Justice in the class action context: recent developments in litigation funding

Andrew Morrison, Greg Williams, Will Atfield, Gabriella Lim and Isabella Stubbs
24 Nov 2023
6 minutes

Following the abandonment of the previous Government's proposals to regulate litigation funding, we are in a period of innovation in class action funding.

Three recent decisions demonstrate the continued evolution of litigation funding in Australian and confirm the viability of investing in class actions in the Federal Court of Australia and the Victorian Supreme Court.

Common Fund Orders in the Federal Court

In 2019, the High Court determined that section 33ZF of the Federal Court Act does not give the Federal Court the power to make a common fund order (CFO) at an early stage in a proceeding. In its decision, the High Court explained that section 33ZF gives the Federal Court a wide power to make any order that is appropriate or necessary to do justice in the proceeding. However, consideration of a CFO at an early stage in the proceeding relates to the viability of the proceeding, not to ensuring that justice is done in the proceeding. The making of such a CFO is therefore outside the scope of section 33ZF.

However, the High Court did not decide whether the Federal Court has the power to make a CFO at some later stage in the proceeding, in particular whether such an order could be made when exercising the power in section 33V to approve settlement. A divergence in judicial opinion emerged, resulting in uncertainty for parties, lawyers and litigation funders.

Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162

Earlier in the year the question of whether the Court has the power to make a CFO at the time of settlement pursuant to section 33V was expressly reserved to be determined on an expedited basis by the Full Federal Court in McDonald's.

In its recent judgment, the Full Court confirmed that section 33V does empower the Court to make a CFO when approving settlement. The Full Court said that section 33V gives the Court a wide judicial discretion to make orders with respect to the distribution of settlement funds. Settlement CFOs made under section 33V should, therefore, be contrasted with early-stage CFOs sought under section 33ZF, because the Court is concerned with the justness of the settlement scheme, rather than the viability of the proceeding.

The Court also said that there is "no reason why the inclusion of a term of the proposed settlement that could be described as a CFO in and of itself would be a reason why a settlement must not be approved by the Court in the exercise of its approval jurisdiction".

Further, one of the Full Court judges, Justice Lee, said that in certain circumstances it might be just for the Federal Court to make a CFO in favour of a solicitor, who has taken on the risk to obtain the settlement, constituting a sum in addition to legal costs payable pursuant to a retainer. While this observation of one judge should not be regarded as a concluded statement of the law, it points to the possibility that in the future the Federal Court will seek to make orders which have a similar effect to the Victorian Group Costs Order when approving Federal Court settlements.

Greentree v Jaguar Land Rover Australia Pty Ltd (Carriage Application) [2023] FCA 1209

In Greentree, which was decided shortly after McDonald's, Justice Lee made further comments about a CFO in favour of a solicitor:

"… the distribution of monies paid under a settlement to a third-party to a class action who has acted in such a way to facilitate the realisation of the fund, and to whom a payment is “just” within the meaning of s 33V(2) by reference to all the circumstances, need not necessarily be a commercial funder. What matters, at least in the context of any settlement fund, is whether a proposed payment out of the realised fund can be characterised as being just.

In characterising what might be considered just depending upon all the circumstances, it is relevant that a settlement CFO can be seen as being consistent with the notion that a person who benefits from another’s efforts in producing a fund is obliged to provide appropriate value in return, as is reflected in the underlying principle that it would be inequitable for the person who has created or realised a valuable asset, in which others claim an interest, not to have the costs, expenses and fees incurred in producing the asset paid out of the fund or property created."

What this means

The Full Court's decision in McDonald's confirms that the Court has the power to make a CFO when approving settlement pursuant to section 33V, thereby bringing greater certainty to parties and litigation funders alike. The Court's decision in Greentree indicates that the CFO may continue to evolve in a manner that provides an even more favourable reward to class action plaintiff firms, similar to contingency fees in Victoria.

However, a significant question remains as to how any law firm could seek such an order from the Federal Court, consistently with their professional obligations. In particular, the Legal Profession Uniform Law prevents a law firm from entering into a cost agreement in which any portion of its fees is calculated by reference to the value of any award or settlement recovered in any proceedings. The Victorian GCO regime is a narrow and specific exception to this general prohibition.

Contingency fees in the Victorian Supreme Court

Since July 2020, the Supreme Court of Victoria has had the power to permit lawyers representing a lead plaintiff in a class action to recover a contingency fee by way of a GCO.

Until that time, there was a blanket prohibition on Australian lawyers charging contingency fees. The development was a major change to the way in which Australian lawyers operate, and has seen the Victorian Supreme Court emerge as the class action forum of choice.

Bogan v The Estate of Peter John Smedley (Deceased) [2023] VSCA 256 (Arrium class action)

The Arrium class action was commenced in the Victorian Supreme Court in August 2020 on behalf of group members who acquired an interest in shares in Arrium Limited within the relevant period, and who are alleged to have suffered loss and damage. It is funded by a litigation funder whose funding agreement entitles it to a commission from any award of damages or settlement amount arising from the litigation in exchange for it covering the costs of the proceeding.

The conduct giving rise to the Arrium class action took place in New South Wales, which is also where most of the parties and their legal advisers are based. However, the plaintiff commenced proceedings in the Victorian Supreme Court because of the power to make a GCO and made an application for such an order on 2 February 2021.

On 26 February 2021, the fifth defendant sought to have the class action transferred to the NSW Supreme Court.

The Victorian Supreme Court decided to determine the plaintiff's application for a GCO before determining the transfer application. In April 2022, the Court ordered a GCO which entitled the plaintiff's lawyers to take 40% of the proceeds of the litigation having regard to: the risks inherent in the complex proceeding, the plaintiff's submission that the funder would withdraw its support unless a GCO of 40% or more was obtained, and the absence of any viable alternative funding option.

The transfer application gave rise to questions as to what weight, if any, ought to be given to the existence of the GCO, which saw the Court refer those questions and questions as to the powers of the NSW Supreme Court in relation to the GCO to the Court of Appeal.

In making its determination in July 2023, the Victorian Court of Appeal said that the question of transfer requires an assessment of what is "in the interests of justice", which includes justice being done as between the parties and what is in the interests of the public. While a plaintiff does not get to load the dice in their favour by selecting a particular jurisdiction, a GCO does not cause a defendant any particular disadvantage or change the basis on which the issues in the proceeding are determined. It is in the public interest for the Victorian Supreme Court to determine bona fide claims, and the power to order a GCO "is a reflection that justice in the proceeding can be served by a particular costs model". Further, the Court of Appeal also said that where a GCO already exists, it follows that the Court has already determined that justice would be served by the making of that order.

The Victorian Court of Appeal observed that once transferred, the relevant law to be applied to the conduct of a proceeding is that of the transferee court. If transferred, the NSW Supreme Court would be required to have regard to the steps taken in the proceeding whilst it was in Victoria, but that does not mean the powers of NSW Supreme Court can extend to enforcing a GCO. As a result, the order would fall on 'barren ground' and could not be enforced or varied by that court.

Ultimately, it was determined that the Arrium class action should remain in the Victorian Supreme Court and not be transferred. This was, in part, because the GCO had already been made and the evidence demonstrated that the funder would withdraw its support if the GCO was revoked, meaning the proceeding would not continue. In effect, this tied the proceeding to Victoria.

In addition, putting the GCO to one side, the Victorian Court of Appeal determined that, while the broader preponderance of factors suggested that the Supreme Court of NSW was the more appropriate forum, there was no evidence to suggest that Victoria was an inconvenient jurisdiction to determine the proceedings.

What this means

The Victorian Supreme Court of Appeal's decision means that contingency fees (which are available to both lawyers and litigation funders alike) are limited to proceedings in the Supreme Court of Victoria until such time as they are introduced in other courts. As a result, the Victorian Supreme Court will remain an attractive forum for class action plaintiff firms. despite Justice Lee's suggestion that a solicitor's CFO may be possible.

Key takeaway

Following the abandonment of the previous Government's proposals to regulate litigation funding, we are in a period of innovation in class action funding. The rapid development of models is both a consequence of, and reason for, the increased popularity of group proceedings in the country generally. With courts approving record class action settlements, it is clear that these kinds of proceedings remain viable investments for plaintiff firms and third-party litigation funders alike.

When it comes to jurisdictional decisions however, the ability for the Victorian Supreme Court to order contingency fees benefiting lawyer or third-party funders at an early stage of the proceeding offers a degree of certainty that may be more enticing than the Federal Court's power to make a CFO at settlement.

The fifth defendant has submitted an application to the High Court of Australia challenging the Victorian Court of Appeal's decision in relation to "travelling GCOs" on a number of grounds. The High Court will now consider whether the application ought to be heard. Separately, in the Federal Court context, Justice Lee's suggestion that solicitor's CFOs may be available demonstrates the Court's willingness to ensure that funding options are available for plaintiffs in circumstances where those options ensure justice is done, but there remains uncertainty as to how any such order could operate in practice.

The market certainly remains vibrant.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.