Momentum on settlement CFOs stalled (for now)

By Melissa Gladstone-Joyce, Brock Gunthorpe and Adam Irwin

In February 2023, O’Callaghan J rejected an application for a settlement common fund order (CFO)[1] in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 (7-Eleven) on the basis that CFOs are not within power of s 33V of the Federal Court Act 1976. This decision has called into question the recent Federal and NSWSC practice of making CFOs at the settlement of class action proceedings.

The 7-Eleven decision has prompted debate regarding the interpretation of the High Court’s 2019 decision in Brewster[2] and is likely to cause some short-term uncertainty for third-party litigation funders (Funders) in existing and contemplated proceedings.

The Federal Court’s power to make CFOs pursuant to s 33V is unlikely to remain an open question for long, as the issue was swiftly referred for consideration by the Full Court as part of the McDonald’s Fair Work class action.[3]

Recent history

In Brewster, [4] the High Court of Australia found that s 33ZF does not grant power to order a pre-settlement CFO.

Since Brewster,[5] courts in class actions have been without power to make CFOs at the early stages of proceedings, which had evolved as a practice to enable Funders to guarantee their expected returns from the action and relieve them of the time and expense of signing up group members to funding terms (a so-called book-build).

State and Federal Courts have read the High Court’s decision in Brewster as being confined to CFOs ordered at any stage of the proceeding prior to settlement or determination (that is, CFOs at settlement being a permissible exercise of the court’s power). The question of whether the section 33V power permits the making of CFOs at settlement had not been determined by the Full Federal Court.[6]

High Court ‘clear enough’

In denying the funder’s application for a CFO at the conclusion of the litigation, O’Callaghan J concluded that the Brewster majority had been “clear enough” in their ruling that CFOs were beyond the Court’s power and not matters for Courts to concern themselves with:

Although the decision of the High Court in BMW Australia Ltd v Brewster (2019) 269 CLR 574 was concerned with the power to make a common fund order at a preliminary stage of proceedings under s 33ZF, the reasoning of the majority points clearly enough to the conclusion that there is similarly no power to make a common fund order upon settlement under s 33V(2).

[…]

Justice Gordon was unequivocal about it. At 630 [141], her Honour said:

A representative proceeding may not be settled or discontinued without the approval of the Court. If the Court gives approval, s 33V(2) confers power on the Court to “make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court”. But that provision 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.

Further, as Nettle J said […] the commercial interests of funders formed [no] part of the mischief that the introduction of Pt IVA was intended to confront (at 625 [126]). [Emphasis added]

It bears mentioning that Gordon J went further than the remainder of the High Court in Brewster, both in respect of the construction of s 33V (a matter not considered by the other judges) and the desirability of CFOs as a matter of policy.

Divergence among the Federal Court

Within a matter of days, the question of settlement CFOs was referred for consideration by the Full Federal Court.

In the Full Court hearing on 6 March 2023, Lee, Beach and Colvin JJ heard arguments to the effect that Brewster offers limited assistance on the question of settlement CFOs, as in that case “the High Court did not expressly preclude or even deal with s 33V”[7], a section which the parties agreed was less confined in its operation than s 33ZF considered in Brewster.[8]

During the hearing Lee and Beach JJ gave a number of indications that they favour the view that the Court has power to make CFOs. Beach J, for instance, appeared to criticise the judgment in 7-Eleven for taking from Brewster “generalised statements decontextualised from the question of statutory power”[9] and presenting them as the High Court’s reasons for decision.

Before handing down its decision, the Full Court will receive submissions from the State and Federal Attorneys-General[10] pushing out the timetable for much needed clarification.

Take aways

We will continue to monitor developments and consider any impact of the recent settlement CFO discussion on other jurisdictions. Some observations from the CFO debate as it currently stands:

1. This will not be the end of the debate regarding funding models and their permissibility. In particular, there will likely be continued innovation in funding markets, for example, the foreshadowed application for a novel “solicitors’ CFO” in the nature of a contingency fee.
2. The decision in 7-Eleven does not curtail the making of orders spreading contractual funding commissions across all funded and unfunded group members (known as ‘funding equalisation orders’). For practical purposes, Funders with effective book-building processes will lose potential upside from a CFO but still likely retain sufficient return from contractually agreed commissions.
3. If the Full Court confirms the availability of settlement CFOs, contested carriage motions in the Victorian Supreme Court may increase in complexity and take longer to decide. At present, class actions can be brought on the basis that the Court may make a Group Cost Orders (or contingency fee). In general terms, the absence of a third-party litigation funder means that the expected return to group members from the action (if successful) is higher than in cases where both a law firm and funder promote the claim. It remains to be seen how the funding market might structure future CFO proposals so as to better compete for carriage with GCO funded proceedings.
4. The position in the New South Wales Supreme Court has not changed. In 2022, the Court found that settlement CFOs are within power (Rees and Stevenson JJ).

Footnotes

[1] A common fund order (CFO) is an order made by a court providing for the remuneration of a litigation funder as a proportion of the proceeds recovered from litigation.

[2] BMW Australia Ltd v Brewster (2019) 269 CLR 574 (Brewster).

[3] Elliott-Carde v McDonald’s Australia Ltd (VID726/2021)

[4] Brewster (2019) 269 CLR 574.

[5] Brewster (2019) 269 CLR 574.

[6] Prior to 7-Eleven, the question of power to make settlement CFOs had been referred to a Full Court of the Federal Court, but only indirectly answered after a majority of Federal judges considered it premature to resolve this issue in the absence of an application for a CFO having been made at that time in the proceeding (Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183).

[7] Elliott-Carde v McDonald’s Australia Ltd (VID726/2021), Transcript T7.2–5 (Armstrong KC).

[8] Elliott-Carde v McDonald’s Australia Ltd (VID726/2021), Transcript T32.21–26 (Armstrong KC); T47.10–18 (Donnellan).

[9] Elliott-Carde v McDonald’s Australia Ltd (VID726/2021), Transcript T14.25–27 (Beach J).

[10] The State and Federal Attorneys-General filed s 78B notices in response to the identification of a constitutional issue by the Contradictor. The Contradictor appears to have raised the question of whether the making of a CFO is not, in fact, an exercise of judicial power (where it could be said to be creating new rights between persons, rather than resolving a justiciable matter which has earlier come into existence).