In a decision that will be welcomed by litigation funders and class action plaintiffs, the Court of Appeal has ruled that New Zealand courts can make common fund orders at the start of a class action.^[1] Read the full decision of the Court of Appeal [here] and our earlier comments on the High Court decision [here]. 

What is a common fund order?

A common fund order (CFO) requires all members in an opt-out class action to contribute to the third-party funding of the class action out of any proceeds recovered in the proceeding, regardless of whether they have signed the funding agreement.

CFOs avoid the need for litigation funders to complete a costly ‘book building’ process prior to commencing a proceeding. They also provide funders with certainty of a return from any claim proceeds, and address the issue of ‘free riding’ by requiring all class members to contribute to the litigation funder’s costs of financing the proceeding (irrespective of contractual funding arrangements) rather than providing a windfall gain to those who have not signed up to the funding agreement.

The current position in Australia and the UK

CFOs have been the subject of much judicial controversy in recent years.

In Australia, the High Court has said the federal class action regime has no power to make a CFO at an early stage of proceedings.^[2] Federal courts have, however, continued to make CFOs at the conclusion (or settlement stage) of a proceeding. In a recent decision,^[3] the Full Federal Court found it has the power to make a ‘solicitor’s common fund order’, permitting a solicitor to receive a percentage of claim proceeds in a Federal Court class action, otherwise than as payment for costs and disbursements incurred in relation to the conduct of the class action.

There is uncertainty in England and Wales as to whether the courts have jurisdiction to make a CFO at all, albeit opt-out class actions are currently limited to competition claims. 

The Court of Appeal’s decision  

The Court of Appeal held the Australian position on CFOs was “unrealistic”, and noted that: 

• the courts in New Zealand continue to “test, evaluate and modify the way they supervise representative proceedings in response to emerging innovations in this area of law”;
• “representative proceedings require flexibility” in how they are managed; and
• a litigation-funding arrangement “enhances access to justice by providing certainty in the way a representative proceeding is funded”.

The Court of Appeal concluded that “the overall interests of justice and, in particular, access to justice are best achieved through a CFO being made as early as possible”. This is because an early-stage CFO ensures: 

• funding arrangements for representative proceedings are entered into on a comparatively secure footing; 
• class members are better informed about their possible returns when deciding whether to opt out of the proceeding; and 
• less uncertainty about how the court might exercise its discretion to allocate the costs of funding the proceeding at the conclusion of the litigation. 

Conclusion

This judgment is in line with the Law Commission’s earlier recommendation that the courts should have the power to make CFOs.^[4] It is a further step in the development and clarification by the courts of key issues affecting representative litigation. 

If you have any questions about class actions or litigation funding, please get in touch with one of our experts. 

Special thanks to Emma Strong for her assistance in writing this article.