In a landmark decision for the Australian class action regime, the Full Court of the Federal Court has ruled that the Court has the power to make a so-called “common fund order” (CFO) at the settlement stage of proceedings.
Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162 (McDonalds) will be welcomed by commercial litigation funders, given the spectre of uncertainty over settlement CFOs since the High Court’s 2019 decision in Brewster.[1] This uncertainty has now been put to rest, subject to any appeal.
The decision will also pique the interest of plaintiff class action firms. It provides further judicial support for the idea that the Court’s power extends to making a so-called “solicitors’ CFO”, being an order that the lead plaintiff’s solicitors receive a portion of any settlement proceeds in return for taking on the financial risks of the action. Akin to awarding a contingency fee, such an order would be novel in the Federal Court, and its availability could have far-reaching consequences for the conduct of class actions generally.
The Full Court’s decision
In a unanimous decision, the Full Court ruled that the court has power under section 33V(2) of the Federal Court of Australia Act 1976 (Cth) (Act) to make a settlement CFO.
According to Justice Beach, the text, context and purpose of section 33V(2) do not preclude the making of a settlement CFO. The section confers a wide judicial discretion, which is not to be read down by reference to limitations not found in the language of the section. His Honour noted that settlement CFOs are conducive to the objectives of the class action regime, because litigation funding is a means by which claims which would not otherwise have been able to be brought are litigated.
Justice Lee (with whom Justice Colvin substantially agreed) expressed similar views.
In doing so, all three judges ringfenced the High Court’s decision in Brewster. That decision, they found, dealt only with section 33ZF(1) of the Act in the context of CFOs made at the start of a proceeding. It did not deal with any settlement approval or other exercise of power under section 33V. And, unlike section 33ZF(1), section 33V(2) is not a “gap-filling” power, but is a specific power to make orders as to the distribution of claim proceeds arising from a settlement.
Implications
The Full Court’s ruling will likely come as a surprise to very few. It was only in 2020 that the same court, in another class action, expressed the view that Brewster was no bar to the court’s power to make a CFO at the settlement stage.[2] And the ensuing three years saw a clear trend in the Federal Court making settlement CFOs.
However, the decision may still have a profound impact on the class action landscape in Australia. For instance, we may see:
- A marked decrease in the number of class actions commenced on a “closed” basis, and a corresponding increase in “open” class filings. Particularly since Brewster, litigation funders have preferred closed classes. This is so that their financial investment was protected and there were no “free riders” among group members. The availability of settlement CFOs will significantly reduce the investment risk of open class actions and encourage funders to fund actions on an open basis.
- A continuation of the high number of competing class actions. Historically, it was necessary for litigation funders to ensure that a sufficient “book” of loss had been “built”, so that the likely commission justified the expense and risk of the litigation. This necessity acted as a natural brake on competing actions. But CFOs remove the need to book build prior to commencing proceedings. In reducing the barriers to entry for lead plaintiffs and making litigation funders’ investments less risky, CFOs may encourage the filing of more competing actions.
- A reversal of the recent trend of Victoria as class action plaintiffs’ forum of choice. Shortly following the Brewster decision was the introduction of the “Group Costs Order” (GCO) regime for class actions in the Supreme Court of Victoria. This regime permits solicitors for lead plaintiffs to receive a percentage of the monetary compensation recovered on behalf of class members. According to Professor Vince Morabito, filings data in the post-GCO period clearly shows a growth in the volume of class action litigation with respect to Victoria, and a significant decrease in Federal class actions.[3] Faced with strong competition from large plaintiff law firms prepared to carry financial risk in return for (what are effectively) contingency fees, litigation funders may revert to the Federal Court as their preferred forum, particularly for securities class actions. This outcome seems all the more plausible in the light of some of the starkly-low GCO rates approved by the Supreme Court of Victoria.
In its December 2018 report (ALRC Report), the Australian Law Reform Commission recommended that the Act be amended to provide the Court with an express statutory power to make CFOs. It remains to be seen where the federal government sits in relation to this recommendation, particularly in the light of the Full Court’s decision in McDonalds.
Are solicitors’ CFOs next?
The McDonalds decision solely concerns the Court’s power to make a CFO in favour of a commercial litigation funder at the settlement stage of a class action. It is not a binding authority beyond that context.
However, the separate judgments of Justices Beach and Lee suggest that the Court’s power may extend to settlement CFOs in favour of not just commercial litigation funders, but of solicitors as well. Justice Lee stated at paragraph 380 of the judgment:
… the distribution of monies paid under a settlement to a third-party to a class action who has acted in such a way to facilitate the realisation of the fund, and to whom a payment is “just” by reference to all the circumstances, need not necessarily be a commercial funder. … [O]ne can readily conceive of circumstances where it could be a “just” order to pay to a solicitor (who has taken the necessary risks to get in the settlement fund) a sum in addition to legal costs payable pursuant to a retainer.
These remarks are not the first occasion that the Court has left open the concept of solicitors’ CFOs. In Klemweb Nominees Pty Ltd (as trustee for the Klemweb Superannuation Fund) v BHP Group Limited,[4] Justices Middleton, Beach and Lee suggested that the Court may have the power to make such orders in appropriate circumstances.
Nor are they the last occasion. In a judgment delivered on the same day as McDonalds, concerning a carriage dispute where one of the proposed funding models included a solicitors’ CFO, Lee J stated:
… there is no substance in the argument that Pt IVA precludes, as a matter of power, the possibility of a settlement CFO which incorporates the payment of a fee to solicitors in an appropriate case. The same considerations apply mutatis mutandis to a CFO being sought upon a judgment obtained because solicitors ran the risk of funding the claim or claims that merged in the judgment.[5]
So, it certainly seems that judicial momentum is building for the recognition of power to make solicitors’ CFOs. However, it must be borne in mind that the favourable statements in the above decisions were only made in passing, so the question of power remains unresolved and seems ripe for consideration at appellate level.
Solicitors’ CFOs would, of course, effectively involve the payment of a contingency fee to the solicitors for lead plaintiffs. It was a recommendation in the ALRC Report that the Act be amended to permit the charging of contingency fees in Federal class actions. But, as with an express power for CFOs, it remains unclear what the federal government’s position is on this recommendation. Only time will tell.
Written by – Alexander Sloan – Senior Associate, GRT Lawyers
[1] BMW Australia Ltd v Brewster [2019] HCA 45.
[2] Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183.
[3] Morabito, Empirical perspectives on twenty-one years of funded class actions in Australia (April 2023), p 11.
[4] [2019] FCAFC 107 at [16]-[23] (Middleton and Beach JJ), [139]-[141] (Lee J).
[5] Greentree v Jaguar Land Rover Australia Pty Ltd (Carriage Application) [2023] FCA 1209 at [45].
