Reforming Australia’s litigation funding and class actions 06: Common Fund Orders and legislative reform

By Greg Williams, Will Atfield, Alex Corsaro and Max Carter
27 May 2021
Legislative reform of Common Fund Orders will be an important step in providing the certainty needed for all parties involved in class actions to litigate and solve disputes efficiently.

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One feature of Australia's lively class actions scene is common fund orders (CFO), which require all class members to pay the litigation funder a commission (generally a percentage of the total settlement sum or judgment) from the proceeds of a class action settlement or judgment, regardless of whether the class member has entered into a funding agreement with the funder requiring them to pay a commission.

Proponents say the availability of CFOs has been an important factor in the growth of the number of class actions (particularly funded class actions), and the number of litigation funders, in Australia. In turn, the increase in class actions is considered to result in improved access to justice, a desirable social outcome. They also say that CFOs have led to increased competition among litigation funders and have put downward pressure on litigation funding fees.

An alternative view is that it is not necessarily positive that CFOs have increased the number of class actions in Australia. It is also said that the availability of CFOs means that it is less important for plaintiff firms to gauge the interest in a potential class action among potential class members, and build a book of potential class members, before commencing proceedings. This has resulted in some class actions in which the main beneficiaries are litigation funders and plaintiff lawyers.

That divergence of views is reflected in the recommendation from the Parliamentary Joint Committee on Corporations and Financial Services for legislative reform to clarify when CFOs are available in class actions in the Federal Court of Australia.

The availability of CFOs: a history

The first CFO in Australia was made in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191. In making the CFO, the Full Court of the Federal Court of Australia held that it had the power to make a CFO at an early stage in the proceeding under section 33ZF of the Federal Court of Australia Act 1976. This section does not specifically refer to CFOs but is rather a general power to "make any order the Court thinks is appropriate or necessary to ensure justice is done in the proceeding".

After Money Max, CFOs became common in Australian class actions. This usually involved an order at an early stage of the proceeding which foreshadowed that a CFO would be made at settlement or after judgment with a particular funding commission rate. However, in the absence of legislation expressly directing if and when CFOs can be made, the principles were developed gradually and somewhat inconsistently by the courts.

This reached a crescendo in December 2019, in BMW Australia Ltd v Brewster [2019] HCA 45 when the High Court considered whether the Federal Court of Australia had the power to make a CFO under section 33ZF, and if the NSW Supreme Court could do so under an analogue provision in NSW. The Court held that there was no power to make a CFO at an early stage in a class action. However, the High Court left open the question of whether a Court can make a CFO order at a later stage in a proceeding under a different section of the applicable legislation setting out the class action provisions, for example at settlement or following judgment. Since Brewster, this question has been asked of the Federal Court on several occasions and a divergence in views has emerged.

The Parliamentary Joint Committee's recommendation

In recognising the ongoing uncertainty in relation to CFOs, the Parliamentary Joint Committee's report recommended "the Australian Government legislate to address uncertainty in relation to common fund orders", in accordance with the Brewster decision.

It was influenced by its view that, if CFOs were only available at the end of a class action, litigation funders may be more encouraged to undertake a book build of class members and, thereby possibly leading to greater investigation of the level of interest among class members. The Committee noted that this would mean that the CFO would be made when there is greater certainty about the profile of the class and the costs of running the class action. It concluded the availability of a CFO at the end of a proceeding would promote outcomes which are reasonable, proportionate and fair for all class members, and that post-Brewster decisions confirmed CFOs could be made at the point of settlement or judgment.

What might the legislative reform for CFOs look like – and what effect could it have?

This might involve adding a section to the existing class action regime in Part IVA of the Federal Court of Australia Act 1976 to expressly allow the making of CFOs expressed as a percentage of the judgment or settlement sum paid as a commission to the litigation funder. The section, or the court's practice note, could provide guidance for the court about the factors relevant to determining an appropriate percentage.

We suggest that to completely quell the uncertainty that has developed since Brewster, the section should also specify at which stages of the litigation CFOs can be made. In our view the section should provide that a CFO can only be made on application either as part of a settlement approval application to the court, or following a judgment. Restricting the availability of CFOs to these later stages of the proceeding would discourage litigation funders from commencing a class action in expectation of a CFO, and instead ensure that they sufficiently investigate the merits of the claim and book build before commencing a class action.

However, this would potentially pose a problem for plaintiff firms and litigation funders because as litigation funding commissions come to the fore, group members may perceive little benefit from signing a funding agreement. If such legislation is enacted, it will be interesting to watch how plaintiff firms and litigation funders incentivise group members to enter into litigation funding arrangements as part of the book building process. One trend which might emerge is closed class actions becoming more common - that is, a class action where a pre-requisite to meeting the class member definition is having signed a funding agreement with the chosen litigation funder.

Any reform should be made consistently across Federal and State courts. Victoria moved first to reform its class action regime to allow for lawyers to charge percentage-based contingency fees in certain circumstances. Even if the Federal Government doesn't give effect to the Committee's recommendation on CFOs, it's possible that a State Parliament will react to the Committee's recommendation first, and legislate on CFOs. This would not provide the consistency that is needed to avoid forum shopping.

In either case, legislative reform in this area will be an important step in regulating Australia's fast-moving class action space, providing the certainty needed for all parties involved in class actions to litigate and resolve disputes efficiently.

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