Historic joint sitting of Federal and State Appeal courts gives further support for common fund orders

In an unprecedented move, a joint sitting of the Full Court of the Federal Court of Australia (Court) and the New South Wales Court of Appeal, heard appeals in Westpac Banking Corporation & Anor v Lenthall & Ors (Westpac decision) and Brewster v BMW Australia Ltd (Brewster decision).¹ Both appeals related to common fund orders for the costs of running a class action and gave rise to similar submissions; separate judgments were handed down by the respective courts on 1 March 2019. We examine below the Westpac decision in more detail.

In Issue

• Whether or not the Court has the power to make a common fund order; and
• Assuming the power exists, when and how the Court ought to exercise that power.

The Background

The proceeding was commenced under Part IVA of the Federal Court of Australia Act 1976 (Cth)(Act) in October 2017 by Gregory Lenthall and three others (applicants), as representative applicants, against Westpac Banking Corporation and Westpac Life Insurance Services Ltd (collectively Westpac). The applicants alleged that Westpac’s financial advisers gave inappropriate advice in that they were required, but failed, to advise them of alternate policies of insurance offered by third party insurers which were equivalent or better, and available at a lower premium, than the products recommended.

The Decision at Trial

The applicants entered into a funding agreement with JustKapital Litigation Pty Ltd (JKL) and brought an application seeking a common fund order binding other group members. The application was heard by Justice Lee in May 2018 and judgment was handed down in September 2018.² The trial judge:

• by reference to the principles laid down in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited³ (Money Max), held that:

1. JKL will likely meet its funding obligations;
2. the funding rate is reasonable in all the circumstances and there is no evidence that another funder would propose more favourable terms;
3. no conflict issues arise;
4. that the solicitors have acted responsibly in the selection of the funder;
5. the common fund order now proposed is put forward by the applicants and their solicitors conscious to their duties to group members;
6. the legal costs are likely to be very considerable and without litigation funding it is likely that the proceeding would not advance to resolution at a mediation or on the merits; and
7. the making of the proposed order, and thus allowing an open class, is consistent with the policy objectives of Part IVA.

• made the common fund order, subject to certain undertakings,⁴ which His Honour considered appropriate to ensure justice was done and the group members were afforded the opportunity to advance their claims in the class action; and
• stated that, as a matter of principle, it would be preferable to calculate the commission rate of the common fund order by reference to the lesser of a multiple of costs or net (rather than gross) recoveries.

The Decision on Appeal

On appeal, Westpac submitted that:

1. the Court was not authorised by either section 33ZF or section 23 of the Act to make a common fund order, either at all, or prior to settlement of, or judgment in, the proceeding (the construction argument);
2. the making of a common fund order was not an exercise of judicial power, or an appropriate incidental power to judicial power (the judicial power argument);
3. to the extent that the making of a common fund order is an exercise of authorised judicial power, such provisions are to that extent a law with respect to the acquisition of property for the purposes of s51(xxxi) of the Constitution, which does not provide 'just terms' (the acquisition argument); and
4. if there was power to make the order, the exercise of the power by the trial judge miscarried for any one or more of three reasons (the discretion argument).

The Full Court of the Federal Court of Australia:

1. found there was no basis for the construction argument. However, for the order to be made, the Court held there must be a legitimate view that it is appropriate or necessary to ensure that justice is done in the proceeding;
2. determined a common fund order reached by a judicial process, which involves assessing and delivering a funding commission and the resolution of legal rights of the parties in an efficient manner and at a reasonable cost, is an exercise of judicial power;
3. held section 33ZF is not a law with respect to the acquisition of property on just terms;
4. rejected all aspects of the discretion argument; and
5. accordingly, dismissed the appeal and ordered Westpac pay the applicants’ costs of the appeal.

Implications for you

In a positive step for litigation funders and plaintiff law firms, common fund orders continue to grow in acceptance where there is a legitimate basis for them and the order will further the interests of justice. Each application will need to be assessed on its merits and the Courts are willing to deal with these issues early in the proceeding and before a final settlement is achieved.

Moreover, the Brewster decision has also confirmed the power of the New South Wales Supreme Court to make common fund orders in class action proceedings.

Westpac and BMW have until 29 March 2019 to make any special leave applications to the High Court of Australia.

Westpac Banking Corporation v Lenthall [2019] FCAFC 34