High Court rules against common fund orders in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45
What you need to know
- The High Court by majority (5-2) held that the Court's supplementary power to make orders that are appropriate or necessary to ensure justice is done in a proceeding do not empower the Court to make common fund orders.
- This landmark decision will have a significant impact on the way in which third party funding of class actions in Australia is undertaken.
Challenging common fund orders
A common fund order imposes on all group members an obligation to pay a third party litigation funder a funding commission irrespective of whether a group member has entered into a funding agreement.
The power of the Court to make common fund orders was challenged in the High Court by way of appeal from the decisions of:
- the Full Federal Court of Australia (Westpac Banking Corporation v Lenthall [2019] FCAFC 34) in which a common fund order had been made pursuant to section 33ZF of the Federal Court of Australia Act 1976 (Cth); and
- the New South Wales Court of Appeal (Brewster v BMW Australia Ltd [2019] NSWCA 35*) on a separate question on whether the Court has power to make a common fund order pursuant to, inter alia, section 183 of the Civil Procedure Act 2005 (NSW).
Both the Full Federal Court and NSW Court of Appeal in separate judgments unanimously held (after a historic joint sitting in early 2019) that common fund orders were within the power of the Court.
"Gap filling" provisions do not empower the Court to make common fund orders
The majority of the High Court (Kiefel CJ, Bell, Keane, Nettle and Gordon JJ) found that, on their proper construction, the supplementary power provisions did not empower the Court to make common fund orders.
Kiefel CJ, Bell, Keane JJ concluded that the "gap-filling" provisions (s 33ZF and s 183) were not intended to meet the "exigencies of litigation not adverted to at all" by other provisions, and cannot be relied upon as a vehicle for rewriting the existing legislative scheme.
Section 183 (and s 33ZF) cannot be given a more expansive construction and a wider scope of operation than the other provisions on the scheme.
No warrant to ease commercial anxieties of litigation funders
Their Honours also concluded that there is no warrant to supplement the legislative scheme by judicial involvement to ease the commercial anxieties of litigation funders or to relieve them of the need to make their decisions as to whether a class action should be supported based on their own analysis of risk and reward.
No criteria for establishing funding relationship or funding commission
The majority observed that the making of a common fund order went beyond the scope of these provisions because the overall legislative scheme:
- does not provide any criteria to determine whether such a relationship (as contemplated by a common fund order) should be established at all, and if so, what terms on which that might occur; and
- does not provide any criteria for fixing, even provisionally, a rate of remuneration for a litigation funder that is "appropriate or necessary".
No need to consider constitutional challenges
In finding for the appellants on the statutory construction point, the majority did not need to consider the constitutional challenges – judicial power and acquisition of property other than on just terms.
Can common fund orders be made at all?
The Court primarily dealt with the making of common fund orders at earlier stages of proceedings.
The joint reasons do not explicitly state, one way or another, whether the Court has a power at judgment or settlement to make a common fund order.
However, there are a number of implicit suggestions either that:
- there is no such power to make common fund orders at settlement or judgment; or
- that there is no reason in justice for a court to make such an order at all.
In separate reasons, but also in the majority, Gordon J rejects the ability of a court to make a common fund order at any time.
Green light for funding equalisation orders
In contrast to common fund orders, a funding equalisation order distributes the costs that funded group members have contractually agreed to pay the funder across the whole of the class (both funded and unfunded). The joint judgment found that an equitable spreading of the cost was better achieved through a funding equalisation order.
This overcomes the issue of "free-riders".
By contrast, the joint judgment recognised that a common fund order imposes an additional cost on the group by requiring more money to be paid to the litigation funder than would otherwise be the case.
Book building
Prior to the 2016 Full Federal Court decision in Money Max approving common fund orders, a process of "book building" was often undertaken by litigation funders to enter into funding agreements with group members. It is still undertaken in many current class actions.
The joint judgment dismissed the suggestion that book building is an exercise in wasted costs because this ignores the reality that group members will have to take action at some stage to obtain the actual payment of any monetary relief to which they have established an entitlement.
Back to the future
As stated in the joint judgment, until 2016 open class actions were brought and resolved without recourse to common fund orders. The pre-Money Max established methods of book building and funding equalisation orders will now most likely be the primary way of securing funding for class actions.
For those matters in which a Court-approved settlement (that includes a common fund order) is still pending, it may be appropriate for a contradictor to be appointed on the issue of whether common fund orders can be made at all.
*Ashurst acted for BMW Australia Ltd in the High Court appeal.
Authors: John Pavlakis (Partner), Ian Bolster (Partner), Ellena Petinos (Senior Associate) and Tess Grieve (Lawyer).
