28 Feb 2020

State of Play: An unexpected turn for Australian class action common fund orders

Greg Williams and Alexandra Rose explore the significant changes in the Australian litigation funding landscape as a result of the Brewster decision in late 2019 and its impact on litigation funding capital and investment in Australian cases.


To learn more about the key market trends and latest legal developments in Australia, visit our Australian Market: the state of play page.

In summary:

  • The High Court has increased uncertainty for litigation funders
  • Flow of litigation funding capital into Australia may slowdown
  • The Federal Court is considering alternatives to the common fund order
  • Potential uncertainty and experimentation in the Australian litigation funding market in the short to medium term

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We're here to talk about Australian class actions and a bit change in litigation funding landscape.  In the past 3 to 4 years many class actions in Australia have been funded and have proceeded on the basis that the Court will be asked to make a common fund order so litigation funders can cover a funding commission from all class members, not just those who have signed a Funding Agreement.  It's become the answer to the so-called free rider problem.

Late last year in the Brewster decision the High Court poured some cold water on the common fund bonfire.  It held that the Court's power to make any order it thinks appropriate or necessary to ensure that justice is done in the proceeding did not extend to the making of the common fund orders that were sought.  That's because common fund orders are not concerned with questions of how an action should proceed in order to do justice, but with a radically different question of whether an action can proceed at all.  There's no doubt that the Brewster decision has created uncertainties which may dampen the vibrant Australian litigation funding market.  Litigation funding capital will flow to the place where it can generate the best return for the least risk.  Common fund orders reduce the risk for litigation funders considerably, by increasing certainty of return and Brewster has removed some of that certainty.

However, Federal Court class action Judges have been quick to signal that common fund orders or perhaps orders with a similar effect may still be made.  Within 2 days of the Brewster decision, one Federal Court Judge was reported as saying that Brewster might prevent common fund orders being made at an early stage of proceedings but didn't prevent them from being made later as part of a settlement.  The Federal Court is also signalling that perhaps the Court has other powers to rely on to make common fund orders or something similar.  It released a new class action practice note just before Christmas which states that parties to a class action may expect the Court to make an order to equitably and fairly distribute the burden of reasonable litigation funding commissions amongst all the people who have benefited from the action, not just those who've signed an Agreement. 

Since Brewster there've also been two Federal Court decisions which have approved class action settlements, including orders which provide for a litigation funder to be paid a funding commission from all participants.  One of those cases in particular was called Climb Capital.  In February 2020 the Court approved a settlement which included a close relative of the common fund order, the Funding Equalisation Order.  It's likely to become more widely used.  In fact this case was in its settlement approval hearing on the very morning when the Brewster decision was handed down and the original settlement proposed a common fund order.  The parties retired and ultimately came back to ask the Court to make a Funding Equalisation Order, but it resulted in an identical amount of commission being paid to the funder.  The Court even went so far as to acknowledge that the Funding Equalisation Order was devised to result in the same outcome.

We have a way to go before we know the scope of the Court's powers to make orders to facilitate a return to litigation funders.  However this recent activity also suggests that the predictions of the demise of litigation funding and common fund orders following Brewster were overstated and that there may be other ways forward. So litigation funders may not need to panic just yet, although there is no doubt that in the short to medium term the uncertainty caused by Brewster will be factored into litigation funders' decisions about whether to invest in Australian cases. 

Also while there may be increased uncertainty the 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 and so settlements under negotiation should include contingencies.