Clifford Chance

Directors of Blue Sky Alternative Investments and auditor, EY, have successfully challenged a decision of the Full Federal Court which held that the Federal Court had power to extend the operation of Common Fund Orders (CFO) to reward solicitors taking on the risks of running class action litigation through the making of a solicitors' CFO (SCFO).

Background

On 6 August 2025 the High Court of Australia delivered a unanimous decision in Kain v R&B Investments Pty Ltd; Ernst & Young v R&B Investments Pty Ltd; Shand v R&B Investments Pty Ltd [2025] HCA 28 (Blue Sky), decisively axing SCFOs and reaffirming the importance of state-based prohibitions on contingency fees.

The appeal to the High Court was from an earlier decision of the Full Federal Court (discussed in our previous article, Class Action Funding in Flux: The High Court hears argument on Common Fund Orders) which held that sections 33V and 33Z of the Federal Court of Australia Act (FCA) allowed the Court to make a SCFO, being a species of CFO entitling solicitors to a share of any settlement or judgment as payment for their costs and as a reward for taking on the risk of running the litigation without funding.

In deciding the appeal, the High Court was called on to examine whether the Federal Court had power to make a CFO on judgment or settlement, and if so, whether that power could be extended to making a SCFO. The High Court was also asked to reopen its earlier decision in BMW Australia Ltd v Brewster (2019) 269 CLR 574, which concerned the power to make a CFO at an earlier stage of the proceeding pursuant to section 33ZF of the FCA.

Issues on appeal to the High Court

1. Whether the Federal Court has power to make a CFO on settlement or judgment

The High Court upheld the Full Federal Court's decision, deciding that sections 33V and 33Z of the FCA did not prohibit the making of a CFO at settlement or judgment in favour of a litigation funder. The Court found that the power conferred on the Federal Court by section 33V(2) of the FCA to make orders that are "just" is sufficiently broad to encompass orders authorising payment to a litigation funder out of a settlement or judgment sum, even where the funder has no contractual relationship with all group members.

The Court rejected arguments that the power was limited to giving effect only to pre-existing legal or equitable rights, and instead recognised that the concept of what is "just" can include compensating those whose efforts and risks have brought about the settlement or judgment from which group members benefit.

2. Whether the Federal Court has power to make a SCFO

The High Court rejected the decision of the Full Federal Court, holding that the Federal Court does not have power to make SCFOs where the solicitor is subject to the Legal Profession Uniform Law (NSW) (LPUL) or equivalent state law prohibiting contingency fees. The Court reasoned that SCFOs would be "illicit" as such orders would give effect to a costs agreement that is prohibited by section 183 of the LPUL, which forbids law practices from entering into costs agreements where the amount payable to the solicitor is calculated by reference to the amount of any award or settlement.

The Court found that the prohibition is not limited to the form of the agreement or the mechanism by which payment is sought; the substance of the arrangement is determinative. The only exception is the statutory regime in Victoria, where Group Costs Orders (GCO) are expressly permitted by s 33ZDA of the Supreme Court Act 1986 (Vic). As a critical point of difference, the Federal Court has no equivalent express statutory power.

3. Whether the High Court should revisit the decision in Brewster to allow CFOs to be made prior to settlement or judgment.

The High Court held that it was not necessary to reopen and overturn Brewster as the form of order sought in that case was distinct from the present circumstances. In Brewster the commencement CFO was an interlocutory order made on the application of the representative applicant and in accordance with the terms of a funding agreement. The Court held that there was "no basis" to revisit Brewster and that the decision "should not be reopened merely to permit re-agitation of arguments that did not prevail in favour" of commencement CFOs.²

Discussion

The applicants in Blue Sky have foreshadowed an application to cross-vest the proceeding to the Supreme Court of Victoria in order to seek a group cost order (GCO) if the High Court allowed the appeal.

Victoria remains the only jurisdiction in Australia to expressly recognise a GCO in a group proceeding. As discussed in Clifford Chance's previous article here, a GCO provides for the legal costs to be calculated as a percentage of an award or settlement, liability for which is to be shared among all class members, pursuant to s 33ZDA of the Supreme Court Act 1986 (Vic).

This judgment almost certainly places Victoria as the preferred forum for unfunded class actions in Australia. As has already been observed, there has been a substantial increase in class action filings in Victoria following the introduction of the GCO regime, which was first considered and approved in Allen & Anor v G8 Education Ltd (No 4) [2024] VSC 487.

On this, the majority judgment referred to the federal Parliamentary Joint Committee on Corporations and Financial Services report published in December 2020 regarding litigation funding and the regulation of the class action industry, drawing out the Committee's recommendation that a measured and steady approach to the use of contingency fees in class actions is essential and that the Commonwealth should work with State and Territory governments to achieve a consistent class action regime. It remains to be seen what impact this decision will have on existing statutory prohibitions against contingency fees.

While this judgment may be a blow to plaintiff law firms looking to self-fund class action litigation in the Federal Court (especially where that Court exercises exclusive jurisdiction, such as in proceedings under the Fair Work Act 2009 (Cth)), the High Court has confirmed the power to make a CFO in favour of a litigation funder at settlement or judgment. While funders will have to live with the unavailability of pre-judgment CFOs, the power to make a CFO in favour of a funder on settlement or judgment is now beyond doubt.

¹[11] (Gageler CJ).

¹ [68] (Gordon, Steward, Gleeson, Beech-Jones JJ).