February 2023: will I get a CFO, or will I not?

On 14 February 2023, Justice O'Callaghan provided his reasons for approving the proposed settlement in the 7/11 class action.?While the settlement amount was found to be "fair and reasonable" for group members, importantly his Honour held that the Federal Court of Australia does not have power to make a "common fund order" (CFO) at the settlement approval stage.

As readers may be aware, a CFO is a Court order that requires all group members who receive compensation from a settlement (or judgment) to pay a percentage of it to the litigation funder who has funded the proceeding – whether or not those group members have signed a funding agreement with the litigation funder.?Since their approval by the Full Federal Court in 2016, CFOs have been regularly sought by litigation funders in class actions because such an order provided more certainty about their potential returns (being a fixed percentage from every group member).?The availability of CFOs contributed to class actions being commenced more quickly, as litigation funders did not have to incur the time and expense associated with book-building (that is, individually signing up group members to funding agreements).

However, the decision by the High Court in BMW v Brewster in December 2019 created some uncertainty in the Australian class action landscape.?In Brewster, the High Court held that there was no power to make a CFO at a preliminary stage of a proceeding under s 33ZF of the Federal Court Act (the Act).?However, the High Court did not answer whether there was power to make a CFO at the settlement approval stage under s 33V(2) of the Act.

Since Brewster, numerous single judges of the Federal Court have held that Court has power to make a CFO at the settlement approval stage under s 33V(2) of the Act (for example, Beach, Lee and Murphy JJs have all held that there is such power).?

Justice O'Callaghan's decision is unexpected.?In arriving at his conclusion, his Honour referred to Brewster and noted that although the High Court was concerned with the power to make a CFO at a preliminary stage of a proceeding under s 33ZF of the Act, the reasoning of the majority pointed "clearly enough" to the conclusion that there was, similarly, no power to make a CFO at the settlement approval stage under s 33V(2) of the Act.?

This decision further increases the divergence between the views held by Federal Court Judges, and is likely to lead to greater uncertainty for litigation funders and class action participants alike.?Litigation funders may now need to think twice about relying on the availability of a CFO at the settlement approval stage, which may lead to renewed efforts on book-building before a class action is commenced.?Further, we may see a slowdown in the filing of new class actions in the Federal Court while class action promoters digest this recent decision.?

In our view, the question of whether CFOs are available in Australian class actions is unlikely to be resolved until it comes before the High Court again.?Alternatively, the Albanese Federal Government may be required to intervene and pass legislation to definitely answer this question sooner rather than later.?

For now, this uncertainty remains.?We will continue to follow any new developments.?For further queries or information relating to recent developments in class actions more generally, please contact us.