“Uncommon Fund Orders” Group member costs orders in class actions and Davaria Pty Ltd v 7-Eleven Stores Pty Ltd

Last week, in delivering a settlement approval judgment¹ in the 7-Eleven class action,² Justice O’Callaghan of the Federal Court of Australia rejected the litigation funder’s request for a “Common Fund Order” (CFO), which would have had the effect of deducting $24.5M in funder’s commissions from the $98M settlement prior to distribution of those settlement funds amongst the group members.

The CFO judgment

The funder’s proposal included distributing the multi-million dollar commission across group members who had signed funding agreements along with those who had not. Justice O’Callaghan stated:

1. The Federal Court does not have the power to make a CFO or an order in the nature of a CFO at any time, including at the settlement stage of a class action. The making of a CFO, whether at an early stage or at the conclusion of a proceeding, cannot be supported by equitable principles. To that end, His Honour agreed with his fellow Federal Court judge, Justice Foster, in Cantor v Audi Australia Pty Ltd (No 5).³
2. If wrong about the Court’s power to make a CFO, he would still not make a CFO as a matter of discretion for the following reasons:


1. He did not accept that the funder’s commission should be determined principally by reference to a fixed or “benchmark” percentage in the market;


2. The High Court in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45 (Brewster) expressed a preference for funding equalisation orders over CFOs (albeit that the High Court in Brewster was dealing with CFOs made at a preliminary stage of a proceeding);


3. The funder is currently entitled to a total commission of $13.72M under the funding agreements with group members. A CFO totalling $24.5M would provide the funder with a commission which is nearly double what it would otherwise be entitled to. There was noted to be no clear rationale for the $10.78M difference, other than some sort of “windfall gain” theory.



What next?

This judgment is significant for a number of reasons:

1. It has further underlined the lack in consistency amongst the judiciary about the power to make CFOs. Federal Court Justices Moshinsky⁴ and Foster⁵ have previously held that there is no power to make CFOs at all, whilst Federal Court Justices Lee,⁶ Beach⁷ and Murphy have all previously held that the Federal Court does have the power to make CFOs. On top of that, the High Court in Brewster has held that CFOs cannot be made (at least) at a preliminary stage of a proceeding.
2. This situation is unhelpful for all stakeholders in class actions, be it the lead applicant and group members, plaintiff lawyers, funders or defendant interests. Nobody involved in the management of representative proceedings benefits from such a state of uncertainty.
3. It seems essential that this issue be considered at the earliest possible time by the Full Federal Court, which may well happen shortly anyway given that there is a lot of money at stake for the funder in the 7-Eleven class action and that may be enough to prompt an appeal. From there, the High Court may need to consider the issue, especially given that the Brewster ruling was confined to the making of CFOs at a preliminary stage of a class action and not at the settlement stage.
4. Ultimately, access to CFOs may need to be cured by legislative intervention, which the Albanese Government may be open to doing given the Morrison Government’s legislative agenda which was seen by some as being anti-class action and anti-funder.
5. Until either the Courts or the Federal Government prescribe a definitive position, we may in the meantime see an increased number of class actions issued in the Supreme Court of Victoria so that plaintiff lawyers and funders can take advantage of that Court’s unique access to contingency fees (known politely as Group Costs Orders).

 

 

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^{1 Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84.
2 Davaria Pty Ltd & Anor v 7-Eleven Inc & Anor VID 180 of 2018 and Davaria & Ors v Galactic Seven Eleven Litigation Holdings LLC VID 182 of 2018. The 7-Eleven Class Actions concern 2 representative proceedings.
3 Cantor v Audi Australia Pty Ltd (No 5) [2020] FCA 637.
4 Fisher v Vocus Group Ltd (No 2) [2020] FCA 579.
5 Ibid.
6 Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd (No 3) [2020] FCA 1885.
7 Hall v Arnold Bloch Leibler (a firm) (No 2) [2022] FCA 163.}