High Court says litigation funders but not solicitors can claim a cut of federal class actions

What you need to know

• The High Court has confirmed that common fund orders (CFOs) can be made upon a class action settlement or judgment. A common fund order is an order requiring each participating group member to contribute equally to the payment of the funder's commission.
• "Solicitors' CFOs" cannot be made in favour of solicitors which fund class actions, due to the prohibition on contingency fees under the Legal Profession Uniform Law (there are similar prohibitions in other states and territories). Accordingly, Victoria likely remains the only Australian jurisdiction in which contingency fees can be awarded in class actions, through a Victorian statute based Group Costs Order (GCO).
• The Court also declined to revisit Brewster, in which it previously held that CFOs could not be made at the commencement of class actions.
• The decision largely preserves the status quo in relation to the Australian class actions landscape. The unavailability of Solicitors' CFOs may continue to encourage plaintiff firms to commence class actions in the Supreme Court of Victoria, where contingency fees are available by way of GCO. However, the confirmation of CFO's now provides greater certainty for third party funding in all Australian jurisdictions.

The High Court has now ruled on the availability of CFOs upon settlement or judgment in class actions, in Kain v R&B Investments.

A CFO is an order requiring each participating group member to contribute equally to the payment of the funder's commission.

The availability of CFOs has been controversial since the High Court ruled in Brewster that common fund orders could not be made in the early stages of a class action proceeding. However, the Federal Court had continued to make common fund orders upon settlement or judgment and in this case under appeal had ruled that there was power to make a common fund order in favour of a solicitor, so that the solicitor received a percentage of the amount obtained.

CFOs are available on settlement or judgment

The Court unanimously concluded that the powers to make “such orders as are just” (s 33V(2) of the Federal Court of Australia Act) and “such other order as the Court thinks just” (s 33Z(1)(g)) were sufficient to authorise a settlement or judgment CFO benefitting a litigation funder.

The powers were not confined to enforcing pre-existing rights or to distributions only among parties.

The Court interpreted the Brewster decision as based on the particular text and context of the "gap-filling" power in s 33ZF, and not bearing on the availability of a CFO at settlement or judgment – despite the broader language and views expressed by some of the Judges in that decision.

CFOs remain unavailable in the early stages of a proceeding

The Court considered it was not appropriate to re-open Brewster as the question did not squarely arise in the appeal. Accordingly, the position remains CFOs cannot be made at an early stage in a proceeding.

This is a marked difference from the position in the Supreme Court of Victoria, where a Victorian statute based GCO can be made early in the proceeding setting a rate of funding commission or success fee for a solicitor, subject to review and revision at the time of settlement and judgment.

Justice Edelman observed that in practice judges could informally indicate whether they would be minded to make a CFO at an early stage, and in his view there was little difference in substance between that practice and a GCO subject to revision. The other members of the Court did not expressly address that issue, but his Honour's remarks are likely to encourage that practice. It will be interesting to see whether litigation funders are content with an informal indication or look to commence in the Supreme Court of Victoria more frequently, to gain the benefit of a GCO.

But lawyers not invited to the picnic – Solicitors' CFOs are unavailable

The Court reasoned that s 33V(2) and 33Z(1)(g) conferred a power to make a Solicitors' CFO, but to do so would not be a permissible exercise of the power in light of s 183 of the Legal Profession Uniform Law in NSW, which prohibits contingency fees. The Judges reasoned to this conclusion in different ways but essentially took the view that the arrangement was either (per the majority) directly prohibited, notwithstanding that the fee was payment by court order and not directly under a retainer agreement, or even if not directly prohibited was sufficiently analogous that it was contrary to the policy underlying that state-based legislation. The judgment leaves little room for creative fee structures such as fees for "risk services" to avoid this restriction.

Contingency fees are prohibited in every state and territory, including Victoria, subject to the exception for class actions in the Supreme Court of Victoria under s 33ZDA of the Supreme Court Act 1986. Accordingly, outside of the Supreme Court of Victoria, it appears likely that Solicitors' CFOs are prohibited in Australia.

The result is likely to be that – absent any further legislative reform – solicitor-funded cases continue to gravitate towards the Supreme Court of Victoria.

Implications

The judgment largely preserves the status quo in relation to class actions in Australia. It is unlikely to have a material impact on class action risks – which remain significant – or volumes.

The growth of the Supreme Court of Victoria as a venue for class actions is likely to continue in relation to solicitor-funded actions. The High Court also recently rejected a transfer application in relation to a class action in the Victorian Supreme Court, noting that the GCO could not travel with it to the NSW Supreme Court: Bogan v Smedley.

Want to know more?

• High Court to decide whether litigation funders can get common fund orders in class actions…And whether solicitors can also take a percentage (07 November 2024) 

Other author: Brandon Draper, Lawyer.