• Daniel Meyerowitz-Katz

The end of common fund orders... or is it? The High Court's decision explained

Yesterday the High Court handed down its long-anticipated decision in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45. By a 5-2 majority, the Court held that common fund orders are not permissible under s 33ZF of the Federal Court of Australia Act 1976 (Cth) ("FCA Act") or its New South Wales equivalent, s 183 of the Civil Procedure Act 2005 (NSW) ("CP Act").

The decision will come as a huge shock to plaintiff lawyers and litigation funders, and may mark the end of the trend towards "open class" actions being filed instead of "closed class" actions.

However, the situation might not be as bleak as it looks for litigation funders. For one thing, there may still be power to make a common fund order in certain contexts. Also, the Court's reasons seem to have resolved another debate—whether a court can intervene in the private contractual terms between group members and funders—in the funders' favour.


Finally, there may be some legislative reforms on the horizon that will result in the revival of the common fund order as we presently know it.


Those matters are addressed below, but first I need to explain what the Court actually decided.


1. THE HIGH COURT'S DECISION

- Background and Procedural History


For the uninitiated, a common fund order is an order made in a class action pursuant to which any funds recovered on the group members' behalves (eg in a settlement or judgment) are pooled into a "common fund", and a litigation funder's commission is then paid out of the fund before anything is paid to the group members. This allows the funder to be paid a commission by group members who have no contractual relationship with the funder, and thereby avoids the need to sign group members up to funding agreements.


In the BMW/Westpac matter there were two proceedings before the High Court. The first was a NSW Supreme Court claim against BMW and various other car manufacturers concerning defective airbags. The second was a Federal Court claim against Westpac for charging excessive fees for life insurance. The two cases both illustrate why common fund orders are important—in each case, there are many thousands of group members, none of whom have very substantial claims (that is, each group member's claim value is in the hundreds or the low thousands of dollars), but whose claims together add up to a lot of money. This means that it may not be financially viable for a funder to pay for a "book building" process (ie signing up group members to funding agreements), as the costs of book building may outweigh the potential return to the funder if the action is successful, but that it is worthwhile to bring the action overall.


In the BMW case, the question of the Court's power to make a common fund order was referred by Sackar J to the NSW Court of Appeal. In the Westpac case, a common fund order was made at first instance by Lee J and then affirmed on appeal by the Full Court. The two intermediate appellate Courts both determined that there was power under FCA Act s 33ZF(1) or CP Act s 183 (as applicable) to make a common fund order. Those provisions are relevantly identical, and provide that the Court can, in a representative proceeding, make any order that it thinks appropriate or necessary to ensure that justice is done in the proceeding.


BMW and Westpac appealed the intermediate appellate decisions, and the two cases were heard together in the High Court. The majority of the High Court allowed the appeals and ruled that there was no power to make a common fund order under s 33ZF or s 183. As some members of the Court did, I will refer primarily to s 33ZF and the rest of the class actions regime in Part IVA of the FCA Act, but the same principles apply to Part 10 of the CP Act.


- The Majority Decisions


A joint judgment allowing the appeals was delivered by Kiefel CJ, Bell and Keane JJ. In essence, their Honours held that the text and context of s 33ZF indicate that it is a supplementary "gap filling" provision that is concerned with ensuring that justice is done "in the proceeding", meaning as between the parties to the proceeding or as between the group members: at [46]-[47], [51], [53]-[54], [60], [69]-[70]. Their Honours accordingly held that the scope of the power does not extend to considerations of the commercial interests of a non-party litigation funder: at [50], [83]-[84], [91], [94].


Their Honours also rejected the argument that it is part of the policy of Part IVA to encourage representative actions to continue no matter the economic viability: at [52], [93]. Their Honours noted in particular that ss 33M and 33N contemplate that the Court may stay a proceeding or order that it not continue as a representative proceeding in the event that the costs of identifying group members outweigh the value of their claims: at [62]-[65], [71].


Also relevant was that the schemes of Part IVA and Part 10 provide for orders as to the distribution of funds to be made at the conclusion of the proceeding, rather than at an early stage—which is when most common fund orders are made: at [68] , [73].


Finally, their Honours held that common fund orders are not necessary to prevent a "free rider" problem, because "funding equalisation orders" provide a better solution. As their Honours noted, a funding equalisation order spreads the existing costs of the litigation, whereas a common fund order may increase those costs and thereby create a new liability that did not previously exist: at [86]-[90].


Nettle J gave short reasons which essentially agreed with the plurality judgment: at [122]-[128].


In her judgment, Gordon J made a number of similar findings to the plurality, including: that the statutory solution to an uneconomic class action is for it to be stayed or discontinued under ss 33M and 33N: at [138]-[140]; that the return to a third party funder is not within the scope of justice "in the proceeding": at [143], [149], [151], [157], [164]; and that a funding equalisation order is a preferable solution to the "free rider" problem: at [168].


Her Honour also held that certain problematic aspects of common fund orders are strong indications that the Court lacks the power to make such orders, including the question of the liability of group members who opt out of a proceeding where a common fund order has been made, and the difficulties that a court faces in determining the economics of a class action: at [150]-[152], [158]. Finally, in what may have been a rebuke of the dissenting judgments, her Honour held that analogies to orders made by courts in other contexts do not assist in interpreting the statutory scheme: at [166].


- The Dissents


In his dissenting judgment, Gageler J recognised that the class actions regime is designed to enhance access to justice and, in those circumstances, held that it is artificial to distinguish between doing justice in the proceeding and ensuring the proceeding's commercial viability: at [110]. His Honour also held that common fund orders were consistent with the traditional power exercised by courts of equity to do justice between the parties and the beneficiaries of litigation, and that there was no reason in principle why an order should not be made at an early stage (noting that this avoids the risk of hindsight bias creeping in at the conclusion of the proceeding): at [111], [115].


In his judgment, Edelman J did precisely what Gordon J determined was not helpful, and, by analogy to orders made by courts in other contexts, reasoned that a common fund order should be held to be within the scope of s 33ZF. His Honour commenced by noting that the common fund order has its origins in the principle of restitution, in that it would be unjust to permit a litigant to benefit from a fund created by someone else (here a funder) without having to pay the costs of its creation. His Honour then noted that a common fund order is similar to other situations where a portion of a fund is paid to the person who creates the fund despite the beneficiary not having agreed to this occurring, such as maritime salvage awards, and remuneration for bailees, tenants, trustees, and liquidators: at [189]-[201].


Interestingly, Edelman J held that funding equalisation orders were not necessarily a just solution to the free rider problem. As his Honour noted, if the commission payable under funding agreements is excessive, then the funding equalisation order my force group members who had not signed funding agreements to pay the excessive commission: at [202].


As the plurality did, Edelman J examined the scheme of Part IVA. However, his Honour came to the opposite conclusion of the other members of the bench, and held that there was no basis to infer that s 33ZF was limited by the other provisions in the Part: at [206]-[211]. His Honour further held that there was no reason why a common fund order could not be made on an interlocutory basis, rather than at the conclusion of the proceeding: at [213]-[222].


2. WHAT THE DECISION MEANS FOR LAWYERS AND FUNDERS


- The Court Cannot Vary Funding Agreements


Before going into whether common fund orders are gone completely, one matter that warrants comment is the High Court's consideration of whether s 33ZF(1) permits the Court to vary funding agreements between group members and a third party funder. This has been a matter of significant controversy recently, with the two most prominent Federal Court class action judges, Murphy J and Lee J, expressing opposing views—Murphy J thought that the Court can vary funding agreements, and Lee J thought that there was no power to do so: see Endeavour River Pty Ltd v MG Responsible Entity Limited [2019] FCA 1719 at [33].


While it was not directly in issue, the majority of the High Court in the BMW/Westpac case seems to have resolved this question. Kiefel CJ, Bell and Keane JJ held that funding agreements cannot be varied under s 33ZF at [67], and Gordon J expressed a similar view: at [149]. So it's not all bad for litigation funders.


- Are Common Fund Orders Gone Completely?


The obvious result of the High Court decision is that common fund orders are not available at an interlocutory stage. However, it may be that common fund orders are still available, just at the conclusion of the proceedings rather than early on.


As noted above, part of the rationale for rejecting the existence of the power under s 33ZF was that the Part IVA scheme contemplates that the distribution of funds occur at the end of the proceedings. In particular:


  • s 33V(2) provides that when approving a settlement, the Court can "make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court"; and

  • s 33Z(1)(g) provides that in determining a matter in a representative proceeding, the Court can "make such other order as the Court thinks just". Note that there is no equivalent of s 33Z(1)(g) in the CP Act, but this probably does not make any substantive difference, as the Court would nevertheless have the power under s 90(1) of the CP Act to "make such orders as the nature of the case requires" (see also, r 36.1 of the Uniform Civil Procedure Rules 2005 (NSW)).


The important thing to note about these provisions is that they are not subject to the limitation in s 33ZF that an order under that section must be appropriate or necessary to ensure that justice is done in the proceeding. That is: (1) it must be directed to the purpose of ensuring that justice is done; and (2) it is confined to doing justice in the proceeding. In contrast, ss 33V(2) and 33Z(1)(g) are concerned only with whether the order is "just". Accordingly, in the application of those provisions, the equitable principles referred to by Gageler and Edelman JJ in their Honour's judgments may have more of a role to play, and an argument could be made that the group members would be unjustly enriched unless the funder was fairly remunerated.


This question was not addressed by any of the majority decisions in the BMW/Westpac matter. The only one that may have touched on this issue was Gordon J, who held that s 33V(2) "does not envisage a Court making orders with respect to the economics of a proceeding by ensuring that a litigation funder obtains a particular return on funds invested". This may indicate that a common fund order could not be made under s 33V(2), but her Honour did not indicate an express view one way or the other.


On the other hand, Edelman J did expressly hold that a common fund order is available under ss 33V(2) and 33ZJ(3): at [207]. However, as his Honour was in dissent generally, this may not be the view that the rest of the Court would take.


What this means is that whether common fund orders are available at the conclusion of the proceedings remains an open question. No doubt someone will give it a try sooner or later.


3. POSSIBLE REFORM


Finally, it would be remiss of me not to mention that legislative reform may be on its way to bring common funds back. Both the Australian Law Reform Commission and the Victorian Law Reform Commission have recently recommended that an express power to make common fund orders should be introduced into the relevant class actions regimes. The Commonwealth Government has not shown much interest in the ALRC report since it was handed down (which in some notable respects may not be the worst decision it has made), but not so with Victoria.


Most notably, the Justice Legislation Miscellaneous Amendments Bill 2019 is presently before the Victorian Parliament. If enacted, plaintiff lawyers will be able to charge a percentage-based commission as their professional fees in class actions. This will effectively permit common fund orders through the "back door", as solicitors could agree with a funder that in return for the solicitors' fees being paid at their ordinary hourly rate and an indemnity for costs being granted, the funder can keep all of the commission that is payable to the solicitor. That would in substance be a common fund order under a different name. If this becomes possible in Victoria, no doubt a provision expressly permitting common fund orders will shortly follow.


What will this mean for the class actions landscape in Australia? The obvious answer is that everything will be filed in Victoria rather than in other jurisdictions. No doubt there will also be a huge number of costly applications by defendants to transfer proceedings out of Victoria and into another jurisdiction. That being the case, it would not be surprising if other jurisdictions soon followed suit, and common fund orders were again generally available in class actions in Australia.


In other words, common fund orders are not dead yet.

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