The High Court allowed appeals in BMW Australia Ltd v Brewster and Westpac Banking Corporation v Lenthall [2019] HCA 45 finding that neither s183 of the Civil Procedure Act 2005 (NSW) nor s33ZF of the Federal Court Act 1976 (Cth) empowered the respective Courts to make a "common fund order" (CFO).

Background

CFOs have become a common feature in Australian class actions following the Money Max class action in 2016. A common fund order is made at an early stage in an open class action. It requires that all participating members contribute a percentage of any award of damages to the litigation funder regardless of whether the class member had signed a litigation funding agreement or been joined to the case.

CFOs were made in both the Brewster and Lenthall class actions:

  1. Brewster is a claim in the NSW Supreme Court against BMW relating to the installation of faulty airbags. The common fund order required all class members to reimburse the funder for their legal fees plus 25% of the net proceeds.
  2. Lenthall is a claim in the Federal Court against Westpac for mis-selling life insurance policies. The common fund order required all class members to reimburse the funder for their legal fees plus the lesser or 3 times the amount paid in legal fees or 25% of the net proceeds.

In both cases, the defendants objected to these orders and sought to challenge the power of the Court to make a CFO.

Arguments on Appeal

Both BMW and Westpac made three arguments on appeal for why the Courts did not have the power to make a CFO:

  1. In the absence of clear words, the power could not be implied into the relevant statutory provisions (s183 Civil Procedure Act 2005 (NSW); s33ZF Federal Court Act 1976 (Cth).
  2. It was inconsistent with the exercise of judicial power under Chapter III of the Constitution.
  3. The power involved the acquisition of property without providing "just terms" contrary to s51(xxxi) of the Constitution.

All three arguments were rejected by both the Full Federal Court and the NSW Court of Appeal. Both BMW and Westpac appealed their case to the High Court.

High Court's Decision

In a 5:2 decision (Kiefel CJ, Bell, Keane, Nettle, Gordon JJ: Gageler and Edelman JJ dissenting) the Court allowed the appeal. The Court found that when properly construed, the statutory provisions did not give the power to make a CFO. The Court determined that the statutory provisions conferred broad powers on the Court to make appropriate or necessary orders to ensure that justice is done in a proceeding. However, a CFO was an order to define the relationship between a party to the proceeding (the class members) and a third party (the litigation funder) and therefore could not be described as necessary to ensure justice in a proceeding. The Court distinguished that the provisions allowed a Court to make orders about how a class action should proceed, whereas a CFO was an order about whether an action can proceed at all and therefore beyond the statutory powers.

The Court suggested that a funding equalisation order (FEO) was an acceptable alternative to a CFO as it better addressed the problems of "free riders" or group members who sought to take benefit from the litigation without signing the funding agreement. An FEO would allow the redistribution of the additional amounts received by unfunded class members across the class as a whole, without imposing new obligations on the unfunded group members.

As the appellants succeeded on the principle statutory construction point, the Court did not determine whether CFOs were contrary to the Constitution.

Analysis

The High Court's decision will make it more difficult for litigation funders to get large consumer claim class actions off the ground. Without CFOs litigation funders will have to invest more time and money in persuading potential class members to register their interest and to enter into funding agreements before filing proceedings. For example, in Brewster, the matter proceeded with only 0.0165% of group members signing the funding agreement. Without sufficient interest, at an early stage, funders may decide that a particular matter is simply not economical and will not file proceedings.

The decision may not be the death of CFOs, as the Court's issue could be solved by appropriate legislative change. In fact, the recent Australian Law Reform Commission report on class action proceedings and third party funders recommended that the Federal Court Act be amended to provide an express statutory power to make common fund orders.

The Victorian Government's proposal to allow contingency fees may also resolve the High Court's issue with CFOs as it specifically allows lawyers representing a class to be paid as a percentage of damages recovered from all class members in exchange for providing the class with protection from adverse costs orders.