By a 5:2 majority, the High Court has determined that the Federal Court of Australia and the NSW Supreme Court do not have power to make common fund orders.
The High Court was faced with two interlocutory applications concerning the making of 'Common Fund Orders' (CFO) in the 'BMW Class Action', commenced in the NSW Supreme Court (concerning the supply of vehicles containing allegedly defective airbags), and the 'Westpac Class Action' commenced in the Federal Court of Australia (concerning alleged breaches of statutory and fiduciary obligations in relation to advice provided by its financial advisers). Both class actions were supported by a litigation funder.
The representative parties in both class actions sought a CFO. A CFO is an order that is typically made in class actions, supported by a litigation funder. It requires all group members who benefit from the class action (regardless of whether they have signed funding agreements) to contribute a percentage of their benefit received from any settlement award or judgment amount to the litigation funder (and to share the legal costs incurred). A CFO is novel because it effectively imposes the same obligation on group members who chose not to sign funding agreements, as those group members who chose to sign – that is, unless they opt-out of the action, they have to contribute to the funder's return (regardless of the fact that they have not expressly agreed to do so).
Since they were approved by the Full Federal Court in 2016 (in Money Max Int Pty Ltd v QBE), CFOs have become popular among funders. This is because they are not required to sign up individual group members (to derive a benefit from them) through a book build process, which is usually expensive and time-consuming.
In both class actions, a CFO was made by the NSW Supreme Court and the Federal Court of Australia. At a historic joint sitting of Full Federal Court and New South Wales Court of Appeal, the making of the CFO was upheld.
Westpac and BMW appealed to the High Court.
A majority of the High Court determined that the Federal Court of Australia and the NSW Supreme Court do not have power to make a CFO, under section 33ZF of the Federal Court of Australia Act 1976 (Cth) (the FCA) and section 183 of the Civil Procedure Act 2005 (NSW) (the CPA), respectively.
The plurality (Chief Justice Kiefel and Justices Bell and Keane) said that the text of the FCA and CPA authorised a Court to make an order 'to advance the effective determination by the Court of the issues between the parties to the proceeding' (at ). The question of funding was not found to be an issue between the parties to the proceeding. Rather, it was a matter between parties and third parties, and as such, a CFO does not advance the proceeding. The High Court also considered that the purpose of the FCA and the CPA was to facilitate access to justice by group members, and that access to justice is not necessarily associated with a Court making arrangements to assure litigation funders of a sufficient level of return. In upholding the appeal, the plurality made the following comment at :
'While it has rightly been acknowledged that the power conferred by each of s 33ZF and s 183 is broad, it is one thing for a court to make an order to ensure that the proceeding is brought fairly and effectively to a just outcome; it is another thing for a court to make an order in favour of a third party with a view to encouraging it to support the pursuit of the proceeding, especially where the merits of the claims in the proceeding are to be decided by that court. Whether an action can proceed at all is a radically different question from how it should proceed in order to achieve a just result.
In coming to this conclusion, the High Court overruled the Full Federal Court's decision in Money Max.
However, the High Court acknowledged the 'free-rider' problem, which refers to circumstances where non-funded group members would otherwise receive a windfall from a settlement award or judgment amount in the class action without being required to provide a percentage of this windfall to the funder. This has often been considered problematic in circumstances where funded group members who have formed the class which prosecutes the action would have to provide part of their return to a funder, whilst those who did nothing were able (without a CFO or another mechanism) to do better – an arguably inequitable result.
The High Court noted that the free-rider problem could be resolved at the conclusion of proceedings, and the making of a Funding Equalisation Order (FEO) would resolve this problem. A FEO is an order that redistributes the commission payable to the litigation funder by the funded group members, across all group members (ie funded and non-funded group members). The High Court expressly said that a court is empowered to make a FEO under the FCA and CPA.
This decision is a significant blow to litigation funders in existing and future class actions. Litigation funders are now brought back to the situation pre-Money Max, in that they will be required to assess the economics of any new class action before it is filed, rather than perhaps commencing early in reliance on a CFO to establish their returns. This may involve the process of signing up individual group members through a book build process, which litigation funders argued was time consuming and expensive, but which was the norm historically. The High Court had no sympathy for this argument, noting that in most cases, the size of the potential return to the litigation funder from funded group members was still not insignificant.
“We may see a slowdown in the commencement of new class actions and a return to 'closed' class actions.”
We may therefore see a slowdown in the commencement of new class actions (although much of the book-build process occurs behind the scenes) and a return to 'closed' class actions, where class members are defined by, among other things, the funding arrangement entered into. Interestingly, we also see the re-emergence of competing 'open' class actions brought in respect of the same alleged loss or damage the subject of some 'closed' class actions, on behalf of group members who are not captured by the funding criteria which determines membership of the 'closed' class action. Regardless, class action risk still remains high for companies.
Furthermore, the High Court's decision also comes at the same time as Victoria is amending its class action regime to allow contingency fees to be charged by plaintiff lawyers to all group members. If introduced, this would reduce the need for litigation funders in class actions, as plaintiff law firms may be more willing to prosecute these actions themselves, in return for a substantial 'slice' of the settlement award or judgment amount, far in excess of the fess they typically charge. We suspect this could mean more class actions being commenced in the Victorian Supreme Court going forward.
However, the High Court's decision may not be the end of CFOs. Justice Beach noted in open Court last Friday, that the High Court's decision concerned interlocutory CFOs made prior to the conclusion of the proceeding and that during the settlement approval process, s 33V(2) confers the power on a Court to 'make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court'. He further added that while the plurality noted that a FEO can be made under this provision, they did not go so far as to expressly state that a CFO could not be made under this provision. Justice Beach's comments may open the door for litigation funders to now pursue CFOs at the conclusion (or settlement) of the proceedings, rather than at an interlocutory stage – but they must be prepared to accept the risk that a CFO may not be made at the conclusion of the proceeding.
Finally, we observe that both the Australian Law Reform Commission and the Victorian Law Commission reports on class actions and third party funding recommended that legislation be enacted to provide an express statutory power for Courts to make CFOs.