New litigation funding laws put to the test in QLD class action

This was a piece of satellite litigation arising out of a class action that has been brought by the second defendant in this proceeding (with the aid of litigation funding provided by the first defendant in this proceeding (LCM)) against two entities (one of whom is the plaintiff in this proceeding). The class action is a closed class action which alleges misuse of market power by the respondents (including the plaintiff in this proceeding) in the Queensland electricity market, in contravention of s 46 of the Competition and Consumer Act 2010 (Cth), thereby causing loss to electricity consumers (albeit Beach J warned (at [6]) that the class action may not be permitted to continue to trial as a closed class proceeding, because open classes are “consistent with the philosophy of Part IVA of the FCA Act”, the bookbuilding had resulted in an unnecessary, costly and inefficient delay, and a closed class would encourage multiplicity of proceedings).

In this separate proceeding, the plaintiff alleged that the funding arrangements for the class action were unlawful, in that they constitute a ‘managed investment scheme’ which fails to comply with the new Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (CALF Regulations). It sought various injunctions against the defendants.

In response, LCM filed a cross-claim seeking a declaration that the funding arrangements for the class action did not constitute a ‘managed investment scheme’, and sought an order that the proceeding be referred to the Full Court to enable it to challenge the correctness of the Full Court decision in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; [2009] FCAFC 147 (Brookfield) (in which the majority held, in broad terms, that a funded class action fell within the definition of a ‘managed investment scheme’ in the Corporations Act 2001 (Cth)).

The CALF Regulations do not apply to ‘litigation funding schemes’ that were “entered into” prior to 22 August 2020 (reg 10.38.01) (but do not define precisely when a ‘litigation funding scheme’ is taken to have been “entered into”, or what exactly constitutes ‘entering into’ such a scheme). Thus, the primary question in this case was whether the relevant ‘scheme’ was entered into prior to or after 22 August 2020.

The background facts were that the bookbuilding for the class action had commenced on 17 June 2020, and by 21 August 2020 approximately 11,000 class members had entered into a funding agreement with LCM (and further class members continued to do so thereafter). In those circumstances, Beach J was in no doubt that the ‘scheme’ was “entered into” prior to 22 August 2020 – indeed, he found that it was “entered into” on 17 June 2020 when the first funding agreement was entered into by a class member (at [101]). However, the plaintiff argued that, on its proper construction, the funding agreement created two distinct arrangements, the first being an initial ‘work program’ (which effectively involved LCM investigating the feasibility of the proposed class action for its own benefit), and that the actual ‘scheme’ itself did not in fact come into existence until that ‘work program’ had concluded (which was on 22 January 2021 when the plaintiff was served with the originating process in the class action) – in other words, the plaintiff argued that the entry into of each funding agreement only made provision for the future entry into of a ‘litigation funding scheme’ if and when the ‘work program’ was completed to the satisfaction of LCM (and it was only at that later point, after completion of the ‘work program’, that a ‘litigation funding scheme’ satisfying all of the elements of the definition in the CALF Regulations came into existence). His Honour, however, undertook a detailed analysis of the terms of the funding agreement, and rejected that construction, stating (at [100]) that the plaintiff’s arguments “are unattractive as a matter of both contractual construction and commercial reality”. Specifically, his Honour found that the funding agreement did not create two separate arrangements with different dominant purposes – instead, the ‘work program’ was an integral part of achieving the dominant purpose of the ‘scheme’ for its members to seek remedies. As such, the plaintiff’s claim was dismissed. Further, his Honour indicated that he would have refused injunctive relief anyway, because to the extent that the ‘scheme’ was an unlawful ‘managed investment scheme’, it was unclear who was ‘operating’ that scheme (whether that be LCM itself, or the solicitors for the applicant in the class action, or indeed the applicant itself, or some combination thereof (that being an issue that was never actually resolved in Brookfield)).

His Honour then moved to consider LCM’s cross-claim which, as noted above, sought to challenge the correctness of the majority decision in Brookfield. In that context, his Honour undertook a detailed critique of the majority’s reasons in Brookfield, identified numerous aspects of the majority’s reasoning that were highly deficient, problematic and misguided, and stated that he harboured “significant doubts” as to its correctness (at [16]-[20], [161]-[215]). That critique included the obvious incoherence with which the managed investment scheme provisions interact with the provisions of Part IVA and the practical operation of a funded class action. His Honour nevertheless declined to refer LCM’s cross-claim to the Full Court, declined to make the declarations sought by LCM (which, in part, would have been inconsistent with the majority decision in Brookfield), and therefore dismissed the cross-claim.

_{(On 13 December 2021 LCM filed a Notice of Appeal from his Honour’s dismissal of its cross-claim, by which it will no doubt seek to challenge the correctness of the majority decision in Brookfield before a Full Court.)}

Stanwell Corporation Ltd v LCM Funding Pty Ltd [2021] FCA 1430

Federal Court of Australia, Beach J,
17 November 2021

Plaintiff’s Solicitors: Minter Ellison;
Defendants’ Solicitors: Gilbert + Tobin / Piper Alderman;
Plaintiff’s Funder: N/A

Austlii Link: Accessible here