High Court rules against solicitor common fund orders in Federal Court class actions in NSW

Key takeaways

• In Kain v R&B Investments Pty Ltd [2025] HCA 28, the High Court of Australia has ruled that the Federal Court of Australia does not have the power to make "solicitors' common fund orders" (SCFOs) (which facilitate remuneration of plaintiff lawyers by reference to the amount of damages or settlement) in class actions in New South Wales where solicitors are subject to the Legal Profession Uniform Law (NSW), which prohibits such contingency fees.¹
• Such SCFOs are prohibited because they would involve a contravention of s 183 of the Legal Profession Uniform Law (NSW), and therefore making such an order would not be considered "just" under the Federal Court of Australia Act 1976 (Cth).²
• The High Court also took the opportunity to confirm that the Federal Court of Australia generally has the power to make "common fund orders" (CFOs) for litigation funders at the settlement or judgment stage of representative proceedings.³

Context

The prevalence of funded representative proceedings has increased over the last two decades, leading to the development of specialist legal practitioners and judicial panels.⁴

In 2019, the High Court, in BMW Australia Ltd v Brewster, considered the power of the Federal Court under s 33ZF(1) of the Federal Court of Australia Act 1976 (Cth) to make a "commencement CFO", being a CFO made early in the proceedings.⁵ The majority in Brewster held that s 33ZF did not empower such orders, as it was limited to ensuring justice "in the proceeding" rather than determining whether a proceeding could proceed at all.⁶

Despite Brewster's ruling against commencement CFOs, the practice of making "settlement CFOs" under s 33V(2) (at settlement) and "judgment CFOs" under s 33Z(1)(g) (at judgment) in favour of litigation funders has become commonplace in the five years since Brewster.⁷

The Full Court of the Federal Court, in Elliott-Carde v McDonald's Australia Ltd (2023) 301 FCR 1, had affirmed the Federal Court's power to make CFOs at the settlement or judgment stage.⁸ Elliott-Carde also contributed to the development of terminology for various types of funding orders, including "funding equalisation orders" (FEOs),⁹ and observed the practical reality of the Federal Court navigating around the High Court's earlier Brewster decision by indicating a favourable disposition towards settlement CFOs.

The Full Court of the Federal Court in the current case explicitly followed Elliott-Carde when it answered in the affirmative regarding the power to make common fund orders upon settlement or judgment.¹⁰

There remains a significant disparity across Australian jurisdictions regarding the permissible mechanisms for funding class actions, particularly concerning the remuneration of solicitors.

While the charging of contingency fees by law practices is generally prohibited in most States and Territories, Victoria stands as a notable exception.¹¹

The Supreme Court Act 1986 (Vic), specifically s 33ZDA, empowers the Supreme Court of Victoria to make a Group Costs Order (GCO).¹² A GCO allows the legal costs payable to the law practice representing the plaintiff and group members to be calculated as a specified percentage of the amount of any award or settlement recovered.

This model, in effect since July 2020, permits solicitor remuneration that is otherwise forbidden elsewhere. Indeed, class action applicants have already identified the strategic advantages of a GCO due to its funding flexibility, that being evident in the High Court's recent decision in Bogan v Estate of Smedley [2025] HCA 7, in which the class action applicants commenced proceedings in Victoria, where the forum of choice would have likely been NSW if not for the availability of a GCO in Victoria.

This legislative divergence prompted a federal Parliamentary Joint Committee in 2020 to recommend that the Commonwealth Government work with State and Territory governments to achieve consistent class action regimes across jurisdictions.¹³ Further legislative reform has yet to happen.

Background facts and appeal

The matter involved consolidated representative proceedings in the Federal Court, initiated by R&B Investments Pty Ltd and Mr David Furniss (the Applicants) against Blue Sky Alternative Investments Limited (in liquidation), former directors, and its former auditor, Ernst & Young.¹⁴ The Applicants' solicitors, Banton Group and Shine Lawyers (the Solicitors), proposed a "solicitor's CFO" as part of their funding arrangements for the class action.¹⁵

This proposed SCFO aimed to remunerate the Solicitors for their work, expenses, disbursements, and the financial risks undertaken in conducting the class action. The remuneration was to be calculated as a percentage (up to 30%) of the total compensation recovered, effectively replacing existing litigation funding agreements.¹⁶ The Solicitors were unwilling to proceed without early court approval of the power to make an SCFO.¹⁷

Consequently, a question was reserved to the Full Court of the Federal Court of Australia: whether the Federal Court had the power to make a common fund order providing for the distribution of funds to a solicitor, otherwise than as payment for costs and disbursements.¹⁸ The Full Court answered in the affirmative, prompting appeals to the High Court by John Bruce Kain, Robert Warner Shand, and Ernst & Young.¹⁹

Decision

The High Court of Australia allowed the appeals, overturning the Full Court's decision regarding Solicitors' CFOs.²⁰

The Court first clarified that it saw no reason to reopen Brewster, as Brewster concerned "commencement CFOs" under s 33ZF, which is distinct from "settlement CFOs" or "judgment CFOs" made under ss 33V(2) and 33Z(1)(g) at the conclusion of a proceeding.²¹

The High Court confirmed that the Federal Court does possess the broad power under s 33V(2) (for settlement) and s 33Z(1)(g) (for judgment) of the Federal Court of Australia Act 1976 (Cth) to make a CFO in favour of a litigation funder.²² These provisions allow the Court to make "just" orders regarding the distribution of funds, and compensating a litigation funder who helped bring about the settlement or judgment can be considered "just".²³

However, the Court ruled that this power does not extend to making a SCFO where the solicitor is subject to the Legal Profession Uniform Law (NSW).²⁴ That is because of s 183(1) of the Legal Profession Uniform Law (NSW), which prohibits law practices from entering into "costs agreements" under which the amount payable is calculated by reference to the amount of any award or settlement.²⁵

The High Court found that the proposed SCFO was inextricably linked to the amended costs agreement between the solicitors and the applicants, such that the amount payable was still calculated by reference to the costs agreement.²⁶

Consequently, the Court concluded that the proposed SCFO represented an amount payable to the law practice for "legal services" (including financial risks in funding the proceeding) calculated by reference to the recovered sum, thus falling within the prohibition of s 183(1).²⁷

To make an order giving effect to such an arrangement would not be "just" because it would effectively give effect to an agreement that is unlawful under NSW law.²⁸  The Court emphasised that Federal Courts operate "against the background of the scheme of regulation of the legal profession in the State or Territory".²⁹

Implications

The decision confirms that while litigation funders can continue to benefit from CFOs at settlement or judgment, solicitors in New South Wales are prevented from receiving similar percentage-based remuneration orders directly from settlement or judgment sums due to the State's prohibition on contingency fees.

Ultimately, the current state of play in respect of Australian class actions is maintained, with an additional level of comfort being provided to litigation funders through the confirmation of settlement and judgment CFOs, which may see an increase in class action funding.

Edelman J noted that "future development of any power to make an SCFO in that State must be left to occur as a matter of legislative innovation".³⁰

The initial background to the appeals also revealed that if the Solicitors' CFO was denied, the applicants had foreshadowed seeking to cross-vest the proceeding to the Supreme Court of Victoria to obtain a "group costs order" under the Supreme Court Act 1986 (Vic), or alternatively, to seek commercial litigation funding.³¹ This highlights the divergence in class action funding mechanisms between Australian jurisdictions, following Victoria's introduction of GCOs.

Additionally, Edelman J observed that despite the Brewster decision limiting "commencement CFOs," the Federal Court of Australia has, in practice, developed informal techniques to navigate this limitation by providing indications at case management hearings that they might make a settlement CFO in the future.³²

His Honour expressed that there is little practical difference between these informal indications and the formal interlocutory CFOs proscribed by Brewster, as neither is binding regarding the final terms of a CFO.

His Honour even suggested that parties might achieve greater clarity and certainty from a strongly expressed informal view compared to a weakly expressed formal interlocutory order.

Edelman J's remarks may indeed encourage this practice, leaving it to be seen whether litigation funders will find these informal indications sufficient or continue to more frequently seek the statutory certainty provided by GCOs in the Supreme Court of Victoria.

For more information or assistance, please contact our Class Actions team.

Authors

Scott Castledine | Partner | +61 2 8248 3413 | scastledine@tglaw.com.au

Ella Walters | Associate | +61 2 9020 5638 | ewalters@tglaw.com.au

Noah-James Lambert | Lawyer

Footnotes

¹ [22],[35], [63].
‍² [11], [26], [32], [35], [97].
‍³ [10], [22], [35], [76], [135].
‍⁴ [1].
‍⁵ [13], [66].
‍⁶ [14], [115], [155].
‍⁷ [4].
‍⁸ [8].
‍⁹ [57].
‍¹⁰ [8].
‍¹¹ [91].
‍¹² [109].
‍¹³ [92].
‍¹⁴ [36].
‍¹⁵ [37].
‍¹⁶ [40].
‍¹⁷ [46].
‍¹⁸ [49].
‍¹⁹ [50].
‍²⁰ [33], [105], [150], [212].
‍²¹ [12], [68].
‍²² [10],[22], [35], [76], [135].
‍²³ [21].
‍²⁴ [35], [63],[105].
‍²⁵ [26], [88], [96], [199].
‍²⁶ [103].
‍²⁷ [27], [100], [185], [195].
‍²⁸ [80], [96], [104].
‍²⁹ [35], [81].
‍³⁰ [150].
‍³¹ [162].
‍³² [120].

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