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15 Oct 2020

The implications of introducing contingency fees to Victorian class actions

By Greg Williams, Peter Sise

It's clear there are many unanswered questions about the new section 33ZDA of the Victorian class actions legislation. Its full implications are still unknown and might remain that way for a while.

On 30 June 2020, the Justice Legislation Miscellaneous Amendments Act 2020 (Vic) commenced. This introduced a new section 33ZDA to the Supreme Court Act 1986 (Vic) which will allow the Supreme Court of Victoria to award contingency fees to plaintiff lawyers in class actions. We've already explained what contingency fees are and how this amendment will operate. It's been heralded as a significant change since lawyers in Victoria aren't permitted to enter into a costs agreement with a client that allows them to charge a contingency fee. The same prohibition exists in other Australian jurisdictions. But is this amendment as significant as it seems? Perhaps yes. Perhaps no. In this article, we'll look at some of its implications.

Hang on … is there a glitch in this amendment?

Before going any further, it's worth noting a potential issue with the operation of this amendment. The new section 33ZDA allows the Supreme Court of Victoria to make a "group costs order". This is effectively an order that all group members pay a contingency fee to the lawyers for the lead plaintiff. This is like a "common fund order" but where the commission is paid to lawyers instead of a litigation funder. Section 33ZDA only allows a group costs order if the Court is "satisfied that it is appropriate or necessary to ensure that justice is done in the proceeding". Those who deal with class actions will immediately recognise these words from section 33ZF of the Supreme Court Act and the Federal Court of Australia Act 1976 (Cth). Section 33ZF allows the Court to make any order it "thinks appropriate or necessary to ensure that justice is done in the proceeding". The explanatory memorandum for the Act specifically said the words in section 33ZDA "reflect the wording used in [the] existing section 33ZF". So the test in section 33ZDA is very similar to that in 33ZF. The High Court has recently considered the meaning of the words in section 33ZF of the Federal Court of Australia Act and its reasons could have implications for section 33ZDA.

In BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall the High Court concluded that section 33ZF does not allow a common fund order to be made in favour of a litigation funder. A plurality of the High Court said that the words "thinks appropriate or necessary to ensure that justice is done in the proceeding" exist to ensure "justice is done … as between the parties" and not to give a non-party (in Brewster, a litigation funder) "sufficient financial inducement to support the proceeding".

There is nothing in the Act to suggest that the Supreme Court should consider the interests of any third party (for example, the lawyers) when deciding whether to exercise its power to make a group costs order pursuant to section 33ZDA, even though that power will expressly operate in favour of lawyers.

Does this mean that section 33ZDA won't work? Unlikely. However, at the moment it is very unclear, what will be required for the Court to be "satisfied that it is appropriate or necessary to ensure that justice is done in the proceeding" to make a group costs order. Will the Court need to be satisfied that the proceeding could not be brought without a group costs order? If so, how will a well-resourced plaintiff law firm convince the Court that it could not run the proceeding on the usual no-win-no-fee basis? If not, what other criteria will be applied by the Court when deciding whether it is in the interests of justice to allow a law firm to make a greater profit than it might under a no-win-no-fee arrangement? There might need to be a good reason for the Court to make an order that will give the law firm a greater reward than the payment of its fees when this will be at the expense of group members. For these reasons, it might be difficult for plaintiff law firms to obtain group costs orders and is unlikely to be a simple case of "ask and you shall receive". We'll have to wait and see.

Will this amendment actually mean more money for plaintiff law firms?

This amendment was hotly debated before it was passed by Victorian Parliament. One of the points of contention was whether it would lead to greater amounts being paid to plaintiff lawyers. The debate proceeded on the assumption that a group cost order will result in plaintiff lawyers being paid the same kind of commission that litigation funders currently receive. Plaintiff law firms have adopted this assumption when making submissions to law reform bodies. Some of these submissions assume a 25% commission will be paid to plaintiff lawyers. This commission is expressed as a percentage of the total amount awarded to group members for a settlement or judgment. 25% is similar to the commission paid to litigation funders which is typically 25-30%.

However, section 33ZDA doesn't say anything about the calculation of group costs orders. During the Parliamentary debates for the Act, a cap of 35% was proposed for group costs orders but this was voted down. So, the Supreme Court of Victoria can set any percentage it thinks appropriate to each particular case.

Courts have previously referred to empirical evidence of the prevailing percentages for commissions, which are typically 25-30%, but this relates to litigation funders, not law firms being granted group costs orders. It's quite possible that the Supreme Court of Victoria may approach setting a percentage differently for law firms. It may be that the appropriate starting point for determining the percentage is the fees that the law firm charged and not what a litigation funder might have been paid. From 2013 to 2018, the median legal fees for an unfunded class action (ie. one without a litigation funder) in the Federal Court was 15% of the settlement amount or judgment. This is half the amount paid to litigation funders for the same period in the Federal Court.

Another point is worth noting on this topic. Regulations have recently commenced requiring litigation funders to hold an Australian Financial Services Licence and making them subject to the Managed Investment Scheme regime. Query whether similar policy considerations might apply to law firms who enter into litigation funding like cost arrangements.

So, what should we conclude? It's possible that the amendment may lead to greater revenue for plaintiff lawyers from running class actions in the Supreme Court of Victoria but perhaps not as much as some expect. It will depend on how the new section 33ZDA is applied by the Court. However, it seems unlikely that the application of section 33ZDA will be as simple as was widely expected during the Parliamentary debates about its introduction.

How will this change class actions in Victoria?

The Supreme Court of Victoria largely hears unfunded class actions. For the period of 2000 to 2017, only 10 of the 80 class actions commenced in the Supreme Court of Victoria were funded. Many commentators have expected this amendment to reduce the number of funded class actions in the Supreme Court of Victoria and increase the number of unfunded class actions. Depending on how the numbers balance, this could lead to an overall increase in class actions (both funded and unfunded) in the Supreme Court of Victoria. The driver for this would be that the amendment provides a greater financial reward for law firms to bring class actions on an unfunded basis where they seek a group costs order. As already mentioned, it is not yet clear whether the amendment will provide a greater financial reward. However, if the amendment does, it may further entrench the Supreme Court of Victoria as a forum for unfunded class actions.

Although this amendment could mean more unfunded class actions in the Supreme Court of Victoria, it may change the subject matter of those class actions. Some types of class actions are commonly funded, such as shareholder class actions, while others receive funding less frequently, such as consumer protection and product liability class actions. This amendment could lead to more class actions in the Supreme Court of Victoria of the kind that are commonly funded, such as shareholder class actions, but being run as unfunded. This is because plaintiff lawyers may be more willing to fund them if group costs orders do result in greater revenue for them.

Conclusion

It's clear there are many unanswered questions about the new section 33ZDA. Its full implications are still unknown and might remain that way for a while. What is known is that the class actions space is in a state of flux. In the last few months we've seen a landmark High Court decision, the commencement of new regulations for litigation funders, an ongoing Parliamentary inquiry into class actions and we're still waiting on the Commonwealth Government's response to the Australian Law Reform Commission's report into class actions. More changes may be on the way. Whatever they are, they might also affect the impact of the new section 33ZDA.

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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.