Blue skies for solicitors’ common fund orders in the Federal Court of Australia

On 5 July 2024, a Full Federal Court bench comprised of Justices Murphy, Beach, and Lee unanimously held¹ that the Federal Court has the power to grant a “solicitors’ common fund order” – an order that a portion of the compensation from any settlement or judgment be used to remunerate the applicant’s lawyers for the value of their work, the expenses and outgoings they incurred and the financial risks they took (Solicitors’ CFO) – at the time of settlement or judgment.

Key takeaways

• The Blue Sky Decision follows the Full Federal Court’s decision late last year in Elliott-Carde v McDonald's Australia Limited [2023] FCAFC 162 that the Federal Court has power to make CFOs at the settlement stage pursuant to section 33V(2) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) permitting litigation funders to obtain a percentage commission from the settlement proceeds.
• The Supreme Court of Victoria has been the preferred jurisdiction for class action lawyers since 2020, when legislation was passed permitting ‘group costs orders’ entitling solicitors to a percentage of any recovery.
• Only time will tell whether the Blue Sky Decision*, together with the decision in Elliott-Carde, will result in a resurgence of class action plaintiff lawyers filing proceedings in the Federal Court.
• In circumstances where CFOs are permissible only at settlement or judgment, as opposed to early-stage CFOs, and the Full Federal Court has not expressed any views as to the appropriate circumstances where a Solicitors’ CFO will be made, class action plaintiff firms may still favour the greater certainty and security of ‘group costs orders’ available in the Victorian Supreme Court.

Background

What is a Common Fund Order?

“Common fund order” (CFO) is a term typically used to describe a type of order in a class action proceeding that all participating group members, including those who have not signed any agreement with a litigation funder, pay the litigation funder a pro rata share of the legal costs incurred and a funding commission at a specified rate from the common fund of any settlement or judgment in their favour.

Power to make Settlement CFO

Following the decision of the High Court in BMW Australia Ltd v Brewster [2019] HCA 4519 which found that early-stage CFOs were not permissible, there has been debate as to whether the making of a CFO on settlement or judgment was similarly precluded by the High Court’s decision. The Full Federal Court (Beach, Lee and Colvin JJ) ultimately determined late last year in Elliott-Carde that the Federal Court had power to make CFO’s at the settlement stage pursuant to section 33V(2) of the FCA Act. Subsequently, in Galactic Seven Eleven Litigation Holdings LLC v Davaria [2024] FCAFC 54, the Full Court of Murphy, Lee and Colvin JJ held that the primary judge had erred in finding that the Court did not have power under s33V(2) to make a CFO and ultimately determined it was “just” to make a CFO in favour of the applicants representing 25% of the gross settlement sum. However, the Full Federal Court in both Elliott-Carde and Galactic Seven Eleven Litigation Holdings LLC was not asked to, and did not, address whether the Court had the power to make a Solicitors’ CFO. 

Solicitors’ CFO in Blue Sky

In the context of the consolidation of two competing class actions against Blue Sky, Lee J considered applications formalising the consolidation and notifications to group members advising of the applicants’ intention to seek a Solicitors’ CFO.

The agreement to consolidate the competing class actions was predicated on the basis that the applicants would seek a Solicitors’ CFO or otherwise seek to transfer the matter to the Supreme Court of Victoria and seek a ‘group costs order’ pursuant to s33ZDA of the Supreme Court Act 1986 (Vic) at an early stage of the proceedings, which would similarly permit the applicants’ solicitors to be paid from a percentage of the amount of any settlement or judgment. The question of the Federal Court’s power to make a Solicitors’ CFO came before the Full Court in a hearing in May 2024² after it was sent up by Lee J during a hearing of the Blue Sky Class Action³ late last year.⁴ 

The decision*

Justices Murphy, Beach, and Lee held that both sections 33V(2) and 33Z(1)(g) of the FCA Act empower the Federal Court to grant a Solicitors’ CFO upon the settlement or judgment of a representative proceeding. In reaching their decision, their Honours addressed in detail the four arguments made by the respondents as to why the Court did not have the power to make a Solicitors’ CFO:

1. Their Honours rejected the argument that the High Court decision in Brewster did not permit the Federal Court to grant common fund orders at all, which argument necessarily involved a finding that the decisions of Elliott-Carde, as well as the subsequent decision of Galactic Seven Eleven Litigation Holdings LLC, were incorrect. Their Honours agreed with the conclusions in those decisions as to power expressed.
2. In response to an argument that a Solicitors’ CFO would conflict with the fiduciary duties and/or professional duties owed by solicitors to group members, by allowing solicitors to profit from such relationships, their Honours stated that, in determining whether to make a Solicitors’ CFO, the Federal Court can adequately consider any conflict with fiduciary and professional duties owed to group members. The mere fact that the applicants’ solicitors owe duties to group members was insufficient to establish it would not be “just” to grant a Solicitors’ CFO.
3. Their Honours also rejected an argument that a Solicitors’ CFO would breach s 183 of the Legal Profession Uniform Law (NSW) (which prohibits law practices from entering into contingency fee arrangements), as any payments for legal services would arise from the Solicitors’ CFO rather than a cost agreement between the group members and a law practice. Similarly, rule 12.2(i) of the Australian Solicitors’ Conduct Rules 2015 (NSW) (which prohibits solicitors from engaging in any conduct that would lead to benefits that exceed reasonable remuneration for legal services) was not applicable, as any benefit received from a Solicitors’ CFO would be granted under the FCA Act rather than the solicitor’s conduct itself.
4. Finally, the respondents argued that a Solicitors’ CFO would be contrary to a public policy against contingency-fees for lawyers. The Court held that such issues raised by the respondents were outweighed by other considerations with respect to access to justice and reduction of legal costs for group members in class action proceedings. Their Honours also questioned whether there was a coherent basis for a rule of public policy that precludes solicitors being remunerated in class actions on the same basis as litigation funders where they are providing overlapping services (namely, taking on risk in relation to class action litigation).  

Insights & implications

Critically, the Full Federal Court has only confirmed that the Federal Court has the power to make a Solicitors’ CFO. Their Honours made clear that they have not been asked to, and do not, address the question as to whether a Solicitors’ CFO ought to be made in specified circumstances.

Indeed, it may be some time before a Solicitors’ CFO is approved by the Federal Court. While contingency fees have been available in the Victorian Supreme Court since July 2020, it was only in early 2022 that the first contingency fee funding arrangement was approved by the Victorian Supreme Court in Allen v G8 Education Limited [2022] VSC 32.

It is therefore too early to tell whether the decision will result in a reversal of the recent trend for the Victorian Supreme Court to be the forum of choice for class actions (the monthly filing average for the post-GCO period is 1.5 Victorian class actions compared to a monthly filing average of 0.4 Victorian class actions pre-GCO⁵) and particularly unfunded class actions.

In circumstances where CFOs are permissible only at settlement or judgment, as opposed to early-stage CFOs, and with no guidance yet available as to the appropriate circumstances where a Solicitors’ CFO will be made, class action plaintiff firms may still favour the greater certainty and security of ‘group costs orders’ available in the Victorian Supreme Court. In addition, the Victorian regime does not restrict hybrid funding arrangements with both contingency fees for solicitors and litigation funders – the Blue Sky Decision does not shed any light on whether orders for such hybrid funding arrangements will be made in the Federal jurisdiction.

Finally, it is also possible that the decision will prompt a similar test case in the New South Wales Supreme Court, in circumstances where the decision of the Hight Court in Brewster noted that early-stage CFOs are not supported by the Federal class action regime and its New South Wales counterpart.

The Blue Sky Class Action

In the Blue Sky Class Action, it is alleged that Blue Sky engaged in misleading and deceptive conduct and breached its continuous disclosure obligations before it was placed into administration and following the publication of a short seller’s report questioning its asset valuation methods.