Solicitors’ CFO proposed as contingency fee workaround

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This judgment arises from the consolidation of two securities class actions against Blue Sky Alternative Investments Ltd.  The proposed consolidation agreement foreshadowed that the solicitors for the applicants, on settlement or successful judgment, would seek a ‘Solicitors’ Common Fund Order’ (i.e. an order providing for payment to a solicitor, for funding a proceeding, over and above a payment for costs and disbursements) (Solicitors’ CFO).

Three of the respondents contended that the Court has no power to make any form of common fund order, including a Solicitor’s CFO.  Accordingly, Lee J made an order pursuant to s 25 (6) of the Federal Court of Australia Act 1976 (Cth) that the question be reserved to the Full Court to determine whether it was a “licit exercise of power” for the Court (on settlement or judgment of a class action), to make a Solicitor’s CFO.

The applicants indicated that if the Court lacked power to make a Solicitors’ CFO, they would apply to have the proceeding cross-vested to the Supreme Court of Victoria in order to seek a ‘Group Costs Order' under s 33ZDA of the Supreme Court Act 1986 (Vic) or try to obtain commercial litigation funding.

The respondents argued that the Court should decline to answer the question, because while not entirely hypothetical, without specific facts (such as the amount of the payment to be later sought), any answer could only provide general guidance. The Court disagreed and pointed out the practical advantages of exercising its discretion to resolve what was in fact a live issue.

However, given the class action context, and the desire to avoid any consideration of abstract hypothetical issues, the Court confined itself to dealing only with the power to make a Solicitors’ CFO under Pt IVA of the Federal Court of Australia Act 1976 (Cth). It did not deal with the power of a court of equity, to make an order analogous to a Solicitors’ CFO under r 9.21 of the Federal Court Rules 2011 (Cth) or, following a declassing of a class action, the settlement of an individual claim.

The Decision

The Full Court ruled that a Solicitors’ CFO can be made under s 33V or 33Z of the Federal Court of Australia Act 1976 (Cth) (provisions which provide the Court with discretion in relation to the ‘just’ distribution of settlement money and reimbursement of representative party’s costs). 

At the outset, the Court rejected the argument that it had no power to make any type of settlement common fund order. It endorsed the decision in Elliot-Carde v McDonalds Australia Ltd (2023) 301 FCR 1 which established the existence of such power.

The Court then looked specifically at the power to make a Solicitors’ CFO, and the contention that such an order could never be ‘just’ (within the meaning of s 33V and 33Z) on the basis it would:

• create a conflict of interest between a solicitor’s fiduciary/ professional obligations and personal financial interest in a class action:
• be inconsistent with or breach the Legal Profession Uniform Law (NSW) prohibiting contingency fees; and
• be contrary to public policy against contingency fees.

The Court noted that these arguments went to the issue of discretion rather than of power (whether a Court should make such an order, rather than whether it could).

While not sufficient to persuade the Court that it lacked power, the issues raised may still be relevant in a particular case where a Solicitors’ CFO is sought. The Court provided some useful guidance on the exercise of that discretion:

The considerations relevant to the exercise of the discretion and as to whether the proposed order is, or is not, “just” will include the existence of the fully-informed consent of the applicants, and the adequacy of notification to group members and the reaction of those group members — not to mention the Court’s ability to scrutinise whether the solicitors had in fact acted in a way consistent with the existence of the obligations explained above (perhaps aided, at that time, by a court-appointed contradictor if necessary).

The Victorian experience

The Court reviewed the effectiveness of Group Costs Orders available in the Supreme Court of Victoria (allowing solicitors to receive a contingency fee upon judgment or settlement) and concluded that:

Despite any temporal differences, given the extent of similarity between the orders, there is no reason to think the availability of a Solicitors’ CFO would not, consistently with the experience of GCOs, make the resolution of group member claims in large class actions significantly less expensive.

[Postscript: in August 2024, two of the respondents lodged a special leave application with the High Court, seeking a definitive answer to the question of whether the Federal Court has power to make common fund orders, and if that power extends to making a Solicitors’ CFO. In November 2024, the High Court granted special leave to appeal, however no hearing date has been set.]

R&B Investments Pty Ltd (Trustee) v Blue Sky Alternative Investments Ltd (Reserved Question) [2024] FCAFC 89

Federal Court of Australia, Murphy, Beach and Lee JJ, 5 July 2024
Applicant’s Solicitors: Banton Group
Respondent’s Solicitors: GRT Lawyers; Arnold Bloch Leibler; Corrs Chambers Westgarth

AustLII link

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