The High Court has queried the legality of court orders requiring members of class actions to pay litigation funders even if they aren't part of a funding agreement.
The key issue in the cases brought by Westpac and BMW is whether the Federal Court of Australia and NSW Supreme Court were empowered to make what is known as a "common fund order".
BMW challenged an order by the NSW Supreme Court requiring anyone receiving a payout from a class action over faulty airbags to provide 25 per cent of the money to litigation funder Regency Funding for bankrolling the court case.
BMW's legal team argued a "common fund order" breached the constitution as it required people who benefited from the class action to pay Regency Funding even if they had not joined the case.
Westpac made a similar argument in relation to a class action funded by JustKapital Litigation regarding financial advisers breaching their obligations in relation to insurance policy advice.
The High Court found by a majority neither the laws relating to the Federal Court nor the NSW Civil Procedures Act empower a court to make a common fund order.
"It is not appropriate or necessary to ensure that justice is done in a representative proceeding for a court to promote the prosecution of the proceeding by the making of a CFO," the judgment said.
Norton Rose Fulbright disputes practice leader Cameron Harvey said the decision was a significant setback for the business of litigation funding and plaintiff law firms operating in Australia.
"Many expected the High Court to uphold the earlier decision of the Full Federal Court and NSW Court of Appeal," he said.
"It will be interesting to see whether there will be a challenge to the existing common fund orders made since 2016."
Mr Harvey said there would now be strong interest in how the federal and state governments responded to the decision and the recommendations from the Australian Law Reform Commission's report into class actions published in January.
Australian Associated Press