In a recent historic first, the Full Federal Court and the New South Wales Court of Appeal sat together to hear arguments on whether the making of a "common fund order" (CFO) is constitutional and within the power of the Court.

A CFO is a Court order that requires all members in a class action to contribute to the funding of the class action out of the recoveries. The CFO operates irrespective of whether the members have signed a litigation funding agreement with a funder in which they agree to make such a contribution.

In separate judgments handed down by each appeal court last Friday, the result was a unanimous "yes", meaning that, subject to any successful appeal to the High Court of Australia, CFOs are now an entrenched part of the Australian class action and litigation funding framework.

The confirmed viability of CFOs in Australia will likely see: 

  • an increase in the number of class actions filed, particularly in the wake of the banking royal commission; and
  • continuation of the trend toward the filing of class actions at an early stage, leading to a prevalence of competing class actions.
     

Common fund orders

Historically, litigation funders signed up class members to individual funding agreements under which the funder was compensated in return for funding an action (usually by way of a funding commission or a multiple of costs).  Since funders only recovered amounts owing under their funding agreements, it was in the funder's interest to sign up as many class members as possible (the so called "book-build") to ensure the action would be commercially viable.  The requirement to book-build was expensive and time consuming and would frequently also result in delay prior to the commencement of the action.  It also meant that many class actions were (or would become) closed class actions to exclude persons who had not signed funding agreements (the "free riders") from participating.

Since 2016, and the decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148), courts have been willing to make CFOs, which allow a funder to recover compensation from every class member out of recoveries, not just from those who have signed funding agreements.

In making CFOs, the Court takes responsibility for setting the commission available to the funder.  In doing so the Court takes into account, among other things, the "reasonableness" of the funding commission, the amount of available proceeds and the level of risk assumed by the funder.  If a CFO is made early in a class action, the level of commission may be set by the Court at a later stage (usually at the time of settlement approval or judgment). 

 
In our recent experience with CFO applications, the Court has been unwilling to interfere with recovery by the funder of its costs, but has been prepared to set a funding commission which it considers to be reasonable and proportionate to the amount sought and recovered in the proceeding: (Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842).

The joint sitting and resulting decisions

The question of whether the Court has power to make a CFO arose before each of the New South Wales Court of Appeal (Brewster v BMW Australia Ltd [2019] NSWSCA 35) and the Full Federal Court of Australia (Lenthall v Westpac Life Insurance Services Limited [2019] FCAFC 34).

Given the commonality and importance of the issues, particularly the Constitutional elements, it was considered in the interests of the administration of justice for the questions to be heard concurrently before both Courts.  The two appeal Courts sat together during argument but did not confer as to matters heard, and simultaneously delivered their independent judgments. 

The appeal Courts held that: 

  • each court has power to make a CFO, being, relevantly, ss. 23 and 33ZF of the Federal Court of Australia Act 1976 (Cth) and s183 of the Civil Procedure Act 2005 (NSW); in the case of the Federal Court, the language of s33ZF denoting width, amplitude and flexibility, as a power to make "any" order which is appropriate or necessary to ensure that justice is done and which may be exercised by the court on the court's own motion.  A CFO is such an order;
  • the making of the CFOs under each of the above sections was an exercise of judicial power or incidental thereto, and in the case of the Federal Court, a power that could be conferred on the Court under the Commonwealth Constitution.  That is, the power to make CFOs (pursuant to s33ZF of the Federal Court of Australia Act 1976 (Cth)) constitutes part of, and is incidental to, the carrying out of the judicial task of the Court, including considering and deciding (upon application and evidence) what is appropriate or necessary to do justice in a proceeding; and
  • the above sections, insofar as they authorise the making of a CFO, did not involve an acquisition of property other than on just terms contrary to s51(xxxi) of the Constitution.  Rather, the relevant provisions confer a general power on the Court to make orders which the Court considers are appropriate or necessary to ensure that justice is done.  In any event, a CFO does not operate compulsively so as to enliven s51(xxxi) of the Constitution as group members can opt out of the class action prior to the obligation to pay a fee to the funder crystallises.

Although each appeal decision may become the subject of an application for special leave to appeal to the High Court, in the meantime, the Courts are able to make CFOs in group proceedings.

Why the decisions are important

CFOs changed the class action and litigation funding landscape in the following key ways: 

  • group members could no longer benefit from a class action without compensating funders for the cost of running the group proceeding;
  • funding commissions are increasingly set by the Court, not the market, based on principles developed by the Court as to what is fair to the funder while remaining in the interest of group members;
  • without the need to rely on the book-build, class actions can be filed at an earlier stage, resulting in a "race to the courts" by litigation funders and a greater number of competing "open" class actions; and
  • class actions will necessarily involve a number of preliminary hearings, including to determine whether and on what terms a CFO should be made and, in the case of competing class actions, how to resolve which class action should be allowed to continue (the subject of another recent decision of the Full Federal Court in Perera v GetSwift Limited [2018] FCAFC 202)

It can be anticipated that the confirmed availability of CFOs, as endorsed on Friday by the two appeal courts, will see these trends continue.

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