High Court to decide whether litigation funders can get common fund orders in class actions…And whether solicitors can also take a percentage

What you need to know

• The High Court has granted special leave to appeal the Full Federal Court's decision which allowed solicitor common fund orders. 
• This should give finality to the long disputed question around whether courts can make common fund orders at settlement or judgment – and whether solicitors can be given a percentage of class action proceeds in the absence of legislation permitting it. 
• The High Court in Brewster previously ruled against common fund orders being made early in proceedings (read our article here) – but the constitution of the Court has changed significantly since then and CFOs have been repeatedly made at settlement in the Federal Court. 
• The High Court's decision could have significant impacts on both the class actions market and the legal market more generally. 

Special leave granted

The High Court of Australia has granted special leave to appeal the Full Federal Court's decision in R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question). 

In that case, the Full Federal Court held that it has power to make a common fund order in favour of solicitors at the settlement or judgment of a class action.

The effect of that decision was that solicitors could take a percentage of settlement or judgement proceeds (and not just payment for costs and disbursements actually incurred in the proceeding).  Our article on the Full Federal Court's decision is here.

The High Court will now consider two related questions: 

• First, whether common fund orders can be made at settlement or judgment at all (e.g. to give litigation funders a percentage share).  
• Second, if so, whether common fund orders can be made in favour of solicitors.

There are a number of possible outcomes that could mean different things for the class actions and legal market – we discuss them below.

What if the High Court endorses CFOs at settlement (leaving aside solicitor CFOs)?

In short: business as usual.  Not much will change.  

The Federal Court has been making CFOs at settlement for some years.  It did not stop making them after the High Court's earlier decision.  If the High Court now endorses CFOs at settlement then that will remove any lingering uncertainty, but we don't expect that uncertainty has been holding back plaintiffs. 

We don't see this as a "floodgates" moment.

What if the High Court refuses CFOs (again leaving aside solicitor CFOs)?

In short: it will not be the death of class actions, but it will cause disruption and may wind back class action risk a bit.  There will likely be a push for legislative response. 

Common fund orders are relatively new in the scheme of the class action landscape, and the first common fund orders were different to the ones being made today.

That is, the first common fund orders were only made about eight years ago (in 2016), and were made on the basis that the total amount paid would be no more than what was otherwise available under a funding equalisation order.  (Funding equalisation orders limit the total overall payment to the funder to what it is contractually entitled to through agreements with group members.)  

In other words, if the High Court rules out CFOs, funders may return to the position they were in before 2016 (albeit that in 2016 they may have factored in the possibility of CFOs).  Funder recovery would again be limited to the agreements they have with group members.  This may see the return of the pre-action book build – although funders may be prepared to take some risk around obtaining that agreement during registration once the proceedings are on foot.

This may slow down some claims, and there may be cases that aren't as readily assessed as economic to bring.  There have been cases where the court has been informed that the case would not be funded if a CFO is not available.

Interestingly though, the year before the first CFO (i.e. in 2015), there were 35 class actions, of which 18 were funded.  The numbers in 2022 (six years after the first CFO) were similar: 33 class actions, of which 14 were funded.  (However, this ignores a peak in 2020 of 75 class actions of which 36 were funded – some of those claims may have been brought earlier before reforms were introduced affecting the regulatory requirements on funders.  And of course there are many other factors that go to class action risk).

And if the High Court rules out CFOs then there is the possibility of legislative change to bring them back in.  So any disruption may be short-lived.

What if the High Court endorses solicitor CFOs?

This may lead to a few more class actions, but of itself we don't see it as necessarily having a major impact on class action risk. 

There are two main reasons for that:

• First, the class actions market is already mature and active.  There are already a large number of funders looking for cases, with competing class actions common.  

So even if solicitor CFOs result in more law firms bringing class actions on their own account, those claims may have ultimately been brought by funders anyway. 

That said, the tipping point can be hard to predict.  There may be cases – particularly smaller cases and cases in less developed areas – that funders would view as uneconomic due to the cost of carrying full legal fees, and their required rates of return.  But there may be lawyers or law firms prepared to do so (and able to do so due to carrying unpaid fees at cost).  

• Second, contingency fees (which is the commercial effect of solicitor CFOs) are already available in class actions in Victoria through their group costs order regime, and we have already seen proceedings taken in Victoria to access that regime where another jurisdiction was otherwise the appropriate forum.  The Victorian Supreme Court has considered the availability of that regime to be a reason for cases to stay in Victoria.

In other words, many of the cases that may be brought seeking solicitor CFOs may have been brought under the Victorian regime anyway.

However, the High Court is separately considering an appeal about transferring proceedings out of Victoria where NSW was otherwise more appropriate, including whether the group costs order would travel with the case if it is transferred.

That case could potentially reduce the availability of group costs orders through the Victorian regime for cases that otherwise belong elsewhere.

However, solicitor CFOs could have a very significant impact on the legal landscape more generally.  

The prospect of sharing in proceeds worth hundreds of millions of dollars will likely encourage more lawyers and law firms to operate in that way in the plaintiff class action space.  

In the meantime?

Until the High Court resolves the issue, it is likely that CFOs at settlement/judgment will continue being made by the Federal Court (although there may be some reluctance, particularly for solicitor CFOs, if any were to come before the Court, pending the determination of the appeal).

How will this High Court bench compare to the one that ruled out CFOs early in proceedings? 

The High Court bench has changed considerably since it decided against ordering CFOs on commencement of proceedings but left unanswered the availability to do so on settlement/judgment:

• Four of the seven judges that heard that case have now retired (Kiefel CJ, Bell, Nettle and Keane JJ)
• The current judges of the High Court who did not hear Brewster have previously expressed mixed views on CFOs. For example, Beech-Jones J has spoken about innovations such as solicitors CFOs as potentially encouraging  forum shopping and seeing the Courts lose credibility (link), while Gleeson J approved CFOs whilst on the Federal Court.