Contingency fees now available for class actions in the Victorian Supreme Court, so expect more class actions

19 Jun 2020

What has happened?

Plaintiff lawyers will be allowed to charge contingency fees in class actions commenced in the Supreme Court of Victoria and for those fees to be borne by group members, which will make that Court the class action forum of choice This follows the passing of the Justice Legislation Miscellaneous Amendments Bill 2019 (Vic) on 18 June 2020.

What are contingency fees?

Contingency fees are a method of billing for legal services through a percentage of the amount recovered by the litigation rather than through time-based or costs scale billing.  Under a contingency fee arrangement, no fee is charged if the litigation is unsuccessful.

Prior to this development, there was a blanket prohibition on lawyers charging contingency fees in any Australian jurisdiction. It is a major change to the way in which Australian lawyers operate, moving towards a model that has long been utilised in "no cost" legal systems, principally the United States.

What is the effect of the bill?

The bill will add a new section 33ZDA into the Supreme Court Act 1986 (Vic) to give the Court the power to order that lawyers representing the plaintiff be allowed to recover a contingency fee.

Under the new section, a lead plaintiff (representative party) is able to apply to the Court for an order that the legal costs payable to the plaintiff's legal representative be in the form of a contingency fee and for those costs be shared between the plaintiff and all group members (referred to as a Group Costs Order).  The Group Costs Order will also specify the percentage of the litigation proceeds to which lawyers will be entitled.  The Court is able to make such an order if it is satisfied that it is appropriate or necessary to ensure that justice is done in the proceeding.  The Court is required to exercise additional supervisory jurisdiction over class action claimants and those bringing and funding such actions.

The section stipulates that, if a Group Costs Order is made by the Court and the class action is unsuccessful, the plaintiff's law firm is liable to pay any costs of the proceeding awarded to the defendant.

The section also allows the Court to order that the plaintiff's law firm give security for the defendant's costs on behalf of the plaintiff.

While the section does not expressly state at what point in the proceedings a Group Costs Order can be made, it does permit the Court to amend an existing Group Costs Order during the course of the proceeding, including amending the percentage of the award (specified in the Group costs order) which determines the contingency fee.  This suggests that an order can be made before a settlement or judgment is reached in the proceedings.

What are the origins of the bill?

The bill was in response to a recommendation by the Victorian Law Reform Commission (VLRC) in its report Access to Justice: Litigation Funding and Group Proceedings dated March.  Interestingly, both the Australian Productivity Commission and the Australian Law Reform Commission have made similar recommendations, however to date, these have not been acted upon. 

In the report, the VLRC recognised that there has been debate for many years about whether lawyers should be able to charge contingency fees in Australia.  Those in favour argue that contingency fees would expand the availability of funding to cases that are uneconomic for litigation funders to support, reduce costs to plaintiffs and ensure that client interests are not sidelined in favour of the funder’s financial interests.

The VLRC observed that critics say that allowing contingency fees may lead to an increase in unmeritorious claims, create conflict of interests between lawyers and clients and lead to excessive profits for plaintiff lawyers.

The VLRC was also of the view that class actions are an appropriate forum for lawyers to absorb the risks of litigation and be rewarded for this, because the representative plaintiff has a disproportionate exposure to the financial risk of an unfavourable outcome, compared to both the value of their own claim and the exposure of other class members.  The risk is a significant disincentive to taking on the role and is only partly mitigated when lawyers act on a ‘no win, no fee’ basis.

Ultimately, the VLRC was satisfied that charging contingency fees in class actions could increase access to justice by making funding available to claims that litigation funders do not currently fund, and by increasing competition among the firms running large class actions and thereby reducing costs to plaintiffs.

The VLRC recommendation was not without controversy. In addition to the concerns traditionally raised by critics mentioned above, some argued that the proposal would encourage plaintiffs to ‘forum shop’ and commence proceedings in the VSC that would otherwise have been commenced in another jurisdiction.  Others took issue that action on the recommendation put Victoria at odds with other jurisdictions. That is now the case.

The Parliamentary Joint Committee on Corporations and Financial Services

On 13 May 2020, in part in response to the proposal, the House of Representatives referred an inquiry into litigation funding and the regulation of the class action industry in Australia to the Parliamentary Joint Committee on Corporations and Financial Services.  The report is due by 7 December 2020 and will, among other things, consider the consequences of allowing lawyers to charge contingency fees.

What happens next?

We expect to see the Victorian Supreme Court become the class action forum of choice particularly for unfunded class actions and all the more so given the prevailing uncertainties about permissible litigation funding models.  It will be interesting to see whether charging contingency fees in fact increases access to justice and reduces costs to plaintiffs or whether it merely entrenches the dominance of well-known plaintiff law firms.  Addressing actual and perceived conflicts of interest between plaintiff lawyers, the lead plaintiff and group members will be critical.   It will also be interesting to see how other jurisdictions respond, including whether they pass similar legislative reforms. 

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.