Is there a pot of gold at the end of the litigation rainbow? The latest on common fund orders

One of the biggest developments in class actions for 2019 was the High Court's decision in BMW Australia Ltd v Brewster [2019] HCA 45 (Brewster). The High Court held that neither the Federal Court nor the NSW Supreme Court had the power to make "common fund orders" (CFO) sought in two separate class actions, where the CFO was proposed at an early stage of the case. This was a big development because CFOs have been a popular way for litigation funders to make class actions financially attractive.

We've been monitoring the fallout from Brewster. The High Court did not clearly address the question of whether CFOs are still available in limited circumstances. Recently, two decisions of the Federal Court suggest that they may still be available at the end of a class action when judgment is given or the court approves a settlement. However, these decisions fall short of a clear statement that CFOs are still available. This may concern litigation funders since the availability of CFOs at the final stage of a class action would mean there's still a pot of gold at the end of the litigation rainbow.

What are CFOs and why are they important?

A class action is a claim brought by a lead applicant or plaintiff on behalf of a group of claimants. The costs of bringing a class action are often paid by a litigation funder on the basis that if the class action is successful it will be paid a commission. In funded class actions the plaintiff/applicant and some group members enter into funding agreements with the litigation funder. We'll call these claimants funded claimants. The funding agreements usually require the funded claimants to pay a percentage of any amount they receive through a judgment or settlement to the litigation funder. This is called the funder's commission.

However, it is very rare for a funder to be able to make funding agreements with every claimant. As a result there are usually unfunded claimants. The litigation funder has no contractual entitlement to receive a funding commission from unfunded claimants and so potentially misses out on a significant portion of the commission that it could potentially earn.

This is where CFOs come in. A CFO is a court order that imposes the obligation to pay the litigation funder's commission on all claimants whether they're a funded claimant or not. This significantly increases the total commission for the litigation funder and makes funding the class action a more attractive proposition.

Before Brewster, it was common for litigation funders to apply for CFOs at an early stage of the court proceeding. If the court granted the application, it meant that the court would implement a CFO at settlement or judgment, but reserved the right to review the proposed funding commission at that time. Such orders gave litigation funders some assurance that the CFO would be made and therefore comfort that they would receive a return on their investment in the litigation if it was successful. Brewster made it clear that this can no longer occur, but it left open the question of whether a CFO can be made at the time that a court: (i) is asked to approve the settlement of a class action or (ii) gives judgment.

So what's the new development for CFOs?

On 2 April 2020, Justice Lee of the Federal Court delivered an interlocutory judgment in one of the two class actions that the High Court considered in Brewster and in which the High Court had set aside a CFO. Justice Lee was asked to approve the contents of a notice to be sent to claimants to inform them that the CFO had been set aside. However, the lead applicant's draft notice also said that he intended to seek an "Expense Sharing Order" if a settlement was reached or judgment was given in his favour. So, was this Expense Sharing Order a CFO? It is not clear.

The precise form of the Expense Sharing Order that might be sought in the future is not identified in the judgment. However, Justice Lee described an Expense Sharing Order as an order "to distribute the burden of costs, fees and all other expenses equitably among all persons who have benefitted from the class action". This reflects the language of the Federal Court's post-Brewster class actions practice note.

Whether the lead applicant has in mind an order which has a similar effect to a CFO or another type of order, sometimes called a "funding equalisation order", is not clear. We explained the differences between a CFO and a fund equalisation order in detail in a previous article.

Importantly for present purposes, Justice Lee did not accept an argument that the reference to an Expense Sharing Order should be removed from the notice because Brewster prevented any such order being made at settlement or judgment in an appropriate case. However, we're still left wondering whether an Expense Sharing Order includes a CFO. He said that he was "conscious of the observations of various members of the High Court … that a CFO is beyond the purpose of the legislation". This suggests that a CFO may not be available, but it is not definitive.

On 8 April 2020, Justice Beach of the Federal Court published his reasons for approving the settlement of two shareholder class actions. His Honour made funding equalisation orders, but said that if he had not taken that course, he "may have entertained making an expense sharing order in the nature of a common fund". Justice Beach added that "after careful consideration" he thought Brewster did not "clearly preclude" a CFO being made at settlement. This suggests that an Expense Sharing Order may take the form of a CFO at the time of settlement. Interestingly, the reasons his Honour gave for the desirability of CFOs at an early stage of proceedings were: (i) they assisted courts to resolve the problems of competing class actions and (ii) they gave court more flexibility to deal with funder's commission rates (presumably in order to do justice to group members).

However, his Honour's remarks are what lawyers call obiter dicta, which means they weren't an essential part of the decision and are therefore not a binding precedent

So where are we now?

Almost four months on from Brewster, we still don't know whether a CFO is available at the settlement stage of a class action or judgment, although the recent remarks of Justice Beach indicate that they still may be. To clear things up, we'll need a decision of an appellate court or a change to legislation. Justice Beach said in his reasons that there should be legislative reform.

The availability of CFOs directly affects the appeal of Australian class actions to litigation funders. Australia already has an advantage because the legal requirements for class actions are less demanding than in other countries, particularly the USA, but against this weighs the fact there are many litigation funders operating in Australia which makes the environment competitive and more challenging for funders to earn a satisfactory return.

However, we should be careful not to overstate the importance of the availability of CFOs. The loss of CFOs is only significant if something of equal utility can't be found to replace them. There are perhaps two replacements: (i) contingency fees and (ii) a reworked fund equalisation order.

At the time of writing, the Victorian Parliament had before it a bill to introduce contingency fees for class actions run in the Supreme Court of Victoria. If this bill is passed into law, a litigation funder could fund the costs of the law firm, which is representing the lead plaintiff, in return for the law firm paying it the contingency fees that it receives. The litigation funder would effectively fund the class action in the background and obtain a very similar outcome to a common fund order.

Alternatively funding equalisation orders might be reworked to achieve the same result as a CFO. This approach was used in the recent case of Clime Capital Limited v UGL Pty Limited [2020] FCA 66, which we updated you about earlier.

So there are ways that a litigation funder could adjust things to deal with the absence of CFOs but these are novel. For this reason, any developments which reintroduce or confirm the availability of CFOs, which are tried and test, is likely to be welcomed by litigation funders. But for now, we're left asking whether the pot of gold, which are CFOs, is still at the end of the rainbow or somewhere over the rainbow.

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