Courts confirm common fund orders - but will they decline anyway?

The New South Wales Court of Appeal and the Full Court of the Federal Court of Australia have simultaneously delivered decisions confirming the Courts’ power to award 'common fund orders' in representative proceedings.

Common fund orders

A common fund order allows those bringing and funding an action to recover their costs out of the group’s total settlement - even though many group members have not specifically agreed to this arrangement.

Over the last two years, many litigants and funders have sought common fund orders to avoid the costs of signing up individual group members through a book build process.

Despite these decisions, we think book building will continue to play an important role in Australian class actions.

Background – New South Wales proceedings

The NSW proceeding (Brewster) is one of six concurrently managed class actions concerning Takata airbags, in this case brought against BMW Australia (BMW).

The claim is brought on behalf of approximately 200,000 affected owners, but only 33 group members have signed up to an agreement allowing the litigation funder to recover its costs from their proceeds of a successful result. If this was the only way for the funder to recover its outlay, the claim would not be sustainable, even if successful. However, with a common fund order the funder could spread its costs over all 200,000 class members.

BMW challenged the Supreme Court’s power to make the order. In light of the public importance, the question was referred to the Court of Appeal.

Background – Federal proceedings

The Federal proceeding (Lenthall) concerned allegedly deficient financial advice offered by Westpac and its Life Insurance subsidiary. Again, only a small number of group members had signed a funding agreement and the plaintiff sought a common fund order. The Court granted the order, but Westpac appealed to the Full Court.

The joint hearing

The questions in Brewster and Lenthall were substantially the same. This led, most unusually, to the Courts sitting together to hear arguments (although they gave separate judgments).

The respondents, BMW and Westpac, argued that the Courts lacked power to make a common fund order because:

• the Courts did not have power under legislation to make the order;
• the order would be beyond the Courts’ judicial power; and
• the order would contravene section 51(xxxi) of the Commonwealth Constitution, which proscribes the acquisition of property otherwise than on just terms.

Both Courts rejected all three grounds.

Ground 1 – No power under legislation

Section 183 of the Civil Procedure Act 2005 (NSW) and section 33ZF of the Federal Court of Australia Act 1976 (Cth) provide that a court can make any order 'appropriate or necessary to ensure that justice is done'. The applicants for the common fund orders relied on these provisions as the basis for making the orders.

The respondents argued that these broad words should be interpreted in accordance with the ‘principle of legality’. This principle presumes that legislation is not intended to interfere with ‘fundamental rights’ unless it contains clear words to that effect. The respondents said that there were no clear words empowering the Courts to interfere with the group members’ property rights, including their causes of action and any proceeds they might recover.

The Courts held that the principle of legality was not contravened. The Supreme Court said that section 183 was simply one part of a broader legislative scheme, and construing it narrowly would deny the legislature’s intention to provide a comprehensive regime for persons who are made class members.

Second, the Courts did not accept the respondents’ contention that sections 183 and 33ZF did not operate in respect of common fund orders because there were other, more specific, provisions in the legislation dealing with the same subject matter. Rather, these sections served a distinct purpose, including to provide for the exercise of powers after judgment had been delivered.

Accordingly, the Courts found that the legislation did empower them to make a common fund order.

Ground 2 – Order is beyond judicial power

The second argument advanced by the respondents involved the contention that, even if grounded in legislation, the making of the order was beyond judicial power. This was clearly a live question in the Federal Court, because judicial power is limited by Chapter III of the Commonwealth Constitution.

BMW argued that the Supreme Court was also bound by those same limits because it was exercising federal jurisdiction. Despite the Court of Appeal’s reservations about that line of argument, it accepted in Brewster that the State regime would rise or fall with the federal regime. However, it was ultimately unnecessary for the Supreme Court to decide whether it was bound by the limits because it found that, even if it were bound, the limits were not breached.

The respondents argued that the order was non-judicial because it would not resolve an existing dispute, but rather would create new rights or obligations. The Courts said that creating new rights was not inimical to judicial power. The Supreme Court noted that it was common to make orders creating new rights, such as an order requiring a party to give security for costs.

The respondents further contended that there were no objective standards for the Courts to apply in making the order, such that the order would be non-judicial. The Supreme Court said it was accustomed to making determinations on what is a reasonable rate of return based on evidence and submissions, and such a determination is an exercise of judicial power. The Federal Court said that the need to assess funders’ monetary compensation was hardly non-judicial, and would be done by reference to principles and evidence.

Finally, the respondents complained that the order was hypothetical because there may never be a damages award. The Supreme Court said that the effect of the order would be to bind group members to the funding terms set down by the funder, which were not hypothetical. The Federal Court did not squarely deal with the question, but plainly did not find it to deny judicial character to a common fund order.

Ground 3 – Acquisition of property otherwise than on just terms

The respondents' final argument was that group members' property was being compulsorily acquired other than on just terms. The property was said to be the group members’ cause of action and right to the proceeds. The acquisition was said to be the taking of these rights by the litigation funder. The acquisition was said to be compulsory because the group members did not have a contract with the funder.

Both Courts held that sections 183 and 33ZF were not laws with respect to the acquisition of property, so would not engage the constitutional protection. Rather, these provisions conferred a power on the Court to do justice in determining legal rights.

The Supreme Court noted that group members could opt out, so any acquisition would be consensual rather than compulsory. The Federal Court said there was no 'acquisition', but rather an adjustment of the competing rights of the parties.

The Federal Court was unclear as to whether any 'property' was being acquired, but this was not necessary to determine.

Outcome and implications

Both Courts confirmed their power to make common fund orders.

This prevented a significant shift in the class action landscape and preserves the current model of open class actions.

Even though it is not necessary to book build when a common fund order is available, in our view book building will continue to play an important role in Australian class actions. We think funders will be looking for investment opportunities that avoid, or substantially reduce, what has become known as 'the GetSwift risk' – ie the risk that in a situation involving competing open class actions their claim will be permanently stayed. If they are able to build substantial books, funders may well:

• be able to run class closed class actions, thereby avoiding the GetSwift risk completely; or
• stand a better chance if there is a 'beauty parade' – a claim backed by a substantial book is more likely to prevail in a 'beauty parade' than a claim not so backed, all other things being equal.

Time will tell.