In December, the High Court handed down its decision in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall  HCA 45, holding that neither the Federal Court nor the NSW Supreme Court had power to make the common fund orders (CFOs) sought in two separate class actions, each of which was proposed at an early stage of the case. This was seen as a big development in class actions law, as common fund orders have been a popular way for litigation funders to make class actions financially viable.
Brewster suggested that litigation funders may need to look for ways other than a CFO to make a proposed class action financially viable or not bring the class action at all, but there have been some developments which may mean that Brewster isn't as significant as it first seemed.
Are common fund orders still available at settlement or after judgment?
A CFO is an order which requires group members to pay the class action's litigation funder a commission from the proceeds of a settlement or judgment, regardless of whether the group member has entered into a funding agreement with the litigation funder saying that they will pay a commission. Generally, the commission is a percentage of the total settlement sum or judgment amount.
Before Brewster, it was common for class action plaintiffs to apply for CFOs at an early stage of the court proceeding. If the court granted the application, it meant that the court would implement a CFO at settlement of judgment, but reserved the right to review the proposed funding commission at that time. The court was not really granting a CFO, but instead giving some assurance that one would be granted at a later date. Still, such orders gave litigation funders some assurance that the CFO would be made with the commission they wanted, and therefore comfort that they would receive a return on their investment in the litigation if it was successful.
Brewster said that this can no longer occur. But what about a CFO made at the time of settlement in exercise of the court's power to approve a settlement? Brewster could perhaps be interpreted as allowing a CFO at settlement. So, what have judges said about this interpretation?
Two days after the decision in Brewster, Justice Beach of the Federal Court was reported as saying at an interlocutory hearing that Brewster did not necessarily prevent a CFO being made at settlement. There are two more recent and significant indications of how the Federal Court is viewing Brewster.
Neither of these decisions addressed a CFO made after judgment, just at settlement.
Based on the limited precedents to date, it seems that CFOs may still be available at settlement but a litigation funder will not be able to obtain an assurance at an early stage of the proceeding that one will be made at settlement. Arguably, this isn't a significant change since an assurance that a CFO would be made later was never iron-clad and could always be revised when a settlement was approved, but litigation funders will no doubt need to assess the risk.
Common fund orders and fund equalisation order
The recent case of Clime Capital suggests that Brewster may also lead to the increased use of an alternative to the CFO, which is a form of order called a fund equalisation order (or FEO).
As we said in the introduction, the effect of a CFO is to impose the obligation to pay a commission, which is set out in a litigation funding agreement, on both group members who have entered into a funding agreement (let's call them funded group members) and group members who have not entered into a funding agreement (unfunded group members).
An FEO is different to a CFO. It is an order from a court requiring the unfunded group members to contribute to the commission paid by the funded group members under their funding agreements so that all group members (funded and unfunded) contribute equally to the commission. There are two important points about an FEO. First, the litigation funder only receives payments from the funded group members, pursuant to the funder's contractual rights to receive a commission. Second, no group member pays the actual commission rate in the funding agreements. Instead, the burden of the commission paid by funded group members is spread equally across all group members, by taking money from unfunded group members and giving it to funded group members. This spreading means the nett amount paid by all group members is less than the commission rate.
What difference does a CFO or FEO make to the bottom line? Under a CFO, the litigation funder is likely to receive more money and the group members as a whole are likely to receive less. Here's a simple example to illustrate.
Imagine there's a class action with 10 group members. Five are funded group members who have agreed to pay the litigation funder a commission of 20% of their gross judgment or settlement amount.
The class action settles with each group member entitled to $100,000.
For a CFO, the litigation funder would receive $200,000, being 20% of the $1,000,000 going to all group members (both funded and unfunded).
For an FEO, the litigation funder would receive only $100,000, being 20% of the $500,000 going to the 5 funded group members. This amount would be equalised across all group members by taking 20% from each unfunded group member (a total amount of $100,000) and distributing this equally to all group members (ie. everyone is given $10,000). This results in all group members contributing $10,000 nett.
We said that a CFO is likely to result in a litigation funder receiving more than an FEO. That will be the case if the same commission is used for both the CFO and FEO. However, if a lower commission is used for the CFO than the FEO, the litigation funder may receive more under an FEO. In the above example, imagine the court reduced the funder's commission under the CFO to 10%. The litigation funder would then receive $100,000, the same amount as under the FEO which had 20%, with each group member making the same contribution regardless of the form of order. This is significant because courts have consistently said in relation to CFOs that they may reduce the funder's commission percentage if necessary to reflect an appropriate balance of risk and reward.
The validity of FEOs was not challenged in Brewster and there is no reason to think they're not still available, particularly when members of the High Court clearly stated that they were. There have been further developments confirming the ongoing availability of FEOs.
- On 23 December 2019, the Federal Court updated its class actions practice note to say that the parties to a class action "may expect" the Court to "make an appropriately framed order to … equitably and fairly … distribute the burden of … reasonable litigation funding charges or commission[s], amongst all persons who have benefited from the action." This appears to clearly include FEOs (and some might say CFOs, provided the CFO is made at settlement).
- Justice Anastassiou of the Federal Court recently made an FEO in Clime Capital. His Honour stated that FEOs are "well established by authorities in this Court" from 2010 onwards. The circumstances of Clime Capital are significant, because the Court was hearing an application to approve a settlement, including a CFO, on the same morning that the High Court handed down its judgment in Brewster. The approval hearing was adjourned, but the Court ultimately approved the settlement with an FEO which produced the same financial return to the litigation funder as the CFO proposed in the original settlement.
Is an FEO the new CFO?
Even if a CFO is forbidden as part of a settlement or following a judgment, litigation funders might modify an FEO to produce the same result as a CFO. In Clime Capital, this kind of FEO appears to have been made. The FEO required that funded group members pay a commission of 22.5% of the entire settlement sum to the litigation funder and then equalised this amount across all group members. As noted above, CFOs are the usual way of providing a litigation funder with a commission based on the settlement sum for the entire proceeding while an FEO is merely based on the portion of the settlement sum received by funded group members. The decision in Clime Capital even acknowledged that the FEO was "devised to result in the same outcome" as a CFO. In a post-Brewster world, it seems like that the use of FEOs will evolve.
Forecast for the class actions industry: increased uncertainty (for now)
At the time of writing, there hasn't been a judgment definitively saying that CFOs are still available as part of a settlement or following judgment, but Clime Capital and the approval of the Stolen Wages Class Action suggest that the Federal Court considers that they are, or at least that a similar result can be achieved through an FEO. To make it completely clear that CFOs are not available in any circumstances, there will need to be a change to class actions legislation or a decision by an appellate court to that effect. No legislative changes or appellate decisions are currently on the horizon but we'll certainly keep monitoring this space.
In the meantime, while there may be increased uncertainty, early indications are that the risk that governments and major companies will at some point face a class action will not change but there are fresh doubts on the best way to resolve pending class actions. Anyone contemplating a settlement of a funded class action should allow for contingencies when considering the funder's commission.