The High Court of Australia recently refused to hear a challenge regarding the power to make a “common fund order” (CFO) at the settlement or judgment stage of an open class action.  

A CFO is an order in a class action that obliges the class members (litigants) to pay a litigation funder’s commission from the proceeds of a court judgment or compromise agreement (settlement), whether or not the class members have an agreement with the litigation funder. 

In 7-Eleven’s application for special leave to appeal from the Full Court of the Federal Court’s decision in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183, the High Court held that the application for special leave was not a suitable vehicle for the determination of the issue.  In doing so, the High Court has left open the existence of that power for the time being. 

The challenge was raised by 7-Eleven, who was defending two class actions brought on behalf of its current and former franchisees, in advance of a court-ordered mediation. 

In the case before the Federal Court, the Full Court unanimously declined to answer whether certain provisions of the Federal Court of Australia Act 1976 (Cth) empower the court to make a CFO at settlement or judgment.  It did so because there was no CFO subject to challenge. Rather, the declaration was sought only in the hypothetical, as opposed to an actual settlement proposal.  

The Full Court’s decision was significant in two main respects:

  1. First, it held that the High Court’s decision in BMW Australia Ltd v Brewster [2019] HCA 45 was no bar to the power of the Court to make a CFO at the settlement or judgment stage.  While that decision establishes that the Court has no power to make a CFO at an early stage of a class action – a so-called “Commencement CFO” – it does not go further than that.  With Brewster confined as such, the recent Federal Court trend of making settlement CFOs (see eg, Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527, Hodges v Sandhurst Trustees Limited [2018] FCA 1346, Uren v RMBL Investments Ltd (No 2) [2020] FCA 647 and Webster (Trustee) v Murray Goulburn Co-Operative Co Ltd (No 4) [2020] FCA 1053) may continue unless and until the High Court declares that the courts do not have the power to do so.
  2. Second, it accords with that in Brewster v BMW Australia Ltd [2020] NSWCA 272, where the New South Wales Court of Appeal unanimously declined to answer the question of power to make a settlement or judgment CFO, in respect of the cognate provision under the Civil Procedure Act 2005 (NSW).  The High Court’s 2019 decision in Brewster was also held to be no bar to the existence of the power under those provisions.  With the Full Federal Court and the New South Wales Court of Appeal adopting similar positions on this issue, we are unlikely to see a flood of new class actions commenced in one of those two jurisdictions over the other as a result.

What does this mean for class actions?
Whether or not courts have power to make settlement or judgment CFOs is significant.  The determination will likely directly impact on future decisions as to whether class actions are commenced on an “open” or “closed” class basis. 

Australia’s statutory class action regimes generally provide for an open class model.  That is, all affected persons are treated as group members, unless they take the positive step to “opt out” of the proceeding.  Their inclusion in the class takes effect regardless of their consent to be a group member (or even their knowledge of the class action).  The group members receive notification of their right to opt out and pursue their own individual claim in a separate proceeding.  If that right is not exercised, they remain as passive participants in the class action until resolution, but are still able to receive the benefit (if any) of the settlement or judgment. 

However, the statutory regimes do not preclude closed classes, which are becoming increasingly common.  A closed class is one that comprises only those affected persons who have signed a funding agreement with the litigation funder by a certain date. It is an “opt in” model.  On the one hand, this provides greater certainty for the litigation funders’ financial investment.  On the other hand, it excludes all unregistered putative group members from receiving the potential benefit of the class action. 

CFOs do not arise in closed class actions.  That is because the group members have agreed to equally share the burden of the costs incurred to obtain the benefit of the “common fund” from settlement or determination. In open classes, conversely, unregistered group members get the benefit of the common fund without having agreed to carry an equal share of the burden. In essence, CFOs permit a deduction from each of the unregistered group members’ damages that is equal to the burden that was agreed by the registered group members. 

CFOs provide greater certainty as to the total aggregate value of the group members’ claims.  That certainty can assist on several fronts, most notably for any settlement negotiations.  But if they are beyond the courts’ power, the absence of that certainty may lead claimants and litigation funders to proceed on a closed class basis.   

What’s next?
Following reports that a settlement was reached in the 7-Eleven class actions in July 2021, it remains to be seen whether there will be a further challenge to the court’s power to make Settlement CFOs, as part of the necessary process of seeking the court’s approval to the settlement terms.   In the meantime, the ongoing uncertainty surrounding this issue may see a continuation of the trend of more class actions being commenced on a closed basis, rather than an open basis.  

For any enquiries in relation to class action proceedings, whether as plaintiff or defendant, please contact Ashley Hill (3309 7022) or Alexander Sloan (07 3309 7005) at GRT Lawyers.