We reported in March this year that, in historic appeals, the Full Federal Court and New South Wales Court of Appeal sat together to consider whether the making of a “common fund order” (CFO) was constitutional and within the power of the Court. CFOs allow a litigation funder to recover compensation from every class member out of recoveries, not just from those who have signed funding agreements.

The question of whether the Court has power to make a CFO arose before both the New South Wales Court of Appeal (Brewster v BMW Australia Ltd [2019] NSWSCA 35) and the Full Federal Court of Australia (Lenthall v Westpac Life Insurance Services Limited [2019] FCAFC 34).

Delivering separate judgments, each appeal Court answered that question in the affirmative, holding that:

  • each Court has power to make a CFO, because under ss. 23 and 33ZF of the Federal Court of Australia Act 1976 (Cth) and s183 Civil Procedure Act 2005 (NSW) the Court is empowered, on its own motion, to make any order which is appropriate or necessary to ensure that justice is done;
  • the power to make CFOs under each of the above sections was an exercise of judicial power or incidental thereto, which could be conferred on a Court under the Constitution; and
  • the above sections, insofar as they authorise the making of a CFO, did not involve an acquisition of property other than on just terms contrary to s51(xxxi) of the Constitution. Rather, the relevant provisions confer a general power on the Court to make orders which the Court considers is appropriate or necessary to ensure that justice is done.

The High Court has granted special leave to both Westpac Life Insurance Services and BMW Australia to appeal against the decisions of the appeal Courts arising from the joint sitting.

Why is the High Court appeal important?

Courts have been increasingly willing to make CFOs since the 2016 decision in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148).

That decision significantly altered the class action and litigation funding landscape in a number of significant ways. Firstly, class members could no longer benefit from a class action without compensating funders for the cost of running the action. Secondly, CFOs give the Court greater oversight on funding commissions payable to funders, which the Court determines based on principles as to what is fair to the funder, while reflecting the interests of group members. CFOs also obviate the need to rely on a typical "book-build" process, resulting in the filing of actions at an earlier stage, which has led to a "race to the courts" and a greater number of competing open class actions.

If the High Court upholds the decisions of the two appeal Courts, then litigation funders will have final closure on the validity of CFOs and the trends identified above will likely continue.

However, if the High Court allows the appeals, then the current trends in class actions may take a sharp turn unless there is a legislative remedy. In particular, the removal of the ability of funders to seek compensation from all class members for the costs of running the action may reduce the prevalence of open class actions. With less class actions running as "open" classes, and instead running as "closed" classes after a traditional book build process, fewer may be compensated for loss the subject of the action.

We will keep you updated as to any developments on the High Court appeals.