In a highly significant decision, the High Court in BMW Australia Limited v Owen Brewster & Anor; Westpac Banking Corporation & Anor v Lenthall & Ors [2019] HCA 45 has held that the Federal Court of Australia and the Supreme Court of New South Wales do not have the power to make common fund orders ('CFOs') in class action lawsuits.

What is a CFO?

A CFO is an order made by a Court at an early stage of litigation funded class action proceedings, which imposes an obligation on the lead plaintiff and all group members of that class action to pay a litigation funder's costs and commissions (on a pro rata basis) from a 'common fund' comprising any settlement or judgment in their favour. 

The purpose of a CFO, and its attraction to litigation funders, is that it avoids the uncertainty that the substantial up-front costs of building a 'book' of group members, plus a reasonable rate of return, may not be ultimately recoverable.  Without the availability of a CFO, a litigation funder would need to sign up individual group members one at a time to an agreement in which each member agrees separately to contribute a proportion of his or her ultimate award to the funder.  Because Australia adopts an 'opt-out' class action scheme (where all members of a class are considered to be within that class unless they opt out by a set date) the availability of a CFO has meant that a litigation funder need not undertake this 'book building' exercise as its costs and commission would still be recoverable out of any eventual proceeds without the need to enter into individual funding agreements with each group member.

Decision

The power to make CFOs was based on section 33ZF of the Federal Court of Australia Act 1976 (Cth) ('FCA') and section 183 of the Civil Procedure Act 2005 (NSW) ('CPA').  These two sections are on substantially identical terms and provides that a Court may, of its own motion or on application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding.

By a five to two majority, the High Court held that the FCA and the CPA did not empower the respective Courts to make CFOs.

The essential reasoning behind this decision was that the making of a CFO is to better secure the litigation funder's costs and to ensure a return on the litigation funder's investment, that this was not a matter 'in the proceeding' and that making a litigation funder's role easier was not the purpose of the legislation.  Accordingly, in the opinion of the majority, the making of CFOs were not what the legislatures intended to cover when giving Courts the power to make orders 'appropriate or necessary to ensure that justice was done in a proceeding'.

Whilst the majority did accept that the making of CFOs may improve access to justice in a general way, that did not mean that the making of a CFO is 'appropriate or necessary to ensure that justice was done in a proceeding'.

It should also be noted that the High Court found no difficulty in a Court making a Funding Equalisation Order ('FEO') at the end of the proceedings.  The difference between a CFO and an FEO is that under an FEO, a litigation funder can only claim commissions from group members with which it entered into direct funding agreements.

Writing individually, Justices Gageler and Edelman dissented, finding that the words 'appropriate or necessary to ensure that justice was done in a proceeding' were capable of empowering a Court to make CFOs.  Their Honours found that these words, when given their plain and ordinary meaning, conveyed a wide discretion on a given Court to fashion orders that would do justice between the parties in any given situation.

A Constitutional problem?

The appellants submitted that even if the FCA and the CPA, on their respective terms, were wide enough to encompass the making of CFOs, that doing so would be contrary to the Constitution, because it would involve the Court in exercising a non-judicial function, or that it would involve the compulsory acquisition of property.

The majority did not need to consider these submissions because they found that the FCA and the CPA did not authorise the making of CFOs in any event, and Justice Gageler essentially dismissed the Constitutional submissions without much discussion. 

However, Justice Edelman did provide substantive reasons why the making of a CFO would not be contrary to the Constitution, stating that the making of a CFO is not an exercise in non-judicial power as Courts are familiar with balancing competing interests, and that a CFO does not involve the acquisition of any property.

What does the future hold?

To a certain extent, litigation funders are no worse off than they were prior to 2016, before the Courts began making CFOs.  This decision simply means that funders will need to spend more time 'book building' at the commencement of a class action.

A consequence of this decision would also seem to be that litigation funders will gravitate towards class actions with 'closed' classes (that is, classes where all members have signed individual funding agreements with the litigation funder).

An issue does however arise for class actions that have already been commenced on the basis that a CFO will be available.  In such matters, where the individual return to each potential group member is relatively low, the litigation funder will need to assess whether the costs of now having to build a book, will ultimately be worthwhile and therefore, whether it is commercially viable to continue pursuing the class action.

If you need advice regarding common fund orders or class action lawsuits contact CCK Lawyers on (08) 8211 7955.