Legal development

Class Actions Update: Has the door opened to contingency fees in class actions, and the last word on competing class actions?

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    As one door shuts, does another one open?

    What you need to know

    • The Full Federal Court has left open the possibility of approving a common fund order incorporating a contingency payment for plaintiff law firms in class actions. But will they really be ordered while the legislative ban on contingency fees in costs agreements remains?
    • The Full Court also gave some further guidance on selecting from competing class actions before making it clear it has limited interest in allowing further appeals on competing class actions given the principles are now clear.
    • The prospect of contingency fees as part of a common fund order may encourage more class action activity. The reduction in appeals (for competing class actions) should speed up dealing with multiple claims.

    Opening the door for contingency fees in class actions?

    Contingency fees allow law firms to share in a percentage of a judgment or settlement. All states and territories have laws prohibiting solicitors from entering cost agreements with them, although the Australian Law Reform Commission has recommended that contingency fees be allowed in class actions (see our previous article).

    In this case, one applicant proposed a funding arrangement to be the subject of a common fund order involving the payment of a contingency fee. The idea was that the solicitors not enter into a cost agreement for a contingency fee – but the court be asked to order one.

    The primary judge considered that even if that structure would mean there was no contravention of the prohibition on contingency fees in cost agreements, there was a clear legislative policy against such payments and it was unlikely a court would make a common fund order incorporating a contingency fee.

    The Full Court considered whether such an order could be made: the legislative prohibition was on costs agreements rather than payments, and its exercise of federal power could not be circumscribed. In particular:

    • Justice Middleton and Justice Beach accepted there was a reasonable implication that legislative policy was against such payments being paid and this was not irrelevant. However they said that the primary judge's comments were a statement of opinion only and other judges may hold different views. They did not themselves express any opinion on the subject. 
    • Justice Lee stated that it was not apparent to him why a common fund order involving a contingency payment could not in some cases be appropriate to ensure justice. His Honour went on to say that he did not consider it unlikely that a common fund order incorporating a contingency payment could be made. His Honour's main issue in this case was that the order proposed by the applicant was not properly framed.

    Will we now see contingency payments?

    While the door may have been opened, it is hard to see many cases where a contingency fee would be ordered (as part of a common fund order) while they are banned in costs agreements.

    For example:

    • If a law firm has agreed to act without a contingency fee, why would a Court consider it in the interest of justice to give them an extra payment (at the expense of group members)?
    • While it is conceivable that a contingency fee payment could be seen as more attractive for group members than the standard solicitor's costs plus funders commission model for class actions (eg if the contingency is less than the funder's commission), they are also likely to be coming up against "no-win no-fee" models as well as being compared against an hourly rate model likely to result in smaller payment to the lawyers (as well as facing the other issues surrounding contingency fees).
    • If the court waited until the end of proceedings before considering a contingency fee payment as part of a common fund order would it also compare the contingency with an hourly fee rate alternative?

    We also note that the question of validity of common fund orders is currently before the High Court on 13 and 14 August 2019 in the Westpac and BMW Australia appeals. The High Court's determination may impact on the possibility of any contingency fee payment via a common fund order.

    Some of the key factors in play when choosing among the competing class actions

    This is the second Full Federal Court decision on competing class actions and adds to the growing authorities setting out the applicable principles. The Full Court's further guidance on choosing among competing class actions in this decision included:

    No win/no pay is not the benchmark for success

    Justice Middleton and Justice Beach endorsed the observations made by the Supreme Court of NSW in Wigmans v AMP Ltd in relation to the potential benefits of a no win/no fee model. However, they also confirmed that a no win/no fee model, "like other funding models, is to be considered on its merits and has no necessary privileged status over other funding models".

    Accordingly, the Court held that although the nature of a funding model is relevant, the fact that a no win/no fee model was not preferred by a competing firm was not and each model proposed had to be considered on its own merits.

    Equal fighting power between the parties

    At first instance the trial judge considered whether the action that would proceed was "properly resourced" so that there was a "level playing field". Justice Lee accepted that resourcing was a relevant consideration, and it was impliedly accepted by Justice Middleton and Justice Beach.

    Different pleadings will be relevant but not determinative

    The Court said that whilst the fact that one class action had broader or different allegations would be a relevant factor, it would not be determinative. Significant emphasis was placed on the professional obligations of plaintiff lawyers to consider amending pleadings as necessary. Justice Lee explained: "If upon reflection it is thought a claim exists that should be advanced, then applicants are rarely shrinking violets paralysed by indecision".

    The Court's comments also reflected its concern that placing too much emphasis on different pleadings may result in perverse incentives in the form of encouraging competing class actions to file claims for longer periods to try and seek an advantage.

    The Court will be more strict in considering future applications for leave to appeal

    A consistent theme was that applications for leave to appeal would be treated more strictly in the future.

    The Court emphasised that a decision as to which competing class action would proceed was a discretionary judgment forming part of the case management of cases. Justice Lee referred to the test as follows: "an applicant for leave must usually show that: first, in all the circumstances, the decision to be appealed is attended with sufficient doubt to warrant its reconsideration on appeal; and secondly, supposing the decision to be wrong, 'substantial injustice' would result if leave was refused."

    Justice Lee also emphasised that even with the Court's protective role in relation to group members "it must be borne in mind that the potential injustice to be identified on a leave application must be substantial". His Honour concluded this part of his judgment with the stark warning that: "In my view, in light of this guidance [from two Full Court decisions], and the flexibility given to docket judges, absent recognisable legal error, considerable hurdles confront those seeking leave to appeal in similar circumstances in the future".

    His Honour also warned that in future parties should not expect that applications for leave to appeal would be heard at the same time as the appeal.

     

    Authors: Ian Bolster, Partner; John Pavlakis, Partner; and Matt Youssef, Senior Associate.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.