28 Oct 2021

First contingency fee decision is another example of court discretion over funding class actions

By Greg Williams, Will Atfield, Alex Corsaro and Max Carter

While the decision in Fox does not provide clear guidance as to when an application for a Group Costs Order will be successful, it does demonstrate that there is judicial appetite for making such an order.

The first application for a contingency fee funding arrangement since legislative reform to the Victorian class action regime in June 2020 has been denied (Fox v Westpac [2021] VSC 573).

Contingency fees in Victoria

A contingency fee is a method of billing for legal services through a percentage of the amount recovered in the litigation rather than through time-based or costs scale billing. Under a contingency fee arrangement, a fee is only charged if the litigation is successful.

Historically, lawyers in Australia have been prohibited from entering into a costs agreement with a client which allows contingency fees to be charged. However, section 33ZDA was added into the Supreme Court Act 1986 (Vic) in June 2020 which gave the Court the power to order that lawyers representing a lead plaintiff be allowed to recover a contingency fee.

Under section 33ZDA a lead plaintiff is able to apply to the Court for an order that the legal costs payable to his or her lawyers be in the form of a contingency fee, and for those costs to be shared between the plaintiff and all group members (referred to as a Group Costs Order or GCO).

In making a Group Costs Order, the Court specifies the percentage of the litigation proceeds to which lawyers are entitled if the class action is successful. However, if the class action is unsuccessful, the lead plaintiff’s lawyer may be liable to pay any adverse costs order in favour of the defendant.

This development made the Court an outlier when compared to other jurisdictions in Australia, where contingency fees are still prohibited. We have previously explained how the amendment will operate, and the implications which may arise.

The first GCO applications

Two separate applications were brought in two class actions: one against Westpac (the Fox proceeding) and another against ANZ and Macquarie Bank (the Crawford proceeding). The plaintiffs in both class actions were represented by the same law firm who were operating under comparable “no win, no fee” legal costs agreements that also provided that the law firm would indemnify their clients against any adverse costs orders in the proceeding.

The plaintiffs' lawyers proposed identical GCO orders, pursuant to which they would receive 25% of any award or settlement recovered in the proceeding, contributed to equally by the plaintiff and group members in each case. In interpreting how section 33ZDA is to be applied, the Court stated that the making of a GCO will depend upon a wholesale assessment of the relevant facts and evidence, but that the interests of group members is the most important factor.

Central to the each application was whether the proposed GCO was more advantageous for group members than an alternative funding arrangement (such as by providing a better financial return for group members). The plaintiffs proposed that this involved a comparison between the proposed GCO and the hypothetical alternative of third-party litigation funding. However, the Court made it clear that determination of a GCO application will not always turn on how attractive the proposed GCO is for group members when compared to a theoretical alternative funding arrangement. The test, as the Court noted, involves a "broad, evaluative assessment" in which the interests of the group members is given primacy.

It was submitted by the plaintiffs that under a typical third-party litigation funding arrangement, funding fees and legal fees amount to 36-55% of the amount recovered, and in contrast, a contingency fee of 25% was favourable to group members as it would guarantee group members a 75% return of the amount recovered in the litigation.

The court took a different approach. It considered whether the GCO was more favourable than the existing "no win no fee" arrangements that the plaintiffs' lawyers had in place with the lead plaintiffs which already indemnified those plaintiffs against any adverse costs (one of the features of the proposed GCO).

Ultimately, the Court decided that it could not be shown that the proposed GCO would make group members better off, so the proposed GCO was not appropriate nor necessary to do justice in the proceeding. This was in part informed by inherent uncertainty in predictive economic modelling, including that put forward by the plaintiff's lawyers for the purposes of projecting recovery scenarios in order to compare possible outcomes for group members under different funding arrangement options.

Group Costs Orders and the future of class action litigation

While the decision in Fox does not provide clear guidance as to when an application for a GCO will be successful, it does demonstrate that there is judicial appetite for making such an order.

 

Justice Nichols rejected submissions that the power ought to be used cautiously, and even invited the plaintiffs' lawyers to re-formulate their GCO applications at a later time. However, the fact that the judge nonetheless rejected the application outright, rather than making a GCO at a rate less than 25%, suggests that plaintiff lawyers will need to more carefully 'pick' the rate that they propose to the Court in future GCO applications.

Under the existing "no win no fee" arrangements (which the plaintiffs' lawyers had in place before the GCO application), the lawyers would indemnify their clients against any adverse costs orders, which was also a feature of their proposed GCO. In turn the Court observed that in either scenario the lead plaintiffs would be indemnified. It therefore noted that the plaintiffs' lawyers could not point to the indemnity available under the proposed GCO as a reason for why the GCO was necessary or appropriate. Accordingly, plaintiff lawyers contemplating a GCO application will need to consider their existing fee arrangements, and how they may impact upon their proposed GCO.

The landscape will continue to evolve in the near future, with the Court expected to hear a second GCO application next month (in another class action) which may offer further insight.

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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.