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Snapshot

  • Common fund orders developed as a response to the problem of ‘free riders’ (i.e. group members who had not entered into a litigation funding agreement).
  • Common fund orders flourished after a 2016 Full Federal Court decision.
  • By 5-2 majority, the High Court has held that section 33ZF of the Federal Court of Australia Act 1976 (Cth) and its State equivalent do not empower the Court to make common fund orders.

This article provides a short history of the common fund in Australia, culminating in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45 (‘Brewster). In Brewster, the High Court held (by 5-2 majority) that section 33ZF of the Federal Court of Australia Act 1976 (Cth) (‘FCA‘) does not empower the Federal Court to make a common fund order or ‘CFO‘. The High Court reached the same conclusion in relation to equivalent State provision (s 183 of the Civil Procedure Act 2005 (NSW) (‘CPA‘)).

The problem of ‘free-riders’

When the class action regime in Pt IVA of the FCA was introduced, litigation funding of the kind now commonplace was thought not to be permitted. Hence, Pt IVA (and the equivalent State legislation, which largely adopted Pt IVA) did not contain provisions that dealt with the regulation of litigation funding expressly.

However, as litigation funding developed in Australia, in particular following its endorsement in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386, the courts have had to deal with a range of issues, including a concern that group members who have not signed funding agreements should not get a ‘free ride’ on the efforts of those who have signed funding agreements.

This issue arises in particular in relation to ‘closed’ class actions, in which group members are defined not only by reference to having suffered a particular loss (e.g. having purchased shares in an ASX-listed company during a specified period) but also by reference to some additional factor such as having signed a funding agreement with a litigation funder.

The legitimacy of ‘closed’ class actions was confirmed by Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275. After that decision, litigation funders generally preferred to fund a proceeding on a ‘closed’ basis, as this created an incentive for potential group members to sign up with the litigation funder and thereby maximised the funder’s returns (see e.g. Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 (‘Money Max) at [185]-[186]).

However, this created a problem for respondents, who did not want to pay substantial amounts unless they settled with all potential claimants (not just those who had signed up to join the closed class). As a result, a practice developed of ‘opening’ the ‘closed’ class to permit potential claimants who had not signed up with the litigation funder to participate (see e.g. Money Max at [188] and [190]). While this gave the respondent certainty, it also raised the issue of unequal outcomes between group members (not all of whom signed funding agreements). How was a fair outcome to be achieved?

 

Funding equalisation orders

The first approach adopted was a ‘funding equalisation order’ or ‘FEO‘. In broad terms, an FEO involves an amount being deducted from those group members who have not signed funding agreements equivalent to the funding commission paid by group members who have signed funding agreements. That amount is not paid to the litigation funder, but is instead distributed on a pro rata basis across all group members. In that way, all group members receive equal treatment. They all receive an equal deduction from their settlement, but in the case of unfunded group members, that deduction is distributed among all group members, not paid to the funder (see e.g. Brewster at [45] and [134]).

Funding equalisation orders were made in some early cases such as P Dawson Nominees v Brookfield Multiplex (No 4) [2010] FCA 1029 and Modtech Engineering v GPT Management Holdings [2013] FCA 626.

Common fund orders

A different approach was taken in Money Max, which was the first decision of an intermediate appellate Court to make a common fund order. A common fund order is usually made at an early stage in representative proceedings and provides for:

  • the quantum of a litigation funder’s remuneration to be fixed as a proportion of any money ultimately recovered in the proceedings;
  • all group members to bear a proportionate share of that liability (including those group members who have not entered into a funding agreement with the funder); and
  • that liability to be discharged as a first priority from any moneys recovered (see e.g. Brewster at [1]).

Following Money Max, common fund orders flourished. Common fund orders removed the need for litigation funders to ‘book build’ i.e. sign up potential group members to a litigation funding agreement. This in turn contributed to an increase in competing class actions (as it was no longer necessary for a litigation funder to sign up enough group members to make the proceeding commercially viable).

Brewster

In Brewster, the High Court considered a decision of the NSW Court of Appeal in a class action involving the recall of airbags and a decision of the Full Federal Court in a class action involving financial advice about life insurance policies. In both decisions, it had been held that the applicable court had power to make a common fund order (which had been sought prior to any substantive hearing or settlement).

Kiefel CJ, Bell, Keane, Nettle and Gordon JJ allowed the appeals, and held that section 33ZF of the FCA and section 183 of the CPA did not empower the applicable court to make a CFO. In separate judgments, Gageler and Edelman JJ dissented.

The leading judgment was delivered by Kiefel CJ, Bell, and Keane JJ. Their Honours said that, while the power conferred by sections 33ZF and 183 was wide, ‘[i]t is not appropriate or necessary to ensure that justice is done in a representative proceeding for a court to promote the prosecution of the proceeding in order to enable it to be heard and determined by that court. The making of an order at the outset of a representative proceeding, in order to assure a potential funder of the litigation of a sufficient level of return upon its investment to secure its support for the proceeding, is beyond the purpose of the legislation’ (at [3]). In reaching this conclusion, their Honours disapproved Money Max and preferred the earlier decision of Wigney J in Blairgowrie Trading Ltd v Allco Finance Group Ltd (2015) 325 ALR 539 (‘Blairgowrie‘).

Kiefel CJ, Bell, and Keane JJ accepted that the concern to prevent ‘free riding’ is relevant to doing justice as between group members, but said that the equitable sharing of the expense of the proceeding may be achieved by the making of a funding equalisation order (at [86]). Their Honours stated that ‘there is no reason why the amount taken from unfunded group members’ awards should be directed to the litigation funder, much less that an order to that effect should be made at the outset of the proceeding rather than on the occasion contemplated by s 33ZJ(2) of the FCA and s 184(2) of the CPA. Unfunded group members have no contractual or other relationship with the funder. Nor have they any liability to the funder. The funder has no right to that money under contract or under equitable principles’ (at [87]).

Their Honours also had no difficulty with requiring litigation funders to book build, stating that (among other things) ‘there is no warrant to supplement the legislative scheme by judicial involvement to ease the commercial anxieties of litigation funders or to relieve them of the need to make their decisions as to whether a class action should be supported based on their own analysis of risk and reward’ (at [94]).

Gordon J also allowed the appeal, noting (at [149]) that:

  • a CFO seeks to have a court craft a relationship between group members who have not signed funding agreements and a litigation funder who is not a party to the proceeding;
  • Part IVA as a whole and s 33ZF(1) in particular does not allow the Court to set (or provide the statutory criteria to guide the Court in setting) the terms or contours of that relationship.

In a short judgment, Nettle J acknowledged the cogent arguments for and against section 33ZF conferring power to make a CFO but indicated he preferred the approach of the plurality.

Because the majority concluded that there was no power under the relevant statutory provisions, they did not need to consider the constitution challenges made in relation to the CFOs (including that the making of a CFO involved the acquisition of property on other than just terms or did not involve the exercise of judicial power). In dissent, Gageler J said that these constitutional challenges ‘do not withstand scrutiny and do not warrant elaborate responses’ (at [119]) and Edelman J said that they were ‘not strong’ (at [174]).

Where to from here?

Five matters are noted in relation to whether CFOs have a future.

First, Brewster decides that sections 33ZF and section 183 do not empower the Court to make a CFO (the CFOs having been sought before settlement or judgment). A question arises as to whether other provisions might empower the Court to make a CFO at a later stage in proceedings, such as section 33V(2) on settlement or sections 33Z or 33ZA on judgment. Gordon J expressed the (obiter) view that none of these provisions envisaged a court making a common fund order (at [141], [143] and [147]). The plurality’s judgment might be thought to be less definitive, although their Honours did say that the respondents required sections 33ZF and 183 to do work beyond the scope of the other provisions (at [70]; see also e.g. at [59]-[60], [66]-[81]) and appeared to favour FEOs over CFOs (at [85]-[90]). To the extent it is relevant, in Blairgowrie (which was approved by the plurality) Wigney J stated that his conclusion in that case did not ‘mean that the court will not make an order, at some later stage of the proceeding, which has the effect of ensuring that any proposed settlement fund, or any award or awards of damages, is distributed equitably having regard to the funding obligations of the applicants’ (at [222]; see also at [223] and [226]).

Second, Recommendation 3 of the Australian Law Reform Commission’s Report 134 about class action proceedings and third-party litigation funders dated December 2018 (i.e. pre-Brewster) was that Pt IVA of the FCA be amended to provide the Court with an express statutory power to make common fund orders. Adoption of that recommendation would overturn Brewster (but would leave unresolved the constitutional issues referred to above).

Third, a bill is before the Victorian Parliament that would introduce a new section 33ZDA into the Supreme Court Act 1986 (Vic) empowering the Victorian Supreme Court to order that legal costs be calculated as a percentage of any award or settlement and that liability for payment of the legal costs be shared among the plaintiff and all group members. If enacted, this would effectively allow a common fund style order payable to the lawyers (as opposed to the litigation funder).

Fourth, on 20 December 2019 (i.e. post-Brewster), the Federal Court released a new Class Actions Practice Note (GPN-CA). Section 15 (which is headed ‘Settlement – Procedure’) refers to the expectation that the Court will make an appropriately framed order to prevent unjust enrichment and equitably and fairly to distribute the burden of reasonable legal costs, fees and other expenses, including reasonable litigation funding charges or commission, amongst all persons who have benefited from the action ‘if in all the circumstances it is fair, just, equitable and in accordance with principle’ (at [15.4]; see also e.g. at [16.1], which refers to a proposed settlement involving part of the payments to be made to class members being applied toward payment of litigation funding charges).

Fifthly, in the pre-Brewster decision Pearson v State of Queensland [2017] FCA 1096 at [4] and [18]-[33], Murphy J applied Money Max to make a common fund order under section 33ZF. In the post-Brewster orders dated 17 January 2020 approving a settlement in Pearson (published on the Federal Court’s website), the Court noted that ‘the common fund order … made on 25 August 2017 continues in effect’. Reasons in relation to the 17 January 2020 orders were not available at the date of this article.


Ross Foreman SC is a barrister at PG Hely Chambers.