Common fund orders can be made at settlement, and employment cases can be class actions: Full Federal Court 

What you need to know

• The Full Federal Court has confirmed the court's power to order that proceeds of settlement be paid to litigation funders from class action group members who have not agreed to that, through a "Common Fund Order".
• Whether a CFO is made in any particular case (including in preference to a Funding Equalisation Order) remains a matter of discretion.
• The Full Court also confirmed that employment related matters under the Fair Work Act can proceed as class actions.

Recap of the journey to Settlement CFOs

CFOs are used to pay third-party litigation funders a commission from any settlement or judgment sum regardless of whether group members have entered into a funding agreement. The recent trend is for the funder to be paid about 20%-25% of the total.

In 2019, the High Court held in Brewster that the court did not have power to make a CFO prior to settlement under 'gap-filling' provisions in the equivalent NSW legislation.

Despite that, first instance decisions have generally considered there is power to make CFOs at the time of settlement under a different power (s33V). However, there was a recent first instance decision going the other way. See our earlier article here.

The Elliott-Carde case

The decision arose in the context of two competing matters – a class action, and proceedings by the Shop, Distributive and Allied Employees Association (SDA) on behalf of employees.

The power to make a Settlement CFO was relevant to comparing the potential return to employees under each matter for the purposes of an application to stay the class action, and the accuracy of potential opt out notices. This was because the funder behind the class action indicated it would seek a CFO, whereas the SDA would not.

The Full Federal Court has now ruled that Settlement CFOs are within the Court's power

Section 33V(2) gives the Court power to make orders that are "just with respect to the distribution of any money paid under a settlement or paid into Court". Each Judge considered this a broad discretion that should not be read down to exclude Settlement CFOs.

In particular, Beach J considered "distribution" to refer to the function and exercise of allocation of funds, and s33V says nothing about the identity of the recipient. To read s33V(2) in a way that precludes distribution of a settlement sum to third parties would have what Lee J considered to be the "absurd" result of preventing payments to third parties such as the applicant's solicitors, settlement administrators and costs referees. The funder's self-interest is irrelevant to whether the Court has power.

Beach J noted:

It is consistent with the Court's supervisory role in respect of settlements of representative proceedings, in considering what orders are just, to assess the remuneration that should be provided to a litigation funder (without which compensation may not have been payable to group members at all).

The Court raised questions about the virtues of Funding Equalisation Orders

As an alternative to CFOs, the court can make a Funding Equalisation Order (FEO) to address the issue of "free riders". An FEO caps the total amount payable to the funder to what it is contractually entitled to receive through the funding agreements it has signed with individual group members, but then makes adjustments to share that payment among all group members.

The High Court in Brewster preferred FEOs because CFOs can increase the amount payable to the funder, and therefore the cost to group members. But the Full Court in Elliott-Carde considered FEOs have a number of disadvantages:

• FEOs are premised on the funder having a sufficient book build, which is itself expensive and can increase the costs of running the litigation; and
• the book build process encourages closed classes, which is against the open class philosophy of the opt-out model in Part IVA, can lead to duplicative class actions, and often restricts access to justice.

Whether a Court considers a FEO or a CFO "just" in the circumstances is a matter of discretion – both are available according to the Full Federal Court.

Employment cases can be class actions

There are provisions in the Fair Work Act which permit proceedings to be brought on behalf of employees (sections 539 and 540). The SDA argued that these provisions impliedly exclude the Federal Court class action regime.

The Full Court rejected that argument. It held:

• the Fair Work Act provisions deal with who can make applications and the contraventions to which their applications can relate; and
• the Federal Court regime does not expand this, but rather authorises those people to bring proceedings on behalf of other people.

The court also considered this outcome to be consistent with the purpose of each statute.

What next?

1. No real impact on the class actions funding market

While this appeal court decision provides more certainty for litigation funders following the High Court's decision in Brewster, the outcome was entirely expected given how the members of the Full Court had already considered CFOs.

In the period between the High Court's decision in Brewster and the hearing in Elliott-Carde there were 15 first instance decisions in which a settlement CFO was sought. They were ordered in 13. Beach J and Lee J (who both sat on the Full Federal Court in Elliott-Carde) were among the judges who ordered CFOs – one by Lee J and six by Beach J.

2. No real impact on employment class actions

We don't think the class action market had been suppressed by any concern about an argument that employment cases couldn't run as class actions. They had been growing strongly over recent years.

Indeed, Lee J said that if the SDA's argument was correct it would displace well-entrenched understanding.

3. Law reform to cap commissions available to funders?

The ALRC's 2018 report on class actions and litigation funding recommended a statutory power to make common fund orders. That would seem unnecessary at this stage given the Full Court's decision that there already is a power - though might be more likely if the High Court ultimately took a different view.

Law reform to cap commissions also seems unlikely at the moment. The Full Court rejected the contention that Settlement CFOs involve the Court acting as a market regulator and setting funding commission rates. Beach J considered making a common fund order based on the particular case to be "plain vanilla judging".

4. Contingency fees and solicitor CFOs?

In a separate judgment on a carriage motion in the Jaguar Land Rover class action delivered at the same time, Lee J again commented on the possibility of common fund orders involving payment to solicitors – effectively enabling contingency fees which are otherwise only available in Victoria.

Lee J again indicated that he considers:

• solicitor CFOs are not inconsistent with the prohibition on contingency fees as they do not comprise costs agreements;

• if the court has power to make CFOs then it can make them to solicitors in an appropriate case - the power under s33V does not depend on a commercial funder.

This issue may be considered by the Full Federal Court shortly in the Blue Sky class actions, where it has been previously indicated that approval may be sought to issue a notice to group members foreshadowing an application for a solicitors' CFO. This had been deferred pending the outcome of Elliott-Carde.

This is a controversial area, which we consider further in our separate article. 

5. The High Court on CFOs?

While appeals of CFOs are unlikely after settlement, Elliott-Carde demonstrates the possibility for consideration as part of carriage or stay motions and notices to group members, when a defendant may have greater appetite.

If that does happen, the High Court's approach will be interesting given the arguable similarity in language in the provisions considered by the High Court in Brewster and the Full Court in Elliott-Carde. In Brewster the provision required the order to be "appropriate or necessary to ensure that justice is done", and in Elliott-Carde orders "as are just".

However, the context of the provisions is different: one is a general gap filler concerning orders "in the proceeding", whereas the other is specifically directed to distribution of money paid under a settlement. The membership of the High Court has also changed considerably since Brewster.

Elliott-Carde v McDonald's Australia Limited [2023] FCAFC 162.

Authors: Ian Bolster, Partner; John Pavlakis, Partner; Sally-Anne Stewart, Senior Associate; and Andrew Westcott, Expertise Counsel.