Unsuccessful beauty parade funders cautioned against returning to ‘lion’s den’ to recover costs

In Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (Settlement Approval) [2024] FCA 386 (17 April 2024) (Watson (Settlement Approval)), funders got their answer: “little if not nothing”.

Watson (Settlement Approval) involved an application by Balance Legal Capital II UK Limited (Balance) to recover $970,000 in costs from an aggregate settlement of $16 million (being 6% of the settlement).  Justice Thawley awarded a little over $100,000 (i.e. 0.625% of the settlement) and took a dim view of whether the costs claimed were “just” deductions from settlement (or just duplicated effort of the funder who backed the successful applicant):³

…the funder is not acting altogether – or perhaps even predominantly – altruistically. The funder is pursuing its own business and commercial gain. That involves costs, including costs in the nature of sunk costs. Funders must be well aware that the costs expended might not be recovered if the litigation commenced is stayed as a result of a carriage dispute…

There is nothing unjust in funders wearing costs expended in their own pursuit of a commercial gain in circumstances such as the present. And there is much which would be unjust in visiting the costs of unsuccessful funders on group members, particularly where there are many unsuccessful funders.

Balance succeeded on a narrow aspect of its claim because Thawley J accepted part of its pre-commenced funding activities had created an “enduring benefit” for group members and was non-duplicative.⁴

The Watson (Settlement Approval) decision is a welcome, common-sense development for the parties involved in a class action:

• The process of striking a settlement capable of court-approval as “fair and reasonable and in the interests of group members as a whole” (after deduction of legal costs and funder charges) is already challenging. Mediations and settlements would be considerably more difficult if parties needed to account for the potential erosion of any settlement sum by claims from previously unsuccessful funders, or even law firms.
• Group members’ returns (which are carefully supervised by the Court in settlement approvals) are safeguarded. Watson-style applications (where an unsuccessful funder sought a deduction from the overall settlement sum and not from the share of a successful funder of law firm) would raise a risk of diluted returns to group members.
• Watson-style applications would likely add delay and risk to the resolution of the proceedings by settlement, in circumstances where carriage motions to resolve multiplicity already add approximately 6 to 9 months delay (in our experience) at the commencement of proceedings.⁵

It remains to be seen whether more third party funders will try and expand the small foothold created in Watson, but there will be caution about returning to the ‘lion’s den’ after this decision.

1. Between 1992 to 2019, 634 class actions were commenced in relation to 420 legal disputes: see e.g. Vince Morabito, ‘Shareholder class actions in Australia – myths v facts’ (November 2019).
2. See e.g. the practice of the NSWSC which was the subject of High Court appeal in Wigmans v AMP Ltd (2021) 270 CLR 623.
3. Watson (Settlement Approval) at [191]–[193].
4. Watson (Settlement Approval) at [194], [196], [206].
5. Herbert Smith Freehills submission to Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Litigation Funding and the Regulation of the Class Action Industry.

The issue of delay was also canvassed by the Australian Law Reform Commission in its report No. 134 Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third Party Litigation Funders.