New rules for Litigation Funders: Common Fund Orders and Class Actions

On 4 December 2019, the High Court of Australia allowed two appeals in a joint judgment for BMW Australia Ltd v Brewster & Anor (BMW matter) and Westpac Banking Corporation & Anor v Lenthall & Ors (Westpac matter) [2019] HCA 45 (together, the Cases). The decision is set to affect how litigation funders seek security of remuneration in class actions, by invalidating common fund orders made by the Federal Court of Australia and the Supreme Court of New South Wales.

The Cases were representative proceedings and were financially backed by litigation funders. The BMW matter involved litigation pursued in the Supreme Court of New South Wales against BMW Australia Ltd for its national recall of BMW vehicles fitted with defective airbags. In the Westpac matter, the Federal Court of Australia heard allegations that Westpac’s financial advisers had breached their obligations in relation to advice on insurance policies.

What are common fund orders?

The principal issue in each appeal was whether, in representative proceedings, section 33ZF of the Federal Court of Australia Act 1976 (Cth) and section 183 of the Civil Procedure Act 2005 (NSW) empower each respective court to make what is known as a “common fund order”.

The representative parties in each matter sought a common fund order. A common fund order is an order characteristically made at an early stage of representative proceedings. It provides that any moneys ultimately recovered in the proceedings can go proportionately to the litigation funder’s remuneration. A common fund order offers litigation funders comfort in that remuneration can be obtained in the absence of a signed costs agreement by members of a representative proceeding.

The respective sections of legislation were cited by the High Court as targeted at ensuring that ‘justice is done’. However, upon examination of the text, context and purpose of the legislation, the Court was not satisfied that the legislation gave Courts the power to make a common fund order.

Repercussions?

These decisions remove an economic protection for litigation funders and potentially make the funding of representative proceedings less lucrative for them. Funded class action cases may not be commenced as quickly, as litigation funders will need to effectively “book build” in order to acquire members. The book building process will involve members of a class action signing a funding agreement to ensure payment prior to joining as a party to the proceeding.

In spite of the ramifications of the Cases, Australia will likely continue to be considered a favourable jurisdiction for class actions, partially due to the lack of regulations that govern litigation funders. Irrespective of the unavailability of common fund orders, litigation funders have alternative means to pursue remuneration. Equalisation orders are available for litigation funders, which are similar in effect to common fund orders, but typically provided at the end of a successful action.

Finally, the Federal Court has indicated that a practice note will be released, which provides that the Court may make an order fairly distributing funds generated at the conclusion of a class action. Consequently, notwithstanding the importance of the Cases, it is unlikely that the volume of class action activity will decrease due to alternative measures litigation funders may employ to secure remuneration. 

By Mark Farquhar, Director Peter Clay, Senior Associate and Millie Clayton, Law Graduate