Settlement stage common fund orders receive the green light

Broad implications for class actions in the Federal Court 6 min read

Common fund orders are back following a unanimous decision of the Full Federal Court that they are permissible when sought at the settlement stage of a class action.

The Full Court's decision in Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162 confirms that Federal Court judges can make common fund orders pursuant to the court's settlement approval powers. This judgment follows years of uncertainty after the High Court's 2019 decision that the court did not have the power to make common fund orders at an earlier stage in class actions.

In this Insight we explain why this decision will be welcomed by litigation funders and plaintiff solicitors operating in the Federal Court.

Background

A common fund order (CFO) requires all group members in a class action to contribute to a litigation funder's commission, regardless of whether a group member has signed a funding agreement. Between 2016 and 2019, CFOs became a popular mechanism for funding class actions because they avoided the need for litigation funders to complete a costly 'book building' process prior to the commencement of proceedings, provided funders with certainty of a return from a proportion of any claim proceeds and addressed the issue of 'free riding' through requiring all group members to contribute to the litigation funder's costs of financing the proceedings (rather than providing a windfall gain to those who had not signed a funding agreement).

In 2019, however, the High Court struck down early-stage CFOs on the basis that they were beyond power: BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 94 ALJR 51 (Brewster). The majority held that the miscellaneous or 'gap filling' power in section 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and its NSW equivalent, which had been relied upon to make CFOs, did not support the making of CFOs at a preliminary stage of a class action.

Uncertainty regarding the scope of the High Court's decision in Brewster followed, with divergent lines of authority emerging on the question of whether Brewster also precluded the making of CFOs at the settlement stage of a proceeding.

The decision

In Elliot-Carde v McDonalds, the Full Court has resolved this uncertainty, with Justices Beach, Lee and Colvin (in separate but concurring reasons) ruling that the court's settlement approval powers in section 33V(2) of the FCA Act allow the court to make settlement-stage CFOs.

Section 33V(2) provides that upon approval of a settlement, the court may make such orders as are just with respect to the distribution of any money paid under a settlement. The Full Court held:

• as a matter of construction, the language of s33V(2) supports the making of settlement CFOs, and nothing in the provision or wider class actions regime otherwise precludes the making of them¹
• the High Court's reasoning in Brewster as to why early stage CFOs cannot be made does not apply to settlement stage CFOs or s33V(2).

The Full Court contrasted settlement CFOs with the High Court's reasoning concerning early stage CFOs in Brewster. The High Court in Brewster characterised early stage CFOs as facilitating a class action by providing assurance to a funder of a sufficient return. Section 33ZF was incapable of supporting this order because it was a 'gap-filling' power concerned with how a class action should proceed, as opposed whether it should proceed. Conversely, the Full Court explained that s33V is an independent source of power specifically directed to the distribution of settlement proceeds. Where that power is exercised at settlement, the court is no longer concerned with the viability of the proceeding, but rather the distribution of settlement proceeds.

In the course of his reasoning, Justice Beach queried whether the High Court's apparent preference for funding equalisation orders (FEOs)² is justified in all circumstances. Although his Honour acknowledged that s33V(2) does not preclude the use of either mechanism,³ his Honour suggested FEOs are inconsistent with the opt-out class action model that applies in the Federal Court class action regime, present practical difficulties in registration and can unnecessarily inflate costs.

Implications

The Full Court's decision in Elliot-Carde v McDonalds resolves the uncertainty following Brewster about the availability of settlement CFOs in class actions in the Federal Court. This decision will have a range of implications for class actions in the Federal Court, including providing confidence to class action funders that:

• they can recover a return from all group members regardless of whether they have signed a funding agreement. That reduces both the need for any book-building exercise before filing proceedings and the incentive for litigation funders to limit the class definition to those who have entered into a funding agreement (ie encouraging truly 'open class' class actions). In turn, this can provide greater assurance to defendants regarding the finality achieved in a settlement; and
• when agreeing a settlement, including a CFO as a settlement condition will not necessarily preclude the settlement being approved by the court.

Due to the procedural context in which this decision was made, it does not appear likely that there will be an appeal to the High Court regarding this issue in this proceeding. The matter did not come before the Full Court as an appeal but was referred as a 'reserved question' without substantive opposition from the respondent on the question of settlement CFOs.

It is too early to say whether the availability of settlement CFOs will result in more class actions in the Federal Court. As we recently reported in our interim update regarding class action risk, filings in the Supreme Court of Victoria have continued to gain momentum as plaintiff lawyers pursue the group costs orders (ie contingency fees) now available in that jurisdiction.

Separately, the Federal Court has left the door ajar to the possibility of 'solicitor CFOs', which are broadly equivalent to group costs order arrangements in the Supreme Court of Victoria. In a decision delivered immediately following Elliot-Carde v McDonalds,⁴ Justice Lee reiterated⁵ his Honour's view that the Federal Court could exercise its power to order a CFO in favour of a solicitor who bears the risk in funding litigation, including a commission calculated as a percentage of any proceeds awarded to group members.

The law continues to develop apace in respect of class actions and litigation funding. Prior to its election, the current Federal Government indicated it would consider introducing litigation funding reforms (including the possible introduction of contingency fees in the Federal Court) as recommended by the Australian Law Reform Commission in its 2018 report into class actions and litigation funding, but this issue does not appear to feature prominently in the Government's current reform agenda.