High Court’s class action blow 'may not be fatal'

by John Reynolds, KT Journalism

The High Court has cast doubt on the future of class action funding after finding two of Australia’s most superior courts misinterpreted legislation and wrongly granted early common fund orders (CFOs).

The 4 December majority judgement said the Full Federal Court and the NSW Appeal Court, and the lower courts which granted CFOs, had wrongly assumed federal and NSW legislation had “the widest possible powers” that enabled judges to issue interlocutory orders.

They had granted the orders after hearing plaintiff arguments that the two class actions would be unable to proceed without financial guarantees for the class action funders.

But, in a plurality judgement, Chief Justice Susan Kiefel and Justices Virginia Bell and Patrick Keane, found the CFOs were issued only to ensure proceedings continued when building a case and signing claimants became too expensive. That was contrary to the federal and NSW legislations’ meaning.

The justices said legislation recognised “at some point, the cost of identifying group members may simply be too high or too difficult compared to the value of the claims”.

“If that is the case, the solution contemplated by the legislation is to halt the representative proceeding, not to make a CFO because the process of book building is proving too expensive or too difficult.”

Because the High Court found legislation did not support interlocutory orders before a class action began, it did not consider Westpac’s and BMW’s alternative argument that issuing CFOs was unconstitutional.

But some lawyers and litigation funders say the situation may not be as dire for class actions as it first appeared.

Shine Lawyers Head of Class Actions Jan Saddler told Resolve the Federal Court in January issued a practice note in response to the High Court’s judgement. It indicated the Federal Court would take steps to ensure future class action financial burdens were fairly distributed.

She said the ruling was “disappointing”, but plaintiff law firms did not believe the High Court had necessarily spelt an end to class actions.

Other law firms said the ruling affected only two jurisdictions and could spark the Federal Government, NSW and other states and territories to reassess their class action legislation.

Two appeals heard as one

The High Court decided to hear the two appeals together because they both involved interlocutory orders and CFOs granted to offset litigation funders’ initial costs.

In Westpac Banking Corporation & Anor v Lenthall & Anor, the Full Federal Court had ruled section 33ZF of the Federal Court of Australia Act 1976 (FCA Act) permitted the court to grant a CFO if it was "appropriate or necessary to ensure that justice is done in the proceeding".

In BMW Aust Ltd v Brewster & Anor, the NSW Appeal Court made a similar ruling about s183 of the NSW Civil Procedure Act 2005 (CP Act).

The federal case involved people affected by Westpac Life’s insurance selling policies, while the NSW case involved BMW vehicle owners affected by an airbag recall.

Both Westpac and BMW appealed to the High Court, arguing CFOs were not open to plaintiffs or litigation funders in either case.

In the plurality judgement, Chief Justice Kiefel and Justices Bell and Keane agreed.

They accepted Westpac’s and BMW’s arguments the courts had acted, “in effect, as a remuneration tribunal for litigation funders”, and an order made to maintain a litigation’s viability did not ensure justice was done because it did not advance the parties' legal rights and obligations.

The justices said, while the FCA Act’s and the CP Act’s powers were broad, they were also “supplementary”. They did not give courts authority to issue interlocutory orders to assist with funder trial costs.

“It is one thing for a court to make an order to ensure a proceeding is brought fairly and effectively to a just outcome; it is another thing for a court to make an order in favour of a third party to encourage it to support the pursuit of the proceeding, especially where the merits of the claims in the proceeding are to be decided by that court,” they said.

The legislation authorised “an order apt to advance the effective determination by the court of the issues between the parties to the proceeding. Whether or not a potential funder may be given sufficient financial inducement to support the proceeding is outside” the legislative scope.

The judges said some claims would not  attract funding, either because of a want of interest among group members or because litigation funders' assessments of the claim’s prospects led them to decline the risk.

There should be no suggestion the law required courts to ensure all claims, “no matter how dubious their merits or paltry the likely monetary recovery”, were given an opportunity to be heard in court.

They said ensuring funded claimants and those who had not contributed to initial group costs, known as “free riders”, were treated fairly could be addressed through a funding equalisation order (FEO) after the trial had ended or settlement was reached.

The FEO would reduce unfunded group members' awards by an amount equivalent to that paid to the litigation funder by funded group members.

In separate but concurring judgements, Justices Geoffrey Nettle and Michelle Gordon said the parliaments would not have intended legislation to be props to assist “entrepreneurial litigation funders”.

“The legislative purpose does not extend to addressing uncertainties on the part of litigation funders generating profits,” Justice Nettle said.

Justice Gordon said a funder’s role was to assess viability before cases were proposed or brought. Once action had started, it was not appropriate to improve a funder’s economic position, nor was it  “to ensure justice is done in the proceeding".

Dissenting opinions

But Justices Stephen Gageler and James Edelman disagreed with the majority opinion.

Justice Gageler said courts should not be “squeamish” because litigation funders were trying to secure returns on investment. Courts had an obligation to make CFOs if they were in the interests of justice, regardless of funding arrangements.

“Provided [the] interests of group members are adequately represented, I see no reason why the court cannot [make] an order early in the proceeding [to] advance the interests of justice by placing the funding available to the representative party on a secure footing,” he said.

A CFO would reduce uncertainty for all concerned about how a court might exercise statutory discretions to distribute costs; and enable group members to make more informed decisions about their potential returns.

Justice Edelman said courts had the power to make orders that were "appropriate or necessary to ensure justice is done, including on an interlocutory basis”. Those powers were supported by long-standing, established legal principle.

Possible relief from ‘disappointing’ judgement

Shine Lawyers Ms Saddler said the High Court ruling was disappointing, and would force class action law firms and litigation funders to return to book building or seek other avenues to ensure costs and funds were distributed equitably.

That would involve collecting signatures through a mixture of grassroots campaigning and community gatherings.

Most firms would not be too concerned because book building was normal before CFOs became commonplace in 2016 and it would not be too onerous to return to the practice.

Ms Saddler said class action lawyers would be relieved by Federal Court Justice Michael Lee’s response to the High Court ruling. He said he would issue a practice note to “address and permit the making of orders to prevent unjust enrichment and to ensure an equitable and fair distribution of costs and other expenses” in class actions.

“We will need to consider carefully the content and implications of the practice note but it is a very positive step from the Federal Court in ensuring the fair treatment of the interests of the applicants and all group members in all class actions,” Ms Saddler said.

Association of Litigation Funders of Australia president Pip Murphy told Resolve the High Court’s decision was “disappointing but not unexpected”. Its impact would be felt by claimants and funders, creating uncertainty and delaying claims.

 “The ground is shifting so rapidly it has had a negative impact on the just, quick and fair resolution of claims,” she said.

But she agreed the setback may be only temporary as funders and litigators adjusted to the new ruling.

“They did it when CFOs were made legal and they will do it again once the new landscape is known,” Ms Murphy said. “The courts and the parties will find ways to keep progressing cases in cost-effective ways. “

She said some cases might not proceed because they were not financially viable, but a return to book building and issuing closed class actions would be a short-term solution.

By running closed class actions, funders would  know what probable returns were on offer, creating more certainty and an ability to properly assess commercial risks.

“The problem with this is it may result in multiple class actions being run in one court or across different courts,” Ms Murphy said. “This will create challenges for courts and  defendants.

“Courts will have to manage multiple cases very carefully and we may see more joint sittings of different courts.  Defendant costs will increase because they will be fighting multiple claims instead of one large one. Courts will have to put measures in place to manage these costs very carefully.”

Setback ‘may be temporary’

Minter Ellison partners Beverley Newbold and David Taylor said the High Court’s decision was a “significant blow” to litigation funders and people who felt they had a claim.

But they said the setback may be only temporary.

They said Federal Court Justice Jonathon Beach had also commented in open court on the High Court decision, suggesting it did not affect courts’ powers to make orders to distribute money paid under a settlement or paid into the court.

He also said the High Court had recommended FEOs at settlement as a preferable option, but had not “expressly ruled out” CFOs issued during settlement.

Justice Beach's comments may open the door for litigation funders to pursue CFOs at the proceedings’ conclusion or settlement, rather than at an interlocutory stage, Ms Newbold and Mr Taylor said.

 “But they must be prepared to accept the risk a CFO may not be made at the [end] of the proceeding.”
 
Clayton Utz said the ruling was “a hurdle” that would “probably slow but not stop Australia's lively class action industry”.

The law firm agreed the ruling was not a permanent setback. It was an interpretation of legislation that could be returned to the NSW and Federal parliaments for remedy.

It did not affect other jurisdictions, such as Victoria, which was overhauling its class action regime to enable lawyers to charge contingency fees to all group members.

Mills Oakley partner Graham Maher said it was “almost certainly a blow to litigation funders” who would now have to build their own books or “take their chances” with an FEO after a trial.

The ruling would have the greatest impact on class actions with many members but modest individual losses.

He said the majority justices had made “powerful statements which clearly showed” they believed  funding choices and risks were for litigation funders and not courts to control.

Norton Rose Fulbright said many class actions may not be as commercially attractive for litigation funders after the ruling.

“This applies particularly to smaller litigation funders [that] may not wish to devote the significant resources required to book build effectively,” it said.

“Litigation funders are also likely to prefer ‘closed’ class actions, where only the claims of funded group members are part of the proceedings.

“The likely consequence will be reduced access to justice for unfunded group members.”

Gilbert + Tobin said it was “the most significant class action decision from the High Court in [more than] a decade”.

BMW Australia Ltd v Brewster [2019] HCA 45, 4/12/19