Today, the High Court of Australia delivered a judgment which is likely to have a significant impact on the business models of litigation funders operating in Australia.

In BMW Australia Ltd v Brewster & Anor and Westpac Banking Corporation & Anor v Lenthall & Ors [2019] HCA 45, the High Court held that, under the current legislative regimes relating to representative proceedings, there is no power for the Federal Court or the Supreme Court of New South Wales to make a ‘common fund order’.

A common fund order is an order, generally made early in the proceeding, providing for a litigation funder’s remuneration to be fixed, and for all members of the representative proceeding to bear a proportionate share of that remuneration. Common fund orders may also provide that the litigation funder’s remuneration be paid out of any proceeds as a first priority, and an undertaking by the litigation funder that it will not withdraw from the funding arrangement. Such an undertaking is a significant benefit to the group members because many litigation funding agreements enable the funder to withdraw its funding, upon giving notice.

Common fund orders are generally made at the early stage of a representative proceeding because, from a commercial perspective, the order provides security for a litigation funder by ensuring the remuneration represents a sufficient return on investment, and is paid in priority. It also provides security for group members, by ensuring that the representative action will be funded to its completion.

Depending on where a representative proceeding is commenced, applicants will rely on section 33ZF of the Federal Court of Australia Act 1976 (Cth) or section 183 of the Civil Procedure Act 2005 (NSW) to seek a common fund order. These sections are near identical, and are drafted in very broad terms. That is, they do not specifically refer to common fund orders (or the like); rather, these sections empower the Court to make ‘any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding’.

The High Court examined these provisions and determined that they do not empower the courts to make common fund orders. The Court recognised the breadth of the relevant sections, but held that, despite the wide power conferred, the sections only go so far as empowering the Court to make orders as to how a representative action should proceed; not whether a representative action can proceed.

The High Court suggested that common fund orders assured a potential litigation funder of a sufficient level of return on investment, but were not appropriate or necessary to ensure that justice is done in the representative proceeding and, therefore, did not fall within the ambit of sections 33ZF or 183, as applicable.

The practical effect for litigation funders is that their business model may need to be adjusted in light of the High Court’s decision.

However, it should be noted that the decision of the High Court does not suggest that legislation to specifically permit common fund orders can’t be enacted; it is simply the case that the current legislative regimes don’t provide for it.

In Victoria, which is arguably the heartland of representative proceedings in Australia, parliament has already taken steps to enact legislation which specifically empowers the Supreme Court of Victoria to make common fund orders. The Commonwealth and other states and territories may now be required to follow Victoria’s lead and enact similar legislation.

For more information, please contact us.