Legal development

First contingency fee approved what next

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    What you need to know

    • The Supreme Court of Victoria has approved a Group Costs Order under the new Victorian regime for class action funding.
    • For the first time, plaintiff lawyers will be permitted to charge a contingency fee calculated as a percentage of the amount of any award or settlement recovered (in this case, not greater than 27.5%). The Court may review and amend the order at a later stage.
    • The Court preferred the certainty that group members receive not less than 72.5% of any compensation recovered, to the risk of an inferior return after third party litigation funding costs.
    • A Bill dealing with the reasonableness of litigation funding commissions is currently before the Senate. With limited time remaining before the next federal election, it is unclear whether the legislation will be reached.
    • Plaintiff lawyers will likely see the cost agreement and evidence in this case as a model, paving the way for them to commence class actions in Victoria with some confidence that a contingency fee arrangement will be approved.

    On 7 February Nichols J delivered reasons for making the first Group Costs Order under Part 4A of the Supreme Court Act 1986 (Vic). The Group Costs Order in the G8 Education case was made on 26 November last year, and the reasons published this week.

    Group Costs Orders are permitted under legislation introduced in Victoria in 2020. Where the Court makes a Group Costs Order, a class action plaintiff's legal costs are calculated as a percentage of the amount of any award or settlement and class members share in the liability for the plaintiff's legal costs.

    This week's G8 Education decision follows Nichols J's decision in Fox v Westpac in September last year, which was the first decision dealing with an application for a Group Costs Order. In Fox v Westpac Nichols J set out essential principles informing the court's discretion to make a Group Costs Order.

    In Fox v Westpac, the plaintiffs' lawyers had argued that the plaintiffs would be better off paying a contingency fee than if they entered into a litigation funding agreement. However the Court considered that the plaintiffs would be better off if their lawyers continued to act on a "no-win, no-fee" basis and declined to make the order sought. For further details see our earlier update here.

    Why was a Group Costs Order made?

    In G8 Education, the plaintiff lawyers were conducting the litigation on a "no-win, no-fee" basis pursuant to a Retainer Agreement. However, the Retainer Agreement expressly contemplated that a Group Costs Order would be sought and, in the event that it was refused, the lawyers may seek third party litigation funding.
    After weighing up the funding options, the Court accepted that the proposed Group Costs Order, capped at 27.5% of any gross settlement or award, would provide greater certainty of outcome in relation to the costs of litigation compared to the alternative forms of funding.

    The Court summarised evidence in relation to the cost of litigation funding based on historical data compiled by the Australian Law Reform Commission and the Law Council of Australia. Based on that data, legal costs and litigation funding combined consume an average of 46% of the award or settlement sum in class actions.

    In relation to the "no-win, no fee" arrangement, the Court considered that there were significant limitations in the assessment of this arrangement. If a Group Costs Order were refused, it was more likely that the plaintiff lawyers would seek and obtain third party litigation funding.

    The proposed Group Costs Order was considered by the Court to be appropriate because it would give rise to equity between group members (in respect of liability for costs), simplicity and transparency and would secure the plaintiffs against the risk of having to pay adverse costs.

    Importantly, Nichols J emphasised that the legislation does not require the Court to first identify the relevant counterfactual funding scenarios and then determine whether the proposed Group Costs Order is proven to be more advantageous to group members then the counterfactual funding arrangements. According to her Honour, "comparative outcomes modelling must not be permitted to subsume the place of the evaluative inquiry required by s 33ZDA".

    Referring back to the Fox v Westpac decision, her Honour noted that there is no warrant for characterising a Group Costs Order as a funding mechanism of last resort.

    Where to from here?

    The reasoning in G8 Education illustrates what evidence will be sufficient to persuade the court that a Group Costs Order is appropriate.

    The risk to group members of paying both a third party funding commission and legal costs out of any award or settlement (rather than a single contingency fee to a law firm) is a compelling consideration.

    Plaintiff law firms are likely to structure their retainers to increase the chances that a Group Costs Order will be made.

    Group Costs Orders are likely to be attractive to plaintiff law firms where they are prepared to accept the risks of an unfavourable outcome or adverse costs orders in return for the potential reward of a contingency fee.

    This may add to the recent popularity of the Supreme Court of Victoria as a venue for class actions. The availability of contingency fees has not been introduced in other jurisdictions.

    A Bill currently before the Senate would introduce a rebuttable presumption that a return to group members in a funded class action of less than 70% of the gross proceeds of a claim is not fair and reasonable. It is unclear whether this legislation will be dealt with in the limited sitting time before the federal election.

    Authors: John Pavlakis, Partner; Andrew Westcott, Expertise Counsel; and Sophia Kwiet, Lawyer.

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