In two recent decisions, the Full Court of the Federal Court of Australia and the Court of Appeal of New South Wales have refused to decide whether they have the power to make a common fund order (CFO) at settlement or judgment, finding that the questions could not be answered in the hypothetical context in which they were asked.
In doing so, both Courts not only made it clear that in their view the question of whether CFOs can be made at settlement remains wide open, but also in their view the Courts would have the power to make CFOs at settlement if it were ‘just’ in all the circumstances to do so. These decisions will give renewed encouragement to litigation funders that Courts will be willing to make CFOs at settlement in certain circumstances and undermine some of the impacts of the High Court’s decision in Brewster, which had disallowed CFOs made under s 33ZF of the Federal Court of Australia Act and s 183 of the Civil Procedure Act 2005 (NSW). A CFO is a court order which obliges all group members in a class action to pay their proportionate share of a litigation funder’s commission out of the proceeds of a judgment or settlement, whether or not the group members have entered into a funding agreement directly with the funder.
Last year, the High Court made it clear that the Federal Court and the NSW Supreme Court did not have the power to make CFOs at an early stage of a class action. That decision left a residual uncertainty as to whether courts can make a CFO at any stage of a proceeding, with Federal Court judges subsequently expressing contradictory views on the issue.
In Davaria Pty Limited v 7-Eleven Stores Pty Ltd  FCAFC 183 and Brewster v BMW Australia Ltd  NSWCA 272, both the Full Court of the Federal Court of Australia and the Court of Appeal of New South Wales were asked to decide the issue as to whether the Courts had the power to make a CFO at settlement or judgment of the class action proceeding. In neither case had a settlement been reached or a judgment made, nor had a CFO yet been sought.
Both Courts declined to determine the issue, finding that:
- the decision of the High Court in Brewster did not address or answer the question whether the Courts had the power to make a CFO at settlement or judgment; and
- it was not appropriate to decide the question on a hypothetical basis, without having before them the terms of the settlement and proposed distribution orders, so that the Courts could form a view about whether the CFO sought would be just in all the circumstances.
Despite declining to answer the question, the Courts nevertheless indicated that they view the power to make a CFO at the conclusion of a proceeding to be different to the power considered by the High Court in Brewster, and that in certain circumstances it may be open to a Court to make a CFO at settlement or judgment.
In Brewster, President Bell observed that “one can well understand an argument that it is just in all the circumstances for a funder to receive a measure of recompense out of the overall settlement sum for its contribution to the realisation of the settlement pool beyond that which may result from a [funding equalisation order]” (FEO). The Court’s decision to order a CFO on that basis may be influenced by a variety of factors, including the size of the overall settlement sum, the amount proposed to be paid to group members, the number of group members who signed up to the funding agreement, the amount that would be required to be paid to the funder if a FEO were made, the degree of risk involved in funding the action, and the length and complexity of the proceedings.
Similarly, in Davaria, Justice Lee appeared to indicate that “if the net return to group members is sufficient to be fair and reasonable and hence suitable to be the subject of an application for approval under s 33V of the Act”, the Court may have the power to make a CFO at settlement, and that a relevant consideration would be whether the CFO would increase the amount paid by group members to a funder from what would have been the position if an FEO was made.
Accordingly, even though the Courts declined to answer the questions put to them, the reasoning and remarks in both decisions foreshadow a willingness to entertain CFO applications made at the time of settlement or judgment and that some courts will be prepared to make such orders depending on the circumstances. While the law in this area is far from settled, the prospects of the High Court further considering the issue seem limited given a defendant’s interest in challenging such an order will almost certainly dissipate at the time of settlement or judgment, meaning it will be for an affected member of the class to take up the issue.