In a landmark decision, the High Court of Australia has weighed in on two cardinal issues concerning funding models for Federal Court class actions. It confirmed that common fund orders (CFO) can be made in favour of litigation funders at settlement or judgment, dispelling any lingering uncertainty from its earlier decision in Brewster. However, it also found that a CFO cannot be made in favour of the solicitors acting for the class, pouring cold water on the push for contingency fees to extend beyond Victoria.
Kain & Ors v R&B Investments Pty Ltd & Ors [2025] HCA 28 (Blue Sky) is significant, and it could have a profound impact on the future of Australia’s class action regime.
Alex Sloan, who acted for one of the successful appellants, and Tim Case unpack the decision and its ramifications below.
Key takeaways
- Commercial litigation funders will breathe a sigh of relief, given there is now greater certainty around their investment decisions. This may lead to an uptick in class action activity across the board.
- Victoria remains the only jurisdiction in Australia where contingency fees are available for plaintiff law firms, due to specific State-based legislation. The spike in class action filings there in recent years is likely to continue, and potentially even accelerate.
- Federal and state lawmakers will now have serious pause to consider whether to adopt measures aimed at minimising forum shopping in the class action landscape.
Background
Blue Sky was an appeal from the decision in R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89.
There, a question was reserved to the Full Federal Court in a shareholder class action against Blue Sky Alternative Investments Limited, two of its former directors and its former auditor. The question arose in the context of an application under section 33X of the Federal Court of Australia Act 1976 (Cth) (FCAA) for approval of a proposed opt-out notice to group members.
The question reserved to the Full Court primarily concerned the making of a CFO in favour of a solicitor (Solicitor CFO). It asked whether the Federal Court has power under Part IVA of the FCAA to order that a solicitor acting for the class be paid a fixed percentage of any settlement or judgment sum. In effect, it asked whether solicitors could be paid a contingency fee.
The reserved question also raised a broader issue. That is, whether the Federal Court has power to make a CFO in favour of a litigation funder at settlement (Settlement CFO) or judgment (Judgment CFO). This anterior question arose because Solicitor CFOs are essentially a specific type of Settlement or Judgment CFO; the main difference being that the solicitor for the class also takes on the financial risks of the action.
That broader issue also arose due to the High Court’s decision in BMW Australia Ltd v Brewster (2019) 269 CLR 574. Strictly speaking, Brewster concerned “commencement CFOs” in the context of section 33ZF of the FCAA. But the decision nevertheless left uncertain whether CFOs of any kind could ever be allowed. Blue Sky was the High Court’s first opportunity since Brewster to directly consider what Brewster stood for, and the extent to which the reasoning in it was of broader application.
The Full Federal Court answered the reserved question in the affirmative. It found that Settlement CFOs, Judgment CFOs and Solicitor CFOs are all within power. Three of the respondents to the class action were granted special leave to appeal to the High Court.
Settlement and Judgment CFOs are permissible, except for solicitors
In Blue Sky, the High Court upheld the decision of the Full Court as regards Settlement CFOs and Judgment CFOs, but overturned the decision as to Solicitor CFOs, which it found are not permissible. The decision was unanimous on both fronts, albeit with four separate judgments.
At issue were two specific statutory provisions in Part IVA of the FCAA. For Settlement CFOs, this was section 33V(2), which empowers the Federal Court to “make such orders as are just with respect to the distribution of any money paid under a settlement”. For Judgment CFOs, this was section 33Z(1)(g), which empowers the court to “make such other order as the Court thinks just” in determining a class action.
The High Court found that these provisions were broad in scope, and broad enough to authorise payments to litigation funders.
Gageler CJ stated at [19]:
‘… the concept of what is “just” in those provisions cannot be conceived of so narrowly as to deny the Federal Court the capacity to recognise and, where appropriate, compensate a third party for what that third party has done and risked in bringing into existence the settlement or judgment from which the group members stand to benefit.’
Similarly, the plurality (Gordon, Steward, Gleeson and Beech-Jones JJ), Edelman J (writing separately) and Jagot J (also writing separately) found no reason to limit the provisions as only authorising payments to parties and group members.
However, all of the judges considered Solicitor CFOs to be a bridge too far. They found that it cannot be “just” to allow Solicitor CFOs, which would be inconsistent with State and Territory laws prohibiting contingency fee arrangements.
The High Court focussed on the New South Wales prohibition on solicitors entering into contingency fee arrangements, which is in section 183 of the Legal Profession Uniform Law (NSW) (LPUL). The plurality stated at [96]:
‘… If the Solicitors’ CFO were made, the Court would be giving effect to an agreement that was entered into contrary to s 183 of the LPUL and would be enabling the Solicitors to recover amounts which they are disentitled from recovering under s 185 of the LPUL. Such an order cannot be within the power of the Federal Court under s 33V(2) or s 33Z(1)(g). It cannot be “just” to make an order that gives effect to an agreement that was unlawfully entered into and to enable a solicitor to recover amounts to which they are not entitled. Put another way, the Court cannot authorise what the LPUL forbids.’
Critically, the court made clear that class action solicitors cannot use clever drafting in costs agreements to circumvent section 183 of the LPUL, which is designed as a protective measure.
What next?
Blue Sky is likely to have significant ramifications for the Australian class action landscape.
It leaves Victoria as the only jurisdiction that permits contingency fees for plaintiff law firms in class actions, pursuant to the Group Costs Order (GCO) regime. If there is to be any change federally and in other States and Territories to allow contingency fees, that change will require legislative intervention. At this stage, it remains unclear whether this may occur.
The door potentially remains ajar to contingency fees for class actions filed in the Victorian Registry of the Federal Court. This is because the High Court’s decision was, strictly speaking, based on the inconsistency between Solicitor CFOs and the prohibition in New South Wales law on contingency fee arrangements. The High Court did not address the impact (if any) of the different legislative and policy considerations that inhere in Victoria, by reason of the GCO regime.
Either way, the recent surge in class action filings in Victoria seems likely to continue. Questions will now need to be asked by federal and state lawmakers as to what, if anything, should be done to minimise forum shopping. Should all Australia class action regimes permit contingency fees, whether in the form of GCOs, Solicitor CFOs or otherwise? Should there be a uniform class action scheme? These are complex questions that will involve balancing numerous policy considerations.
Finally, Blue Sky will be welcomed by commercial litigation funders. The High Court refused to re-open Brewster and commencement CFOs. However, with Settlement CFOs and Judgment CFOs confirmed, funders now have greater certainty when making their investment decisions for Australian class actions. This may lead to an uptick in filings, particularly on an “open class” basis.