Clifford Chance
Class Action Funding in Flux: The High Court hears argument on Common Fund Orders
Directors of Blue Sky Alternative Investments and auditor, EY, are challenging a decision of the Full Federal Court which expanded the beneficiaries under a Common Fund Order (CFO) to include litigation funders and solicitors. Oral arguments have commenced in the High Court of Australia – having just delivered a judgment on a Group Costs Order (GCO), which permit solicitors in Victorian class actions to recover a percentage of fees from a settlement or judgment, where will the High Court land? This upcoming decision is likely to have a significant impact on the Australian class action landscape.
Background
A CFO requires group members to contribute to the funder's commission in exchange for financing a class action. They have had a tumultuous history.
The High Court in BMW Australia Ltd v Brewster [2019] HCA 4519 (Brewster) held that CFOs could not be made at the commencement of class action proceedings pursuant to section 33ZF of the Federal Court of Australia Act 1976 (FCA). Subsequently, in Elliot-Carde v McDonald's Australia Limited [2023] FCAFC 162 (Elliot-Carde), the Full Court in separate but concurring judgements held that section 33V(2) of the FCA did authorise the Court to make CFOs at settlement or judgment. Brewster viewed early-stage CFOs as aiding a class action by giving funders confidence in obtaining a sufficient return. Whereas section 33ZF focuses on how a class action should proceed, rather than whether it should proceed, and thus could not support such an order. The Full Court in Elliot-Carde noted that by contrast, section 33V is aimed at the distribution of settlement proceeds and provided an independent source of power.
As discussed in our article, Group Costs Orders in Class Action Settlements, the Victorian Supreme Court approved the first settlement of a class action involving a Group Cost Order (GCO) in Allen & Anor v G8 Education Ltd (No 4) [2024] VSC 487 (28 August 2024). GCOs allow a solicitor's legal fees to be determined as a percentage of an award or settlement. There has been an increase in class action filings in Victoria since the introduction of the GCO regime in the Supreme Court Act 1986 (Vic), leading to discussions about Victoria being a preferred forum for class actions. But much in tandem with the Victorian Supreme Court's decision, in R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89 (5 July 2024) (Blue Sky), the Federal Court of Australia paved way for CFOs to similar effect. In that matter, Justices Murphy, Beach and Lee found that sections 33V and 33Z of the FCA allowed the court to make a 'solicitors CFO', with the effect that solicitors will be able to receive a share of a settlement or damages award as payment for their costs.
The Full Court's decision in Blue Sky has since been appealed, and the High Court is poised to deliver some clarity on the scope of CFOs, which may have a dramatic effect on the class action landscape.
Appeal to the High Court
The High Court of Australia granted special leave to appeal the Full Federal Court's decision in Blue Sky on 7 November 2024. Each appellant argues the Full Court erred in finding that ss 33V and 33Z of the FCA permits the making of a CFO providing for the distribution of funds to a solicitor otherwise than as payment for costs and disbursements incurred in relation to the conduct of the proceeding.
Each appellant argues that solicitors' CFOs are contrary to:
- Common law principles established in Clyne v Bar Association (NSW) (1960) 104 CLR 186 to the effect that solicitors must not bargain with their client for an interest in the subject-matter of litigation, or for remuneration proportionate to the amount which may be recovered in a proceeding;
- Section 183 of the Legal Professional Uniform Law (LPUL) which prohibits solicitors from entering into a costs agreement under which the amount payable to the law practice, or any part of that amount, is calculated by reference to the amount of any award or settlement or the value of any property that may be recovered in any proceedings to which the agreement relates (eg., the prohibition on 'contingency fees', as distinct from, say, a no-win, no-fee arrangement); and thus,
- public policy relevant to determining what is "just" within the meaning of 33V(2) and 33(Z)(1)(g).
The points of emphasis, or differentiation in each application, are broadly as follows:
- Shand emphasises that sections 33V and 33Z is limited to doing justice as between the parties and group members as at the time that the order is made, the commercial interests of the funder are irrelevant.
- EY raises, in addition to section 183 of the LPUL, rule 12.2 of the Solicitors Conduct Rules and emphasises it would never be "just" to make an order in favour of a funder to the detriment of group members on the basis that to do so would facilitate the commencement of some other representative proceeding, or general class action enterprise.
- Kain emphasises conflicts of interests arising from solicitors' CFO's (including perceived conflicts) and the Courts ability to address them. It asserts that the Full Court's interpretation of sections 33V(2) and 33Z(1)(g) undermines an important safeguard of the administration of justice embodied therein.
Applicability of state laws
The Appellants argue that solicitors' conduct rules and professional standards are governed by state laws and apply to solicitors even in federal matters. The Respondents disagree, suggesting that sections 33V and 33Z should not be read down by state laws that limit solicitors' conduct. The Respondents further argue that Solicitors CFOs are not contingency fees, meaning that state prohibitions do not apply where solicitors acquire an interest under an order and against a settlement subject to the Court's supervision.
The bench has raised several questions and ostensibly, concerns, about the Respondents' interpretation. Justice Gordon raised the fact that all states and territories maintain prohibitions on contingency fees. Justice Beech-Jones pointed out the potential for conflict between state laws prohibiting contingency fees and a federal process for CFOs that awards solicitors with settlement or judgment funds.
Brewster decision
The Respondents ask the High Court to re-open Brewster, arguing that the decision unjustly limits the application of CFOs and creates practical challenges for litigation funding. Supported by the Association of Litigation Funders of Australia – an intervening party in the current appeal – the Respondents argue Brewster limits access to justice by limiting access to litigation funding. Justices Gordon and Edelman, as well as Chief Justice Gagelar, all presided over the Brewster decision and now preside over the current appeal. In dissent, Justice Gageler (now Chief Justice Gageler) propounded in Brewster that the principal object of Pt IVA of the FCA is to "enhance group members' access to justice". In His Honour's opinion, orders which "shore up the commercial viability of the proceeding" do not inhibit interests of justice in representative proceedings. Justice Edelman also provided a dissenting judgment, finding it appropriate for courts to recognise a "right to remuneration from the lawyer who performs the work to the litigation funder who engages the lawyer and incurs the risk".
Discussion
The High Court has reserved its decision and requested that the parties make further submissions on the statutory interpretation of sections 33V(2) and 33Z(1)(g), the implications of the Brewster decision and the broader regulatory framework governing litigation funding and legal costs.
Ultimately, the High Court's decision could go several ways:
A. High Court upholds the decision of the Full Federal Court, permitting CFOs at settlement or judgment for funders and solicitors;
B. High Court excludes solicitors from CFOs at settlement or judgment;
C. High Court discards CFOs altogether by upholding the appeal and refusing to reopen Brewster; or
D. High Court upholds CFOs for commencement and settlement and agrees to revisit the Brewster legacy.
The High Court's recent decision in Bogan v The Estate of Peter John Smedley (Deceased) [2025] HCA 7 may shed some light on the direction the bench may take in Blue Sky. The majority in Bogan signalled that promoting access to the courts through GCOs is pertinent to the interests of justice. But on the other hand, Justice Steward issued a strong dissent, suggesting that there is a "clear conflict of interest" posed by contingency fees. So while settlement CFOs may get the greenlight, solicitors' CFOs could be on the chopping block.
As it stands, solicitors may receive a portion of the settlement fund, not by agreement with the client, but by way of court order. For plaintiff solicitors and litigation funders alike, an affirmation of the CFO regime may indeed make class actions more commercially enticing and in turn, influence the number of class action filings in Australia.
---------------------------------------------------------------------------------------------------------------
1BMW Australia Ltd v Brewster [2019] HCA 4519 at [110].
2BMW Australia Ltd v Brewster [2019] HCA 4519 at [191].
3Bogan v The Estate of Peter John Smedley (Deceased) [2025] HCA 7, [122]-[123] (Steward J).
