High Court rules on common fund orders in class action shakeup
Common fund orders – Appeal from finding that Federal Court and Supreme Court of New South Wales have power to make interlocutory common fund orders under s 33ZF of the Federal Court of Australia Act 1976 (Cth) and s 183 of the Civil Procedure Act 2005 (NSW), respectively – Held by 5:2 majority that no such power exists – Appeals allowed
On 4 December 2019, a majority of the High Court of Australia (Kiefel CJ, Bell, Keane, Nettle and Gordon JJ, Gageler and Edelman JJ dissenting) held that neither s 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCAA) nor s 183 of the Civil Procedure Act 2005 (NSW) (CPA) empowers a court to make a common fund order (CFO).
In so holding, the Court overturned unanimous decisions of the Full Court of the Federal Court of Australia (Westpac Banking Corporation v Lenthall (2019) 366 ALR 136;  FCAFC 34) and the New South Wales Court of Appeal (Brewster v BMW Australia Ltd (2019) 366 ALR 171;  NSWCA 35).
The Majority Judgments
Sections 33ZF of the FCAA and 183 of the CPA each provide that in a representative proceeding the court may make any order the court thinks appropriate or necessary to ensure that justice is done in the proceeding.
In a joint judgment, Kiefel CJ, Bell and Keane JJ (the plurality) held that although the power conferred on the court by those sections is broad, considerations of text, context and purpose all point to the conclusion that it does not extend to the making of a CFO. Some of the key aspects of the plurality’s judgment are set out below.
- Textual considerations: The focus of the power conferred on the court by the text of ss 33ZF and 183 is to ensure that justice is done in a representative proceeding as between the parties to it (including as between class members). In particular, the provisions are concerned with the making of orders as to how an action should proceed in order to do justice between the parties. However, “[t]hey are not concerned with the radically different question as to whether an action can proceed at all” (at ). Making a CFO “is not apt to ensure that justice is done in the proceeding by regulating how the matter is to proceed; to the contrary, an application for a CFO is centrally concerned to determine whether the proceeding is viable at all as a vehicle for the doing of justice between the parties to the proceeding” (at ). Indeed, “[w]hether or not a potential funder of the claimants may be given sufficient financial inducement to support the proceeding is outside the concern to which the text is addressed” (at ).
- Contextual considerations: The statutory context in which ss 33ZF and 183 appear shows that each section is a supplementary source of power. These sections are not intended to do “much the same work as other provisions of Pt IVA of the FCA and Pt 10 of the CPA, or … to meet the exigencies of litigation not adverted to at all by those other provisions”. The provisions of Pt IVA of the FCAA and Pt 10 of the CPA expressly provide for the making of orders with respect to (1) whether a proceeding should proceed as a class action, and (2) the distribution of the proceeds and costs of a representative proceeding. Insofar as (1) is concerned, the legislation recognises that the costs of identifying class members may be too high or too difficult in comparison to the value of the claims, and in these circumstances “the solution contemplated by the legislation is to halt the representative proceeding, not to make a CFO because the process of book building is proving too expensive or too difficult” (at ). Insofar as (2) is concerned, the legislation provides for the making of these orders at the conclusion of the proceeding (not at the outset), and the relevant provisions “do not involve the court in any predictive exercise, or in a concern as to whether a litigation funder may be sufficiently satisfied with the prospective return on its investment to assume the financial risk of pursuing".
- Purpose: The two central objectives of Pt IVA of the FCAA (and Pt 10 of the CPA, which emulated Pt IVA) were identified by the Australian Law Reform Commission in its 1991 report. They are to enhance access to justice and promote the efficient use of judicial resources; “[t]he defects in the existing law targeted by the ALRC in order to improve access to justice simply did not include the absence of sufficient incentive for litigation funders to fund litigation”, and ss 33ZF and 183 “do not empower the courts to rewrite Pt IVA and Pt 10 respectively in order to pursue other objectives in different ways” (at  and ). In short, the making of a CFO at the outset of a representative proceeding “in order to assure a potential funder of the litigation of a sufficient level of return upon its investment to secure its support for the proceeding, is beyond the purpose of the legislation” (at ).
- Free-riding: Preventing ‘free-riding’ by unfunded class members is relevant to doing justice as between class members. However, making a CFO is not apt to do justice by equitably sharing the costs of the litigation amongst class members. Indeed, a CFO imposes an additional cost on the class by requiring the payment of more money to a litigation funder, in circumstances where the funder has no equitable or contractual entitlement to that money, and there is no good reason why money should be taken from unfunded class members and directed to the funder. By contrast, a funding equalisation order (FEO), which redistributes the additional amounts received by unfunded class members pro rata across the class as a whole, is apt to do justice in the proceeding by ensuring that the cost of litigation is borne equitably between all class members.
- Book-building: “Plainly, there is no warrant to supplement the legislative scheme by judicial involvement to ease the commercial anxieties of litigation funders or to relieve them of the need to make their decisions as to whether a class action should be supported based on their own analysis of risk and reward ... A suggestion that book building is an exercise in "wasted costs" ignores the reality that group members will have to take action at some stage to obtain the actual payment of any monetary relief to which they have established an entitlement” (at ).
In a short separate judgment, Nettle J agreed with the plurality’s orders and (to a large extent) its reasoning. In particular, his Honour agreed that:
- the statutory context of ss 33ZF and 183 (including, in particular, the detailed provisions in Pt IVA of the FCAA and Pt 10 of the CPA concerning the distribution of cost burdens and judgment or settlement proceeds) militates strongly against a finding that those sections confer power on the court to make a CFO; and
- “the legislative purpose of the enactment of Pt IVA did not extend to addressing uncertainties on the part of litigation funders as to the financial viability of funding such proceedings” (at ).
Justice Gordon (also in a separate judgment) agreed with the plurality’s orders. Her Honour’s key conclusions included that:
- the power conferred by ss 33ZF and 183 is a supplementary or gap-filling power, and none of the provisions of Pt IVA of the FCAA or Pt 10 of the CPA envisage a court making a CFO;
- a CFO involves a court crafting a relationship between unfunded class members and a non-party litigation funder, in circumstances where Pt IVA of the FCAA and Pt 10 of the CPA do not “allow the Court to set (or provide the statutory criteria to guide the Court in setting) the terms or contours of that relationship” (at ); and
- a FEO already provides an acceptable solution to the free-riding problem.
The Dissenting Judgments
Justices Gageler and Edelman dissented (in separate judgments), holding that a CFO can be thought by a court to be appropriate or necessary to ensure that justice is done in a representative proceeding, and therefore can be made pursuant to the power conferred on it by ss 33ZF or 183. Some particularly relevant aspects of the dissenting judgments are set out below:
- Justices Gageler and Edelman both observed that the scope of the power conferred on the court by ss 33ZF and 183 is not fixed by understandings or expectations held in 1991 or 2010 (when those provisions were enacted). Rather, what the court thinks necessary or appropriate to do justice in a representative proceeding should be capable of taking into account factual and legal developments that have occurred since the provisions were enacted, including the advent and development of litigation funding.
- Their Honours both rejected the contention that Pt IVA of the FCAA and Pt 10 of the CPA were intended to be comprehensive regimes, or that the provisions contained therein limited or confined the court’s power under ss 33ZF or 183 so as to exclude it from making a CFO.
- Their Honours also rejected the suggestion that the court is not well-placed to evaluate the appropriateness of the payment to be made to a litigation funder in return for the risks taken on by it in funding the proceeding. Their Honours also indicated their support for the making of such an evaluation at an early stage of the proceeding, so as to avoid ‘hindsight bias’.
- Justice Gageler held that the power conferred by ss 33ZF and 183 extend to ensuring that both substantive and procedural justice is done between the representative applicant and class members in the conduct of the proceeding. Insofar as procedural justice is concerned, his Honour said that the power cannot be separated from the central object of Pt VIA of the FCAA and Pt 10 of the CPA, being to enhance access to justice. In this vein, his Honour observed that, “it introduces an unrealistic dichotomy to postulate that an order that serves to shore up the commercial viability of the proceeding from the perspective of the litigation funder can have nothing to do with enhancing the interests of justice in the conduct of the representative proceeding” (at ). Insofar as substantive justice is concerned, his Honour said that the power enables the court to make orders it “thinks appropriate or necessary to ensure that expenses incurred in carrying on the litigation are shared fairly between the representative party and those group members who ultimately benefit from the representative proceeding” (at ). Putting these considerations together, his Honour could see no reason why a court could not think that making a CFO would be appropriate or necessary to ensure that justice is done in a representative proceeding.
- Justice Edelman held that a CFO can be appropriate or necessary to ensure that justice is done in a representative proceeding “by requiring those who obtain the benefit of a litigation funding service, including the benefit of risk and cost incurred by the litigation funder, to bear a proportionate share of the reasonable remuneration for that service” (at ). His Honour observed that similar kinds of orders “are made in numerous circumstances where justice requires remuneration for unrequested intervention that rescues or preserves the property of another including actions by maritime salvors, bailees, tenants, trustees, liquidators, and solicitors” (at ).
There are two key unresolved questions following the High Court’s judgement.
The first is whether the court has power to make a CFO at the conclusion of a representative proceeding, pursuant to ss 33ZF of the FCAA and 183 of the CPA (following a judgment) or ss 33V(2) of the FCAA and 173(2) of the CPA (following a settlement) (or pursuant to its general equitable jurisdiction). Indeed, the High Court was only required to determine whether the court has power to make an interlocutory CFO at an early stage in a proceeding. However, it appears unlikely that the majority would hold that the court has power to make a CFO at the conclusion of a representative proceeding, because (among other things):
- as outlined above, the plurality said that a CFO is not apt to ensure that justice is done as between class members by equitably spreading the costs of the litigation, because it requires the payment of additional money to a litigation funder to which the funder has no contractual or equitable entitlement; and
- Gordon J expressly said that s 33V(2) of the FCAA “does not envisage a Court making orders with respect to the economics of a proceeding by ensuring that a litigation funder obtains a particular return on funds invested” (at ).
The second unresolved question is whether the making of a CFO would be unconstitutional, either because it would involve the exercise of non-judicial power (contrary to Ch III of the Constitution) or the acquisition of property otherwise than on just terms (contrary to s 51(xxxi) of the Constitution). Although these arguments were dismissed by the dissenting judges, they did not arise for determination as a result of the majority’s findings. These issues may thus require future determination in the event that a judge makes a CFO at the conclusion of a representative proceeding, or an express power to make a CFO is conferred on a court by a State or the Commonwealth.
BMW Australia Ltd v Brewster;
Westpac Banking Corporation v Lenthall  HCA 45
- High Court of Australia, Kiefel CJ, Bell, Gageler, Keane, Nettle, Gordon and Edelman JJ,
- 4 December 2019
- Appellants’ Solicitors in Lenthall proceeding: Allens;
- Appellant’s Solicitors in Brewster proceeding: Ashurst;
- Respondent’s Solicitors in Lenthall proceeding: Shine Lawyers;
- Respondent’s Solicitors in Brewster proceeding: Quinn Emanuel Urquhart & Sullivan;
- Respondent’s Funder in Lenthall proceeding: JustKapital Litigation Pty Ltd;
- Respondent’s Funder in Brewster proceeding: Regency Funding Pty Ltd
Read more about this case on Austlii: Westpac Banking Corporation v Lenthall  HCA 45
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