Home » High Court Decision Threatens Booming Class Action Industry

High Court Decision Threatens Booming Class Action Industry

Posted by Marcus McCarthy | 09 December 2019 | Finance Transaction Support

The Situation

Litigation funding (also known as legal financing or third-party litigation funding) has been a major driver of Australian class actions. It typically involves a funder advancing the costs or fees associated with litigation into a “common fund”. In exchange, the funder receives a cut of any proceeds recovered from a settlement or a court judgment.

Common fund orders require all members of a class action to contribute a percentage of any settlement or damages they receive to the litigation funder. This applies even if they have not personally signed any contract with the funder.

Challenges to common fund orders mounted in the Federal Court and Court of Appeal in the Supreme Court of New South Wales.

The Case

On Wednesday, the High Court of Australia determined that the Federal Court of Australia and the Court of Appeal in the Supreme Court of New South Wales do NOT have the power to make common fund orders in class actions.

This decision in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall will have wide-ranging implications for all stakeholders in class actions in Australia.

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 ruled that while both sections empower the courts to make any appropriate or necessary order “to ensure that justice is done,” 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.”

The lead judgment of Chief Justice Susan Kiefel and Justices Virginia Bell and Patrick Keane also said that when section 33ZF was enacted, “the Parliament could not have been understood to contemplate that [it] might be invoked to support a [common fund order] “.

The Ramifications

What are the key points to take from the decision?

  1. There is likely to be a decrease in access to justice for claimants because of the need to book build.
  2. Litigation will not be commenced as quickly because funders will need to book build.
  3. Funding commissions will be higher. It will be more expensive to get cases off the ground due to wasted costs associated with building a book.
  4. Book building could lead to more closed cases which excludes group members who don’t sign a funding retainer.

Should you have any questions, please do not hesitate to contact Marcus McCarthy (mwm@nexuslawyers.com.au) or Michael Holmes (mbh@nexuslawyers.com.au) on 02 9016 0141.

This publication is © Nexus Law Group and is for general guidance only. Seek legal advice before taking action in relation to any specific issues.

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