High Court strikes blows to class actions

10 December 2019

The High Court Decision

In a significant setback for class action litigation last week the High Court of Australia decided, by a 5-2 majority, that the Federal and New South Wales class action regimes (both of which allow open or “opt out” class actions) do not permit the making of “common fund orders” or “CFO’s” for the benefit of litigation funders. 

A CFO is an order, usually made at an early stage in class action proceedings, which fixes the amount of a litigation funder's fee or commission and requires all group members (typically the majority of whom have not yet been identified) to meet a proportionate share which is to be paid as a first priority from any litigation proceeds.  In doing so the courts have afforded litigation funders with substantial degree of commercial certainty, at an early stage in the process, that they will recover the legal costs to be incurred and their commission from any successful judgement or settlement.

In each of the proceedings on appeal to the High Court (BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45), the litigation funder had entered into a litigation funding agreement with a small number of class action group members.  The representative class action members had then applied for, and been granted, a CFO.

The majority of the High Court allowed the appeals, holding that neither of the class action regimes empowers a court to make a CFO because it was not “appropriate or necessary to ensure that justice is done” for a court to promote the prosecution of the proceeding by the making of a CFO and thereby providing a litigation funder with the commercial certainty to justify committing to funding the action. 

Implications

The likely implications of this decision are:

  • a move back towards closed class actions pursued only for the benefit of identified class members who sign up;
  • the significant cost of “book building” (identifying and getting members to sign up at the outset of an action) – even if, as has been suggested, CFO’s can still be made when a case settles;
  • higher litigation funder fees or commission rates reflecting the increased risk to funders;
  • some riskier cases involving large group’s with small individual claims not being pursued – at least one current class action has already been put on hold whilst a funder considers its position;
  • a focus on proposed legislative changes which would permit CFO’s.

 

This article provides general comments only.  It does not purport to be legal advice.  Before acting on the basis of any material contained in this article, we recommend that you seek professional advice.

 

Author: Paul Dugan, Principal in our Disputes Team

Contact
Email: pdugan@dmawlawyers.com.au
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