In January 2025, we published a class actions spotlight outlining six key topics to watch. One was the much-anticipated High Court of Australia (High Court) decision on whether solicitors' common fund orders (which operate like a contingency-fee arrangement) are available in Australia.
Last week, the High Court delivered its decision in Kain v R&B Investments Pty Ltd [2025] HCA 28. It found that the Federal Court of Australia (Federal Court) does not have power to make a common fund order (CFO) in group proceedings in favour of solicitors. In the same decision, the High Court also considered whether the Federal Court can make CFOs in favour of litigation funders. The Court confirmed that the Federal Court does have the power to make CFOs at settlement or judgment – litigation funders are not law firms and are not subject to the same legislative restrictions.
Background
The Applicants, R&B Investments Pty Ltd and Mr David Furniss, brought claims against Blue Sky Alternative Investments Limited (in liquidation), some of its former directors (including Mr John Kain), and its former auditor, Ernst & Young. The Applicants alleged the Respondents engaged in misleading or deceptive conduct, breached the accounting and auditing standards and breached the company's continuous disclosure obligations.
The Applicants applied to the Federal Court for approval to distribute a notice to group members. It stated that if a settlement or judgment results in compensation payable to the group members, the Applicants would ask the Court to make an order that a portion of the compensation be used to remunerate the Applicants' solicitors. This covered their work, expenses and the financial risks incurred in running the class action (solicitors' CFO). A solicitors' CFO refers to an order authorising a payment to the Applicant's solicitors in a class action out of a settlement or judgment sum calculated by reference to a percentage of the sum recovered or value of any property that may be recovered (as opposed to an order for solicitors' costs and disbursements by reference to time spent and hourly rates).
In 2024, the Full Court of the Federal Court held that the Federal Court had the power to order a CFO in favour of both litigation funders and solicitors. This decision was appealed to the High Court.
We note that solicitors' CFOs are permitted in the state of Victoria in the form of "group costs orders" (GCOs). We refer to our previous article on GCOs which outlines the background and development of GCOs in the Victorian Supreme Court.
Key Points
All justices of the High Court found that:
- The Federal Court has power under s 33V(2) or s 33Z(1)(g) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) to order a CFO in favour of litigation funders either on settlement or judgment; and
- The Federal Court does not have power under s 33V(2) or s 33Z(1)(g) of the FCA Act to order a common fund order in favour of solicitors.
The reason solicitors' CFOs were not permitted under the FCA Act was because that order would contravene the prohibition against contingency fees, which is found in s 183 of the Legal Profession Uniform Law (NSW) (LPUL) and so any such order could not be considered "just". Sections 33V(2) and s 33Z(1)(g) permit the Federal Court to make any such orders as it considers "just" upon settlement approval of a class action or upon judgment. The text of s 183 of the LPUL prohibits a law practice from entering a costs agreement under which the amount payable to the law practice, or any part of that amount, is calculated by reference to the amount of any award or settlement or the value of any property that may be recovered in any proceedings to which the agreement relates.
Gordon, Steward, Gleeson and Beech-Jones JJ found that:
- "The Federal Court exercises power in federal jurisdiction against the background of the scheme of regulation of the legal profession in the State or Territory in which the solicitors in the proceeding are practising. Where, as in these appeals, the solicitors are practising in New South Wales, s 183 of the Legal Profession Uniform Law (NSW) ("the LPUL") prohibits contingency fees. The Federal Court cannot make such an order in favour of the law practice conducting the representative proceeding because to do so would be contrary to s 183" [35]
- "neither provision [s 33V(2) or s 33Z(1)(g)] empowers the Federal Court to make an order for payment from the settlement or judgment fund which is prohibited by law or gives effect to an agreement or understanding that is otherwise unlawful. An unlawful payment cannot be a "just" payment" [80]
Gageler CJ held:
- "My view is that an order under s 33V(2) or s 33Z(1)(g) of the FCA could not properly be thought "just" if seeking or giving effect to the order would involve a contravention of the Legal Profession Uniform Law. That is because, to provide in the terms of the written retainer, as proposed to be amended upon the making of the order under s 33X for the giving of notice to group members, for the applicant to apply to the Federal Court for the solicitor's CFO would involve the solicitors in a contravention of s 183 of the Legal Profession Uniform Law" [11]
In summary, the High Court held that ordering a solicitors' CFO would amount to enforcing an agreement made in contravention of s 183 of the LPUL. Such an order would exceed the Federal Court’s power, as it cannot be considered “just” to enforce an unlawfully entered agreement that enables a solicitor to recover amounts to which they are not entitled.
Key takeaways and implications
- The High Court decision creates a clear distinction between the treatment of law firms and litigation funders in class actions, and between jurisdictions. The decision may prompt calls for a more harmonised national approach to class action funding, as stakeholders seek to address the inconsistencies and uncertainties created by the current patchwork of laws.
- As Edelman J stated in his judgment, any power to make a solicitors' CFO in New South Wales "must be left to occur as a matter of legislative innovation". Until such reform occurs, law firms in states other than Victoria remain bound by each state's prohibition on contingency fees under the uniform law, precluding their ability to share in the proceeds of class action recoveries.
- Expect more class actions filed in the Supreme Court of Victoria, particularly where Applicants’ solicitors self fund the case. This is because Victoria has specific legislation permitting plaintiff law firms in class actions to be paid their legal costs as a percentage of the amount of any award or settlement in the proceeding.
- The High Court found that CFOs in favour of litigation funders are still permissible, so such orders can continue to be made by the Federal Court.
If you have any questions or would like to discuss this case, please reach out to Beverley Newbold or David Taylor.
