Federal Court provides clarity around settlement common fund orders

The recent Full Federal Court decision of Elliott-Carde v McDonald's Australia Limited [2023] FCAFC 162 has provided much-needed clarity on the Federal Court's power to make common fund orders (CFOs).

CFOs require all class members to equally contribute to a litigation funder's commission from their share of settlement or judgment proceeds, irrespective of whether they have entered into a litigation funding agreement with the funder. Typically, CFOs have been made at the commencement of proceedings.

However, since the High Court's decision in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall (Brewster),¹ there has been uncertainty regarding the Federal Court and NSW Supreme Court's ability to make CFOs. In Brewster, the High Court held that section 33ZF of the Federal Court of Australia Act 1976 (Cth)² did not extend to the making of orders regarding third parties (i.e. litigation funders) at an early stage of proceedings. However, it was unclear whether the Brewster judgment would apply to a CFO being made at the conclusion of proceedings.

In Elliott-Carde, the Full Court held that section 33V(2) of the Federal Court of Australia Act 1976 (Cth) enables the Court to make a settlement CFO.

Background

The case comprises two related proceedings.

The first is a representative proceeding commenced by two applicants against McDonald’s Australia Limited (McDonald's) (Elliott-Carde Proceedings) asserting contraventions of the Fair Work Act 2009 (Cth) and claims regarding workplace entitlements. The second proceeding is brought by the Shop, Distributive and Allied Employees Association (the SDA) against McDonald’s and its franchisees. It includes similar claims against McDonald’s as well as pecuniary penalties (SDA Proceedings).

As a result of the competing claims, stay applications were made and ultimately heard in December 2022. At the hearing, it was proposed that each of the stay applications be dismissed, with both the Elliott-Carde Proceedings and the SDA Proceedings remaining on foot, such that:

• the group members' entitlement to statutory compensation would be decided within the Elliott-Carde Proceedings, unless a group member opted out; and
• if this occurred, the compensatory claim would be determined in the SDA Proceedings, along with the other claims advanced in the SDA Proceedings (such as pecuniary penalties).

However, by February 2023 the parties had abandoned the proposal and the SDA renewed its application for a stay of the Elliott-Carde Proceedings and sought approval of opt-out notices. In support of its application, the SDA relied on the decision of O’Callaghan J in Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 which held the Court had "no power to make a common fund order upon settlement under s 33V(2)".

The proposed opt-out notices in the Elliott-Carde Proceedings referred to a proposed settlement CFO. Lee J determined it was necessary to refer the matter to the Full Court to consider whether the Federal Court had the power to make such an order. Lee J referred the following question to the Full Court of the Federal Court:

"If it was just to do so, does the Court have the statutory power, pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth), to make an order distributing money paid under a settlement in the form of a 'Settlement CFO', as that term is defined in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183; (2020) 281 FCR 501 (at 506–507 [19], [22]–[25])?" (Referred Question)

The Full Court's decision

The Full Court of the Federal Court ordered that the answer to the Referred Question was "yes". In coming to this view, the Full Court considered the wording of s 33V(2), the decision of Brewster, and whether the making of a settlement CFO pursuant to s 33V(2) falls within the judicial power of the Commonwealth.

Section 33V(2)

Section 33V of the Federal Court of Australia Act 1976 (Cth) provides:

1. A representative proceeding may not be settled or discontinued without the approval of the Court.
2. If the Court gives such an approval, it may make such orders as are just regarding the distribution of any money paid under settlement or into the Court. Beach J noted s33V(2) employed language "importing a wide judicial discretion"³ and, aside from a requirement that orders be just, s33v(2) only required orders be “with respect to the distribution of any money paid under a settlement or paid into the Court”.

Beach J further observed: "...none of the terms used in s 33V(2) would, as a matter of natural meaning, be read as precluding a settlement CFO."⁴ The section made no implication as to the ultimate recipient of monies, such that it could not be said the word "paid" should be limited to payments to the applicant or group members only. Beach J noted:

"Such a narrow reading would preclude the Court from invoking s 33V(2) to require that settlement funds be used to pay the legal costs incurred by the class applicant..."⁵

Beach J also indicated that, if the Court could use s33V(2) to make orders regarding the payment of legal fees, it should follow the Court had the power to use s 33V(2) to make orders regarding payment of litigation funding fees, notwithstanding the fee may be expressed as a percentage funding commission, and the litigation funder may have had a self-interest in providing the funding. Lee J noted there was no issue with providing a litigation funder with reasonable remuneration.⁶

Colvin J noted that s33V(2) "confers an authority to make orders as to the distribution of money", and there is "no foothold in the language of s33V(2) for concluding that a Settlement CFO is a kind of order that falls outside the jurisdiction conferred by s33V(2)".⁷

The Brewster decision

In Brewster, it was held that section 33ZF of the Federal Court of Australia Act 1976 (Cth)⁸ did not extend to the making of orders regarding third parties (i.e. litigation funders) at an early stage of proceedings.

The Full Court considered whether Brewster would apply to this case, and each of Beach, Lee and Colvin JJ found it would not. Beach J noted Brewster did not address s 33V(2) nor settlement CFOs. Rather, Brewster was concerned with the "gap filling s 33ZF(1) and early CFOs".⁹

Section 33ZF(1) confers general powers on the Court and provides:

"In any proceeding (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding."

The High Court described the section as a "gap filling" power as it may be relied upon "to do what is appropriate" to provide a procedure for representative proceedings.

As to the distinction between early CFOs and a settlement CFO, Beach J referred to the reasons given by Nettle J in Brewster and noted his Honour "carefully expressed himself by reference to s 33ZF(1)" and referred to “a common fund order ('CFO') of the kind in issue in these matters” (at [122]) and “the kind of CFOs sought in these matters” (at [125])."¹⁰

Beach J determined that such wording was used by Nettle J to support the position an early CFO was not empowered by s 33ZF(1), however, it would not follow that this reasoning would operate to preclude a settlement CFO being made under s33V(2). Specifically, Beach J stated: "None of this says anything about the proper construction and ambit of s 33V(2) let alone the power to make settlement CFOs under s 33V(2)."¹¹

Likewise, Colvin J noted the High Court did not express a "...concluded view that there is no power under s 33V to make a common fund order at the time of approving a settlement as required by s 33V(1)."¹²

Judicial power of the Commonwealth

The Court received submissions from a court-appointed contradictor,¹³ and on behalf of the Attorney-General of the Commonwealth on constitutional issues.¹⁴

The court-appointed contradictor submitted the making of a settlement CFO pursuant to s 33V(2) does not fall within the judicial power of the Commonwealth as:

• it is said that it would involve the creation of new rights and obligations as between the unfunded group members and the funder, and establishes a relationship between unfunded group members and the funder;
• it is said that it would involve the application of non-judicial, policy considerations in quantifying the amount of commission to be paid; and
• there is presently no "matter" in the constitutional sense that has arisen because the relevant power can only be enlivened at the time of settlement approval (i.e. not at the time opt-out notices are issued).

As to the question of judicial power, Beach J found "the power to make a settlement CFO is neither inherently non-judicial nor otherwise incapable of being exercised judicially."¹⁵ Rather, it is "at least incidental to the exercise of a judicial power given the very language of s 33V(2)" being that the Court “may make such orders as are just.”¹⁶

Likewise, Lee J noted "...an order made for the express purpose of being part of the orders by which the Court resolves a dispute about existing rights (and quells the controversy resolved by the settlement) is not at the margins of judicial power."¹⁷

As to the second issue, Beach J noted a judge would not be setting a market rate; rather, an application as to an appropriate rate would be made by the representative party, and the Court would be asked to approve a rate sought by the applicant. Beach J stated that any such application would include evidence as to why the funding was provided on the terms it was, and the Court would have a discretion to make the order sought based on the available evidence. Lee J also noted that, while making such an order would involve assessment of “commercial returns” of litigation funding, "a Settlement CFO might be thought to be consistent with general equitable principles that a person who benefits from another’s efforts in producing a fund is obliged to provide appropriate value in return."¹⁸

Finally, on the question of whether there was a "matter" for the Court to consider, where the two elements of a matter were present ─ namely, subject matter and justiciability ─ there was no issue as to the "subject matter". As to justiciability, Beach J noted "that there be an immediate right, duty or liability to be established by the determination of the Court, that is, a justiciable controversy."¹⁹

Lee J noted: "The question of the proper characterisation of a 'matter' is not revisited for every intermediate question of fact or law that arises. Once there is a matter in this Court, the Court can deal with all issues that arise subject to the issue being justiciable."²⁰

In support of this position, Beach J stated: "Not only is there a matter before the Court, but answering the reserved question has, as both Lee J and I have indicated, real and immediate utility. And it is not premature for this Court to determine the reserved question, in circumstances where the question arises directly in the applications before the docket judge, with the controversy live before him and as alive before us given the reservation for our consideration."²¹

Accordingly, the Court found that making a settlement CFO was within the judicial power of the Commonwealth.²²

Going forward

While the decision has provided clarity on the Federal Court's power to make CFOs, it favours litigation funders and plaintiff law firms, rather than insurers and insureds.

It enables litigation funders to obtain certainty as to costs at settlement. It also removes the need for litigation funders to focus on extensive book building, and enter into funding agreements with all group members to secure a return on funds invested.

Finally, we expect the decision will encourage plaintiff firms and litigation funders back to the Federal Court, and away from the Victorian Supreme Court which has, more recently, been a preferred venue by reason of the group costs order regime introduced in 2020.

¹ [2019] HCA 45.

² the legislation under which the Federal Court had previously been making common fund orders, and also section 183 of the CPA.

³ [97].

⁴ [99].

⁵ Ibid.

⁶ See [410].

⁷ [497].

⁸ the legislation under which the Federal Court had previously been making common fund orders, and also section 183 of the CPA.

⁹ [109].

¹⁰ [114].

¹¹ [119].

¹² [496].

¹³ As the SDA initially indicated it did not intend to play any part in the Full Court hearing.

¹⁴ As the contradictor identified constitutional arguments.

¹⁵ [249].

¹⁶ Ibid.

¹⁷ [373].

¹⁸ [380].

¹⁹ [195].

²⁰ [367].

²¹ [226].

²² At [450] Colvin J stated: "I agree with Lee J for the reasons given by his Honour that the making of a settlement CFO would not involve the Court undertaking a task that was non-judicial".

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