Federal Court reopens popular funding model for class action funders

In brief: 

On 12 October 2023, the Full Court of the Federal Court of Australia delivered judgment in Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162 clarifying a controversy that has vexed litigation funders and the class action practitioners in relation to the power of the Court to make a settlement common fund order (CFO). 

The separate, but unanimous judgments of Beach, Lee and Colvin JJ, confirmed the Court has power under section 33V(2) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) to make orders for settlement CFOs.

Common fund orders and their tortuous journey

A CFO is an order unique to Australian class action proceedings. It permits the deduction of expenses, (including litigation funding expenses) from any settlement or judgment amount from an otherwise entitlement of group members, regardless of whether they have entered into an agreement with a litigation funder. Whether the Court has the power to make a CFO under the FCA Act has been a subject of substantive debate amongst class action practitioners over recent years. 

CFO's were first endorsed by the Full Court of the Federal Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191. Following that decision, it became commonplace for CFOs to be made at the early stages of class action proceedings. The practice evolved as a means to provide equitable sharing of the expense of litigation (to avoid the problem of 'free-riders'), avoid the expensive task of book building, and identify the funding commission to facilitate settlement discussions. At that time, CFOs were generally made pursuant to the 'gap filling' provision of section 33ZF of FCA Act, which permits the Court to make any order it "thinks appropriate or necessary to ensure that justice is done in the proceeding".

That all changed following the majority decision of the High Court in BMW v Brewster (2019) 269 CLR 574. In Brewster, the Court amongst other things held that section 33ZF (or equivalent state provisions):

• Is a power only to be exercised in the context of how an action should proceed in order to do justice; and

• Can be used to support any interlocutory procedural order necessary to ensure that the pleaded issues are resolved justly between the parties or "to bring the matter to a fair hearing on a just basis."

As a result, the Court held that it did not have power under section 33ZF to make a CFO at an early stage of a class action. In short, making a CFO for the dominant purpose of addressing uncertainties on the part of litigation funders as to the financial viability of funding such proceedings was found to be impermissible.

In Cantor v Audi Australia Pty Limited (No 5) [2020] FCA 637, Foster J observed (without finally deciding) that the true import of Brewster was there was no power to make a CFO under either section 33ZF or section 33V.

In contrast to the approach taken by Foster J, in Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCAFC 183, the Full Court of the Federal Court, Lee J (with whom Moshinsky and Middleton JJ agreed) observed that the majority decision of the High Court in Brewster was limited to the Court's powers under section 33ZF to make a CFO at an early stage of the proceedings. It did not concern any exercise of power under section 33V(2). Judges continued to make CFOs in class action proceedings in the Federal Court.

Over recent years, since the decision in Davaria, the Courts have continued to make CFO's pursuant to section 33V(2) (or its cognate provisions in state jurisdictions) in at least 18 cases. However, the validity of CFOs was again thrown into doubt following the judgment of O’Callaghan J in Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84. In that case, his Honour held that the reasoning of the majority in Brewster "points clearly enough to the conclusion that there is similarly no power to make a common fund order upon settlement under s 33V(2).”

The McDonald's Case

Recent decisions in the Federal Court have done little to resolve the controversy surrounding whether the Court has the power to make a CFO. However, the decision of the Full Federal Court in Elliott-Carde may now, subject to any appeals that might occur, provide long-awaited clarity. 

The question has resurfaced in a number of proceedings brought by the Shop, Distributive and Allied Employees' Association (SDA) and the Retail and Fast Food Workers' United Union (RAFFWU). These two unions, who both represent workers in the fast food retail space, have brought competing actions against McDonald's, arguing that McDonalds' employees were not provided with appropriate break entitlements. In a bid to throw out the class action brought by RAFFWU, the SDA filed an interlocutory application that questioned the Court's ability to make settlement CFOs. This question was then referred to the Full Court of the Federal Court for determination. 

In a unanimous decision, with Beach, Lee and Colvin JJ providing separate but overall consistent reasoning, the following matters emerge from the Full Court's judgment: 

• The Court rejected the submission that Brewster precluded the making of settlement CFOs pursuant to section 33V of the FCA Act. Rather, their Honours held that Brewster was not concerned with section 33V(2) or settlement CFOs. Brewster was concerned with section 33ZF and the power to make a CFO at an early stage of the proceeding. In this case, section 33V speaks to the other end of the time spectrum where "the action is for all practical purposes over and no such in future uncertainties or financial viability of funding questions are in play";

• Section 33V(2) is a settlement specific power, which is substantively different from the ambulatory and 'gap-filling' power in section 33ZF;

• Section 23 of the FCA Act which gives the Court the power to make orders it thinks appropriate could be invoked as a source of power for making a settlement CFO (and possibly an early CFO); and

• Lee J rejected submissions by the court-appointed contradictor that making a settlement CFO would involve the creation of new rights and obligations for which the FCA Act does not provide. Rather, the conferral of a power on a court to create or alter rights does not place those powers outside of the scope of judicial power.

The Full Court's decision resolves lingering uncertainty about whether the Court can make a common fund order on settlement or judgment of a class action. The judgment is significant for the class action and (particularly litigation funding) industry as it is likely to provide greater certainty for funders and plaintiff firms about the likely remuneration that will be recovered as part of any settlement in class action proceedings. 

The Next Frontier - Solicitors' CFOs

Observations made by Lee J in Elliott-Carde are also likely to reinvigorate debate about whether other third parties - particularly solicitors - can receive a percentage recovery of any settlement or judgment, akin to a contingency fee arrangement. 

In the context of discussing payments to third parties (including funders) under Settlement CFOs, Lee J observed there are circumstances where it could "be a just order to pay a solicitor (who has taken the necessary risks to get in the settlement fund) a sum in addition to legal costs payable pursuant to a retained".

In a separate judgment delivered on the same day in Greentree v Jaguar Land Rover Australia Pty Ltd (Carriage Application) [2023] FCA 1209 which determined a carriage dispute between two competing class actions, Lee J also expressed the view that:

• There is a distinction between the prohibition on solicitors from entering into contingency fee arrangements and the payment of a contingency fee out of any settlement proceeds in a class action pursuant to an order of the Court;

• The distribution of monies paid under a settlement or judgment to a third-party who has aced to facilitate that outcome, and to whom a payment is 'just', does not need to be a commercial litigation funder. This is said to be 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; and

• As a matter of power, the class action regime in Part IVA of the FCA Act does not preclude the possibility of a settlement CFO which incorporates the payment of a fee to solicitors;

In all Australian jurisdictions other than Victoria, contingency fee arrangements for solicitors are expressly prohibited by legislation. Contingency fee arrangements for class actions (referred to as "Group Costs Orders') were introduced in Victoria in July 2020. Since that time, there has been a significant increase in the number of class action filings in the Supreme Court of Victoria. 

Lee J's endorsement of a Solicitors' CFO seemingly opens the door to law firms seeking to recover a contingency fee payment in class action proceeding in other jurisdictions. Unlike the Victorian regime, there is no legislative entitlement giving rise to a Solicitors' CFO. If permitted, we are likely to see a further decrease in the proportion of cases funded through traditional litigation funding models and, perhaps, a rebalancing of class action filings away from Victoria. 

The first case for approval of Solicitors' CFOs is likely to be delivered in the Blue Sky class action (in which Lee J is currently the docket Judge) - R&B Investments Pty Ltd As Trustee For The R&B Pension Fund And David Furniss V Blue Sky Alternative Investments Limited (Proceedings NSD665 of 2022). In that case, the plaintiffs' solicitors have previously outlined their intention to seek such an order and will no doubt be encouraged by the Court's early indications of likely support.