In December 2019, in BMW Australia Ltd v Brewster the High Court of Australia determined that neither the Federal Court of Australia nor the NSW Supreme Court had the power to make a "common fund order" (CFO) under section 33ZF of the Federal Court of Australia Act 1976 (Cth) or the equivalent NSW provision.
This was a significant decision. Before Brewster, litigation funders would often make an application for a CFO at an early stage of proceedings. If the court granted the application, it provided the funder with an assurance that the proceedings would be economically viable because they would receive a commission from all group members who received a benefit from any settlement or judgment.
Following Brewster, funders have been forced to look for alternative ways of addressing these issues, such as book building or seeking alternative costs sharing orders such as a funding equalisation order (FEO).
However, Brewster didn't definitively address whether a Court could make a CFO at a later stage when it approved a settlement under section 33V of the Federal Court of Australia Act or its equivalents. Section 33V prevents a class action from being settled or discontinued without the approval of the Court. The Court must be satisfied that the proposal is fair and reasonable for all group members considered as a whole before granting approval; if it is, it may make any orders that it considers just with respect to the distribution of any settlement amount.
This question has been considered by three separate Federal Court judges in the last month. Their decisions demonstrate the continuing uncertainty which exists in the wake of Brewster.
Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Limited (No 2)
The Fisher class action was funded by two third-party litigation funders, and the class included some members who had entered into a funding agreement and others who had not. The parties reached a settlement in December 2019 and applied to the Court for approval under Section 33V.
As part of the settlement, the applicants proposed that their legal costs, administrative expenses and a funding commission be deducted from the settlement amount and borne by all registered group members – not just the funded group members. The applicants proposed that the funding commission be either:
- $6.2 million, representing 17.43% of the settlement amount. This was slightly below the commission rate in the agreements between the funders and the funded group members (Option A); or
- $3.9 million, being the total amount to be paid under the agreements between the funders and the funded group members (Option B).
These two options are akin to a CFO and FEO respectively. Accordingly, this presented an opportunity for the Court to consider making a CFO under Section 33V at settlement approval.
Is a FEO preferable to a CFO?
In his decision, Justice Moshinsky said that he did not consider the majority in Brewster “to express a concluded view that there is no power under section 33V to make a common fund order” but recognised that they expressed “strong reasons for favouring a funding equalisation order over a common fund order”. He also considered it appropriate that all registered group members contribute towards to the costs of bringing the class action and that an order to this effect was “just”.
However, Justice Moshinsky concluded that Option A was not appropriate because it imposed a higher cost on the group by requiring it to pay more to the funders. In contrast, Option B represented the actual costs incurred in funding the litigation and was therefore a more appropriate and just option. Further, Option B sufficiently recognised the funder’s contribution, and granting a higher recovery to the funder in the form of a CFO was not necessary nor appropriate.
Further, Justice Moshinsky observed that Option A went further than necessary to address the problem of group members who had not signed a funding agreement benefiting from the settlement achieved by those who had. The funding equalisation aspect of Option B ensured that unfunded group members who were eligible for a settlement distribution contributed to the payment of the funding commission.
Uren v RMBL Investments Ltd (No 2)
Almost two weeks later, Justice Murphy published the reasons for his decision to make a CFO under section 33V when approving the settlement in Uren – the first CFO made under this provision since Brewster. however, he described the CFO as an “Expense Sharing Order”.
Uren was a case where the Court had made an early CFO under section 33ZF prior to Brewster. However that CFO required a further order of the court to be effective.
Justice Murphy said that Brewster did not deny the Court the power to make a CFO when approving a settlement under section 33V.
While acknowledging that the majority in Brewster favoured the making of FEOs over CFOs, Justice Murphy said that the question of whether a CFO should be made under section 33V involves an exercise of discretion based on the circumstances of each case. Uren's circumstances made a CFO appropriate, including that the class action would not have been commenced without the funder and, in funding the litigation, the funder took on the costs and risks in return for a percentage if the case was successful. Justice Murphy said it would not be just if the funder was not fairly remunerated for this.
Justice Murphy also found that the funder agreed to fund the proceedings expecting that a CFO was likely to be made and had conducted the litigation consistently with that expectation. In particular it had not engaged in a book build (that is active recruitment of group members to sign funding agreements). This meant that a FEO was not a viable alternative option to a CFO because it would have returned a small amount to the funder which would not adequately compensate the funder for the costs incurred and risks taken.
Ultimately, Justice Murphy determined that it was just that a CFO be made to fairly and equitably distribute the litigation funding expenses amongst all group members and to avoid the unjust enrichment of the group members who otherwise would not be required to contribute towards the litigation funding. He determined that a rate of 25% was appropriate.
Cantor v Audi Australia Pty Ltd (No 5)
On the same day, Justice Foster published the reasons for approving the settlement in the Volkswagen, Audi and Skoda diesel emissions class actions, but rejected both the CFO and FEO sought at the approval hearing.
The proceedings consisted of five related class actions that were managed together: two brought by Bannister Law as open class proceedings and partially funded by a litigation funder (the BL Proceedings), and three by Maurice Blackburn as unfunded open class proceedings.
At the settlement approval hearing, the lead applicants in the BL Proceedings made two alternative funding applications:
- a CFO under section 33V whereby the litigation funder would receive 10% of the settlement payout of each participating group member who had not otherwise entered into a retainer with Maurice Blackburn or opted out of the BL Proceedings. This order was also formally sought by the litigation funder; and
- an FEO under sections 33V and 33ZF whereby the litigation funder would receive the total amount payable under the funding agreement, but the cost for that amount would be shared equally with unfunded group members in the BL Proceedings.
It is worth noting that the applicants in the BL Proceedings had sought a CFO at an early stage of the proceedings but the application was never pressed, so no order was made at that time.
Does the Court have the power to ever make a CFO?
Justice Foster observed that several other judges of the Federal Court had expressed an opinion that, despite Brewster, the Court has the power to make a CFO at a late stage of the proceeding – but that in his view the position is not so clear. While acknowledging that the issue was not finally resolved, Justice Foster said that the reasoning in Brewster showed that a majority of the High Court held the view that the Federal Court does not have the power to make a CFO at any time or stage in a class action under any provision in the Federal Court Act.
However, the reasons for Justice Foster’s decision indicate that he accepts that Brewster does not preclude the Court from making an FEO at settlement as part of ensuring the equitable sharing of the litigation expenses.
It is important to note that the views expressed by Justice Foster are in obiter (and are therefore not necessarily binding on other judges) given that he refused the funding applications before him on discretionary grounds, determining among other things that:
- the litigation funder went to extraordinary lengths to keep the BL Proceedings on foot, not for the benefit of group members, but for its own benefit and its conduct should not be rewarded with a CFO; and
- there was no good reason to make the FEO sought. This was because such an order would deduct amounts from unfunded group members in circumstances where they were otherwise part of the related class action proceedings which were unfunded open class proceedings.
What all of this means for CFOs
The dust stirred up by Brewster is still settling and the future of CFOs in class actions remains uncertain. According to Justice Foster, Brewster means that CFOs cannot ever be made under the current legislative class action regimes. However, other judges of the Federal Court do not agree. In particular, Justice Murphy is of the view that CFO can be made under section 33V at the settlement of a class action. Similarly, Justice Moshinsky’s reasoning in Fisher strongly indicates that the Court has the power to make a CFO under section 33V.
However, Fisher also suggests that post-Brewster the Court may generally look to FEOs to address the free rider problem and recognise the funder’s contribution towards the litigation, without returning a commission that far exceeds the actual costs of running the litigation. This view was shared by Justice Foster who agreed in Cantor that FEOs are the preferred solution to the free rider problem caused by unfunded group members.
If this approach continues to be applied, litigation funders will need to look at alternative approaches to ensure a return on their investment. Without the convenience of a CFO, which avoided the need for significant recruitment ahead of an outcome in the class action, this is likely to involve a greater focus on group member recruitment at a much earlier stage of the process.
We expect to see further differences of opinion emerge and the debate about the scope of Brewster, and whether CFOs are still available at a later stage in class actions, to continue until settled by an appeal court or by legislative reform. In the meantime, we expect to see a shift to the use of FEOs as the go-to option for courts in approving class action settlements to ensure the equitable sharing of the expenses in conducting the litigation.