The Full Court of the Federal Court of Australia has recently handed down judgment in R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89 (Blue Sky), confirming that the Federal Court has the power to make a ‘common fund order’ in favour of solicitors who bring class action proceedings on behalf of group members.

As we outline below, the Full Court’s decision in Blue Sky illustrates the Court’s willingness to adopt a flexible approach towards issues impacting the commerciality of class actions and demonstrates the Federal Court’s ongoing evolution as a key jurisdiction for the commencement of class action proceedings in Australia. 

Common fund orders and contingency fees explained

The Court’s decision in Blue Sky concerns two separate but related concepts in class action procedure in Australia: common fund orders (CFOs) and contingency fees.

Common fund orders

A CFO is an order made by a court providing for a distribution to be made from the proceeds of a class action (such as an agreed settlement) to remunerate a person who has borne the risks of funding the action. This distribution is made from the ‘common fund’ of the proceeds recovered from the class action and is usually borne pro rata by the group members.

Historically, CFOs have most commonly been sought in favour of third-party litigation funders who have funded the legal fees incurred by the plaintiffs for the duration of the proceedings. The extent of the Federal Court’s power to make CFOs has been the subject of significant uncertainty since the 2019 High Court decision in BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 94 ALJR 51. Although there has been some divergence in decisions regarding the availability of CFOs, a number of recent decisions have confirmed that the Federal Court has the power to make a CFO in favour of a third-party funder following a settlement or discontinuance of a class action under s 33V of the Federal Court of Australia Act 1976 (Cth) (Act).

Contingency fees

Contingency fees are fees that a lawyer proposes to charge only if a matter is successful and are usually calculated as a percentage of the amount that is recovered in the litigation. 

Historically, there have been various prohibitions preventing lawyers from entering into cost agreements which provide for the payment of a contingency fee. However, in June 2020, an amendment was made to the Supreme Court Act 1896 (Vic) which had the effect of permitting an order to be made (referred to as a 'group costs order' (GCO)) entitling lawyers to recover a contingency fee in class action proceedings in the Supreme Court of Victoria.

The introduction of GCOs in the Supreme Court of Victoria has made that Court an attractive jurisdiction in the eyes of many solicitors acting for plaintiffs in class action proceedings. The advent of GCO has also appeared to limit the role of litigation funders in some cases (where a firm of solicitors may wish to self-fund the proceeding on the basis that a contingency fee will be sought through a GCO).

The reserved question in Blue Sky

It was in this context that the applicants in Blue Sky sought confirmation from the Full Court (in the form of a reserved question) as to whether the Federal Court has the power to make a CFO in favour of a solicitor at the time of settlement or judgment (Solicitors’ CFO). A Solicitors’ CFO, where made, will ordinarily have a practical effect akin to the solicitor receiving a contingency fee given the solicitor would receive a portion of the proceeds recovered from the class action (not related to reimbursement of costs and disbursements incurred in respect of the proceeding).

The Full Court’s decision

At the outset, the Full Court emphasised the reserved question concerned an inquiry into power and not discretion. The Full Court’s judgment therefore only considers whether an order for a Solicitors’ CFO can be made, and not whether a Solicitors’ CFO should be made (and if so, on what terms). The question of whether a Solicitors’ CFO should be made in any case will need to be assessed at the time the order is actually sought, and when the Court is appraised of key information such as:

• the outcome of the proceeding;
• the total costs incurred by the plaintiffs;
• the percentage of the recovered proceeds that the solicitor seeks to be paid; and
• any other matters which the plaintiffs contend make a Solicitors’ CFO 'just' in all of the circumstances.

The Full Court confirmed that it has the requisite power to make a Solicitors’ CFO at the time of settlement, discontinuance or judgment pursuant to sections 33V or 33Z of the Act, provided it is ‘just’ to do so in all of the circumstances. In reaching that decision, the Full Court confirmed that the Federal Court has the power to make CFOs at the time of settlement, rejecting submissions from the opposing respondents that a Solicitors’ CFO should be treated differently on the question of power. In particular, the Full Court rejected contentions that the Court lacked the power to make a Solicitors’ CFO on the basis that such an order would:

• give rise to an impermissible conflict between the solicitor’s duties to its clients and their own financial interests: The Full Court acknowledged that potential or actual conflicts of interest can (and do) arise in the context of the class action regime. However, rather than limiting the Court’s powers (including its power to make a Solicitors’ CFO), those conflicts can be appropriately managed by solicitors (and independent barristers) and the interests of group members are protected by the supervision of the Court.
• fall afoul of the prohibition against contingency fees under s 183 of the Legal Profession Uniform Law (NSW) (LPUL): The Full Court rejected the suggestion that a Solicitors’ CFO would be an agreement contrary to s 183 of the LPUL, on the basis that there was no promise to pay an amount, but rather, a promise to make an application for an order directing approved remuneration on a specific basis. A Solicitors’ CFO would not allow the applicants to remunerate the solicitors based on a proportion of what could be recovered. Instead, any payment under a Solicitors’ CFO would be made pursuant to a Court order on the basis that it was 'just' for such an order to be made.
• be contrary to public policy: The Full Court disagreed for a number of reasons, including the illogicality that public policy would preclude the power to make a Solicitors’ CFO in New South Wales but not in Victoria (where, as noted above, contingency fees can be recovered through a GCO). The Court indicated that the GCO regime in Victoria has so far assisted group members in the just resolution of disputes as inexpensively as possible. While Pt IVA of the Act does not empower the Court to make an order granting a GCO, the Court expressed the view that there was no reason to think that the availability of a Solicitors’ CFO would not make the resolution of group member claims significantly less expensive (consistently with GCOs).

Implications of the decision

1. Although the Full Court has confirmed that the Federal Court has the power to make a Solicitors’ CFO in appropriate cases, it remains to be seen how the Federal Court will exercise its discretion to use that power in practice, and what terms will be attached to any Solicitors’ CFO – particularly the percentage of recoveries that a solicitor will be entitled to retain pursuant to a Solicitor CFO.
2. To the extent commencing proceedings in the Supreme Court of Victoria is desirable to class action plaintiffs to access the GCO regime, this decision provides an alternative forum to commence a class action proceeding where a law firm is prepared to effectively underwrite the claim. As the Full Court’s decision only concerns the power of the Federal Court to make a Solicitor CFO at the time a settlement is reached, it differs from the Supreme Court of Victoria where a GCO is ordinarily sought much earlier in the proceeding. 
3. It remains to be seen how State courts (other than Victoria) will view applications seeking a Solicitors’ CFO in light of these developments. 
4. By confirming that the Federal Court has the power to make a Solicitors’ CFO in appropriate circumstances, it is possible we will see an increase in the number of claims filed in the Federal Court commensurate with the decrease in claims being filed in the Supreme Court of Victoria.