Galactic Seven Eleven Litigation Holdings LLC v Davaria

This appeal arose from two related class actions about 7-Eleven franchise arrangements. One case was brought by corporate franchisees. The other was brought by guarantors connected to those franchise businesses, who were typically directors or shareholders of the franchisee companies. Both proceedings were funded by Galactic Seven Eleven Litigation Holdings LLC, a US litigation funder.

The parties reached an in-principle settlement in August 2021 for $98 million inclusive of costs, subject to Court approval. That did not end the matter. In a representative proceeding, settlement approval is a separate and important stage. The Court must decide whether to approve the settlement and what orders should be made about distributing the settlement money.

That is where the real dispute in this appeal began. Galactic asked the Court to make a common fund order for $24.5 million, equal to 25% of the gross settlement sum. The primary judge refused to make that order, held there was no power under s 33V(2) to do so, and instead made a funding equalisation order for $12.005 million. Galactic appealed to the Full Court.

The appeal was not about whether the franchisees or guarantors had proved their substantive claims at trial. It was about the machinery of settlement approval and, more specifically, the litigation funder's remuneration from the settlement sum.

The central legal question was whether the Federal Court has power under s 33V(2) of the Federal Court of Australia Act 1976 (Cth), when approving a settlement, to make a common fund order. The primary judge had said no. The Full Court said yes.

There was also a practical discretionary question. Even if the power existed, should it be exercised here? Galactic said a $24.5 million commission was commercially realistic and properly reflected the costs and risks it had taken on by funding the proceedings, paying large legal costs and disbursements, and providing security for costs while facing the risk of adverse costs orders. The primary judge accepted that Galactic had taken on significant risk and that the proceedings could not have been brought without its funding, but still declined to make the common fund order and instead preferred a funding equalisation approach.

That distinction matters. A common fund order and a funding equalisation order are not the same thing. The extract does not give a full textbook definition of each, but it clearly shows they are different mechanisms for dealing with the funder's return across the class. In this case, the difference was commercially significant. The primary judge's funding equalisation order fixed the funder's amount at $12.005 million. The Full Court's common fund order fixed it at $24.5 million.

For non-lawyers, the easiest way to understand the difference is to focus on outcome rather than labels. A common fund order fixes an amount payable to the funder from the settlement sum for the purposes of the settlement scheme. That is what the Full Court ultimately did here, ordering that $24.5 million be paid to Galactic from the settlement sum on account of its litigation funding commission.

A funding equalisation order is a different method that seeks to spread the effect of funding costs across group members. At first instance, the applicants had sought that kind of order if the Court declined to make a common fund order. The primary judge accepted that approach and fixed the amount at $12.005 million.

So the practical difference in this case was not abstract. It changed the amount the funder would receive from the settlement fund. For businesses participating in funded proceedings, that can directly affect the net amount available for distribution to claimants.

The judgment also records that some group members had entered into litigation funding agreements with Galactic that contractually bound them to pay a 35% funding commission. The proposed common fund order was for 25% of the gross settlement sum. The primary judge was concerned, among other things, that the proposed common fund order would produce a result materially different from the funder's aggregated contractual position. The Full Court, however, re-exercised the discretion and fixed the amount at $24.5 million.

The Full Court held that the primary judge was wrong to conclude that the Court lacked power under s 33V(2) to make a common fund order at settlement approval stage. The Court referred to the later Full Court decision in Elliott-Carde v McDonald's Australia Ltd, where the Court had unanimously held that such power exists. The Full Court said it was bound to follow that decision unless it was plainly wrong, and it was not plainly wrong.

The Court also said the primary judge should not have departed from seriously considered dicta in earlier decisions, including the earlier Full Court decision in Davaria and the New South Wales Court of Appeal decision in Brewster, without being persuaded those decisions were plainly wrong. The Full Court noted that the primary judge had made no reference to those decisions.

Having found error on the power question, the Full Court also held that the primary judge erred in the exercise of discretion by refusing to make a common fund order on the basis that he did. The Court then re-exercised the discretion for itself.

The result was clear. The appeal was allowed. Order 20 made at first instance was set aside. Pursuant to s 33V(2), the amount payable to Galactic from the settlement sum on account of its litigation funding commission was fixed at $24.5 million. The Court said that amount was commercially realistic and properly reflected the costs and risks Galactic took on by funding the proceedings.

The Court also recorded an undertaking by Galactic that, once the appeal orders were made, it would not seek to enforce any contractual or other entitlement to a funding commission from the applicants and group members in the proceedings. That matters because it shows the Court was dealing with the funder's remuneration through the settlement scheme itself.

One of the most practical parts of the judgment for business readers is the Court's criticism of how the settlement approval application was run. The Full Court said the issues were relatively commonplace. In substance, they concerned the reasonableness of the settlement, the reasonableness of legal costs to be charged to applicants and group members, and the reasonableness of other deductions from the settlement sum, especially the funder's commission.

Despite that, the approval application became very large and expensive. The Court noted that the parties relied on 49 affidavits, that Galactic and the contradictor adduced expert evidence about what constituted a reasonable rate of return for the funder, and that the hearing occupied six days. The Court said this involved a huge expenditure of time and resources by the solicitors, the contradictor, Galactic and the Court.

Most importantly, the Court pointed out that much of that work was at the expense of the applicants and group members. It referred to approved costs of $294,030 for the contradictor and $2.248 million for the applicants' solicitors on the approval application, with those amounts deducted from the settlement money. The Court said that, putting aside the burden on a busy Court, an approval application of this kind should not have been permitted to cost group members $2.54 million.

The Court linked that criticism directly to the overarching purpose in s 37M. For businesses, this is a strong practical message. Even where a claim settles for a large amount, process costs can erode the value of the outcome. A business considering participation in funded group litigation should ask not only whether the claim has merit, but whether the case is being run in a way that is likely to remain proportionate and efficient through to settlement approval.

If you run a franchise business, this case is a reminder that disputes can involve more than the operating entity. The related guarantor proceeding shows that individuals behind the business may also be drawn into the litigation picture, especially where personal guarantees sit behind franchise arrangements. The extract does not set out the full underlying allegations, so the case should not be read as a broad statement of franchise law. Its clearest public lesson is about class action settlement funding and distribution.

If your business is considering joining a funded class action, focus on net recovery. Ask what legal costs have already been incurred, what security for costs has been provided, what commission the funder may seek, whether a common fund order or funding equalisation order may be pursued, and how those possibilities could affect your return.

Also ask how the approval process is likely to be managed. The Full Court's criticism here shows that even routine settlement approval issues can become expensive if evidence and process are not tightly controlled. That matters because those costs may come out of the settlement fund.

Finally, remember that the Court's role at settlement stage is active. It is not simply endorsing what the parties have agreed. It may decide what deductions are just and how the settlement money should be distributed. For a business claimant, that means the final commercial outcome may differ from what you expected when you first signed up to the proceeding.

The judgment highlights several practical areas businesses should review before joining funded litigation. First are the funding documents themselves. In this case, some group members had signed litigation funding agreements said to provide for a 35% funding commission. The proposed common fund order was lower as a percentage of the gross settlement, but it still became the subject of a major dispute.

Second is the settlement structure. The settlement here was $98 million inclusive of costs. That wording matters because it means the gross figure may need to absorb multiple deductions before claimants receive their share.

Third is the conduct of the approval process. The Court's criticism of the volume of affidavits, expert evidence and hearing time shows that process choices can have direct financial consequences for group members.

For business owners, the practical lesson is to ask for a plain-English explanation of the funding model, the likely deductions, and the approval pathway. If those answers are unclear, the commercial risk is harder to assess.

The Full Court judgment is dated 2 May 2024. It records that the in-principle settlement was reached in August 2021, that the primary judge's orders refusing the common fund order were made on 8 March 2023, and that the appeal was then allowed by the Full Court.

The public points on this page are confined to what is clearly supported by the judgment. The strongest lessons concern settlement approval, common fund orders, funding equalisation orders, and the Court's criticism of disproportionate approval costs.