The Full Federal Court has delivered a significant decision with broad ramifications for the conduct of class action litigation in Australia, ruling in Elliot-Carde & Anor v McDonald’s Australia Limited and Shop, Distributive and Allied Employees’ Association v Bandoc Pty Ltd & Ors (McDonald’s) that the Federal Court has the power to make ‘Common Fund Orders’ (CFO) following a settlement of a class action under s 33V of the Federal Court of Australia Act 1976 (Cth) (Act).

A CFO is an order or orders made by a court providing for a distribution to be made from the proceeds of a class action (such as an agreed settlement) to remunerate a person who bore the risks of funding the action.  This distribution is made from the ‘common fund’ of the proceeds recovered from the class action and is usually borne pro rata by the group members.  In essence, CFOs present a major financial incentive to litigation funders in that they obviate the need for the funder to enter into direct agreements with class members and ensure their funding fee can be deducted from the total pool of funds, rather than just the funds of class members who have entered into an agreement with the funder. CFOs significantly increase the scope of class actions that are ‘economic’ for a third party to fund.

CFOs became commonly used mechanisms following the Full Federal Court’s 2016 decision in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191. That was until the 2019 High Court decision in BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 94 ALJR 51 (Brewster), in which the majority ruled that the Court did not have power under s 33ZF of the Act (or its NSW state cognate) to make a CFO at the commencement of a class action.   

The ability and circumstances under which a Court could make a CFO has been significantly unsettled since Brewster. Following the decision, several Federal Court judges have made CFOs at the conclusion of class actions on the basis that Brewster only precluded such order at the commencement of proceedings. As such, class action litigants and participants in the class actions industry have been operating in an environment of uncertainty regarding class action funding mechanisms.   

However, the Full Court’s decision in McDonald’s purports to settle the issue (at least until the question comes before the High Court again) with three main consequences. First, the decision will instil third party funders with greater confidence that they will be able to obtain a CFO at the conclusion of a class action and thus encourage the commencement of class actions. Second, the decision will encourage the commencement of class actions in the Federal Court rather than enter jurisdiction where their ability to obtain a CFO is less clear. Third, litigation funders, representative applicants and respondents may now enter into settlement negotiations and settlement approval processes with more certainty as to the funding orders the parties can propose, and courts may make.  

Having said that, the class action landscape is a fast changing one. While McDonald’s has quelled the CFO controversy for now, it may eventually be challenged in the High Court. Further, the ratio in McDonald’s only conclusively determines the question of whether the Court has the power to make a CFO at settlement under s 33V. The question of whether other sources of power, statutory or equitable, may provide a basis for the Court to make CFOs at other stages of the proceeding, remains open (though perhaps otiose).

Highlighting the pace of change in the Australian class actions landscape, immediately after delivering the Full Court’s judgment in McDonald, Lee J delivered a judgment at first instance in which he found that there was no reason why the Court’s power to make a CFO could not be exercised in favour of a solicitor who bore risk in funding litigation, for instance by charging for their services on a ‘no win, no fee’ basis, and thus contributed to the creation of the common fund, where such an order was ‘just’ in the circumstances: Greentree v Jaguar Land Rover Australia Pty Ltd (Carriage Application) [2023] FCA 1209.  This decision represents another significant development in the law relating to the funding of class action litigation in Australia given that to date, the direct benefits of CFOs have only bestowed upon commercial litigation funders.

Finally, it’s worth noting that the Australian Law Reform Commission and the Victorian Law Commission report on class actions and third-party funding have recommended that legislation be enacted to provide an express statutory power for Courts to make CFOs.