Class Actions Update: Has the door opened to contingency fees in class actions, and the last word on competing class actions?
27 June 2019
27 June 2019
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:
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:
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.
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:
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.
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.
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.
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.