Jacobson acknowledged that litigation funding of representative proceedings raises legitimate concerns about the administration of justice. These 'access to justice' considerations were also raised by Justice Finkelstein in Multiplex, Justice Stone in Aristocrat and Chief Justice Young in Jameson. The Full Federal Court appears to have indicated that it is the role of Parliament, not the courts, to regulate litigation funding. Regulation of the litigation funding industry is currently the subject of consideration by the Standing Committee of Attorneys-General and the Victorian Law Reform Commission, as part of its review of civil justice proceedings. A committee of the Council of Chief Justices of Australia and New Zealand is also considering whether consistent court rules should be made relating to litigation funding. It remains to be seen whether Parliament or the court seek to balance the conflicting access to justice issues differently following the various reviews underway.

Footnotes

1. Dorajay Pty Ltd v Aristocrat Leisure Ltd (2005) 147 FCR 394.
2. [2005] VSC 449.
3. P Dawson Nominees Pty Ltd v Multiplex Limited [2007] FCA 1061.
4. [2007] NSWSC 1437.
5. Multiplex Funds Management Limited v P Dawson Nominees Pty Limited [2007] FCAFC 200 (the Multiplex appeal).

For further information, please contact:

• Peter O'DonahooPartner, Melbourne
  Ph: +61 3 9613 8742
  Peter.ODonahoo@aar.com.au
• Paul NicolsPartner, Sydney
  Ph: +61 2 9230 4414
  Paul.Nicols@aar.com.au
• Tracey HarripPartner, Brisbane
  Ph: +61 7 3334 3215
  Tracey.Harrip@aar.com.au
• Kim ReidPartner, Perth
  Ph: +61 8 9488 3727
  Kim.Reid@aar.com.au
• Simon McConnellInternational Partner, Hong Kong
  Ph: +852 2840 1202
  Simon.McConnell@aar.com.au

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