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2101069_AustralianCourt_SOCIAL

Victorian Supreme Court Denies First Ever Contingency Fee Applications in Class Actions

In Short

The Situation: In July 2020, Victoria introduced landmark legislation to allow, for the first time in any Australian jurisdiction, the charging of contingency fees by law firms acting for plaintiffs in class actions. The charging of contingency fees is only permitted under the legislation if the court makes a "Group Cost Order"("GCO"), which will only be made where the order is "appropriate or necessary to ensure that justice is done in the proceeding".

The Decision: In the first decision of the Victorian Supreme Court in respect of a GCO —Fox v Westpac; Crawford v ANZ [2021] VSC 573—Justice Nichols rejected applications by two plaintiffs in consumer class actions seeking to set the legal fees of all class members at 25% of any future recovery.

Looking Ahead: Defendants and potential class action targets should note that this decision raises questions as to the future availability of GCOs. The decision also casts doubt on GCOs' ability to increase competition in the market for class action funding when conditional fee arrangements are already permitted, as plaintiffs and other proponents of the reforms had initially claimed. In this case, her Honour adjourned the application to allow the plaintiffs to further consider their position and it is possible that the plaintiffs may make another attempt to obtain a GCO at a later stage, which we will continue to monitor.

The Facts 

The plaintiffs in two separate class actions (Fox v Westpac Banking Corporation & Anor (Fox) and Crawford v Australia and New Zealand Banking Group Ltd & Ors (Crawford)) sought GCOs from the court pursuant to the recently-introduced s 33ZDA of the Supreme Court Act 1986 (Vic) ("the Act"). Given the substantial overlap in the issues to be determined, the applications were heard jointly.

Section 33ZDA allows a plaintiff in a group proceeding commenced under Part 4A of the Act to make an application for an order that (i) the legal costs to be paid to the law firm representing the plaintiff and group members be a particular percentage of any award or settlement in the proceedings (in both of these cases, 25%), and (ii) liability for payment of the legal costs be shared among the plaintiff and all group members. In the event a GCO is made, the law firm representing the plaintiff is liable for any costs payable to the defendant in the proceeding and must give security for costs to the defendant, if the plaintiff is ordered to pay security in the course of the proceeding.

In practice, Section 33ZDA requires that a proceeding be commenced against a defendant while an agreement for the payment of legal costs is already in place, prior to seeking a GCO from the court in the future. In both the Fox and Crawford proceedings, the plaintiffs agreed to "no win/no fee" ("NWNF") conditional cost agreements with their solicitors, prior to commencing the proceedings. Under those agreements, the plaintiffs will not be liable to pay their solicitors' fees unless the actions are successful, in which case a 25% premium or 'uplift' is also payable on the costs incurred. The agreements also provide that the plaintiffs are indemnified by their solicitors against the risk of adverse costs orders in the proceedings.

In making a GCO, the court must be satisfied that it is "appropriate or necessary to ensure that justice is done in the proceeding". The plaintiffs in each proceeding argued that fixing a GCO at 25% of any future recovery would result in the group being "better off" than under alternative funding arrangements that would likely result in higher costs being deducted from any award of damages or a settlement sum.

The Decision 

Justice Nichols rejected both applications on the basis that the plaintiffs failed to establish that they and the relevant group members would be better off under a GCO compared with the existing NWNF arrangements. Her Honour found that the exercise of the discretion to make such an order under s 33ZDA of the Act required, in this case, a comparison of the proposed GCO against the existing NWNF funding arrangements.

The plaintiffs argued that the NWNF arrangements were intended only to be temporary in nature and that the proposed GCO should be compared against likely returns to the plaintiffs if a third party litigation funder was involved in the proceedings. The plaintiffs argued that under those arrangements, returns to the plaintiff would likely be significantly lower than the 75% guaranteed by the proposed GCO. Her Honour disagreed with the plaintiffs, finding that the NWNF agreements were, in fact, ongoing agreements that would continue to govern the legal fees payable by the plaintiffs, regardless of whether or not the GCOs were made.

Her Honour also found that modelling presented to demonstrate the benefits of the proposed GCO was founded on a series of highly uncertain assumptions about the future conduct of the litigation and that the evidence was insufficient to support the exercise of the discretion.

Ramifications 

This decision exposes some significant issues in the operation of s 33ZDA.

First, it highlights the challenge with putting in place an arrangement for the payment of legal costs prior to commencing a proceeding, and before seeking the court's approval to switch to a GCO. Her Honour found that the comparator for the proposed GCO should be the existing funding arrangement then in place at the time of the plaintiff's application. For plaintiffs to succeed in securing a GCO in the future, they will need to demonstrate to the court's satisfaction that the GCO will result in them being better off than under the existing arrangement. Without putting in place sufficient protection from the risk of adverse costs orders and acting on a NWNF basis from the outset, however, we consider it will be difficult for plaintiff law firms to locate a representative plaintiff to commence an action when there can be no certainty that a GCO will be obtained at a later date.

Second, Her Honour identified that despite GCOs logically needing to be sought at the earliest stages of a proceeding, this is also the point at which uncertainty as to the likely outcome of the proceeding is at its highest. This in turn makes an assessment of the benefit of the fee arrangement for the group members difficult and casts doubt on the usefulness of the regime.

Three Key Takeaways

  1. To obtain a GCO, the court must be positively satisfied that it is "appropriate or necessary to ensure that justice is done in the proceeding" which requires a broad evaluative judgment, but requires protection of group member interests as a primary consideration.
  1. The court's reasoning demonstrates that there are alternatives to a GCO, namely a NWNF arrangement with an indemnity for an adverse costs order, that can result in a better outcome for plaintiffs and group members casting doubt on the need for a GCO at all, particularly in circumstances where an application for a GCO is required to be supported by a difficult and costly modelling exercise.
  1. Defendants and potential class action targets should note that the court's decision nonetheless provides guidance to plaintiffs' law firms as to how they may structure the funding of the class action prior to the application for a GCO and the factors that will be relevant to whether an order will be made. It remains to be seen how plaintiffs' law firms will adapt their fee arrangements, if at all, and develop evidence in the current proceedings for a subsequent application and for future applications more generally. We will continue to monitor and report on relevant developments.

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