Solicitors' CFOmg! – Federal Court has the power to make common fund orders in favour of solicitors (but should it use it)?

The Full Federal Court has decided that the Federal Court has the power to make Common Fund Orders for the benefit of solicitors (as opposed to solely third party funders), more closely aligning the Federal Court's contingency fee powers with those of the Victorian Supreme Court. This means that a solicitor may be able to receive a percentage of a judgment or settlement in a class action. However, the Court did not consider whether such an order "ought" be made in this case – instead leaving that up to the discretion of the docket Judge managing the case in the Federal Court (R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89).

Litigation funding: a quick explanation

Litigation funding involves a third-party funder, who is not otherwise involved in the litigation, contributing monies to pay the costs of plaintiff law firms in return for a share of any settlement or judgment. Where a case is not successful, the litigation funder will not see a return on their investment and may be exposed to adverse cost orders or other fees. Litigation funding has become particularly common in the context of Australian class action proceedings.

Because there is a general statutory prohibition in Australia on law firms entering into costs agreements where the costs of the firm are to be calculated as a percentage of an award or settlement, it is often not commercially viable for solicitors to underwrite the cost of running large complex claims. However, the Supreme Court Act 1986 (Vic) permits solicitors acting in class actions to obtain a group costs order from the Court if it is satisfied that it is appropriate or necessary to ensure that justice is done in the proceeding, which means that solicitors fees will be calculated as a percentage of any award or settlement in the litigation.

Funder's fees in the Federal Court

To date the Federal Court has used two forms of funding orders to facilitate payments to third-party litigation funders: funding equalisation orders (FEOs) or common fund orders (CFOs).

Both FEOs and CFOs manage the unfairness that arises where only funded group members are contractually required to pay the funder if the class action succeeds, despite the entire pool of group members reaping the benefit of the settlement or award. FEOs require unfunded group members to contribute to the total commission payable by the funded group members, so all group members contribute equally to that commission amount. CFOs operate more like a contingency fee; all group members (funded and unfunded) must pay the funder a commission, generally in the form of a percentage of any settlement or judgment amount. Given the amount recoverable under a CFO is tied to the total amount of the judgment or settlement, a funder will usually receive more money under a CFO than an FEO.

While there has been some divergence of opinion in the Federal Court in recent years as to when, if ever, a CFO can in fact be ordered by the Court, a number of recent Full Federal Court decisions have determined that the Court does have the power to make such an order at the time of settlement or discontinuance pursuant to section 33V of the Federal Court of Australia Act 1976 (Cth).

Solicitors' common fund orders – R&B Investments v Blue Sky

In several Federal Court decisions last year dealing with CFOs, Justice Lee raised the possibility that section 33V(2) of the Act was not necessarily relevant only to commercial third party funders. Where the solicitor has taken on risk to obtain the relevant settlement, it may be just within the meaning of section 33V(2) for a CFO to be made in favour of that solicitor, which sees the payment of a sum in addition to the solicitor's retainer.

The question of whether the law firm acting for the lead plaintiff could pursue a solicitors' CFO crystallised in R&B Investments Pty Ltd (Trustee) v Blue Sky Alternative Investments Limited (Administrators Appointed) (in liq). Justice Lee was asked to decide whether it was within the Court's power to make a CFO in favour of a solicitor at the time of settlement or judgment.

The applicants' agreements with their solicitors contemplated that, in addition to the solicitors being paid for their legal costs and disbursements, orders allowing the solicitors to claim a percentage of the settlement or damages awarded would also be sought so as to further remunerate the solicitors for the risks undertaken in funding the proceeding. If that order wasn't available, the applicants planned to apply to transfer the case to the Victorian Supreme Court so that a GCO could be sought, or third-party litigation funding pursued.

Justice Lee reserved the question to the Full Federal Court of Australia.

Full Federal Court's decision

The Full Court, comprised of Justices Lee, Murphy and Beach, have confirmed that a CFO may be made in favour of a solicitor at the time of settlement, discontinuance or judgment pursuant to sections 33V(2) or 33Z(1)-(2) respectively, so long as it is "just" to do so in all of the circumstances.

In making that decision, the Full Court reaffirmed the Full Court's recent decisions confirming settlement CFOs are within the Court's powers to be made. The Full Court did not agree with the respondents that a solicitors' CFO would introduce unusual conflict issues that could not be appropriately managed by the Court at the relevant time. Nor did the Full Court find it particularly relevant that section 183 of the Legal Profession Uniform Law expressly prohibits law firms from entering into costs agreements with clients that provide for contingency fees in litigious matters.

On analysis, the Full Court was of the view that any payment made to the solicitors from a settlement or judgment pool would be made pursuant to an order of the Court (whose powers are not restrained by section 183) rather than as a result of the bargain struck between solicitor and client. Nor did the Full Court accept that the making of a CFO in favour of a solicitor would be contra public policy for reasons including the development of GCOs in Victoria and the likelihood that solicitors' CFOs would facilitate a less expensive resolution to class action proceedings for group members where the Court would have ultimate managerial oversight.