High Court rules on funding of class actions

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By Graham Maher, Partner

In what will almost certainly be a blow to litigation funders, the High Court ruled on Wednesday in BMW Australia Ltd v Brewster [2019] HCA 45, that the Federal Court and the NSW Supreme Court are not empowered to make common fund orders in class actions.

Common fund orders are typically made at an early stage in class action proceedings “to provide for the quantum of a litigation funder’s remuneration to be fixed as a proportion of any moneys ultimately recovered in the proceedings”[1] (whether by way of judgment or settlement).

Litigation funders who wish to fund class actions will now have to build their own books of group members who agree individually with them to fund class actions, or to take their chances that a Court will make a funding equalisation order to redistribute funds from unfunded group members to all group members at the conclusion of a matter.

In a majority of 5 to 2 (Gageler and Edelman JJ dissenting), the High Court overturned both the Full Federal Court and the NSW Court of Appeal, which had held, respectively, that  section 33ZF of Federal Court of Australia Act 1976 (Cth) and section 183 of Civil Procedure Act 2005 (NSW) did empower the Courts to make such orders.  Those sections provide that the Court in a representative proceeding may make any order it thinks appropriate or necessary to ensure justice is done in the proceeding.

In overturning those decisions the High Court held that:

  • the sections “empower the making of orders as to how an action should proceed in order to do justice. They are not concerned with the radically different question as to whether an action can proceed at all. It is not appropriate or necessary to ensure that justice is done in a representative proceeding for a court to promote the prosecution of the proceeding in order to enable it to be heard and determined by that court.” [2]; and
  • If a litigation funder seeks a common fund order in order to avoid the costs of book building (and that is a very real incentive for a funder to seek such an order), that objective has no connection with what is appropriate or necessary to ensure justice is done in the proceeding”[3]

Those are powerful statements which clearly indicate the High Court’s majority view that the funding choices, and risks, for litigation funders are matters for them and not ones which the Court has power to control during the course of class action proceedings.

The judgment is likely to have its greatest impact in class actions where the amount of loss claimable by an individual group member is modest but the number of members of the class are high.  Such a situation throws into stark distinction the choice for a litigation funder.

Justice Gordon succinctly described [4]the conundrum for litigation funders by noting that where there are “very modest claims for damages” it is “hardly surprising that there is little appetite for litigation amongst them” which in turn leads to the supposition that litigation funders will be “reticent to incur costs in book building which may be largely wasted and prove irrecoverable. Far better from the litigation funder’s point of view, no doubt, to obtain a common fund order which avoids the costs of book building and guarantees a handsome rate of return from the aggregate of damages which may ultimately be recovered”.

The High Court has removed the option of a common fund order but not necessarily the conundrum for litigation funders faced with such a situation.

[1]  BMW Australia Ltd v Brewster [2019] HCA 45 per Kiefel CJ, Bell and Keane JJ at [1]

[2] Per Kiefel CJ, Bell and Keane JJ at [3]

[3] Per Gordon J at [164]

[4] At [160]

For further information, please do not hesitate to contact us.

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