High Court delivers major setback for litigation funding

• The High Court has ruled existing legislation does not permit the making of ‘common fund orders’ in class action proceedings
• The decision is a significant setback for the business of litigation funding and plaintiff law firms operating in Australia
• Existing common fund orders made in class action proceedings could be challenged
• Legislative intervention will be required if courts are to make common fund orders in the future

The High Court’s decision

On 4 December 2019, the High Court handed down its decision in the Westpac and BMW class action proceedings.¹ The High Court overturned the decisions made by the historic joint sitting of the Full Federal Court and the NSW Court of Appeal.²

The High Court decided by a 5-2 majority that neither section 33ZF of the Federal Court Act 1976 (Cth) nor section 183 of the Civil Procedure Act 2005 (NSW) authorise a court to make a common fund order (CFO) (see ‘What is a CFO?’ below).

The majority did not rule on a further issue raised by the appellants that the making of CFOs by Courts could be prohibited by the Commonwealth Constitution.

The High Court left untouched the Court’s power to make a ‘funding equalisation order’ (FEO) at the conclusion of class action proceedings. Under an FEO, all group members in like circumstances receive an equal share of any judgment or settlement sum. The litigation funder receives only what it is entitled to receive from group members who have entered into funding agreements.

Implications for class actions and litigation funding

The High Court’s decision is a significant setback for the business of litigation funding and plaintiff law firms operating in Australia. Litigation funders can no longer seek assurance from the court in the form of a CFO in order to secure their funding investment.

Litigation funders will have to resort to a funding model that includes ‘book building’ to secure remuneration. Book building is a time consuming process – litigation funders have to identify, contact and sign up as many class action group members as possible to funding agreements. 

Given the additional effort and expense, many class action claims may not be as attractive commercially for litigation funders. This applies particularly to smaller litigation funders who may not wish to devote the significant resources required to book build effectively. Litigation funders are also likely to prefer ‘closed’ class actions, where only the claims of funded group members are part of the proceedings. The likely consequence will be reduced access to justice for unfunded group members.

Where to next for class actions?

 All eyes will now be on the federal and state governments to see whether they will amend legislation to revive CFOs. Without legislative remedy it is possible that CFOs in existing class action proceedings will be challenged by defendants. 

If legislation were introduced to revive CFOs, it is possible that the constitutional arguments raised by the appellants but not decided by the majority of the High Court may be raised again. Although, as the dissenting judgments of Gageler J and Edelman J foreshadow, the arguments that CFOs are prohibited by the Commonwealth Constitution are unlikely to prevail.

As reported in our recent update, the Commonwealth Government is currently considering class action reform in response to the Australian Law Reform Commission’s report on class actions released in January 2019. The ALRC report made 24 recommendations including that federal legislation be changed to allow plaintiff lawyers to charge fees based on a percentage of a successful class action settlement or judgment subject to court approval. The Victorian Parliament has already introduced a Bill to implement this reform and the Western Australian Parliament is currently considering legislation to introduce a state-based class action regime.

What is a CFO?

A CFO is a court order that provides for a litigation funder’s remuneration to be calculated as either a percentage of a successful class action judgment or settlement, or as a multiple of the costs incurred in litigating the proceeding. 

A CFO will usually allow a litigation funder to be paid before any judgment or settlement amount is distributed to the group members. Under a CFO, all class action group members share the cost of funding the proceedings. 

A CFO is usually sought early in the proceedings to provide assurance to a litigation funder that it will receive a sufficient level of return for its funding investment.