Federal Court of Australia

Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCAFC 183

ORDERS

THE COURT ORDERS THAT:

1.    The question reserved under s 25(6) of the Federal Court of Australia Act 1976 (Cth) for hearing and determination by the Full Court being:

Does the Federal Court of Australia have power pursuant to sections 33V, 33Z or 33ZF of the Federal Court of Australia Act 1976 (Cth) or otherwise to make a Common Fund Order upon the settlement or determination of this proceeding?

should be the subject of the following response:

The reserved question, as framed, should not be answered.

2.    The application for declaratory relief in terms of prayer 2 of the first respondent’s interlocutory application dated 7 August 2020 be dismissed.

3.    There be no order as to costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MIDDLETON J:

1    I have had the considerable benefit of reading in draft the reasons of Lee J. I agree with his Honour’s reasons and with the orders his Honour proposes.

2    Whilst the Court dismisses the application for declaratory relief and declines to answer the question reserved on the application of the first respondent, 7-Eleven, the parties and the funder have been given some guidance for the forthcoming mediation by the analysis of Lee J (and the agreement with it by Moshinsky J and myself).

3    In addition, the New South Wales Court of Appeal in Brewster v BMW Australia Ltd [2020] NSWCA 272, whilst taking a similar approach in relation to the question reserved for it, provided a consistent view as to whether the question of power under the State cognate of s 33V of the Federal Court of Australia Act 1976 (Cth) was conclusively determined by the High Court in BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 374 ALR 627.

Associate:

Dated:    3 November 2020

REASONS FOR JUDGMENT

MOSHINSKY J:

4    I have had the considerable benefit of reading in draft the reasons of Lee J. I agree with his Honour’s reasons and with the orders he proposes.

Associate:

Dated:    3 November 2020

REASONS FOR JUDGMENT

LEE J:

A    INTRODUCTION

5    The issue as to whether this Court has power to make a so-called “common fund order” upon the conclusion of this proceeding has been reserved under s 25(6) of the Federal Court of Australia Act 1976 (Cth) (Act) for determination by the Full Court. The question as ultimately framed is as follows:

Does the Federal Court of Australia have power pursuant to sections 33V, 33Z or 33ZF of the Federal Court of Australia Act 1976 (Cth) or otherwise to make a Common Fund Order upon the settlement or determination of this proceeding?

(Emphasis added).

6    The term “Common Fund Order” was defined to mean:

an order of the Court that provides for the quantum of the remuneration of the third-party litigation funder, Galactic Seven Eleven Litigation Holdings LLC …, to be fixed as a proportion of any moneys ultimately recovered in this proceeding, for all group members in this proceeding to bear the same proportionate share of that liability, and for that liability to be discharged as a first priority from any moneys so recovered.

7    The circumstances whereby a judge of the Court reserved this question, and referred to the Full Court a related application for declaratory relief, were set out in Davaria Pty Limited v 7-Eleven Stores Pty Limited (No 7) [2020] FCA 1487, and do not require repetition.

8    The term “common fund order” (CFO) was developed in the United States and there describes orders providing for shifting litigation costs (being attorney’s fees including disbursements) to those benefitting from the suit or judgment by the creation, protection, or increase of a common fund or common benefit in order to prevent unjust enrichment. The widespread adoption of this terminology in Australia following the decision of the Full Court of this Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd [2016] FCAFC 148; (2016) 245 FCR 191 came to describe a particular form of order or orders distributing funding expenses made pursuant to an express statutory power usually early on in a class action, or upon settlement. The use of this terminology to describe different types of orders made at different times might be inevitable, but it can obscure: (a) important differences between orders commonly described as CFOs; (b) the various statutory contexts in which such orders have been made or proposed; (c) the fact that orders colloquially called CFOs can deal with different concepts, such as the existence or creation of a fund, the approval of deductions from that fund, or distribution after deductions to participating group members; and (d) the differences between such orders made under Pt IVA of the Act and CFOs as they came to be developed, by application of equitable principles, in the United States.

9    The label was deliberately not used when this Court published Class Actions Practice Note (GPN-CA) in December 2019 (CAPN). The CAPN at [15.4] provided as follows:

Particularly in an open class action, the parties, class members, litigation funders and lawyers may expect that unless a judge indicates to the contrary the Court will, if application is made and if in all the circumstances it is fair, just, equitable and in accordance with principle, make an appropriately framed order to prevent unjust enrichment and equitably and fairly to distribute the burden of reasonable legal costs, fees and other expenses, including reasonable litigation funding charges or commission, amongst all persons who have benefitted from the action. The notices provided to class members should bring this to their attention as early in the proceeding as practicable.

10    Consistently with this approach, when it came to dealing with such an order in Lenthall v Westpac Banking Corporation (No 2) [2020] FCA 423; (2020) 144 ACSR 573 (at 575 [3]), I preferred to fashion the term “Expense Sharing Order” to distinguish an order contemplated by CAPN [15.4] from those orders that until that time had been made pursuant to s 33ZF of the Act at an early stage of a class action prior to the decision of the High Court in BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 94 ALJR 51 (when the making of such orders was disapproved).

11    The term “common fund order” has been used on this application but, because of its limitations, it is appropriate to explain initially the different types of CFOs that have been made, or have been suggested could be made, in class actions in Australia. After that explanation, it is necessary to consider the issues as to: (a) whether the making of a CFO upon settlement approval or following judgment is precluded by BMW v Brewster; and (b) whether the Full Court should determine the question of power in the absence of an application to make such an order.

12    The balance of these reasons are organised under the following headings:

    B    Types of CFOs

    C    BMW v Brewster and the Issue of Power

    D    Should the Power Issue be Determined by the Full Court?

    E    Orders

B    TYPES OF CFOs

13    During oral submissions, senior counsel for the first respondent (7-Eleven) contended that the definition of CFO adopted on this application (see [6] above) is “identical to the High Court’s definition” in BMW v Brewster. This submission, with respect, pays insufficient regard to the differences in the use of the term as between the judges in that case, including as between those judges that formed part of the majority.

14    Kiefel CJ, Bell and Keane JJ described (at 58 [1]) a CFO as an order:

characteristically made at an early stage in representative proceedings and provides for the quantum of a litigation funder’s remuneration to be fixed as a proportion of any moneys ultimately recovered in the proceedings, for all group members to bear a proportionate share of that liability, and for that liability to be discharged as a first priority from any moneys so recovered.

15    As to the other judges forming the majority, Nettle J referred (at 78 [122]) to the CFOs “of the kind” referred to in the appeal, and Gordon J noted (at 80 [135]) that a CFO:

in general terms, is a set of court orders, usually made early in the life of an open class proceeding, which impose on the representative party, and all group members, an obligation to pay a litigation funder a pro rata share of the legal costs incurred and a funding commission at a specified rate from the common fund of any settlement or judgment in their favour. Such an order obliges all group members, including unfunded group members, to contribute to the legal costs and to pay the litigation funder a commission.

(Citations omitted, emphasis in original).

16    As to the other judges, Gageler J described (at 74 [104]) the type of CFO at issue in the cases before the High Court as being:

made by a court at an early stage of a representative proceeding, in advance of the fixing of a date before which group members must exercise their rights to opt out of the proceeding. The order is made on the application of a representative party, who is in an existing contractual relationship with a third-party litigation funder, and on the giving of an undertaking to the court by the litigation funder to be bound for the duration of the proceeding to funding terms approved by the court. The funding terms require the litigation funder to fund the costs of conducting the representative proceeding, including by paying the costs and disbursements that are charged by the representative party’s solicitor, providing any security for costs that might be required in the proceeding and meeting any costs orders that might be ordered against the representative party in the proceeding. By force of the order, the representative party and group members are required to pay to the litigation funder, out of such amount or amounts as may be jointly or severally obtained by them by way of settlement of, or judgment in, the proceeding, such amount or amounts by way of reimbursement for funded costs and by way of funding commission as are identified in the funding terms. The funding commission to be paid to the litigation funder includes a premium for litigation risk. Although interlocutory in the sense that it is able to be varied or revoked by the court during the course of the proceeding, the order is final in the sense that it is framed in terms which would operate absent variation or revocation to compel payment to the litigation funder by the representative party and group members immediately upon an amount or amounts by way of settlement or judgment coming into existence prior to any distribution to them.

17    Finally, Edelman J noted (at 87 [178]) that a CFO is:

not a term of art. It loosely describes orders made by a court providing for the remuneration of a litigation funder, borne pro rata by the group members from a common fund of the proceeds recovered from the litigation. The order generally provides for the priority of payment to the litigation funder from the common fund, and for the quantum of the payment, which might include a proportion of the money recovered in the proceedings. Sometimes a common fund order is made by the court towards the conclusion of the proceedings, such as after reasons have been delivered or after a settlement has been reached [See, eg, Caason Investments Pty Ltd v Cao (No 2) [2018] FCA 527; Hodges v Sandhurst Trustees Ltd [2018] FCA 1346]. On other occasions, a common fund order is made by the court at a relatively early stage in the proceedings.

(Some citations omitted).

18    To avoid confusion, it must be borne in mind that the CFO as defined on this application is an order or orders relating to a funding commission at a specified rate from the common fund of any settlement or judgment (generally made at the same time as orders dealing with other expenses incurred in the conduct of a class action, the most significant being legal costs). Further, the CFO as defined provides: (a) for the quantum only to be fixed at the conclusion of the proceeding; (b) that all group members bear the same proportionate share; and (c) that it be paid as a first priority from any moneys so recovered.

19    As to the type or category of CFO characteristically made at an early stage in a class action (the subject of BMW v Brewster), it is convenient to describe this as a Commencement CFO and to distinguish this category of CFO from the other occasions when CFOs have been and could be made, as identified by Edelman J, at the conclusion of a proceeding: being a Settlement CFO or a Judgment CFO. But it must be stressed that although the definition provides some certainty as to what 7-Eleven described as the “critical characteristics” of a CFO, the heterogeneity of orders which might be made (and yet still be described as a CFO) points immediately to the difficulty of answering questions as to power in the absence of an application for a precise form of order, a topic to which it will be necessary to return.

20    In any event, as noted above, it is worth pausing to make some observations about each of the possible categories of CFOs identified, in order to recognise that at each of these stages of a class action the role of the Court and the statutory provisions within Pt IVA that have been relied upon (or which could be relied upon) to make the CFOs are different.

Commencement CFO

21    Commencement CFOs were made pursuant to s 33ZF of the Act and subject to further order. They were made on the mistaken basis that the judge making them thought they were appropriate or necessary to ensure that justice was done in the proceeding; the majority in BMW v Brewster determined that, properly construed, s 33ZF did not empower the Court to make a Commencement CFO. The reasoning which led to this conclusion is discussed in Section C below.

Settlement CFO

22    As Edelman J noted in the extract reproduced above, prior to BMW v Brewster, CFOs had been made in a number of cases upon settlement approval being granted. Two examples were noted by his Honour, being Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527 (Murphy J) and Hodges v Sandhurst Trustees Limited [2018] FCA 1346 (Lee J). Although there are many other examples, these two are illustrative. In both cases (Caason (order 12) and Hodges (order 6 of proceeding NSD1488/2017)) the Settlement CFO was made relying on the statutory power contained in s 33ZF but also, expressly, in s 33V. Section 33V 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 with respect to the distribution of any money paid under a settlement or paid into the Court.

23    Subsections 33V(1) and (2) have been said to confer two distinct, but related, powers: first, to approve the settlement; and, secondly, if the approval is given, to approve the distribution of payments made under the settlement: see Botsman v Bolitho (No 1) [2018] VSCA 278; (2018) 57 VR 68 (at 111 [200] per Tate, Whelan and Niall JJA). But in at least some cases where Settlement CFOs have been made, it was evidently thought recourse to the ancillary power in s 33V(2) was unnecessary because the specific power of approval of a settlement in s 33V(1) allowed for approval to be given to a proposed settlement, including, as a provision of such a settlement, any payments to be paid out of that settlement. This no doubt reflects the way the s 33V application was framed by the applicant seeking approval. Of course, it is not unusual for a deed entered into subject to Court approval to provide for all payments to be made out of the gross settlement sum, which may include such things as incurred legal costs, “uplift” payments to solicitors and barristers, refunds of “after the event” insurance premiums, funding commission and administration costs. The settlement is not to be approved if its terms do not amount to a settlement which is fair, reasonable and in the interests of all group members.

24    Having said this, to the extent s 33V(2) has been relied upon, as is evident from its text, this ancillary power only arises upon an approved settlement, and provides that the Court “may make such orders as are just” with respect to the distribution of the approved settlement (emphasis added). Plainly, the use of the word may means the Court can make distribution orders “at the discretion of the … court” (see s 33(2A) of the Acts Interpretation Act 1901 (Cth)) provided the Court is satisfied that the order is “just”.  The only limitations are that an order, considered just, must be “with respect to the distribution of any money” paid, or to be paid, under either a settlement or into Court.

25    As a general proposition, the exercise of a judicial discretion allows a judge to make a choice between lawful, but different courses of action and the concept necessarily implies choice. Given the way s 33V is expressed, if there is no power to make a Settlement CFO, that is because, irrespective of its precise terms or any other circumstance obtaining upon a settlement, a Settlement CFO is not within that conception of a settlement which could obtain approval on the basis that it is fair, reasonable and in the interests of all group members (s 33V(1)) or within the conception of a just order that could be chosen “with respect to the distribution of any money” (s 33V(2)).

Judgment CFO

26    Experience suggests that the three most likely outcomes of a class action are: (a) global settlement before an initial trial; (b) global settlement after an initial trial (if common issues are resolved in favour of the applicant); or (c) dismissal (if common issues are resolved adversely to an applicant). Rarely do class actions proceed to the entry of monetary judgment by an aggregate award or the payment of an individual judgment sum in favour of the applicant and/or group members. As a consequence, there has been no examination in the authorities as to the practical operation of Judgment CFOs, although many Commencement CFOs were previously (but mistakenly) made contemplating operation upon a judgment being obtained by an applicant or group member.

27    A money judgment in favour of a person whose claim is the subject of a class action properly commenced under Pt IVA can occur either during the currency of the class action or, unusually, after the representative proceeding has come to an end. More specifically, and without seeking to exhaust all possibilities:

(1)    an applicant, a sub-group representative appointed under s 33Q(2), or an individual group member might obtain judgment upon determination of their individual claims at an initial trial pursuant to s 33Z(1)(e) (when common issues and so-called “issues of commonality” might also be determined): see Dillon v RBS Group (Australia) Pty Ltd [2017] FCA 896; (2017) FCR 150 (at 163–7 [62]–[75] per Lee J);

(2)    in determining “a matter in a representative proceeding”, pursuant to s 33Z(1)(e), the Court may make an award of damages for group members, sub-group members or individual group members, being damages consisting of specified amounts or amounts worked out in such manner as the Court specifies, including by the constitution of a “fund” pursuant to s 33ZA;

(3)    group members might obtain an award of damages in an aggregate amount without specifying amounts awarded in respect of individual group members pursuant to s 33Z(1)(f) (while making provision for the payment or distribution of the money to the group members entitled pursuant to s 33Z(2));

(4)    without declassing the class action, if it appeared determination of the common issues would not finally determine the claims of all group members, the Court may give directions pursuant to s 33Q(1) including, as s 33R explains, to allow an individual group member to appear for the purpose of determining the group member’s claim; this was the approach initially adopted by Gillard J in Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No 2) [2003] VSC 212 and allows an individual claim leading to the entry of judgment to be resolved within the structure of the class action;

(5)    alternatively to (4), and less commonly, an applicant and/or a group member might obtain judgment upon determination of their claim in an individual proceeding following a “declassing”; this “declassing” might occur pursuant to ss 33L, 33M or 33N (each of which sections provide discretions to “declass” arising in different ways); this determination of an individual claim might occur after an initial trial of common issues, or without such a trial having taken place prior to the “declassing”.

28    Dealing with the first four of these examples, and leaving aside any power to make a Judgment CFO which exists other than within Pt IVA, different statutory provisions within the Part could be relevant, depending upon the circumstances in which a judgment is entered in favour of an applicant or group member. The power of most likely practical relevance is s 33Z(1)(g), which has operation whenever a determination of “a matter” is made “in a representative proceeding”, which allows the Court, at the same time any award of damages is made to an applicant or group member, to “make such other order as the Court think just”. This is also reflected in s 33ZJ which has operation when the Court has made an award of damages “in a representative proceeding” and allows an applicant, or a sub-group representative party, or a person who has been such a party, to apply for an order allowing reimbursement of costs (if costs reasonably incurred are not recoverable against the respondent) and also allows the Court “to make any other order it thinks just” (emphasis added). If a fund was created under s 33ZA, it may be argued that the Court may, under the powers given under that section, provide for the administration of the fund and the payment, on terms (including terms relating to the reimbursement of funding expenses), of the aggregate judgment sum to group members.

29    As to (5) above, making a “declassing” order after the resolution of common issues (or after a partial settlement) is not unprecedented. A recent example (which may, or may not, lead to a judgment) can be seen in the declassing following the decision of the Full Court of this Court in Dyczynski v Gibson [2020] FCAFC 120; (2020) 381 ALR 1. In any event, if such an order is made, it may be at a time when vast costs have been incurred up to and including the hearing of an initial trial and any appeals. These circumstances could give rise to an order being sought that a group member benefitting from the work done in resolving the common issues contribute to the costs of doing so (including the funding expenses). Any Judgment CFO in these circumstances would, it seems, need to be made pursuant to a power not contained within Pt IVA, if such a power exists. In this regard, it is noteworthy that Pt IVA is not a code: see s 33ZG of the Act, which relevantly provides that nothing in Pt IVA affects the Court’s powers under other provisions of the Act, including as a Court of equity (see s 5(2) of the Act), and its power under s 23 to make orders of such kinds as the Court thinks appropriate.

30    What the above survey of the possibilities demonstrates is that the question of whether there is power to make a Judgment CFO involves the consideration of not only the terms of the proposed order but also a number of different, albeit similarly expressed, statutory powers. Moreover, as (5) above demonstrates, it could also require consideration being given as to whether an appropriately framed order could be made in equity to distribute costs, including funding charges or commission, among all persons who have benefitted from the existing or former class action.

C    BMW v BREWSTER AND THE ISSUE OF POWER

31    The question as to whether the making of a Settlement CFO and/or and Judgment CFO is precluded by the principled application of BMW v Brewster has caused some debate.

32    As the contradictor submitted, it is accurate to observe that BMW v Brewster concerned the Court’s power to make a Commencement CFO under s 33ZF of the Act (see at 58 [1] per Kiefel CJ, Bell and Keane JJ). The majority held that the Court has no such power under s 33ZF (at 58 [3] per Kiefel CJ, Bell, Keane JJ, at 78 [125] per Nettle J, at 80 [135] per Gordon J). Of the three judges who made observations of the power to make a CFO at the conclusion of the proceeding (that is, a Settlement CFO or a Judgment CFO) under other provisions in Pt IVA of the Act, Gageler and Edelman JJ said that there was power (at 77 [117] per Gageler J, at 94 [207] per Edelman J), but Gordon J said that there was no power (at 80–3 [135], [141], [143], [149]). The other judgments, of the plurality (Kiefel CJ, Bell and Keane JJ) and Nettle J, confined their reasons to the Court’s power under s 33ZF to make a Commencement CFO.

33    A number of judges of this Court have also approached the judgments in BMW v Brewster in this way when considering whether, in the wake of that decision, it is open to conclude that the Court has power to make a Settlement CFO: McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3) [2020] FCA 461 (Beach J); Evans v Davantage Group Pty Ltd (No 2) [2020] FCA 473 (Beach J); Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Limited (No 2) [2020] FCA 579 (Moshinsky J); Uren v RMBL Investments Ltd (No 2) [2020] FCA 647 (Murphy J); Webster (Trustee) v Murray Goulburn Co-Operative Co. Limited (No 4) [2020] FCA 1053 (Murphy J); Clime Capital Limited v UGL Pty Limited [2020] FCA 66 (Anastassiou J).

34    But, as Middleton J observed in Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 7) (at [31]–[34])), in Cantor v Audi Australia Pty Ltd (No 5) [2020] FCA 637, Foster J took a different view. But in assessing whether BMW v Brewster forecloses the making of a Settlement CFO and/or a Judgment CFO, it is necessary to focus on how the plurality of the High Court, in construing a power of the apparent breadth of s 33ZF, found limitations by considering the text, context and the purpose of the legislation.

35    The conclusion of the plurality was that s 33ZF is concerned with the question of how an action should proceed in order to achieve a just outcome (including procedures necessary to bring a matter to determination); not with the different question as to whether an action can proceed at all: at 58 [3], 64 [47] per Kiefel CJ, Bell and Keane JJ. The error in the approach of the Full Court of this Court and the Court of Appeal of New South Wales was to elide words of limitation in s 33ZF when interpreting the meaning of the text of that provision: at 60 [19]–[21] per Kiefel CJ, Bell and Keane JJ. The initial task is to focus on the particular issue or problem in the proceeding which needs to be addressed (at 65–6 [53] per Kiefel CJ, Bell and Keane JJ, quoting Blairgowrie Trading Ltd v Allco Finance Group Ltd (In liq) [2015] FCA 811; (2015) 325 ALR 539 (at 560 [112]–[114] per Wigney J)), and the reference in the text of s 33ZF to the words “in the proceeding”, indicates that the issue or problem must be one arising between the parties currently in that proceeding; the making of a Commencement CFO “does not assist in determining any issue in dispute between the parties to the proceeding” and hence is beyond the principled (albeit broad) scope of the power conferred by s 33ZF: at 65 [51] per Kiefel CJ, Bell and Keane JJ; see also at 83 [149] per Gordon J.

36    That conclusion is supported by contextual considerations including specific provisions within Pt IVA dealing with issues such as: whether the class action should be declassed, including where costs become excessive (ss 33M(b) and 33N) and for reimbursement of costs incurred by a representative party, such as when the Court has made an award of damages (for example, s 33ZJ(2)): at 67 [62]–[65], 71–2 [87] per Kiefel CJ, Bell and Keane JJ. These primary provisions conferring specific power are those through which the Court acts to achieve the legislation’s aims, and s 33ZF is supplementary: at 64 [46] per Kiefel CJ, Bell and Keane JJ, at 78 [124]–[125] per Nettle J, at 82 [147] per Gordon J. As no provision is made for Commencement CFOs, this is a pointer to there being no relevant “gap” – hence a supplementary, or “gap filling” power such as s 33ZF is unavailable. Further, as Kiefel CJ, Bell and Keane JJ observed (at 67–8 [68]), the provisions of Pt IVA:

… expressly provide for the making of orders distributing any proceeds of a representative proceeding. As will be seen, the occasion for the making of such an order is the conclusion of the proceeding. At that stage, if the group members happen to be indebted to a litigation funder for its support of their claims, the value of the litigation funder’s support to the group members will be capable of assessment and due recognition. That stage is the appropriate occasion for orders for meeting and sharing the cost burden of the litigation because the value of the litigation and the extent of the burden will have been rendered certain. In contrast, an application for a CFO at an early stage of a proceeding necessarily involves speculation on the part of the parties and the court in respect of these matters; and attention to matters of concern to the litigation funder which may not be shared by, and may well be contrary to the interests of, group members.

(Emphasis added).

37    Their Honours, after making reference to ss 33V, 33X(3)–(4), 33Z and 33ZA of the Act (which deal with settlement, notice to group members and judgment), observed (at 69 [73]) that those provisions confirmed that the legislative scheme of Pt IVA contemplated that “the occasion for the making of orders in relation to distribution of the proceeds of the action is its successful completion”.

38    As to purpose, while one purpose of the class action reform was enhancing access to justice by allowing the collectivisation and litigation of claims that might not be economically viable individually, Pt IVA was not intended to address a perceived defect being the absence of sufficient incentive for funders to fund litigation: see 70–1 [82]–[84] per Kiefel CJ, Bell and Keane JJ.

39    As part of this consideration of text, context and purpose, the plurality did deal with the respondents’ arguments as to how a Commencement CFO was said to do justice in the proceeding. Needless to say, the way the plurality dealt with part of these submissions are of particular importance and are entitled to great respect in assessing whether a Settlement CFO can and should be made pursuant to a general power of the Court to approve a settlement that is fair and reasonable and to make any order it considers “just”.

40    Foster J in Cantor v Audi Australia Pty Ltd (No 5) (at [421]) expressed the view that the decision in BMW v Brewster “probably forecloses resort to s 33V” providing power to make a Settlement CFO – not that this was part of the ratio decidendi of the High Court’s decision. As I sought to explain in Lenthall (No 2) (at 576–80 [7]–[21]), the essential areas of agreement found within the reasons of the judges in the majority were concerned with the question as to whether there was power under s 33ZF(1) (and the cognate section (s 183) of the class action provisions in the Civil Procedure Act 2005 (NSW)), to make a Commencement CFO. Importantly, as Kiefel CJ, Bell and Keane JJ emphasised (at 58 [3]–[4]), the determinative issue in the case was whether, properly construed, s 33ZF empowered a Commencement CFO.  As a result, a number of “further issues determined by the courts below and agitated again by the parties in this Court do not arise for determination”.  Some of these further issues considered (and rejected) by the Full Court (and by the Court of Appeal) included contentions that a CFO amounted to an acquisition of property on other than just terms, and that the making of such an order was not part of, or incidental to, the proper exercise of judicial power. Additionally, there was the Full Court’s conclusion that this Court is “clothed with power … to make any appropriate order in a matter within its jurisdiction that a court of equity could make in similar or like circumstances”: Westpac Banking Corporation v Lenthall [2019] FCAFC 34; (2019) 265 FCR 21 (at 29 [15] per Allsop CJ, Middleton and Robertson JJ; see also at 29 [16]).

41    In a reprise of an argument advanced in Lenthall (No 2) (see at 578 [13]), it was also suggested on this application that the evident intention of the majority was to prohibit any form of CFO and this “seriously considered dicta”, reflecting this intention, should be followed. But I adhere to my view, explained in Lenthall (No 2) (at 578–9 [13]–[15]), that this misapprehends the approach mandated by Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, and that an intermediate court of appeal is required to follow the seriously considered dicta of a majority of the High Court.  And no dicta of a majority of judges can be identified in BMW v Brewster for the proposition that there is a want of power to make a Settlement CFO and/or a Judgment CFO.

42    I am fortified in my view as to the proper approach to BMW v Brewster by the reasoning of the Court of Appeal of New South Wales in Brewster v BMW Australia Ltd [2020] NSWCA 272 (Brewster (CA)), which observed that: (a) the ratio was limited to the Court’s power under the State equivalent of s 33ZF to make a Commencement CFO; and (b) that it was far from obvious that the majority judgments were addressing, still less deciding, any question of power under the State cognate of s 33V: at [28], [30], [41]–[43] per Bell P, Bathurst CJ and Payne JA agreeing.

D    SHOULD THE POWER ISSUE BE DETERMINED BY THE FULL COURT?

43    As noted above, there is no application before the Court for a Settlement CFO or a Judgment CFO. The applicant asserted in communications with 7-Eleven that the current application is premature and advisory in nature. Despite this, it took a passive role on the application and, as a consequence, no notice under s 78B of the Judiciary Act 1903 (Cth) was served (although this assertion amounted to a contention that any determination as to whether relief should be granted is not a licit exercise of Ch III judicial power). However, the assertion can also be characterised as a contention that the Full Court should not grant relief in the exercise of its discretion, even if it did have power to do so.

44    Obviously enough, it is necessary for this Court to satisfy itself that it can and should deal with the issue of power, notwithstanding no point as to prematurity was argued before us by the contradictor. At the commencement of the hearing, the Court granted leave for an intervener to be heard, the Association of Litigation Funders of Australia Ltd (ALFA). Leave was appropriate in the absence of any opposition and because the submissions of Mr Edwards, who appeared for ALFA, did address matters not otherwise canvassed in the submissions of the contradictor, including as to prematurity.

45    The relevant principles are not in doubt. Any relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The question is hypothetical if relief is claimed in relation to circumstances that might not happen or the relief will produce no foreseeable consequence: Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 (at 581–2 per Mason CJ, Dawson, Toohey and Gaudron JJ).

46    It is convenient to deal initially with Judgment CFOs. No such order has ever yet been made by the Court and it is far from foreseeable that one would be made in this proceeding. As explained below, the parties are required by order to participate in a mediation, but the entry of a monetary judgment might never happen (and if experience is any guide, is unlikely). It is not necessary for the purposes of forming a view as to any possible s 33V application for the issue of power to make a CFO on judgment to be resolved now. Moreover, importantly, as explained above, a Judgment CFO could be sought in different terms and at different stages of the litigation; the relevant judgment, be it an aggregate judgment, or in favour of an individual claimant, might arise variously and the power or powers relied upon to make the order (both statutory and non-statutory) might, as consequence, also be different. To answer the issue of power in the abstract would be to fail to pay sufficient regard to the necessity for there to be a real and immediate controversy (Re McBain; Ex parte Australian Catholic Bishops Conference [2002] HCA 16; (2002) 2019 CLR 372 (at 458–9 [242] per Hayne J)). This conclusion is sufficient to decline to answer the question framed by 7-Eleven (as subsequently amended, see [5] above) and also to refuse the relief specified in 7-Eleven’s interlocutory application, which was a declaration that the Court:

… does not have power pursuant to sections 33V, 33Z or 33ZF of the Federal Court of Australia Act 1976 (Cth) to make a Common Fund Order upon the settlement or determination of this proceeding.

47    The position in relation to Settlement CFO is less clear-cut. It is necessary to explain why in a little detail.

48    An order has been made pursuant to s 53A(1) of the Act referring the whole of this class action for mediation to be conducted by the end of next April, with a hearing, if there is no settlement, to commence in August. Mediations are of particular significance in class actions for two reasons. First, and most obviously, a court approved settlement is the way the Court quells the controversies litigated by the class action in the vast bulk of cases, and they should be viewed as “an integral part of the Court’s adjudicative processes”: see the Hon Spigelman, J J, “Mediation and the Court” (2001) 39(2) LSJ 63. Secondly, in class actions, the responsibilities resting upon those acting for a representative applicant at court ordered mediations are different than in most litigation between persons without legal disability.

49    As those experienced in acting for applicants in funded litigation are well aware, conflicts oftentimes emerge during the course of negotiations at mediation as to the amount by which any proposed gross settlement sum is to be reduced by funding expenses. Questions commonly arise: what are the entitlements of a funder? Are those entitlements going to be enforced according to their terms? What return to a funder is one that is sufficient from the perspective of the funder, but which allows the net settlement sum to be one that results in an outcome that is in the interests of group members?

50    Some degree of predictability is required as to the net amount likely to be paid to group members and the amount to be paid to a funder before a mediation can proceed effectively. A view needs to be formed conscientiously by those acting for the applicant as to whether the net return to group members is sufficient to be fair and reasonable and hence suitable to be the subject of an application for approval under s 33V of the Act.

51    Section 37N of the Act requires both the parties and their lawyers to conduct negotiations for settlement in a way consistent with facilitating the overarching purpose. Identifying the correct legal foundation for the negotiation of a settlement of the claims of group members at the mediation, including whether a Settlement CFO is available, is not only important in discharging obligations to any client and to act in a way that is not inimical to the interests of group members but, as the evidence on their application demonstrates, also assists those participating in the mediation and those advising them to negotiate on a correct legal foundation (Edwards v Santos [2011] HCA 8; (2011) 242 CLR 421 (at 436 [37] per Heydon J)) and in a way consistent with their responsibilities pursuant to Pt VB of the Act.

52    It might be thought that a practical and real consequence about the future course of affairs between these parties would be served by resolving the issue of whether there is power to make a Settlement CFO, such that to do so would not be purely hypothetical and it would produce foreseeable consequences. But this does not fully address the issue as to prematurity.

53    A number of arguments were advanced by 7-Eleven as to why the making of a Settlement CFO on whatever terms can never be made, irrespective of the circumstances. One argument was that principled application of BMW v Brewster was determinative; another related to the construction of s 33V; and another was that a Settlement CFO was beyond power because it would serve to impose upon the unfunded group members a set of obligations they did not otherwise have. Although it is possible to deal with some aspects of the argument at a level of generality, a number of other aspects point to difficulties as to determining the question of power in the abstract.

54    The first was expressed in various ways by 7-Eleven, but can be adequately captured by the following extract from its written submissions as follows:

the particular feature of a CFO which distinguishes it from [a funding equalisation order (FEO)] is that, under a CFO, “the quantum of a litigation funder’s remuneration [is] fixed as a proportion of any moneys ultimately recovered in the proceedings and all group members “bear a proportionate share of that liability”. A CFO thus increases the amount of commission received by the funder by taking an amount from each unfunded group member and directing it to the funder. In contrast, under an FEO, the funding liability to be directed to the funder is not enlarged – instead, the funding costs actually incurred by funded group members are redistributed pro-rata between all group members.

(Citations omitted, emphasis added).

55    The second (also reflected in the above extract) was that the making of a Settlement CFO means, unlike an FEO, that a funder obtains a benefit to which the funder is not otherwise entitled by reason of the contractual relationship between the funder and funded group members.

56    It might be thought that these are arguments more about the exercise of discretion than as to the existence of a power – but the arguments were relied upon as contextual matters relevant for the purpose of undertaking a proper construction of s 33V. It suffices for present purposes to note that both these propositions are incorrect, if expressed at this level of generality.

57    As to the first, it is important to recognise that an FEO is also not a term of art. An FEO was first made (and the term was coined) upon the settlement approval of the Aristocrat Class Action and was advanced, as part of a Settlement Distribution Scheme, as an innovation posited by practitioners seeking to resolve a practical problem as to “free riding” that had arisen in Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19: see Blairgowrie Trading Ltd v Allco Finance Group Ltd (recs and mgrs apptd) (in liq) (No 3) [2017] FCA 330; (2017) 343 ALR 476 (at 504 [102] per Beach J). In the approved scheme, which was commonly but not universally adopted thereafter, two funds were established to be distributed among the two categories of group members (funded group members (FGM) and unfunded, or other group members (OGM)), in proportion to their individual losses.  As is common in settlements, it was necessary, as a first step, to discount the estimate of “actual” loss suffered by each group member, in the proportion which the aggregate of all such losses bore to the amount available for distribution.  This was done by what was called an “Adjustment Factor”. The effect of applying an Adjustment Factor was to adjust the “actual” loss suffered by each OGM so that the OGMs’ recovery would be at the same rate received by the FGMs.

58    The equalisation achieved between OGMs and FGMs using the Adjustment Factor only related to the calculation of their entitlements in the distribution of the two funds.  But the distribution to the OGMs was final, in the sense that they did not face the prospect of any claim by a third party against the money received by them.  The FGMs, however, were required to contribute a percentage of the distributions they received to a third party (the funder) in satisfaction of their obligations under the funding agreements.  Without more, the effect of adjusting the losses of OGMs to ensure the same recovery rate meant that they would end up receiving a higher net rate of recovery because of the FGMs’ further obligations.  A “funding equalisation factor”, reflected in the FEO, negated that outcome and ensured that the OGMs did not obtain a “free ride”. The FEO was justified on the basis that it was not in the interests of all group members that a subset of them should obtain a special benefit.

59    Any argument advanced by 7-Eleven that an FEO means there is no difference in the amount a funder would have received pursuant to the bargains struck with the funded group members is not borne out by analysis. Although all the funder receives is its contractual entitlement, the equalisation means that the amount otherwise available to funded group members is different from what would have been the case if the fund available to unfunded group members had not been equalised. This was explained by Beach J in Blairgowrie Trading Ltd v Allco Finance Group Ltd (recs and mgrs apptd) (in liq) (No 3) (at 503 [99]). When a percentage amount is deducted from unfunded group members and added back pro rata across all group members, that incrementally increases the recoveries for the funded group members. This allows a funder to assert, pursuant to the terms of most standard funding agreements, that they are contractually entitled to an additional amount (that is, a contractually mandated percentage on the incremental amount).

60    The written submissions of 7-Eleven asserted that a Settlement CFO will necessarily increase the amount paid by group members to a funder from what would have been the position if an FEO was made. But this is also incorrect: it will all depend upon the precise circumstances. I referred earlier (at [22]) to the two examples of a Settlement CFO referred to in BMW v Brewster by Edelman J. In Caason, the Settlement CFO was perceived to be fair and reasonable (and hence just) because, among other things, it provided a greater return for both funded and unfunded group members (and a lesser commission for the funder) than would have been the case if an FEO had been made: at [167] per Murphy J. In Hodges, the Settlement CFO was perceived to be fair and reasonable on the basis that in the circumstances of that case, it resulted in the funders receiving less in total funding commission from all group members than they would have received in the event that the funding agreements had been enforced according to their terms: at [7] per Lee J.

61    Without examining the precise terms of a proposal for a Settlement CFO, any comparison between the amount received on a Settlement CFO and pursuant to an FEO is incomplete. On this application 7-Eleven have performed a comparative analysis but, with respect, that analysis is based on “guesstimates” of comparative returns resting upon assumptions.

62    Apart from anything else, that analysis did not take into account the issue of whether the Court has power pursuant to s 33V(2) to make an order varying the amount a funder can receive pursuant to its contractual entitlements against those with whom it has struck a bargain. Settlements of class actions generally reflect compromises and not capitulations – often they come late and the gross settlement sum proposed, when reduced to take account of legal and related costs, in some cases represents a small percentage of the total possible value of group member claims.

63    As the cases in which Settlement CFOs have been made demonstrate, applicants, with the consent of funders, have often proposed orders which provide for a lesser return to funders than otherwise would have been the case if the funder had recovered pursuant to the terms of funding agreements. Bypassing the contentious issue as to power to amend the funded group member contracts by a s 33V(2) order (see Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289 (at [18]–[51] per Lee J)), such a proposal is accompanied by an undertaking that funded group members will not be pursued by the funder pursuant to their personal contractual obligations upon receipt of a payment pursuant to the Settlement CFO. The cases demonstrate that this course has been adopted a number of times because given: (a) the relevant funding agreements; (b) the quantum of costs incurred; and (c) the gross settlement sum, no proposed settlement which is fair and reasonable could be reached if the funding agreement was enforced according to its terms.

64    Moreover, there are other reasons why any comparative exercise as suggested by 7-Eleven (as though all other things were equal as between a Settlement CFO and an FEO) might, again depending upon the circumstances, have a degree of unreality: first, it ignores the reality that the percentages which funders charge will, in many instances, been driven far lower by the competition which the prospect of a common fund promotes.  A second difficulty is that such a comparison does not take into account savings where no, or a more limited, book build process is undertaken because of the prospect of a Settlement CFO being made; as the accumulated experience of the Court on settlement approval applications indicates, the costs of conducting a book build, ultimately factored into funding commission rates, can be very substantial.

65    During oral submissions, the more refined submission was put that the CFO may be “apt” to produce a greater return to funders than an FEO. This may be accepted, but to the extent any comparative exercise is relevant to the issue of power rather than discretion, it all depends upon the precise circumstances of a proposed Settlement CFO.

66    For reasons explained above, no legal controversy presently exists of a type which makes it appropriate to determine the issue of power in relation to a Judgment CFO and, as a consequence, the relief framed and sought by 7-Eleven should be refused; but the question remains: should the Court take it upon itself to frame more limited declaratory relief dealing only with the power to make a Settlement CFO, which might be considered to have foreseeable consequences?

67    As the Chief Justice observed in National Australia Bank Ltd v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543; (2019) 377 ALR 627 (at 629 [7]) “questions of jurisdiction, judicial power and the power and discretion to entertain a suit for declaratory relief can be seen to be intertwined”. Notwithstanding that it might be open to conclude that the answer to the issue of whether there is power to make a Settlement CFO would assist those with duties to group members (and those negotiating with them) to participate in the Court ordered mediation on a correct legal foundation, the answer to the question of what is the correct legal foundation should take place by reference to concrete facts on an application for a Settlement CFO.

68    The appropriate course is to decline to formulate and then make any declaration. This is for at least four reasons.

69    First, neither the applicant nor the funder has participated in the hearing. Although this is not an insuperable difficulty, if an actual Settlement CFO proposal emerges from a mediation, at the approval hearing, the applicant, any opposing group members and/or the funder (all persons having real but different interests in the making of the Settlement CFO) could be heard both as to power and as to discretion. Further, upon a concrete proposal being put before the Court, in the absence of an opposing group member, it may be appropriate for a contradictor to be appointed if, at that time, 7-Eleven does not contend there is a want of power to make the order. Any submissions on the approval hearing will, obviously enough, be informed by the precise terms of the proposed order.

70    Secondly, the argument of 7-Eleven is that there could be no conceivable circumstances in which a Settlement CFO could be licit. This argument, which is said, at least in part, to involve a comparative analysis between the return available to group members if an FEO was made rather than a Settlement CFO, should take place by reference to facts and not assumptions.

71    Thirdly, a common fund may come into existence on settlement in different ways and following a range of different dealings between persons who may have an interest in the due administration of any settlement fund; the submission of 7-Eleven is premised upon the notion that equity could never have a role to play in justifying the making of any form of Settlement CFO. This is a large proposition. Questions may arise as to whether equities could conceivably arise based on dealings between group members and the funder (that is, a relationship which goes beyond mere passivity). Equity always requires consideration of the circumstances that may be relevant. As the intervener correctly submitted, “hypothetical postulation as to the absence of equities, in the absence of knowledge of the facts, is dangerous”. All relevant facts will only be ascertainable when an order for a Settlement CFO is sought.

72    Fourthly, the Court of Appeal of New South Wales declined to answer a similar question in Brewster (CA), finding that the question as to whether or not it is just that a particular order or proposed order be made is best determined in the context of known facts and the precise terms of any proposed order: at [44] per Bell P, Bathurst CJ and Payne JA agreeing. Although for reasons explained above we have separately reached the same view, comity considerations do not favour this Court formulating and then determining any refined declaratory relief.

E    ORDERS

73    For the above reasons, the Court should dismiss the application for declaratory relief and decline to answer the question reserved on the application of 7-Eleven.

74    The applicant played no active role, 7-Eleven have separately agreed to pay the costs of the contradictor, and ALFA intervened on terms that no orders as to costs would be made in relation to the intervention. Accordingly, there should be no order as to costs.

Associate:

Dated:    3 November 2020