Common ground on common fund orders in class actions?

By Greg Williams, Will Atfield, and James Walker
26 Nov 2020
The financial viability of class actions remains uncertain as two appellate courts consider path forwards after Brewster and decline to rule out common fund orders at settlement.

The availability of common fund orders (CFOs) has been controversial since the High Court’s December 2019 decision in BMW Australia Ltd v Brewster [2019] HCA 45 (Brewster).

A CFO generally provides for the commission and costs paid to a litigation funder to be fixed as a proportion of the money recovered at the settlement of a class action, for all group members to pay the same proportionate share of that amount (being a percentage amount lower than the funder's contractual entitlement under the individual funding agreements entered into by some, but not all, group members), and for the funder to be paid as a first priority from the money recovered.

The more orthodox position not doubted in Brewster in relation to class action funding is the making of a funding equalisation order (FEO). An FEO does not change the overall entitlement of the funder, but instead sees the total payable amount split across all group members who are obtaining a benefit from the Court's decision or any settlement.

In Brewster, the High Court ruled that the Federal Court and the NSW Supreme Court did not have power to make a CFO when that order was made at an early stage of a class action under section 33ZF of the Federal Court of Australia Act 1976 (Cth) or section 183 of the Civil Procedure Act 2005 (NSW) (the equivalent NSW provision).

Two recent decisions – one from the Full Court of the Federal Court and the other from the NSW Court of Appeal – indicate that CFOs may be available at later stages of a class action and under different provisions of the Federal Court Act and the Civil Procedure Act. Both Courts indicated that deciding whether to make a CFO will involve careful scrutiny of the terms of the proposed order and the surrounding circumstances.

Power to make a CFO

As we noted in May, following Brewster several Federal Court judges expressed different views about whether or not a CFO was available at a later stage of a class action.

The Full Court of the Federal Court (Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183) and the NSW Court of Appeal (Brewster v BMW Australia Ltd [2020] NSWCA 272, the latest decision in the Brewster class action) have now found some common ground on this question.

Both Courts were asked to consider questions of law arising in ongoing class actions being heard by single judges:

  • The Full Court: whether sections 33V, 33Z or 33ZF of the Federal Court Act provide for a CFO upon settlement or judgment; and
  • The NSW Court of Appeal: whether section 173 of the Civil Procedure Act (equivalent to section 33V) provides for a CFO upon settlement.

Section 33V and section 173 provide power to approve the settlement of a class action and make orders as are just with respect to the distribution of any money paid under a settlement.

Both the Full Court and the Court of Appeal declined to answer those questions formally. In both cases the Court heard argument without being provided with a proposed CFO, or evidence about a proposed settlement, because neither case had settled. Both Courts concluded it was inappropriate to answer the questions when they were hypothetical (rather than a settlement actually before the Court for determination). However, in doing so both Courts gave indications that section 33V/section 173 could provide power to make CFOs at settlement – in the right circumstances.

Is the High Court’s Brewster decision an obstacle?

The Courts referred to five points of difference suggesting that Brewster was not an obstacle to the making of a CFO as part of a settlement under section 33V/section 173:

  1. the definition of a CFO and FEO remains unsettled, pointing to the various definitions adopted by different High Court justices in Brewster and what the Court of Appeal called the “vice of short form labels”;
  2. the scope of the ruling in Brewster was confined to the interpretation of section 33ZF/section 183 and that those provisions did not provide power to make CFOs prior to settlement;
  3. the Brewster ruling did not clearly address section 33V/section 173;
  4. the factual context of a settlement is very different to that existing at the commencement, or in the early stages, of a class action. For example:
    • the settlement sum, quantum of the funder’s commission relative to what group members will receive, and the risks entailed in funding the proceeding will all be known;
    • the attitude of group members towards the settlement is known (or at least group members will have had an opportunity to raise objections);
    • a CFO made at settlement is not made to ensure a sufficient return on investment for a litigation funder or to influence whether or not a class action should or should not proceed; and
  5. comments in obiter from the High Court in Brewster consistent with settlement being an appropriate point in the proceeding to make a CFO.

Reading the tea leaves

Each Court made some additional observations indicating CFOs may be available at settlement.

Full Court of the Federal Court:

  • Introduced new "short-hand" terminology for different types of (hypothetical) CFOs:
    • Commencement CFO: previously made under section 33ZF/section 183 and ended by Brewster;
    • Settlement CFO: made under section 33V/section 173 and must be part of a settlement which is fair, reasonable and in the interests of all group members; and
    • Judgment CFO: never made before (at least in the Federal Court) but possibly available under various powers including section 33Z/section 177.
  • Stepped through a careful analysis of CFOs compared to FEOs, rejecting the assumption that an FEO would always result in a lower commission to litigation funders because:
    • the terms of an FEO may vary;
    • of the effect an FEO may have when it interacts with the terms of a standard funding agreement; and
    • experience in actual class action settlements demonstrates that:
      • litigation funders will often support orders to recover less than what is posited in the funding agreement; and
      • "books builds" and other costs factored into funding commission rates may be reduced by the prospect of a Settlement CFO.

NSW Court of Appeal:

  • Noted the impact of a range of factors that may be relevant considerations for a court invited to make a CFO at settlement involving a payment to the litigation funder beyond that which might result from an FEO, including:
    • class characteristics such as the total number, the proportion of funded to unfunded group members;
    • the total settlement sum, amount per group member and existing entitlement of the funder; as well as
    • the degree of risk for the funder in funding the class action, and the length and complexity of the proceedings.
  • Indicated that the phrase “distribution of any money” in section 33V/section 173 should not be read narrowly, and that the argument that the power to make a CFO upon settlement is limited to distributing money between the parties (and not to third-party litigation funders) would be unlikely to succeed.

So – are CFOs available at settlement?

The Full Court and the Court of Appeal have not settled the answer to this question but certainly neither Court ruled them out. The approach taken by both Courts suggests that persuading the court to make a CFO at settlement will involve careful scrutiny of the particular orders sought, the settlement proposed to be entered into, and most centrally, the impact that this would have on group members.

That scrutiny is likely to involve comparisons between a proposed CFO, a possible FEO and a range of case-specific considerations, such as the commission to be paid to the litigation funder relative to the moneys to be recovered by group members. We expect to see the Courts (as well as the Australian Law Reform Commission) return again to this question – but likely not in the hypothetical.

There is no dispute that FEOs continue to be available at settlement – however, the Full Court’s reasons may have displaced the assumption that FEOs will always result in lower returns being paid to litigation funders which may make them more attractive. As we’ve previously explained, we may see FEOs reworked to achieve the same outcome as a CFO.

The ongoing problems associated with defining what a CFO or an FEO is underscores the Court of Appeal’s warning about the “vice of short form labels” and the likely level of scrutiny.

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