Common Fund Orders are a go: Two significant class action developments in the Federal Court

On 12 October 2023, the Federal Court of Australia published two significant judgments regarding common fund orders:

• An appeal bench of the Full Federal Court has now confirmed that the Court is empowered to make a CFO upon settlement of a class action proceeding.
• The Court has observed that a ‘Solicitors’ CFO’ may be granted in favour of a firm of solicitors in an appropriate case.

The judgments are significant as they provide greater certainty to funders and plaintiff firms as to their ability to receive distributions from any settlement.

In this article, we describe and explain each decision and what to expect in the future.

CFO(k), says the Full Federal Court in McDonald’s class action

Background: a long and winding CFO road

A CFO is a category of orders whereby the remuneration to be paid to a litigation funder in a class action proceeding:

• 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) of the Federal Court of Australia Act 1976 Cth) (FCA Act). This section empowers the Court to make ‘such orders as are just with respect to the distribution of any money paid under a settlement or paid into Court’ upon settlement of a class action proceeding. When made at the time of settlement, these are often described as ‘Settlement CFOs.’

In February 2023, the Federal Court (O’Callaghan J) published a judgment in which it held that it did not have the power to make a CFO upon settlement of a class action proceeding (Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 (‘Davaria’)).

As explained in our earlier article, the Federal Court’s decision in Davaria departed from a line of first-instance decisions in the Federal Court to the effect that the court had the power to make a Settlement CFO under s 33V(2) of the FCA Act.

Two weeks after Davaria, Justice Lee referred the question of whether a Settlement CFO could be made to the Full Federal Court in two of the 17 related employment proceedings against McDonald’s and its franchisees. ^[1]

This was the second time that the Full Federal Court had been asked to determine whether the Court had the power to make a Settlement CFO. On the first occasion, the Full Federal Court declined to determine the issue as it was hypothetical in the context of the relevant proceeding.^[2]

Why did the Settlement CFO matter in the McDonald’s class actions?

The McDonald’s class actions comprised 17 related proceedings commenced against McDonald's Australia Limited (McDonald’s) and its franchisees for alleged contraventions of the Fair Work Act 2009 (Cth) in failing to provide employees with ten-minute rest breaks. The judgment in Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162 (‘Elliott-Carde’) dealt with only two of the 17 related proceedings against McDonald’s: a class action commenced by a former McDonald’s employee and a franchisee employee (Elliott-Carde Proceeding), and proceedings commenced by industry association Shop, Distributive and Allied Employees Association (SDA) on behalf of affected former employees (SDA Proceeding). Each proceeding sought orders for compensation from McDonald's for their alleged contraventions of the Fair Work Act.

The duplication of claims for compensation prompted an application by the SDA for a stay of the Elliott-Carde Proceeding. The stay application was listed to be heard at the same time as the application for approval of draft opt-out notices to be sent to group members in the Elliott-Carde Proceeding. Those draft opt notices foreshadowed the representative applicants’ intention to seek a Settlement CFO in the event the class action settled. Justice Lee observed, that:

• the conduct of the Elliott-Carde Proceeding was premised on the existence of the Federal Court’s power to make a Settlement CFO under s 33V(2) of the FCA Act. If the Federal Court did not have such a power, this would be a material consideration in relation to the stay application; and
• the question of power was also relevant to the approval of the draft opt-out notice.

For these reasons, his Honour considered it appropriate for the question of the Federal Court’s power to be referred for determination by the Full Federal Court.  

Full Federal Court approves Settlement CFOs

In a long and nuanced decision comprising three separate judgments and over 130 pages, the Full Federal Court held that:

• the determination by the Full Federal Court of the question reserved before it by Lee J was not hypothetical, and
• the Court had the power to make a Settlement CFO under s 33V(2) of the FCA Act.

This conclusion was reached by each member of the Full Court bench – Justices Beach, Lee and Colvin. Their Honours reasons differed in certain respects but, as Beach J put it, those differences are ‘subtle’ and ‘in no way’ detract from the clear result in the case.

Common to each of the three sets of reasons are the following propositions:

• The High Court’s decision in Brewster^[3] did not decide whether a CFO could be made under s 33V(2), but was concerned only with the power to make a CFO under s 33ZF(1) of the FCA Act. Justice Gordon’s observations in Brewster that s 33V(2) ‘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’ were therefore either obiter dicta, expressed without the benefit of argument as to the proper ambit of s 33V(2), or related to the stage of approval of the terms of settlement.
• The Federal Court’s power to make orders under s 33ZF(1) which are ‘appropriate or necessary to ensure that justice is done in the proceeding’ is narrower than the broad, evaluative enquiry under s 33V(2) that orders with respect to the distribution of any money paid under a settlement or paid into Court be ‘just’. There is no reason to read down the breadth of the discretion in s 33V(2) by reference to implications or limitations not found in its express words.
• The decision in Davaria was contrary to a consistent trend of decisions in the Federal Court which have held that Settlement CFOs could be made under s 33V(2) (and, in New South Wales, under s 173(2) of the Civil Procedure Act 2005 (NSW)).

Solicitors’ CFOs: Room to Grow?

Immediately after delivering the judgment on behalf of the Full Court, Justice Lee also delivered his judgment in Greentree v Jaguar Land Rover Australia Pty Ltd (Carriage Application) [2023] FCA 1209 (‘Jaguar’), in which his Honour determined a carriage dispute regarding two substantially duplicative open class actions alleging consumer law breaches arising from defects in models of diesel motor cars.

His Honour was asked to consider funding proposals from Gilbert + Tobin and Maurice Blackburn. Both firms proposed a settlement or judgment CFO with sliding scales of commission, however Maurice Blackburn’s proposal also included a commission-based payment to the solicitors (in addition to legal costs) – known as a ‘Solicitors’ CFO’.

In considering the competing proposals, his Honour made the following comments at [41]-[46] on the ‘Solicitors’ CFO’ proposed by Maurice Blackburn:

• A Solicitor CFO would not be contrary to the prohibitions on solicitors entering into a cost agreement with a contingency fee, given the arrangement involved a proposed Court order and not an agreement between solicitor and client;
• When considering whether to make a payment from a settlement fund to a third party to a class action who has facilitated the realisation of the fund, the question is whether the proposed payment is ‘just’ by having regard to all of the circumstances. It is not necessary for the third party in question to be a commercial litigation funder;
• In determining what is ‘just’ in all the circumstances, a relevant factor is that making a Settlement CFO accords with the position that a person benefitting from another’s efforts should provide value in return on the basis that ‘it would be inequitable for the person who has created or realised a valuable asset, in which others claim an interest, not to have the costs, expenses and fees incurred in producing the asset paid out of the fund or property created’; and
• Accordingly, as a matter of power, Part IVA of the FCA Act does not preclude the granting of a Settlement CFO in which a payment is made to solicitors, where appropriate.

Ultimately, the Court ordered that the proceeding run by Maurice Blackburn would be permanently stayed provided that, within 28 days, Gilbert + Tobin and the funder provide an undertaking to the Court, to the effect that Gilbert + Tobin and the funder will match the total commission proposed in the Maurice Blackburn regime.

Where to from here?

As we reported in The Review- Class Actions in Australia 2022/2023, since the introduction of the Group Costs Order regime in Victoria in 2020, there has been a dramatic increase in class action filings in the Supreme Court of Victoria. A Group Costs Order enables solicitors to charge legal costs as a percentage of the amount recovered in the proceeding.

The judgment in Elliott-Carde is a favourable result for litigation funders, who now have greater certainty regarding the position as to their costs at the point of settlement. Similarly, Jaguar could be favourable to solicitors who fund class actions, as they may now be able to obtain orders equivalent to a contingency fee or group cost arrangement, where appropriate, at settlement. Both judgments have the potential to increase in the number of representative proceedings initiated in the Federal Court.

The Full Court’s judgment is however unlikely to have an immediate impact on filings given the likelihood of a further appeal to the High Court. If special leave is sought and granted by that Court, it will be decided by a bench that has changed considerably in the almost four years since the judgment in Brewster.