The Full Federal Court will soon consider whether CFOs can be used by lawyers to allow them to be paid contingency fees in representative proceedings.
Nicholas Andreou[1]
Common fund orders (CFO) are sought so that lawyers and litigation funders can charge all members of a class, not just the ones that have signed up. They can be sought early in the proceedings. The question of whether the Federal Court has power to order CFOs, is, after some uncertainty[2], now settled[3].
Whilst CFOs haven’t come down in the last shower[4], they may well have been thought of in one[5]. Now they are being considered by lawyers as means to be paid contingency fees in representative proceedings in the Federal Court. Arrangements for charging contingency fees are prohibited in most jurisdictions[6] other than Victoria.
In 2022/23 just over half of class action activity is in the Federal Court, followed by the Victorian Supreme Court as the next dominant place to file representative proceedings[7]. The VSC remains the most popular Court for the filing of all new securities class actions[8].
Perhaps the VSC’s popularity stems from Victoria’s unique position on contingency fee arrangements. Following the High Court’s decision in BMW v Brewster[9] and the recommendations of the Victorian Law Reform Commission[10] a bill[11] was passed[12] which added a new section 33ZDA to the Supreme Court Act 1986 (Vic) which provides for Group costs orders to be made on application by the plaintiff in any group proceeding calculated as a percentage of the amount of any award or settlement. It also covers the liability to pay adverse costs orders or post security for adverse costs.
The principles relevant to s 33ZDA(1) application have been summarised by Nichols J in Gehrke v Noumi Ltd[13].
With popularity comes competition and the Victorian class action market is increasingly competitive.
Two plaintiff groups, each having started separate representative proceedings involving the same subject matter in Maglio v Hino Motor Sales Australia Pty Ltd; McCoy v Hino Motors Ltd[14]each made application to see who would have carriage of the proceedings. Both Maglio and McCoy sought GCOs in the amount of 25%. Then, as a result of the competitive processes in the carriage applications, McCoy opted for a stepped rate such that the maximum applicable GCO rate was 25%, then reducing to 22.5%, 20% and 17.5% depending on the quantum of any award or settlement that is recovered. Maglio kept its rate at 25%. The Court considered the respective law firm’s experience [89] and financial capacity of the firm to meet any adverse costs orders [91].
His Honour ordered the Maglio proceeding be permanently stayed and a GCO made in the McCoy proceeding. This meant that the costs already incurred by Maglio were sunk which is the risk of commercialised litigation [93].
As a side note, the Court in Maglio v Hino Motor Sales Australia Pty Ltd; McCoy v Hino Motors Ltd provided a summary of the percentages which have been ordered in 11 other proceedings where a GCO has been made, which were set out in a table at [105]. The range is between 14% and 40% with the average around 24.5%.
Returning now to the Federal Court. There is no equivalent to s 33ZDA, however it may not need one.
On 7 December 2023, the Federal Court ordered an early common fund order (CFO) pursuant to s 33V(2) FCA Act in Ghee v BT Funds Management Limited [15]. Whether the Court has power to make CFOs pursuant to s 33V(2) has, in Justice Murphy’s view, ‘been put to bed’, at [100]:
‘I thought this question had been put to bed by the decisions of the Full Court in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd, and the NSW Court of Appeal in Brewster v BMW Australia Ltd but, alas, that was not the case. Most recently in Elliot-Carde v McDonald’s Australia Limited confirmed that the Court has power under s 33V(2) of the Act to make a CFO at the point of settlement approval. I hope that is the end of the issue.’ [citations and paragraph references omitted].
Justice Lee, who has made his views clear on this topic[16], in R&B Investments Pty Ltd (Trustee) v Blue Sky Alternative Investments Limited (Administrators Appointed) (in liq) (Reserved Question)[17],made an order pursuant to s 25(6) of the FCA Act that reserved the following question to be referred to the Full Court for determination:
“Is it a licit exercise of power, pursuant to statutory powers conferred within Pt IVA of the Federal Court of Australia Act 1976 (Cth), or otherwise, for the Court, upon the settlement or judgment of a representative proceeding, to make an order (being a “common fund order”, as that term is defined in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183; (2020) 281 FCR 501 at [19], [22]–[30]) which would provide for the distribution of funds or other property to a solicitor otherwise than as payment for costs and disbursements incurred in relation to the conduct of the proceeding?”
The reserved question is unlikely to be heard before May 2024[18].
Justice Lee observed that in exercising its statutory power under the Court will be guided by principles of equity. In summary His Honour’s observations can be summarised as follows[19]:
- It is not apparent why a contingency payment toa solicitor, could not, in some cases be appropriate;
- The practical benefit of CFO has been to maintain the Court’s protective and supervisory role in respect of deductions from the common fund;
- Consideration of the equitable roots and restitutionary basis of common fund orders would support a contingency component in an appropriate case.
His Honour also noted that if the Federal Court does not make a solicitor’s common fund order, the parties will seek a Group Costs Order in the VSC and that such a step would frustrate the progress of proceedings already before the Federal Court.
There are 8 respondents in R&B Investments Pty Ltd (Trustee) v Blue Sky Alternative Investments Limited (Administrators Appointed) (in liq) (Reserved Question and three respondents have indicated that they propose to contend that the answer to the question is ‘yes’. If the answer is in fact yes, the applicants have foreshadowed a transfer to the VSC.
It seems that the competition for representative class action work is not limited to competition among practitioners.
[1] Barrister at the Victorian Bar, BSc LLB LLM
[2] BMW v Brewster (2019) 269 CLR 574 the High Court held that the Court did not have power under section 33ZF to make a CFO. Section 33V(2) is now used instead: Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCAFC 183
[3] Not without some frustration that the question continues to be raised: Ghee v BT Funds Management Limited [2023] FCA 1553, per Murphy J at [100] – [101]
[4] The first CFO was considered in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148
[5] https://www.afr.com/companies/professional-services/will-there-be-a-promotion-for-australias-worst-judge-20190228-h1bt2i
[6] s 285 Legal Profession Act 2006 (ACT); s325(1)(b) Legal Profession Act 2004 (NSW); s320 (1) Legal Profession Act (NT); s325, Legal Profession Act 2007 (QLD); s309(1), Legal Profession Act 2007 (TAS); s3.4.29(1); s285(1), Legal Profession Act 2008 (WA)
[7] The Review: Class actions in Australia 2022/2023, King&Wood Mallesons (The Review) https://www.kwm.com/au/en/insights/latest-thinking/publication/the-review-class-actions-in-australia-2022-2023.html
[8] 62% 2021/22, 64% 2022/23, The Review, ibid
[9] ibid
[10] Access to Justice: Litigation Funding and Group Proceedings dated March.
[11] Justice Legislation Miscellaneous Amendments Bill 2019 (Vic)
[12] 18 June 2020
[13] [2022] VSC 672
[14] [2023] VSC 757
[15] [2023] FCA 1553
[16] Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162 where His Honour said at [380] “one can readily conceive of circumstances where it could be a “just” order to pay to a solicitor (who has taken the necessary risks to get in the settlement fund) a sum in addition to legal costs payable pursuant to a retainer”.
[17] [2023] FCA 1499
[18] At [15]
[19] Justice Lee at [2] referring to His Honour’s decision R&B Investments Pty Ltd (Trustee) v Blue Sky Alternative Investments Limited (Administrators Appointed) (in liq) (Carriage Application No 2) [2023] FCA 142 which in turn, referred to His Honour’s own observations in Klemweb Nominees Pty Ltd (as trustee for the Klemweb Superannuation Fund) v BHP Group Limited [2019] FCAFC 107 at [139] to [141]
