Class action contingency fees how common will they be

What you need to know 

• In the first case to consider the new power to make Group Costs Orders, the Supreme Court of Victoria has refused two applications to approve a 25% contingency fee. The contingency fee was not attractive when compared with the alternative of a "no win, no fee" arrangement.
• The power to make "Group Costs Orders" in class actions was introduced in Victoria last year, creating an exception to the prohibition against contingency fees for legal practitioners acting in class actions.
• Victoria is the only jurisdiction so far to allow court approved contingency fees in class actions. The regime has the potential to attract plaintiff lawyers who may prefer their fees to be calculated as a percentage of the damages awarded or an agreed settlement, as in the United States, rather than on a time cost basis. There have been a considerable increase in class action filings in Victoria since the commencement of this regime.
• In applying the statutory test of whether a Group Costs Order is appropriate or necessary to ensure that justice is done, the Court adopted a broad evaluative approach, giving primacy to the interests of group members.

What are Group Costs Orders?

In June 2020 the Victorian Parliament passed legislation allowing the Supreme Court of Victoria to make Group Costs Orders in class actions.

Group Costs Orders involve a Court-approved contingency fee. A "contingency fee" refers to when the legal fees charged by the plaintiff's lawyers are calculated as a percentage of any amount recovered. This creates an exception to section 183 of the Legal Profession Uniform Law (Vic) which provides that a law practice must not calculate its fees by reference to the amount of any award or settlement or the value of any property that may be recovered.

Group Costs Orders also involve a requirement that all group members represented in the class action are responsible for paying a portion of that contingency fee from their share of the proceeds of the litigation.

The legislation followed the decision of the High Court of Australia in BMW v Brewster in which it was held that the Court did not have the power to make a "common fund order" requiring a plaintiff's litigation costs to be shared by all group members in the circumstances of that case.

The reason for the legislative change was to increase access to justice by allowing plaintiff law firms to compete with third party litigation funders. For further details of the change, see our previous update.

The first application for a Group Costs Order

Since Group Costs Orders were introduced, a number of representative proceedings have been commenced where the representative plaintiffs' lawyers have applied for Group Costs Orders. The first time this issue was decided was in two so called "flex commission" class actions.

The class actions were brought against lenders in relation to commissions charged by car dealers. The plaintiffs allege that the dealers were acting on behalf of the lenders and engaged in conduct that was unfair in breach of the National Consumer Credit Protection Act (Cth).

The plaintiffs in the two class actions were represented by Maurice Blackburn on a "no win, no fee" basis. Maurice Blackburn had indemnified the plaintiffs against any costs orders in favour of the defendants and agreed to pay any security for the defendants' costs that the plaintiffs might be ordered to pay, for which purpose it would obtain "after the event" insurance.

Maurice Blackburn sought Group Costs Orders, involving a contingency fee of 25%. The applications were heard and determined together by Nichols J as they raised similar issues.

The Court refused to make Group Costs Orders at this point but adjourned the applications to permit the plaintiffs to further consider their position and make any reformulated applications at a later time.

Why were the Group Costs Orders refused?

Justice Nichols held that whether or not a proposed Group Costs Order is more advantageous to group members is not the sole test. However, in these proceedings, the Court had to consider whether it would be more advantageous to group members than the existing funding arrangement.

The plaintiffs' lawyers argued that fixing a Group Costs Order at 25% of any amount recovered would provide members with a better financial return, lower exposure to financial risks, and more transparency and certainty than third party litigation funding. In particular, it was argued that a 25% contingency fee would be more favourable than if the plaintiffs had to pay both their legal costs and a litigation funding fee.

However, the Court noted that the plaintiffs already had in place a "no win, no fee" arrangement. Therefore the correct comparison was between a "no win, no fee" arrangement without a litigation funder and a contingency fee. In addition, the plaintiffs were already protected against any costs orders or requirement to provide security for costs. Nevertheless, under the "no win, no fee" arrangement, if successful the plaintiffs' legal costs calculated on a time cost basis plus a 25% uplift would be deducted from the amount recovered.

The Court applied a comparative analysis, predictive modelling and tipping point analysis to assess the impact on group members' recovery under the Group Costs Order scheme and different funding arrangements.

Ultimately, the Court was not satisfied that group members would be better off under a Group Costs Order.

When will Group Costs Orders be made in the future?

The decision provides useful guidance for the future on how the power to make Group Costs Orders will be interpreted. The Court is required to make a "broad, evaluative assessment".

The effect on group members of a proposed order must be a primary consideration informing the evaluation.

The Court interpreted the statutory test that an order be "appropriate or necessary" as meaning that a Group Costs Order would be "suitable, fitting or proper in the circumstances" to ensure that justice is done in the proceeding".

Nichols J noted that the legislative intention was to confer on the Court the widest possible power to do what is appropriate to achieve justice in the circumstances and it was inappropriate to impose limitations which are not found in the express words. Her Honour considered that the power to make a Group Costs Order is not a "gap filling" power like that considered by the High Court of Australia in BMW v Brewster. Rather, the power to make Group Costs Orders is a wide and unguided power to do what is appropriate to achieve justice in the circumstances.

Impact on existing class action regime

The decision of Nichols J in Fox v Westpac provides guidance on the discretion to make Group Costs Order in class actions, but it remains to be seen how willing the Court will be to make these orders in the future.

Group Costs Orders are still likely to be attractive to plaintiff law firms, resulting in claims being brought in the Supreme Court of Victoria in preference to other jurisdictions.

While Nichols J declined to make a Group Costs Order in this instance, the parties were permitted to consider their respective positions and re-apply at a later time. No doubt plaintiff law firms will continue to apply for Group Costs Orders and seek to show that there is not a more favourable alternative available.

Litigation funding for class actions has been on the law reform agenda for a number of years in Australia. The availability of contingency fees in particular is controversial. It has not been introduced in other jurisdictions.

Authors: John Pavlakis, Partner; Andrew Westcott, Senior Expertise Lawyer; and Sheenae LeCornu, Lawyer.