By Ross Foreman -
Snapshot
- Common fund orders developed as a response to the problem of ‘free riders’ (i.e. group members who had not entered into a litigation funding agreement).
- Common fund orders flourished after a 2016 Full Federal Court decision.
- By 5-2 majority, the High Court has held that section 33ZF of the Federal Court of Australia Act 1976 (Cth) and its State equivalent do not empower the Court to make common fund orders.
This article provides a short history of the common fund in Australia, culminating in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45 (‘Brewster‘). In Brewster, the High Court held (by 5-2 majority) that section 33ZF of the Federal Court of Australia Act 1976 (Cth) (‘FCA‘) does not empower the Federal Court to make a common fund order or ‘CFO‘. The High Court reached the same conclusion in relation to equivalent State provision (s 183 of the Civil Procedure Act 2005 (NSW) (‘CPA‘)).
The problem of ‘free-riders’
When the class action regime in Pt IVA of the FCA was introduced, litigation funding of the kind now commonplace was thought not to be permitted. Hence, Pt IVA (and the equivalent State legislation, which largely adopted Pt IVA) did not contain provisions that dealt with the regulation of litigation funding expressly.
However, as litigation funding developed in Australia, in particular following its endorsement in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386, the courts have had to deal with a range of issues, including a concern that group members who have not signed funding agreements should not get a ‘free ride’ on the efforts of those who have signed funding agreements.
This issue arises in particular in relation to ‘closed’ class actions, in which group members are defined not only by reference to having suffered a particular loss (e.g. having purchased shares in an ASX-listed company during a specified period) but also by reference to some additional factor such as having signed a funding agreement with a litigation funder.
The legitimacy of ‘closed’ class actions was confirmed by Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275. After that decision, litigation funders generally preferred to fund a proceeding on a ‘closed’ basis, as this created an incentive for potential group members to sign up with the litigation funder and thereby maximised the funder’s returns (see e.g. Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 (‘Money Max‘) at [185]-[186]).
However, this created a problem for respondents, who did not want to pay substantial amounts unless they settled with all potential claimants (not just those who had signed up to join the closed class). As a result, a practice developed of ‘opening’ the ‘closed’ class to permit potential claimants who had not signed up with the litigation funder to participate (see e.g. Money Max at [188] and [190]). While this gave the respondent certainty, it also raised the issue of unequal outcomes between group members (not all of whom signed funding agreements). How was a fair outcome to be achieved?
