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Class Action Common Fund Orders: What does the future hold?

Thursday 5 August 2021

Nicholas Mavrakis
Clayton Utz, Sydney
nmavrakis@claytonutz.com

Edmond Park
Clayton Utz, Sydney
epark@claytonutz.com

 

Two recent decisions arising out of an historic joint-sitting between the Full Court of the Federal Court of Australia and the New South Wales Court of Appeal have confirmed that the making of a ‘common fund order’ (CFO) is constitutionally valid and within the exercise of a court’s judicial power. The decisions, although they are currently the subject of an appeal to the High Court of Australia (the nation’s final court of appeal), provide further clarification to litigation funders over the recovery of commissions in a class action context.

The question of whether an Australian court has power to make a CFO arose separately in each of the following proceedings commenced in:

• the Federal Court of Australia (Lenthall v Westpac Life Insurance) (Lenthall),[1] which concerned a financial services class action alleging that financial advisers had breached their fiduciary and statutory best interests duties along with no conflict obligations in giving financial advice to group members who obtained policies of insurance; and

• the Supreme Court of New South Wales (Brewster v BMW) (Brewster),[2] which concerned a consumer product class action for loss allegedly caused by the installation of faulty airbags in BMW vehicles.

As both cases involved a similar consideration of issues, the unprecedented decision was made, in the interests of the administration of justice, for the questions to be heard at the same time and in the same court room before the judges of both courts. Despite the joint hearing, both courts agreed that they would not discuss their views on the proceedings or share any draft workings in each matter prior to delivering their final judgments.

The historic joint-sitting is one of a number of recent procedural steps that the two Australian appellate courts have taken to improve coordination and consistency in the management of class action proceedings in Australia.

What is a common fund order?

A common fund order is a court order that typically requires all group members in a class action to contribute equally to the legal and litigation funding costs of the proceedings regardless of whether the class member signed a litigation funding agreement.[3] In practice this means that in the event of a successful outcome, the settlement or judgment sum recovered for all group members, not just those who have signed up to the funding agreement, will be used to pay the costs of lawyers and litigation funders, as well as a commission to the litigation funder, before any distribution to the plaintiff and group members.

A significant advantage of CFOs is that they spread the cost of litigation funding across a greater number of class members than would be the case solely under a contractual arrangement. CFOs also reduce the need for the litigation funder to book build (a process of signing up group members to agreements with the litigation funder) which has traditionally been required to make litigation funding economical. However, certain groups have cautioned against the increasing use of CFOs because they represent a departure from freedom of contract by creating a binding arrangement between persons who have not expressly agreed to be bound.[4] CFOs have also been criticised for varying existing contracts, as they may also result in an adjustment of a funding fee already agreed.

Commonality of issues

Despite raising a number of different issues for determination before each court, both BMW and Westpac challenged the court's power to make CFOs on three main grounds:

1. as a matter of construction, the relevant legislative provisions governing the conduct of class actions did not authorise the court to make a CFO;

2. a CFO was contrary to the exercise of judicial power, and for that reason it was impermissible for a court to make the order; and

3. a CFO is unconstitutional because the effect of the relevant legislative provisions amount to an acquisition of property other than on just terms.

Are CFOs within the court's statutory powers?

Section 183 of the Civil Procedure Act 2005 (NSW) and Section 33ZF of the Federal Court of Australia Act 1976 (Cth) respectively authorised the Supreme Court of New South Wales and Federal Court of Australia to ‘make any order that the Court thinks appropriate or necessary to ensure that justice is done in the proceedings.’

The respondents argued that these provisions should be interpreted in accordance with the ‘principle of legality’ which presumes that legislation is not intended to interfere with individuals’ rights without clear words to that effect. It was argued that, in the absence of such clear language, CFOs impermissibly interfered with group members' property rights.

However, both courts noted the ‘width, amplitude and flexibility’[5] and ‘utmost generality’[6] of these statutory provisions and viewed them as being wide enough to empower courts to make CFOs. In Brewster, the Court of Appeal noted that it would be ‘incongruous to apply the “principle of legality” so as to narrow the protections which Parliament has put in place to regulate the new regime’.[7] In Lenthall, the Full Federal Court recognised CFOs as being consistent with the principle of legality as they are an appropriate way to ensure the ends of justice are obtained in an equitable and fair way that distributes the burden of a proper and legitimate funding cost to vindicate and realise common rights.[8]

Are CFOs a proper exercise of judicial power?

The respondents raised numerous arguments to demonstrate that the making of a CFO was not a proper exercise of judicial power, and consequently an impermissible act for a court. These included that the making of a CFO was not concerned with the determination of pre-existing rights, but rather imposed new rights and obligations,[9] that the court was required to make value judgements about market rates or fair returns rather than consider objective criteria,[10] and that CFOs were hypothetical because there may never be a damages award.[11]

Both courts held that the making of a CFO was an exercise of judicial power or a power that is incidental to judicial power.[12] The Full Federal Court noted that there was no exhaustive and complete definition of judicial power[13] but that ‘it is difficult to conceive of a function or standard more appropriate to the judicial branch of government than considering and deciding… what is appropriate or necessary to do justice in a proceeding’[14] as is required by the terms of the statutory conferral of power when making a CFO. The Full Federal Court recognised that the creation of new rights or obligations was ‘not foreign or inimical to judicial power’,[15] and that a court is accustomed to making judgements in the absence of objective statutory guidance,[16] and the Court of Appeal found that CFOs were not hypothetical because they bind group members to the terms of the litigation funding agreement.

Are CFOs unconstitutional?

Section 51 (xxxi) of the Australian Constitution permits the Federal Parliament to make laws with respect to the acquisition of property on just terms. The respondents argued that a CFO took away the future proceeds of a group member's cause of action, transferring them to the litigation funder, and in doing so unconstitutionally compulsorily acquired property other than on just terms.[17]

Both courts determined that the relevant provisions were not laws with respect to the acquisition of property, rather they were laws conferring a power upon a court.[18] The Court of Appeal noted that the relevant provision was a law which confers a general power upon a court, which was available when the court was of the view that its exercise was appropriate or necessary to ensure that justice was done in the proceedings.[19] The Full Federal Court regarded CFOs as genuine adjustments of the competing rights of group members and the litigation funder, rather than an acquisition of property,[20] and added that even if there was an acquisition of property, the applicant did not establish that it was other than on just terms.[21]

Funding cap

In Brewster, the Court of Appeal noted that there was ‘also much to be said for imposing a further order capping the funder’s share of the proceeds of litigation to an amount based upon a multiple of the total amount paid by the funder’.[22] The Court of Appeal did not provide guidance on what multiples might be applied to ensure that the benefit to the litigation funder was not out of all proportion but this may form part of the analysis to be undertaken by the High Court of Australia in the appeal proceeding.

Like the making of a CFO, the imposition of a funding cap would, subject to any further consideration from the High Court of Australia, likely fall within the courts’ statutory power to ‘make any order that the Court thinks appropriate or necessary to ensure that justice is done in the proceedings’. Whether the courts choose to use that power to impose a funding cap will depend on the degree of scrutiny they apply to litigation funding agreements. The recent decision of the Victoria Court of Appeal in Botsman v Bolitho,[23] from which special leave to appeal to the High Court of Australia was sought and refused, suggests an increasing level of judicial scrutiny in this regard.

In Bolitho, the Court of Appeal upheld the settlement sum but overturned the trial judge's approval of the distribution to the litigation funder and remitted the issue of the litigation funder's commission and legal costs to a different trial judge. The Court did so on the view that, under the settlement deed, the application by the plaintiff for approval of the settlement sum was distinct from the application by the litigation funder for its commission and recovery of legal costs.

In refusing special leave to appeal from the Court of Appeal's decision, the High Court of Australia confirmed that the court's statutory power to ‘make such orders as it thinks fit with respect to the distribution of any money… paid under a settlement’ permitted a court to order a settlement on different terms from those agreed upon by the parties.[24] The High Court rejected the proposition that parties could, by contract, constrain that power by making the court's approval of a settlement conditional on the making of a common fund order to give effect to the parties' agreed distribution to a litigation funder.[25]

Law reform

The two appellate court judgments have provided greater clarity as to the availability of CFOs but the matter may ultimately be resolved by legislative reform. An Australian Law Reform Commission report released on 21 December 2018 recommended legislative amendments to ‘provide the Court with an express statutory power to make common fund orders on the application of the plaintiff or the Court’s own motion’[26] citing benefits of facilitating an open class regime that improves access to justice by enabling all victims of a civil wrong to participate in the class action.[27]

Conclusion

The decisions in Brewster and Lenthall have provided greater clarity about the availability of CFOs. It is assumed that this increased certainty will lead to an increase in the number of class actions filed that are supported by litigation funders. However, as both matters are currently the subject of a High Court appeal, it is possible that this position could change in the near future.[28]



Notes

[1] Federal Court of Australia Full Court 34 (2019).

[2] New South Wales Court of Appeal 35 (2019).

[3] Law Reform Report, 4.27.

[4] Victorian Law Reform Report, 5.97.

[5] Lenthall, p 87.

[6] Brewster, p 56.

[7] Brewster, p 61.

[8] Lenthall, p 94.

[9] Lenthall, pp 56-57, Brewster, p 96.

[10] Lenthall, p 58, Brewster, p 96.

[11] Brewster, p 96.

[12] Lenthall, p 100.

[13] Lenthall, p 97.

[14] Lenthall, p 100.

[15] Lenthall, p 98.

[16] Lenthall, p 102.

[17] Brewster, p 106; Lenthall, p 63.

[18] Lenthall, p 109; Brewster p 108.

[19] Brewster, p 108.

[20] Lenthall, p 128.

[21] Lenthall, p 132.

[22] Brewster, p 114.

[23] VSCA 278 (2018)

[24] Australian Funding Partners Limited v Botsman & Ors (2019), HCATrans 102, 17 May 2019, J Edelman.

[25] Ibid.

[26] ALRC Report p 9.

[27] ALRC Report p 17.

[28] Westpac Banking Corporation & Anor v Lenthall & Ors (2019) HCATrans 95, 15 May 2019; BMW Australia Limited v Brewster v Anor (2019) HCATrans 94, 15 May 2019.