Victoria: First Australian State To Permit Contingency Fees In Class Actions.

Introduction
 

In Australia there has been a statutory prohibition preventing lawyers from charging a contingency fee on damages obtained by a successful party. An inherent conflict was recognised to exist between the lawyer's own interests and those of the client, which may affect the advice provided. However with the burgeoning litigation funding industry in Australia, plaintiff firms have been lobbying governments for law reform which enables increased access to justice through law firms receiving their costs on a contingency fee basis. Despite the Federal Parliament's current Joint Committee Inquiry on Corporations and Financial Services into Litigation Funding and Regulation of the Class Action Industry, the Victorian Parliament has followed the advice of the Victorian Law Reform Commission and pushed ahead with a contingency fee model.
 

Will Victoria become a preferred State for Class Action litigation? Are plaintiff law firms on a level playing field with litigation funders or do they now have a distinct commercial advantage? Will the new s33ZDA provide the Victorian Supreme Court with a procedural advantage over NSW and Federal Courts? Are contingency fees the new CFO? This article examines some of the consequences and likely implications of this significant and historical change which permits Australian class action lawyers to charge contingency fees.
 

The new law has been the subject of much comment over several months with competing claims about whether it will improve access to justice or whether it will lead to an outbreak of unmeritorious class actions. The legislation comes into effect in Victoria at a time when there is ongoing debate about the Federal Court's authority to regulate common funding of class actions following the decision last year by the High Court in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45 in which it held that procedurally s183 of the Civil Procedure Act (NSW) and s33ZF of the Federal Court Act did not empower the NSW Supreme Court or Federal Court respectively, to issue common fund orders (CFO) in the early stages of class actions. The High Court found that those sections are each directed to the exercise of the power in the context of how an action should proceed in order to do justice.
 

The Amendment
 

The Justice Legislation Miscellaneous Amendments Act 2020 (Vic) amends the Supreme Court Act 1986 (Act) to make provisions about costs in group proceedings. New section 33ZDA in relation to group costs orders says:
 

"On application by the plaintiff in any group proceeding, the Court, if satisfied that it is appropriate or necessary to ensure that justice is done in the proceeding, may make an order –
 

(a) that the legal costs payable to the law practice representing the plaintiff and group members be calculated as a percentage of the amount of any award or settlement that may be recovered in the proceeding, being the percentage set out in the order; and
 

(b) that liability for payment of the legal costs must be shared among the plaintiff and all group members.
 

(2) If a group costs order is made –
 

(a) the law practice representing the plaintiff and group members is liable to pay any costs payable to the defendant in the proceeding; and
 

(b) the law practice representing the plaintiff and group members must give any security for the costs of the defendant in the proceeding that the Court may order the plaintiff to give.
 

(3) The Court, by order during the course of the proceeding, may amend a group costs order, including, but not limited to, amendment of any percentage ordered under subsection (1)(a)."
 

In summary, the Act allows the Court to make an order in group proceedings (class actions) for plaintiff law firms to charge their fees as a percentage of the amount recovered, rather than calculating legal fees on scale or using the time-costing billing model with a 25% uplift.
 

Practical impacts of the Act
 

Currently, many plaintiff law firms in Victoria pursue class actions on a no-win, no-fee basis. If the action is successful they charge their clients an uplift fee up to a cap of 25% on their standard legal costs. In many class actions the plaintiff firms enter into agreements with litigation funders to finance the costs of the proceeding, including providing any security for costs required and in most cases an indemnity for an adverse costs order if the action is unsuccessful. So plaintiffs pay both an uplifted fee to their solicitors and a funding fee to the litigation funder. The consequence is that where a funder is involved, group members often receive only around 50% of the settlement or judgment sum, though that percentage is typically larger the bigger the claim and judgment sum.
 

The key purpose of the new law is to increase the group members' share of any proceeds from the class action. The quid pro quo for allowing plaintiff's lawyers to charge a contingency fee is to shift the financial risk to the plaintiff's lawyers.
 

The Act does not set a limit on the percentage of the recovered sum that can be charged as a contingency fee. However the Court will play a determinative role in controlling the percentage of the contingency fee. Whilst the percentage will be set at the time the group costs order is made, the Court can amend that percentage during the course of the proceeding.
 

If a group costs order is made, liability for the defendant's costs shifts from the lead plaintiffs to the plaintiff law firm. The plaintiff law firm will have to fund the costs of pursuing the proceeding and will have to pay the defendant's costs if the action is unsuccessful.
 

To satisfy the Court that a group costs order should be made the plaintiff law firm will have to satisfy the Court such an order is "appropriate or necessary to ensure justice is done". The Court has a complete discretion to determine whether a group costs order is appropriate for a particular class action. Importantly, the Act does not displace the broader prohibition against contingency fees. It only applies to group proceedings.
 

An alternative CFO?
 

Significantly, whilst the impact of the Brewster decision is to potentially curtail CFOs, the introduction of a statutory contingency fee power in Victoria provides an alternative mechanism for group proceedings to obtain certainty of funding at an early stage of the litigation. The position is to be contrasted with the Federal Court where the power to make a CFO or funding equalisation order now appears to only be available towards the end of a proceeding, when settlement is approved or judgment delivered. This new power provides the Victorian Supreme Court with market disrupting influence. It will inevitably cause plaintiff firms to assess which jurisdiction enables them to obtain the best commercial benefit.
 

Security for Costs
 

It is common in funded class actions for defendants to make an application that the representative plaintiff provide security for the defendant's costs. Whether or not an order for security for costs is in the interests of justice will depend upon the consideration of all the relevant circumstances. Where the class action is being funded by group members or the solicitors are working on a speculative basis, the Courts are inclined not to order security. However where a litigation funder is involved an application for security is more likely to be successful or consented to. In a recent Victorian decision if was foreshadowed that if there is a contingency fee arrangement in a class action that will be a relevant consideration for the Court to take into account in deciding whether to order security.[1]
 

The Act provides that the plaintiff law firm "… must give any security for the costs of the defendant in the proceeding…" that is ordered by the Court. So as part of the risk reward mechanism the plaintiff law firm will have to provide security that is acceptable to the defendants. For larger plaintiff firms they will no doubt have arrangements in place with their banker to provide appropriate guarantees. It will be interesting to see whether this requirement will prevent smaller law firms from entering the fray. One option is for plaintiff firms to purchase an After the Event (ATE) insurance policy which they will disclose to the defendants in response to an application for security.
 

Impact on Litigation Funders
 

The increase in class actions in Australia and the prevalence of litigation funders has been blamed for inhibiting corporate activity. The returns earned by litigation funders have been the subject of political debate and from 22 August 2020 funders will have to be licensed under the Corporations Act. Some commentators have observed that the introduction of contingency fees provides an alternative funding option to enable some class actions which would not otherwise be funded, either because the sums involved do not provide the returns required by funders or they do not fit the litigation funding model.
 

This new reform only applies to Victoria and it will be business as usual for litigation funders in other States. If the reform significantly impacts their activities in Victoria, as a result of plaintiff firms deciding to go it alone, then we may see funders setting up their own law firms or entering into arrangements with plaintiff firms to provide security for adverse costs in return for a portion of the contingency fees. There is also a real likelihood that other States or the Commonwealth will also introduce contingency fee laws in order to provide equivalent access to justice for their citizens.
 

The Court will scrutinise whether a particular action is deserving of a contingency fee arrangement. In an article published by Vince Morabito and Jarrah Ekstein in 2016, the learned authors reviewed the many different types of class actions not brought by shareholders or investors, but filed on behalf of vulnerable claimants[2]. Many of those class actions involve smaller numbers of class members, often involve personal injury loss and are less attractive to funders than shareholder and investor claims. We expect that the Court will be likely to approve contingency fees for these types of claims which are plainly deserving, and which require significant investment by the plaintiff firm. In contrast where funders are prepared to provide financial assistance to shareholders and investors, we predict that the introduction of a contingency fee alternative is likely to place additional commercial pressure on funders to reduce their rate of commission. This is particularly so having regard to the statements made by various judges that the current statutory regime does not enable judges to vary the commission rate in funding agreements. In competing class actions where one option is a contingency fee which removes the costs risks from the plaintiff and a funding fee which can result in a significant reduction of the take home settlement to members, the attractiveness to the Court in preferring a contingency fee funded class action is obvious where the prospects are that better returns are likely to result for group members. The plaintiff firms in seeking this reform have stated that the overall benefit to members is a much greater share of the settlement/judgment: 75% instead of 60%[3].
 

What will happen next?
 

There has been significant media comment that contingency fees will lead to a financial bonanza for plaintiff law firms. That is unlikely for two reasons. Firstly, the Court has been given a specific power to set, vary or reject the proposed contingency fee arrangement. Recent Court decisions demonstrate that judges take an active role in scrutinising fees and commission rates and we expect that they will carefully review contingency fee rates relative to any judgment or settlement to ensure that they are not excessive. Ultimately the Court has to approve any settlement reached, and the lawyers' costs will be a factor the Court can take into account in assessing whether settlement is in the best interests of group members.
 

Secondly, whilst we expect that plaintiff law firms will initially seek a contingency fee which is similar to the current fees charged by litigation funders, to reflect the risks they are accepting, it is likely that there will be competition between law firms and litigation funders for class actions. We have recently seen class action "auctions" between funders who have competed with each other on funding rates.
 

It has been argued that the contingency fee reform will allow plaintiffs to pursue group claims that are currently considered as too small or too risky by litigation funders or where no lead plaintiff has been prepared to run the risk of being exposed to an adverse costs order.
 

Solicitors are likely to be initially careful about the types of claims they commence where they will seek to apply for a contingency fee order from the Court. We suspect that the early focus will be on those matters where funders have previously not been interested, like bushfire claims, product liability torts, and consumer claims such as mis-selling of financial products, consumer credit insurance and MySuper claims. These types of claims have traditionally been brought on a "no win no fee" basis. We think that Plaintiff firms will focus on these types of claims before they seek to compete in more traditionally funded investor or shareholder claims. In a climate of Royal Commissions investigating institutional abuse, we also expect to see group proceedings for victims of sexual, physical and mental abuse as one class of claims where plaintiff firms will seek to take advantage of the new contingency fee law.
 

It is unlikely that plaintiff law firms will take on unmeritorious class actions when they are exposed to the financial downside if the action fails. If the action involves significant risk then the plaintiff's lawyers will not be able to buy ATE to protect against the adverse costs risk.
 

The matters which the Court will wish to be informed about on any application under s33ZDA are likely to include whether any other costs model has been considered, including the traditional uplift fee; the potential value of the claim; and the backend funding of the lawyers upfront costs, including whether litigation funders are providing any support and likely to receive any fee.
 

When it comes time to discuss settlement, insurers may find that a new dynamic enters the negotiations as the plaintiffs' lawyers need to balance the interests of the group members, with their own financial interests. This interest is not just confined to the greater the settlement the more revenue for the law firm, but also whether in hard fought class actions any revenue will flow to the law firm. Plaintiff firms will need to be careful not to under settle to protect their own interests. We foresee a greater role for Court appointed contradictors of settlements, who may be appointed to independently scrutinise whether a settlement is in the best interests of group members.
 

Summary
 

The introduction of contingency fees is a significant and controversial change to the way that lawyers are permitted to charge their fees. The Victorian Government has been criticised as pandering to the union firms. However, Victoria is frequently at the forefront of reform and this disruptive change is no different. Whilst we do not expect a flood of claims will result, this reform has forever changed the landscape of class action litigation.
 

With thanks to Joel Harris (Professional Support Lawyer) and Jonathan Liberis (Law Graduate) for their assistance in preparing this update.
 

 

For further information, please contact:

 

Marcus O'Brien, Partner, Clyde & Co

marcus.obrien@clydeco.com

 

Footnotes
1. Troiano v Voci [2019] VSC 859, at [57]
2. Vince Morabito and Jarrah Ekstein "Class Actions Filed for the benefit of Vulnerable Persons – An Australian Study" (2016) 35 Civil Justice Quarterly 61
3. Victorian Law Reform Commission report Access to Justice – Litigation Funding and Group Proceedings, Ch 3. para 3.24