It's Time: High Court to consider key class action issues

What you need to know

The High Court is set to provide much awaited guidance on the following key class actions issues.

• Common Fund Orders (CFOs): whether the Federal Court has power to make CFOs at the time of settlement or judgment – at all and, more particularly, in favour of solicitors (Solicitor CFO). Three applications seeking special leave to appeal to the High Court have been filed in the Blue Sky class action asking the High Court to provide long-awaited guidance on this issue.  There are good prospects that the High Court will grant special leave, given the need for clarification and the importance of the questions to the conduct of class actions in Australia (the availability of CFOs being central to current funding models).

• Class closure orders: whether notices can be given to group members foreshadowing orders to "close" the class (i.e. extinguish the claims of those group members who neither registered nor opted out). Such orders are often sought by parties  to understand likely quantum before engaging in mediation. There is divergence between Australian courts for resolution by the High Court (which has granted special leave to appeal in the Lendlease class action). 

• Group Costs Orders (GCOs) and transfer of proceedings: whether a GCO made under Victorian legislation is relevant in deciding whether to transfer proceedings to another Court and, if proceedings are transferred, whether a GCO can remain in force or be revoked. A transfer application in the Arrium class action has been removed to the High Court for determination.

Common Fund Orders 

1. The state of play

A CFO allows a commission or "cut" to be paid to a class action funder and, more recently, solicitors, from the settlement proceeds (typically as a percentage).

The journey so far:

• The High Court in Brewster said that CFOs are not allowed early in proceedings under general powers (s33ZF of the Federal Court Act and equivalents).
• Since then, the Full Federal Court in Elliott-Carde held that it has the power to make CFOs in favour of funders at the time of settlement under s33V (for orders that are 'just' with respect to the distribution of money paid under a settlement). See our article here. The High Court has not yet weighed in on this question. 
• More recently, the Full Federal Court held in Blue Sky that CFOs in favour of solicitors are also allowed at the time of settlement or judgment. See our article here. This is the decision on appeal.

2. Special Leave Question: Does the Federal Court have power to make a CFO at the time of settlement or judgment?

The Applicants' arguments include the following:

• Based on statutory construction, there is nothing in the text of s33V or s33Z that permits a CFO of any kind. What is "just" under these sections is limited to justice between the parties to the litigation (more specifically, the just finalisation of proceedings). It contemplates payments to the parties and group members and does not extend to funders.
• The interests of the funder in (a) obtaining compensation for funding already provided, and risk already taken; or (b) the interests outside of the proceeding itself in funders being incentivised to fund other litigation, is not relevant.
• A CFO takes amounts from unfunded group members and redistributes it to the funder in circumstances where the funder has no right or entitlement to those funds under contract or in equity. It would never be "just" to make an order in favour of a funder to the immediate detriment of group members. Rather, a funding equalisation order (which redistributes contractually agreed payments to the funder across the entire class) is an apt mechanism to equitably distribute funding costs to avoid injustice to funded group members.

3. Special Leave Question: If the Court can make a CFO, does that extend to Solicitor CFOs?

The Applicants' arguments include the following:

• A Solicitor CFO marks a meaningful change to the relationship between a solicitor and client in Australia (and, unlike group costs orders in Victoria, is not brought about by legislative intervention).
• Contingency fees cannot be paid to solicitors as a percentage of the judgment sum – that is a principle derived from one or more of: statute (in s183 of the Uniform Legal Profession Law), implicit legislative policy, public policy and common law.
• The Full Federal Court made the distinction between a bargain struck as part of the solicitor/client retainer and an order by the Court for payment from an identifiable settlement fund. In Blue Sky, the solicitors for the applicants proposed to amend their contractual retainers to include an addendum obliging the applicant to instruct their solicitors to apply for a Solicitor CFO for approval by the Court. That is a contractual promise and cannot be reconciled with the prohibition on contingency fees nor displaced by an order of the Court.
• A Solicitor CFO places a solicitor in a position of conflict (or perceived conflict) and removes an important protector of the administration of justice. 

Class closure 

A "soft" class closure order requires group members to register by a particular date, typically before mediation, to enable them to share in any settlement sum. If there is settlement then (depending on its terms) a class closure order can effectively extinguish the claims of group members who neither registered to participate in any settlement, nor opted out, before the mediation. 

Class closure orders give a respondent certainty about how many group members might seek to participate in any settlement, which is an important commercial driver in settlement negotiations.

1. The state of play

There is a divergence in approach to pre-mediation class closure in Australian courts. See our article here. 

• The NSW Court of Appeal maintains that soft closure orders are not available at all – neither orders that extinguish claims of group members before mediation nor notices that foreshadow seeking an extinguishment order at the time of settlement approval are allowed.
• The Federal Court disagrees. It has approved notices and orders that foreshadow seeking an extinguishment order at the time of settlement (whether it will make the order depends on the facts and the evidence).
• Soft closure orders can be sought in the Victorian Supreme Court under an express statutory power. 

2. Issue for High Court determination 

The question is whether s33X of the Federal Court Act (and NSW equivalent) authorises notices to group members foreshadowing an intention to seek a class closure order at settlement.

The Applicant's arguments include the following:

• The question is one of significant public importance. Signalling a class closure order encourages group members to register and gives the parties a basis to apply for settlement approval based on the number of registered group members.
• The divergence between the courts can only be resolved by the High Court. Absent resolution, Courts in other jurisdictions (i.e. Queensland, Western Australia and Tasmania) will not know which line of authority to follow.
• The approach adopted by the Federal Court should be preferred. It is appropriate for courts in developing the rules and principles to guide the exercise of broad powers to take account of practical and commercial realities. On this issue, class closure can facilitate settlement.
• Notwithstanding the opt out regime, the Court does not lack power to require group members to take a step in order to gain a benefit.

Group Costs Orders and transfer of proceedings

A GCO allows plaintiff lawyers in class actions to receive a pre-determined percentage of judgment or settlement – to similar commercial effect as a contingency fee or solicitor CFO. The GCO regime is unique to Victoria and has been a magnet for claims to be filed in that court.  

In the Arrium class action, the Victorian Court of Appeal declined to transfer the proceedings to NSW – finding that the fact a GCO had been made was a relevant factor in exercising discretion and the GCO would not "travel" (or remain in force) in another jurisdiction. Apart from the CGO, NSW was the more appropriate forum.

The Victorian Court of Appeal has given reasons but not yet made orders. The transfer application has now been removed to the High Court for determination.

The High Court will determine whether a GCO is in fact relevant to a transfer and whether a GCO travels to another court (which would otherwise not have had the power to make a GCO). 

What next

• Decisions by the High Court will provide much needed certainty in these areas - noting that the Court is now differently constituted since earlier decisions (such as Brewster).
• The hearing of the transfer application in the Arrium class action will take place in the High Court later this year. 
  
• Whether special leave to appeal is granted by the High Court in relation to CFO's could be known as early as September 2024 with the possibility of an appeal hearing in late 2024 or early 2025. The granting of special leave to appeal to the High Court may indicate that the Court's power to make both CFO's and Solicitor CFO's is not free from doubt. This may temper any attempts to seek equivalent determinations of the Court's powers to order a Solicitor CFO in the State Supreme Courts.
• A High Court hearing on class closure may take place as early as November /December 2024.
• Separately ,we may see legislative intervention at the Federal and State levels to adopt measures similar to the regime in Victoria, which allows Group Costs Orders and class closure.

Authors: Ian Bolster, Partner; John Pavlakis, Partner; Sally-Anne Stewart, Senior Associate; Mark Bradley, Partner; Angela Pearsall, Partner.