Full Federal Court allows solicitors' common fund orders

Impacts on the litigation funding landscape for class actions 7 min read

In a significant and potentially controversial decision,¹ the Full Federal Court has found it has the power to make a 'Solicitors' Common Fund Order', with the effect that solicitors will be able to receive a share of a settlement or damages award in a Federal Court class action as payment for their costs.

In this Insight, we consider the impact of this decision on the litigation funding landscape for class actions.

Background

Whether, how, and when the Federal Court may make a 'common fund order' (CFO) has been the subject of much judicial controversy over recent years. Between 2016 and 2019, the Federal Court regularly made CFOs at an early stage of class action proceedings, ordering that all group members contribute to the litigation funder's commission regardless of whether group members had entered into funding agreements.

In 2019, the High Court in Brewster² ruled that the federal class action regime (and its New South Wales equivalent) did not empower courts to make 'commencement CFOs', which had purportedly been made under the Court's 'gap-filling' power in section 33ZF of the Federal Court of Australia Act 1976 (Cth) (the Act).

Late last year, the Full Federal Court found it could nevertheless make CFOs at the time of settlement approval pursuant to section 33V(2) of the Act.³ In Elliot-Carde, Justices Beach, Lee and Colvin held that the High Court's reasoning in Brewster did not apply to CFOs made under section 33V because the Court's settlement approval power is separate and distinguishable from section 33ZF, and is concerned with the distribution of settlement proceeds, rather than the conduct of the proceeding.

For some time, the Federal Court has also hinted at the possibility of Solicitors' CFOs.⁴ However, the issue has not fallen squarely for determination until now.

Blue Sky

In Blue Sky, the Full Federal Court found the Court has the power to make a Solicitors' CFO, permitting a solicitor to receive a distribution from funds paid upon settlement or judgment, otherwise than as payment for costs and disbursements incurred in relation to the conduct of the class action.⁵ Affirming and expanding on the Court's reasoning in Elliot-Carde, their Honours emphasised that section 33V(2) confers broad power on the Court to make orders that are 'just with respect to the distribution of any money paid under a settlement or paid into Court'. That power extends to an order for payment of legal fees to lawyers directly from settlement proceeds.

In reaching this conclusion, the Full Court rejected arguments from the respondents that the Court did not have the power to make Solicitors' CFOs on the basis that:

• Solicitors' CFOs would give rise to an impermissible fiduciary/professional conflict of interest;
• there are statutory prohibitions that prevent the making of a Solicitors' CFO; and
• a Solicitors’ CFO could never be 'just' because it is contrary to a public policy against contingency-based fees for lawyers, notwithstanding the abolition of maintenance and champerty.

Fiduciary / professional conflict of interest

Solicitors' CFOs were found not to give rise to any impermissible conflict of interest or professional conduct obligations. The Court held that while potential or actual conflicts are inevitable in the context of a class action, a solicitor would, at the time of seeking a Solicitors' CFO 'owe an obligation of disinterested loyalty and would be unable to obtain any unauthorised benefit from the relationship'. In this regard, in exercising the discretion to make a Solicitors' CFO, the Court would have the ability to scrutinise whether solicitors had acted in a manner contrary to their professional and ethical obligations.

Statutory prohibitions

The Full Court rejected the argument that a statutory prohibition on contingency fees in New South Wales⁶ evinced an 'implied legislative intention' not to allow Solicitors' CFOs. In reaching this conclusion, the Court drew a distinction between an instruction from an applicant to seek such an order and the act of entering into a retainer that provides for a Solicitors' CFO (being the act to which the prohibition is directed). The Court held that where a Solicitors' CFO is made, the distribution to the law firm is made pursuant to a court order rather than 'any bargain struck which forms part of a retainer', which does not fall foul of the prohibition on entering into a contingency fee arrangement.

Public policy considerations

Public policy considerations, including a historical aversion to lawyers charging contingency fees, did not limit the Court's power to make Solicitors' CFOs. Their Honours accepted that Pt IVA of the Act was enacted at a time when maintenance and champerty remained a crime and a tort in some jurisdictions, and award-based fee agreements were considered champertous. However, the Court held that public policy is not 'fixed and immutable' and that regard should be had to recent developments in class action funding.

One significant development highlighted by the Court was the introduction of legislation in 2020 permitting the Supreme Court of Victoria to make group costs orders (GCOs), which enable law firms to receive a fee calculated as a percentage of any final damages award or settlement (effectively, a contingency fee).

The Full Court stated that GCOs provide better financial returns for group members than otherwise possible in proceedings financed by third-party litigation funders and assist in the just resolution of proceedings as inexpensively and efficiently as possible. Although GCOs are unique to Victoria, the Full Court opined that the same considerations could be relevant to the Court's decision to make Solicitors' CFOs.

Other public policy considerations of note include the value of open class actions for group members who might otherwise be unable to seek relief on their own, and the abolition of maintenance and champerty in many Australian jurisdictions.

Implications

As detailed in our recent report on class action risk, there has been significant movement in class action filings from New South Wales to Victoria since the introduction of GCOs. While the Federal Court has attracted the majority of filings before and after the introduction of the GCO regime, in 2023 Victoria was a clear second jurisdiction of choice with only one class action commenced in New South Wales.

Following Blue Sky, law firms seeking to recover contingency fees are no longer limited to the Victorian Supreme Court when choosing the appropriate forum for a class action. This may trigger a slight increase in filings in the Federal Court at the expense of the Supreme Court of Victoria and, possibly, an undesirable rise in competing class actions filed across the two jurisdictions – fuelling additional procedural complexity, delay and cost.

However, as CFOs can only be made at a late stage in proceedings, plaintiff firms may prefer the GCO model and obtaining an increased level of certainty around potential returns at an earlier stage in proceedings.

The availability of Solicitors' CFOs in the Federal Court also creates the potential for like orders in class actions in each state with equivalent class action frameworks. This is because Blue Sky confirms that the making of a CFO in favour of a law practice will not enliven the prohibition on contingency fees. With regard to these issues, it seems clear that the Court's power to make Solicitors' CFOs is ripe for consideration by the High Court, as there is uncertainty as to whether these funding structures can be reconciled with the reasoning in Brewster.