Takeaways from the High Court's rejection of common fund orders

The High Court of Australia rejected on Wednesday that the Federal Court of Australia and the Supreme Court of New South Wales have the power to make common fund orders in class actions.

It is clear that the decision on BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall will have wide-ranging implications for all stakeholders in class actions in Australia, said Chris Pagent, head of class actions at Corrs Chambers Westgarth.

He told Australasian Lawyer that he and his team expect three key effects from the decision.

“Funded cases will not be filed unless or until they have built a sufficiently strong book, which means that litigation will not be commenced as quickly,” he said. “It will be far more expensive to get cases off the ground due to the high costs associated with building a book, creating real challenges for less well-resourced funders.”

It is also likely that there will be a decrease in competing class actions, he said. Nonetheless, Pagent said that the number of defendants facing shareholder claims would likely stay the same, even though there may be less competition for the right to prosecute shareholder claims.

^{Image: Chris Pagent}

Central to the case was whether section 33ZF of the Federal Court Act and section 183 of the Civil Procedure Act (NSW) empower the court, in representative proceedings, to make a common fund order. The court, by a 5:2 majority, said that the sections do not.

In the lead judgment, Chief Justice Susan Kiefel, Justice Virginia Bell, and Justice Patrick Keane said that both section empower the courts to make any appropriate or necessary order “to ensure that justice is done,” but the power does not extend to making common fund orders.

“These 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,” the justices said. “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. The making of an order at the outset of a representative proceeding, in order to assure a potential funder of the litigation of a sufficient level of return upon its investment to secure its support for the proceeding, is beyond the purpose of the legislation.”

Clayton Utz told Australasian Lawyer that the decision brings both the Federal Court and the Supreme Court of NSW back to before the 2016 decision in Money Max v QBE was made, when the common fund order was given the green light by the Full Court of the Federal Court of Australia.

The firm said, however, that it’s too early to assume that the newest High Court decision is a permanent setback, since the decision is based on interpretation of the law. Laws can always be amended, it said, but it expects amendments not to happen any time soon.

Clayton Utz also noted that BMW and Westpac both raised constitutional objections to common fund orders. While both Justice Stephen Gageler and Justice James Edelman rejected the objections in their dissents, the majority did not address the objections, leaving the issue open.

The firm also said that Victoria is in the midst of overhauling its class action regime to allow for contingency fees to be charged by lawyers to all group members. The change could attract future proceedings to the Supreme Court of Victoria. However, the Victorian model does not clearly define a place for litigation funders, it said.