Class Actions Update: Courts rain on beauty parade for unfunded lawyers seeking contingency fee

What you need to know

• Competing class actions are common. In a rare joint sitting, the Federal Court and the Supreme Court of Victoria have offered guidance on the discretionary factors relevant to the resolution of a carriage contest.
• One factor is the degree to which lawyers have expended independent intellectual effort in formulating the claim (as opposed to copying the pleadings in another class action).
• Another factor is the financial position of a law firm running the case and its ability to fund the case, on the prospect of being awarded a Group Costs Order (GCO) (the Victorian statutory equivalent of a contingency fee), without support of a litigation funder. 
• The Courts found that the funding commission rates were lower on the proposed GCO than the funded Federal Court proceedings, which was better for group members.  However, the difference was relatively small and this was not decisive, because other factors evaluated favoured the funded Federal Court proceedings, including the experience of and work undertaken by the practitioners involved.
• The Court did not consider that the differences between the funding regimes in the Federal Court and Victorian Supreme Court, including the inability to seek a CFO at the outset of a case, were relevant to the resolution of the dispute.  Those differences may also be diminishing, in light of recent case law, and accordingly this factor may have even less relevance in future cases.
• Though the primary consideration in carriage disputes is the interests of group members, the decision is a reminder that fairness to the defendant/respondent is relevant in resolving carriage disputes. 

The competing class actions

In concurrent decisions, the Supreme Court of Victoria and the Federal Court of Australia have resolved a carriage dispute regarding three competing claims against IC Markets that were commenced within four months of each other, with substantially the same allegations. 

The Courts resolved the dispute by consolidating two proceedings in the Federal Court and permanently staying the competing proceeding in Victoria. 

What were the key factors that led to these decisions?

The High Court has endorsed a multi-factorial approach to managing competing claims (see our previous update here). The key factors that were relevant in this case were:

1. Independent effort involved in preparing the proceedings

A significant factor in the decisions was an evaluation of existing work and effort expended by the respective solicitors. The Courts consider it relevant that one firm had prepared the pleadings by substantially copying the pleadings in one of the earlier claims. The Courts found that legal teams that had undertaken the thought and effort involved in investigating, preparing and filing the original pleadings would necessarily be in a better position to conduct the proceeding. 

2. Proposed funding arrangements, percentage return to group members, and ability to fund

The Court evaluated the contrasting funding arrangements that reflected the differing models in the Victorian and Federal regimes, including the evidence as to the available resources of the respective funders. 

In Victoria, the Court has a statutory power, at any time of the proceeding including on commencement, to make a GCO. These orders allow the plaintiff's solicitors to be paid a percentage of any settlement or judgment amount (instead of legal costs on an hourly rate basis).  

In the Federal Court, common fund orders (CFOs) can be made at the conclusion of a proceeding. These allow a litigation funder to receive a commission, calculated as a percentage of any settlement or judgment. Recently, the Full Federal Court has held that CFOs can be made in favour of solicitors (see our update here) – achieving essentially the same commercial effect as a GCO. The Federal Court's power to make CFOs has been challenged in three separate applications for leave to appeal to the High Court, which we discuss in our update here. 

In this case, based on the evidence available, the Courts concluded that while the headline rate of funding commission was lower under the proposed GCO, which was better for group members, this was not determinative including because a firm acting on a 'no-win, no-fee' basis (and seeking a GCO) had a higher risk of facing financial difficulty in running the matter, compared with the proceeding supported by traditional third party litigation funding (and in circumstances where there was insufficient evidence about the ability of the firm to fund the litigation and/or seek litigation funding in the future if required).

The Federal Court also noted that the headline percentage rate was not determinative because the actual return to group members would depend on how the litigation was conducted and the judgment or settlement (if any) which was achieved. The focus was therefore more on other factors, including the experience and existing work of the representatives in each proceeding.  

3. Certainty afforded to group members by GCOs was not a material consideration

Both Courts rejected the proposition that the GCO model was inherently 'better' for group members compared with CFOs on the basis there was no practical difference in the benefit to group members between the two.  

The availability of a GCO at an earlier point than a CFO was considered to provide greater certainty to group members (essentially by locking in the GCO rate). However, as the applicants in the Federal Court proceedings undertook that at conclusion of the matter they would not seek recovery in a CFO for amounts higher than their current proposed rates of recovery, the same certainty was afforded to group members in the Federal Court proceeding. 

4. Fairness to defendants - security for costs proposals

It is also relevant in carriage contests to consider fairness to the defendant, particularly in relation to the adequacy of security for costs. IC Markets submitted a preference for the security arrangement in the Federal Court proceeding, in which a deed of indemnity from a reputable insurer was offered. This was in comparison to the Victorian proceeding, in which security was resisted, but it was said that it could be provided, if required. Both Courts agreed security would likely be required, irrespective of whether a CFO or GCO was pursued, and the clarity of the position in relation to the Federal Court proceeding favoured that proceeding. 

This highlights a way that defendants can have input into carriage disputes and progress negotiations around security in the context of them. 

What next

The power of the Federal Court of Australia  to make CFOs is currently the subject of applications seeking special leave to appeal to the High Court in the Blue Sky class action. The outcome of that case will likely impact choice of forum by firms seeking to run contingency fee style and other class actions. 

Authors: Angela Pearsall, Partner; Mark Bradley, Partner; Ian Bolster, Partner; John Pavlakis, Partner; Oscar Doupe-Watt, Lawyer, Sally-Anne Stewart, Senior Associate.