Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162
At a glance
- On 12 October 2023, the Full Federal Court delivered its long-awaited judgment in the McDonald’s breaks class action.
- The Court unanimously confirmed that it has the power under s 33V(2) of the Federal Court of Australia Act 1976 (Cth) to make orders for settlement common funds orders (CFOs).
- The decision ends a period of uncertainly for all parties, especially litigation funders.
- We will shortly launch a class action series that will include a detailed paper on CFOs and Funding Equalisation Orders. In the meantime, this article provides the key points of this important decision.
Background
A CFO is a court order extending a litigation funder’s right to recover commission from all eligible group members who benefit from an approved settlement or judgment, irrespective of whether they have signed a funding agreement. A settlement CFO is one that is made as part of the settlement approval process of a class action.
Following the High Court decision in Brewster, Foster J expressed doubts in the settlement approval hearing for the Volkswagen case[1] about the Court’s power to make CFOs as part of the settlement approval process under s 33V. Foster J refused to make a CFO and referred to the principle that the unfunded group members have no contractual relationship with the litigation funder. In that case, the Court did not reach a final view on whether it had the power under s 33V.
In February 2023, when considering settlement approval in Davaria Pty Limited v 7-Eleven Stores Pty Ltd,[2] O’Callaghan J went further and found that there was no power for the Court to make a CFO under s 33V(2) as part of the settlement approval process. In his view, the “reasoning of the majority points clearly enough to the conclusion that there is similarly no power to make a common fund order upon settlement under s 33V(2).”
The reserved question
Given the uncertainty surrounding the issue, Lee J reserved the following question to the Full Court of the Federal Court, which was the subject of a hearing in March 2023:[3]
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])?
The Full Court, comprised of Beach, Lee and Colvin JJ, has now answered the question in the affirmative.
Key takeaways from the McDonald’s decision
The natural words of s 33V(2) provide sufficient ambit to make settlement CFOs
The Court considered the words of s 33V(2) in two distinct requirements:
- the orders must be ‘just’, and
- the orders must relate to the distribution of any money paid under a settlement or paid into Court.
This, Beach J noted, is a “wide judicial discretion”, which should not be read down by implications which are unavailable from the express words. On that basis, Beach J concluded that none of the terms in s 33V(2) could be read as precluding a settlement CFO.
Justice Lee also held that the proper construction of s 33V as a whole leads to the conclusion that the statutory power to make a settlement CFO is the discretion provided for in s 33V(2). His Honour noted that the purpose of s 33V(2) is obvious – the Court must be satisfied that the settlement is in the interests of the group members as a whole, but that there is no reason the Court cannot make a settlement CFO if it is proposed as part of a settlement and it is satisfied it is just to do so. However, Lee J was careful to re-emphasise that he does not resile from his previously expressed view that “s 33V(2) is not a charter for generally rewriting bargains contained in contracts between group members and third-party funders.”
Justice Colvin agreed and found that “[t]he Court’s approval jurisdiction is sufficiently broad to allow for the Court to consider whether…a settlement which contemplates the payment to a third-party funder of particular amounts should be approved.” His Honour compared such an order to a situation where the Court considers orders for payment of costs to lawyers and experts or receivers.
Settlement CFOs under s 33V(2) are within the bounds of the exercise of judicial power
The court-appointed contradictor, Mr G Donnellan with Mr B Yin, submitted that settlement CFOs fell outside the bounds of judicial power for various reasons, including that:
- the creation of new rights and obligations in favour of a third party is outside the realm of judicial power where it is not conducted in the context of resolving a dispute about determining existing rights and obligations, and
- the determination of matters, such as the rate of remuneration to a third party litigation funder, requires the assessment and determination of policy matters outside the scope of judicial power.
The Court rejected both of these submissions and held that:
- making a settlement CFO under s 33V(2) was at least incidental to the exercise of a judicial power given the language of the provision that the Court “may make such orders as are just”, and may only be made if the Court is satisfied that it is appropriate or necessary to do justice in the proceeding, which must be sufficiently related to the Court’s judicial functions, and
- the Court commonly sets rates for monetary amounts in other contexts, including regarding legal fees, trustee’s remuneration and discounts to common law damages, which is a necessary aspect of giving effect to its judicial power.
Settlement CFOs are conducive to the objectives of the class action regime
The Court was critical of submissions that an order for the distribution of funds to a litigation funder as compensation for its role in the class action could not be just.
Beach J commented that “it is not in doubt that commercial litigation funding has been firmly established as being conducive to the achievement of the legislative objectives of Part IVA” and that CFOs play a part in meeting those objectives. His Honour drew analogies to examples of including reasonable remuneration for the exertions of maritime salvagers on behalf of the true, but unknown, owners of the salvage.
In his reasons, and in the Jaguar decision delivered on the same day[4], Lee J found that a settlement CFO need not only be made in favour of a litigation funder but could, in the right circumstances, be made in favour of a solicitor. This has the potential to be a game changer in this space if orders of this kind are ultimately made.
The High Court’s decision in Brewster does not prevent settlement CFOs
The Court unanimously rejected submissions that Brewster precluded settlement CFOs. Each of the judges relied on the fact that the High Court’s decision was limited to the question of whether CFOs could be made early in a proceeding under what has been described as the ‘gap-filling’ power in s 33ZF(1), which was not the question they had to consider. Lee J specifically found that it was wholly inconsistent with judgments in both the Federal Court and the Supreme Court of NSW and cited over 15 examples of decisions in support of that finding.
Beach J considered each of the reasons in Brewster in some detail and concluded “there is no member of that Court who has poured cold water on the idea that s 33V(2) empowers the making of a settlement CFO.” His Honour’s reasons also included some interesting commentary about early CFOs. While he reiterated that since Brewster it was not permissible to use s 33ZF(1) to make a CFO, he discussed instances in which they may be permissible, for example by relying on the Court’s general power to make orders under s 23 of the Act. It will be interesting to see if these comments embolden plaintiffs to test that proposition.
What’s next for insurers and insureds?
The decision brings clarity to an important issue in the class action space.
It has mixed implications for insurers and insureds, including:
- a likely increase in the number of cases filed as litigation funders now have greater certainty regarding recovery on settlement, and
- further reducing the desirability on the part of funders and plaintiff firms to commence closed class actions based on a heavy (and expensive) initial book build. This also means that insurers and insureds are less likely to be faced with settling a closed class action with the spectre of a subsequent open class action being filed.
The decision also presents an expanded range of funding options for plaintiff firms and litigation funders. The use of settlement CFOs as an alternative to group costs orders in the Victorian Supreme Court will result in greater variety in proposals put forward in carriage disputes. It could also result in a swing back to the Federal Court, slowing the trend we have seen in recent years as a result of the group costs order regime in Victoria.
[1] Cantor v Audi Australia Pty Limited (No 5) [2020] FCA 637
[2] Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84
[3] Being Federal Court proceeding VID726/2021 (Carde & Anor v McDonald’s Australia Limited).
[4] Greentree v Jaguar Land Rover Australia Pty Ltd [2023] FCA 1209