Introduction
In Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 (‘Davaria’), the Federal Court of Australia (O’Callaghan J) held that it has no power to make a common fund order in aid of the settlement of class action proceedings.
A common fund order (or CFO) refers to a category of orders whereby the remuneration of a litigation funder to a proceeding, and the quantum of that remuneration, is borne by all of the group members (not just those who have signed a funding agreement) and is paid out of any judgment or settlement sum in the proceeding. In the Federal Court, such orders have typically been made under ss 33V(2) and 33ZF of the Federal Court of Australia Act 1976 (Cth) (‘FCA’).
Section 33V provides:
Settlement and discontinuance--representative proceeding
(1) A representative proceeding may not be settled or discontinued without the approval of the Court.
(2) If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.
Section 33ZF(1) relevantly provides:
General power of Court to make orders
(1) In any proceeding (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding.
In 2019, the majority of the High Court of Australia held in BMW Australia Ltd v Brewster (2019) 269 CLR 574 (‘Brewster’, see our earlier case note) that the Federal Court did not have the power to make a CFO under s 33ZF(1) in the context of an application for an order at an early stage in a class action proceeding. A significant issue following the High Court’s judgment was whether a CFO could be sought at a later stage where, for example, a proceeding had settled and the terms of that settlement were subject to approval by the court.
Several decisions of the Federal Court since Brewster have held that the court does have the power under s 33V(2) of the FCA to make a CFO as an ancillary order upon settlement of the class action proceeding. However, Davaria marks a significant departure from this line of authority in its finding that the Federal Court has no power to make a CFO at all.
Background
The judgment in Davaria concerned the approval of the settlement of two class action proceedings commenced in the Federal Court of Australia by franchisees of the 7-Eleven brand against 7-Eleven Pty Ltd (and other related entities) and the Australia and New Zealand Banking Group Ltd (ANZ). The proceedings were funded by a litigation funder.
On 14 October 2020, on 7-Eleven’s application, Justice Middleton reserved a question for determination by the Full Court of the Federal Court, being whether the Federal Court has power to make a CFO pursuant to ss 33V, 33Z or 33ZF upon the settlement or determination of the proceedings. At the time the application was made, however, no settlement deed had been entered into by the parties to the proceedings. On 3 November 2020, the Full Court declined to answer the question reserved before it by Middleton J, holding that it was inappropriate to answer the question in the absence of any factual controversy relating to the settlement of the proceedings.
On 4 August 2021, the parties to both proceedings and the litigation funder entered into a settlement deed under which both proceedings were settled for $98 million, subject to the Federal Court’s approval under s 33V of the FCA. By an interlocutory process, the litigation funder sought a CFO to be made as an ancillary order upon approving the terms of the settlement.
CFOs: made in aid of settlement of proceedings?
As stated above, the High Court in Brewster held that the Federal Court did not have the power to make an CFO under s 33ZF(1) of the FCA in those class actions, which were both at a relatively early stage in the proceedings. However, since that judgment was published in 2019, there has been a considerable division of opinion amongst judges of the Federal Court as to whether Brewster foreclosed the power of the Federal Court to make a CFO at the time of settlement of proceedings, either under s 33ZF(1) or s 33V(2) of the FCA, or whether it was more limited in its application and foreclosed merely the making of a CFO at an early stage in the proceeding.
In Cantor v Audi Australia Pty Limited (No 5) [2020] FCA 637, Justice Foster observed (without finally deciding) that the true import of Brewster was there was no power to make a CFO under either ss 33ZF or 33V or in equity at any point in the proceeding, let alone at the settlement of proceedings. As his Honour said (at [418]):
“In summary, there are statements made in each of the judgments of the Justices who comprised the majority in Brewster which indicate that those Justices are of the opinion that, not only does this Court…not have the power to make a CFO at an early stage in a group proceeding brought under Pt IVA of the FCA Act… but also [the Federal Court does] not have the power to make a CFO at any time.”
However, in the Full Court decision of Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCAFC 183, Justice Lee (with whom Middleton and Moshinsky JJ agreed) doubted Foster J’s broad reading of Brewster, observing that the majority of the High Court was concerned only with the narrow question of the availability of the CFO under s 33ZF of the FCA at an early stage of the proceeding and that “no dicta of a majority of judges can be identified in [Brewster] for the proposition that there is a want of power to make [a CFO at the time of settlement of the proceeding]” (see [41]). His Honour also referred (at [42]) to the decision of the Court of Appeal of the Supreme Court of New South Wales in Brewster v BMW Australia Ltd [2020] NSWCA 272 where that court made similar observations in the context of s 183 and 173 of the Civil Procedure Act 2005 (NSW) (‘CPA’).
Following the Full Court’s observations, the prevailing view amongst judges of the Federal Court (as well as judges of Supreme Court of New South Wales under their cognate class action provisions), has been that a CFO can be made under s 33V(2) of the FCA (and, in New South Wales, under s 173 of the CPA), and judges have since made such orders in a number of decisions: see, for example, Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd (No 3) [2020] FCA 1885 at [15] and [33] (Lee J), Haselhurst v Toyota Motor Corporation Australia Ltd t/as Toyota Australia [2022] NSWSC 1076 at [51] (Rees J), Hall v Arnold Bloch Leibler (a firm) (No 2) [2022] FCA 163 at [24] (Beach J), Quirk v Suncorp Portfolio Services Ltd in its capacity as trustee for the Suncorp Master Trust (No 2) [2022] NSWSC 1457 at [43]-[44] (Stevenson J).
The Present Case
In the present case, Justice O’Callaghan declined to make a CFO in aid of settlement of the proceeding under ss 23, 33V and/or 33ZF. His Honour preferred the analysis of Foster J in Cantor to the approach taken in other Federal Court decisions acceding to such applications (referring specifically to Swann Insurance and Hall, see above). Central to O’Callaghan J’s decision was his broad reading of the majority judgments in Brewster. Much like Foster J in Cantor, his Honour’s view was that, correctly understood, Brewster did not allow for any scope to make a CFO under ss 33ZF(1) and 33V(2) of the FCA.
His Honour referred to several salient observations from the majority in Brewster in support of his conclusion, including:
- At [184], Justice Gordon was “unequivocal” that no CFO could be made under s 33V of the FCA because that “provision does not envisage a Court making orders with respect to the economics of a proceeding by ensuring that a litigation funder obtains a particular return on funds invested” (see Brewster at [141]) and that a CFO is “is not an order that is appropriate or necessary to ensure that justice is done in a proceeding” (see Brewster at [166]);
- At [185], Justice Nettle observed that “no provision of Part IVA of the Federal Court of Australia Act contemplates the Court making a CFO” (see Brewster at [125]), “strongly implies exclusion of a construction of that provision that permits of the making of a CFO” (see Brewster at [125]), and that “the commercial interests of funders formed [no] part of the mischief that the introduction of Pt IVA was intended to confront” (see Brewster at [126]);
- At [186], the plurality (Kiefel CJ, Bell and Keane JJ) said that there is “no reason why the amount taken from unfunded group members’ awards should be directed to the litigation funder, much less that an order to that effect should be made at the outset of the proceeding” (see Brewster at [87]).
His Honour stressed (at [188]) that none of these observations by the High Court in Brewster were subject to temporal limitations, such that a CFO could not be made at one point in time, but it could be made at another point in time in the proceeding.
Conclusions
This decision adds more complexity to the precarious status of CFOs following the decision in Brewster. Justice O’Callaghan’s conclusions that a CFO cannot be made at the time of the approval of the settlement is contrary to a number of other first instance decisions of the Federal Court and the Supreme Court of New South Wales and departs from the preliminary views of the Full Federal Court in Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCAFC 183 in which that court expressed an openness towards the availability of a CFO at the time of settlement of proceedings. Undoubtedly, there are funded class actions presently on foot that have been proceeding on an assumption that a CFO would be sought at the settlement approval stage. The decision in Davaria may now augment the potentially divergent interests in those class actions as between the representative applicants (who will have contractual obligations to the funder), unfunded group members, litigation funders, and legal representatives for those various interests. Given the split in judicial decisions, appellate clarification is now essential to restore certainty in this important area of class actions. Until that time, new plaintiffs may seek the relative certainty of a Group Costs Order in the Supreme Court of Victoria, under that jurisdiction’s contingency fee regime.
