Legal development

Funding commission uncertainty validity of common fund orders at settlement remains in question

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    What you need to know

    • O'Callaghan J of the Federal Court of Australia has held that the Court does not have power to make a common fund order (CFO) at settlement. 
    • In making this decision, the Court relied upon the reasoning of the High Court in Brewster, which held that the Court did not have power to make a CFO at an earlier stage of the proceedings. 
    • After Brewster, there have been a number of Federal Court decisions, which have reached different conclusions as to whether or not the Court has power to make CFOs at settlement. 
    • The legal question of the availability of CFOs at settlement remains to be determined by an appellate Court and possibly the High Court.
    • In the absence of appellate authority on this question, the appointment of a contradictor at a class action settlement approval hearing should be considered.(1) 

    There is ongoing uncertainty as to whether common fund orders are available at settlement

    A common fund order grants a third-party litigation funder a commission from any gross settlement or judgment sums (typically in the order of 25%-35% is sought), regardless of whether group members have entered into a funding agreement.

    In 2019, the High Court held in Brewster that the Court did not have the power to make a CFO prior to settlement under supplementary 'gap-filling' provisions (section 33ZF of the Federal Court of Australia Act, equivalent to section 183 of the NSW Civil Procedure Act).

    Since Brewster, first instance decisions have been spilt on whether the Court has power to make a CFO as part of a settlement approval.  Lee J in Asirifi-Otchere v Swann Insurance (No 3) and Beach J in Hall v ABL (No 2) have each held that a CFO would be available at settlement. Murphy J has also indicated support for this position in Pearson v Queensland (No 2) . While Foster J in Cantor v Audi (No 5) held that CFOs are beyond the Court's powers at any time, including as part of a settlement approval.

    Notwithstanding this division, the Full Federal Court (Davaria, Middleton, Moshinsky and Lee JJ ), NSW Court of Appeal (Brewster v BMW Australia), and the High Court (Davaria) have each previously declined to answer applications (made prior to any settlement) as to whether or not the Court has power to make a CFO at any settlement – preferring not to deal with such a question of statutory construction in the abstract.

    However, appeals from settlement approvals are almost unheard of as all parties are usually 'friends of the deal'.  That is, each party supports a settlement approval –thus leaving appellate consideration of this legal question in abeyance. 

    In Davaria, a CFO at settlement was found to be outside the Court's power

    The litigation funder in the Davaria proceedings, Galactic, sought a 25% ($24.5 million) CFO pursuant ss 23, 33V, 33ZF of the Federal Court of Australia Act and/or under the equitable jurisdiction of the Court. 

    O'Callaghan J determined that the Court did not have power to make this order. 

    His Honour found that the reasoning of the majority of the High Court in Brewster pointed "clearly enough" to there being no power to make a CFO at settlement under s 33V(2): Gordon J was "unequivocal about it"; consideration by other members of the majority in the High Court as to the unavailability of CFOs, was not subject to any apparent temporal limitations to only pre-settlement CFOs.

    O'Callaghan J adopted the reasoning of Foster J in Cantor v Audi (No 5) that, upon a true construction of the relevant provisions of the Federal Court of Australia Act or in its equitable jurisdiction, the Court lacked power to make a CFO at any time (including at settlement).

    Instead, a FEO was ordered 

    A Funding Equalisation Order (FEO) distributes (equalises) the costs that funded group members have contractually agreed to pay the funder across the whole of the class (both funded and unfunded). This overcomes the issue of 'free-rider' unfunded group members being better-off than funded group members. Importantly unlike CFOs, FEOs do not increase the overall amount payable to a funder.

    His Honour found that an FEO appropriately recognised the important role of Galactic in the class action and the litigation risks it bore, while at the same time not granting Galactic some additional 'windfall gain' (as a CFO might).

    Galactic was entitled under funding contracts to receive $12.005 million from funded group members, and accordingly the Court made a funding equalisation order in this amount – equalising these costs across the whole of the class. 

    Where to next with CFOs and class action funding

    Group costs orders (GCOs) in Victoria may diminish the significance  of Common Fund Orders 

    In 2020, Victoria introduced a new regime that empowers the Court to make a GCO, which provides for a class action plaintiff's legal costs to be calculated as a percentage of the amount of any award or settlement and class members to share in the liability for the plaintiff's legal costs (i.e. a contingency fee regime) .

    This regime has led to an increase in class actions being filed in the Victorian Supreme Court, which are not dependent upon common fund orders being made in favour of third party litigation funders.

    Solicitor CFOs?

    The introduction of the Victorian contingency fee regime raises interesting questions for other jurisdictions about the possibility of CFOs being sought in favour of legal representatives (rather than third party funders) as part of the settlement approval process. 

    A 'solicitors common fund order' would give the plaintiffs' lawyers a percentage of any gross settlement or judgment. 

    In the Blue Sky class actions, the applicants have foreshadowed seeking Federal Court approval to issue a notice to group members foreshadowing an application for a 'solicitors common fund order'. There is a possibility of this being referred to the Full Federal Court for determination.

    This will raise the issue of whether the Court has power to make such an order, as well as whether such an order can or should be made in view of section 183 of the Legal Profession Uniform Law, which prohibits contingency fee agreements.

    The availability of both CFOs in favour of third party funders and solicitors CFOs will ultimately need to be determined at appellate level and possibly the High Court.

    Authors: John Pavlakis, Partner; Andrew Westcott, Expertise Counsel; Tess Grieve, Senior Associate; and Reuben Heim, Lawyer.

    (1) See also J Kirk, "The case for contradictors in approving class action settlements" (2018) 92 Australian Law Journal 716. 

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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