The High Court of Australia has handed down its judgment1 on common fund orders in the most significant ruling relating to litigation funding since the Fostif case.2 A majority of the High Court held that neither the Federal Court of Australia nor the Supreme Court of New South Wales have the power to make a ‘common fund order’ (CFO), at least not in the early stages of litigation.
Common fund orders and open class actions
In 2016, the Federal Court first held that it had the power to make a CFO in class actions.3 Since then, CFOs have been made in a number of Federal Court and state Supreme Court cases.
CFOs typically required class actions to be commenced on an ‘open’ class basis and all members of the class to contribute equally to the legal and litigation funding costs of the proceedings, regardless of whether the class member signed a funding agreement.
Closed class actions
Prior to CFOs, the system for funded class actions which had developed in Australia (primarily though class actions funded by IMF Bentham) was mainly of ‘closed’ class actions, whereby under the law (as it currently stands) the class is permitted to be constituted by “all or some” of the class members and this can be those members who have signed a funding agreement with the litigation funder financing the class action.
Closed class actions often required a process known as book building to be undertaken at the outset of the action. This involves identification of class members, making contact, raising awareness and enrolling class members in the action.
Background to appeals
The High Court decision follows a historic joint sitting of the Full Federal Court and the NSW Supreme Court which held that the Federal Court and the NSW Supreme Court, respectively, had the power to make CFOs and that they did not violate the Constitution.
Westpac and BMW, the defendants in two separate class actions against them in the Federal Court and the NSW Supreme Court, respectively, were granted special leave to appeal to the High Court.
High Court decision
The majority of the High Court (Keifel CJ, Bell , Keane, Nettle and Gordon JJ, with Gageler and Edelman JJ dissenting) allowed the appeals.
In a joint judgment, Keifel CJ, Bell and Keane JJ (the plurality) held that, properly construed, neither section 33ZF(1) of the Federal Court of Australia Act 1976 (Cth) (FCA) nor section 183 of the Civil Procedure Act 2005 (NSW) (CPA) (which is in all but identical terms to section 33ZF(1)) empowered a court to make a CFO. Those sections provide, relevantly, that in a representative proceeding (or class action), the court may make any order the court thinks appropriate or necessary to ensure that justice is done in the proceeding. While the power conferred by those sections was wide, it did not extend to the making of a CFO:
“These sections empower the making of orders as to how an action should proceed in order to do justice. They are not concerned with the radically different question as to whether an action can proceed at all.”
( Keifel CJ, Bell and Keane JJ)
The making of a CFO at the outset of a class action, in order to assure a potential litigation funder of a sufficient level of return upon its investment to secure its support for the action, was beyond the purpose of the legislation to ensure justice was done in the proceedings.
Nettle J, who agreed with the plurality, held that the broad generality of section 33ZF(1), compared to the detail and specificity of other sections, including sections 33J, 33M and 33N, suggested it was in the nature of a supplementary power to do what was necessary or incidental to achieve objectives at which those other provisions were aimed.
As a result of the majority findings, the Constitutional issues did not arise for determination.
The plurality judgment addressed textual and contextual considerations regarding the power conferred by each of sections 33ZF and 183.
The text of each of sections 33ZF and 183 assumed that an issue had arisen in a pending proceeding between the parties to it, and that the proceeding will be advanced towards a just and effective resolution by the order sought from the court. However, the making of a CFO does not assist in:
- determining any issue in dispute between the parties to the proceeding;
- preserving the subject matter of the dispute;
- ensuring the efficacy of any judgment which might ultimately be made as between the parties;
- the management of the proceeding to bring it to resolution;
- doing justice between group members in relation to the costs of litigation.
- Rather, a CFO was centrally concerned with whether a proceeding was viable. For the scope of the power to have a role, it would have to be assumed that maintaining litigation was itself necessary to do justice to the parties – an assumption about process for its own sake rather than the outcome.
The plurality noted that the statutory context, in which each of sections 33ZF and 183 appeared, showed that each section was a supplementary source of power. Their Honours considered the extent to which the legislation:
- Contemplated the involvement of the court in deciding whether an action should proceed.
- Provided for meeting and sharing the costs of representative proceedings.
Their Honours found that other provisions in Part IVA and Part 10 provided for the determination whether or not representative actions proceed (for example, sections33M and 33N).
Other provisions also existed to address criteria for the distribution of resolution proceeds and sharing of the cost burden at the end of the proceedings (for example, sections 33Z, 33ZA and 33ZJ and the CPA equivalents).
With respect to “free riders” (unfunded group members who seek to take the benefit of the results of the litigation), the plurality held that a CFO was not the obvious solution when equitable spreading of costs was better achieved by a funding equalisation order.
The plurality also rejected the idea that the court had a role and power under Part IVA of the FCA or Part 10 of the CPA to make CFOs in order to relieve litigation funders of the time, effort and expense of book-building. Their Honours noted that the suggestion that book building was “an exercise in ‘wasted costs’ ignore the reality that group members will have to take action at some stage to obtain the actual payment of any monetary relief.”
IMF Bentham welcomes the High Court’s decision which provides much-needed clarity and supports the right to free choice for group members. Book-building has been central to IMF Bentham’s investments in Australian class actions for nearly two decades. We believe that the closed class system (for example, restricted to those who sign a funding agreement) has several benefits over open class actions with CFOs, including that a closed class action:
- Can provide an indication of the level of interest of group members in pursuing the claim, and accordingly the viability of the proceedings, before significant costs are incurred. (This is consistent with the overarching purpose of not using the court’s time to achieve an outcome that group members are not interested in participating in.)
- Provides the funder with a level of comfort that there is a base level of recoveries from which it can receive its fee if the case is successful, that the likely claim size supports the proposed legal budget and is likely to lead to a reasonable return to class members on resolution.
- Provides the group members with an avenue to express their preference for a particular funder and or lawyer or case theory.
- Enables information and data about the claims to be gathered upfront, which information would need to be gathered in any event if there are settlement discussions. It also enables information to be gathered in relation to any relevant individual issues which might impact on the viability of the case or its quantum. This might be particularly important in non-shareholder class actions.
The closed class system had enabled IMF Bentham to return more than a billion dollars to class members before Australian courts began making CFOs.
Both the Australian Law Reform Commission (ALRC) and the Victorian Law Reform Commission have recommended that the Federal Court and the Supreme Court of Victoria, respectively, be given an express legislative power to make CFOs.4 The Australian Government has said it will conduct further consultation with lawyers, litigation funders and other stakeholders before implementing any of the ALRC’s recommendations. IMF Bentham looks forward to contributing to that process.
- BMW Australia Ltd v Brewster and WestpacBanking Corporation v Lenthall  HCA 45. (IMF Bentham did not fund any of the parties in these actions.)
- Campbells Cash & Carry Pty Ltd v Fostif Pty Limited. The High Court held by a majority that it was not contrary to public policy for a litigation funder to finance and control litigation in the expectation of profit. This decision effectively gave the green light to the funding of single and multi-party (class action) proceedings in Australia.
- Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016) 245 FCR 191 (Money Max).
- ALRC Report 134, Integrity, Fairness and Efficiency - An Inquiry into Class Action Proceedings and Third-Party Litigation Funders, page 96 and Victorian Law Reform Commission, Access to Justice – Litigation Funding and Group Proceedings, page 68.