The sky is not the limit – Blue Sky decision goes up to High Court of Australia

On 5 July 2024 the Full Federal Court of Australia held the Federal Court of Australia (Federal Court) had the power to grant a “solicitors’ common fund order” which would permit an applicant’s solicitors to obtain an order at the time of settlement or judgment to be compensated with a portion of the settlement or judgment, as remuneration for the value of the work and financial risk of conducting the class action (Solicitor’s CFO).¹

The Blue Sky Decision is now subject to three applications to the High Court of Australia (High Court) for special leave to appeal.²  If the special leave applications are accepted, the High Court’s decision with respect to these issues will likely provide significant clarity regarding the Federal Court’s power to grant common fund orders generally as well as for the benefit of an applicant’s solicitors. 

Background 

In the Blue Sky Decision, Justices Murphy, Beach, and Lee unanimously held sections 33V(2) and 33Z(1)(g) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) empower the Federal Court to make Solicitor’s CFOs. 

Their Honours considered, and ultimately rejected, arguments that Solicitors’ CFOs:

• were contrary to the High Court decision in BMW Australia Ltd v Brewster,³
• created conflicts of interest inconsistent with the fiduciary duties solicitors owed to group members; 
• breached statutory professional obligations owed by solicitors; and
• contradicted public policy against solicitors charging contingency fees. 

These arguments were reiterated in the applications for special leave to appeal to the High Court. For further background, see here. 

Questions for appeal

Although the applicants filed separate applications for special leave to appeal, the questions for appeal were the same in substance, being:

1. does the Federal Court have power under Part IVA of the FCA Act to make a CFO at the time of settlement or judgment in a class action? 
2. if the answer to the first question is yes, does the Federal Court have power to make a CFO for a solicitor who conducted the class action, being a Solicitor’s CFO?

First Question: Federal Court’s power to make a CFO

In Brewster, the High Court held section 33ZF of the FCA Act did not permit the Federal Court to grant CFOs at the commencement of a class action. However, in Elliott-Carde v McDonald’s Australia Limited (2023) 301 FCR 1, the Full Federal Court held that there was power to make a CFO at the settlement stage under section 33V of the FCA Act.

With respect to the First Question, the special leave applications rely on the reasoning in Brewster, i.e. that there is no power under either sections 33V(2) or 33Z(1)(g) to make a CFO of any kind at settlement or judgment, because it would never be “just” to make an order in favour of a litigation funder to the financial detriment of group members. 

Second Question: Federal Court’s power to make a Solicitor’s CFO

With respect to the Second Question, the special leave applications put similar arguments to those previously considered by the Full Federal Court in the Blue Sky Decision. In particular, the applicants argued Solicitor’s CFOs would:

1. create actual or perceived conflicts of interest between solicitors and group members, by introducing financial incentives into that relationship. This encompassed an argument that it would breach the fiduciary duties solicitors owe to group members.  
2. contravene section 183 of the Legal Profession Uniform Law (NSW), which prohibits law practices from entering into contingency fee arrangements. 
3. undermine the public policy against solicitors bargaining with group members to obtain an interest in the subject matter of litigation.  

Implications

If the special leave applications are accepted, the High Court’s decision could have broad implications for the class actions regime in Australia. 

If the High Court upholds the Blue Sky Decision, the Federal Court may see a greater share of class action filings than in recent years if an applicant’s solicitors may be entitled to a percentage of any recovery. 

However, the High Court could not only overturn the Full Federal Court’s decision with respect to Solicitor’s CFOs, but also make determinations which may impact the ability of the Federal Court to make CFOs for the benefit of litigation funders at the settlement stage, pursuant to the decision in Elliott-Carde. While some of the arguments against CFOs point to protecting group members’ interests, there may equally be a policy reason in favour of CFOs and the role they may play in access to justice – that is, certain cases might not be supported by funders or plaintiffs’ solicitors if CFOs are not available. A High Court decision that effectively prohibits CFOs in all forms, at any stage of a proceeding, would almost guarantee the Supreme Court of Victoria will continue as the preferred forum for class actions. 
 

1. R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89 (the Blue Sky Decision)
2. That is, each of the applicants separately filed special leave applications: Ernest & Young v R&B Investments Pty Ltd (File Number S96/2024); Kain v R&B Investments Pty Ltd (File Number S93/2024); Shand v R&B Investments Pty Ltd (File Number S97/2024). 
3. BMW Australia Ltd v Brewster (2019) 269 CLR 574 (Brewster).