The 304 Words that Could Change Class Actions in Victoria (Part 2)

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By Nieva Connell, Partner

The Justice Legislation Miscellaneous Amendments Bill 2019

Part one of this article was Published in the April edition of Insurance in MOtion. The concluding part of this article is contained in this edition.

Background

The Victorian government introduced a draft Bill into the Legislative Assembly on 26 November 2019, which reached second reading in the Legislative Council on 19 March 2020 and could change the way class actions commenced under the Victorian class action scheme are run. The Justice Legislation Miscellaneous Amendments Bill 2019 (Bill) contains 304 words that, if passed, will allow a significant change in the way litigation is funded in Victoria by allowing plaintiff lawyers to claim “group cost orders”, better known as contingency fees, in class actions. In doing so, it addresses an anomaly in the current law whereby it is illegal for plaintiff lawyers to claim contingency fees[1], but is perfectly legal for litigation funders to do so (through their standard practice of being paid a percentage of the amount recovered if a class action is successful[2]). This two-part article addresses the questions insurers are likely now asking themselves about the Bill. Part one of the article addressed:

  • What are group cost orders/contingency fees?
  • What class actions can such orders be sought in?
  • What conditions will be placed on orders allowing contingency fees to be charged?
  • In what circumstances will a Court make an order for contingency fees?
  • At what stage of a class action will they be ordered?
  • Is there a maximum amount that will be ordered?

The concluding part of this article addresses:

  • What effect will group cost orders/contingency fees have on the number of class actions issued?
  • What is the uptake likely to be?
  • What impact will the introduction of contingency fees in Victorian class actions have on Insurers

What effect will group cost orders/contingency fees have on the number of class actions issued?

The answer to this question can be approached in two ways: Will more class actions be issued? Will Victoria become a(n even more) favourable jurisdiction to issue class actions in?

Will more class actions be issued?

The Explanatory Memoranda expressed the view that the introduction of contingency fees (group cost orders) will enhance access to justice in Victoria, by reducing potential barriers to commencing class actions in the Supreme Court. Assuming the Bill is passed, some doubt must be cast on whether the amendments will achieve that admirable goal. In order to achieve such a goal, the introduction of contingency fees would have to result in class actions that would not have been commenced previously now being commenced. There is no reason to believe that otherwise meritorious class actions are not being commenced because of the lack of contingency fees. Victoria already has a system that allows uplifts on fees and litigation funding (although litigation funding is not used as frequently in Victoria as it is in the federal system). Class actions are already a profitable enterprise for well-equipped plaintiff law firms.

Whilst time will tell, it is the author’s view that the introduction of contingency fees will not increase the number of meritorious class actions that are commenced per se. What is possible, however, is that less meritorious actions that would not otherwise have been commenced may now be commenced. There may be some cases which plaintiff law firms could not get litigation funding for, and which the plaintiff law firms were not prepared to take the risk of running on a no-win-no-fee/uplift basis, which may now be commenced. Such cases might be commenced if the plaintiff law firm was prepared to “take a punt” and seek a contingency fee (group cost order) and also obtain After the Event (ATE) insurance for a security for costs order; although it is difficult to see why a contingency fee would make such a less meritorious class action much more attractive than an uplift fee (save that the law firm might bank on receiving a higher contingency fee than an uplift fee, and may be attracted to the idea of making an early application for a contingency fee rather than waiting until the end of a claim to make an application for an uplift fee).

Will Victoria become a(n even more) favourable jurisdiction to issue class actions in?

Whilst the Law Reform Commission and the Victorian Legislature could not have predicted the High Court decision in BMW Australia Ltd v BrewsterWestpac Banking Corporation v Lenthall [2019] HCA 45 (the BMW decision[3]), would be handed down just over 1 week after the Justice Legislation Miscellaneous Amendments Bill 2019 was introduced into Parliament, the practical effect of that decision is that Victoria may now became a more favourable jurisdiction to commence class actions.

By dint of timing, the introduction of a contingency fee system for class actions in Victoria may lead to forum shopping. This may lead to more class actions being issued in Victoria, as the preferred jurisdiction (until such time as more clarity is given as to when common fund orders may be ordered in the federal and/or other state class action systems[4]). (It also means Victoria is likely to become an even less favourable jurisdiction for litigation funders to operate in.)

What is the uptake likely to be?

There is no doubt that the major plaintiff law firms are sophisticated enough to working out which cases are more likely to be more profitable under the old model than under a contingency fee model. As identified at paragraph 3.28 of the VLRC report, current billing methods are likely to be retained if they would result in a higher payment to the law firm than a contingency fee.

The overseas experience is also likely instructive. England, Wales and Canada have all introduced contingency fees in recent years and there has not been a surge in new class actions since those jurisdictions introduced contingency fee schemes. In fact, there has not been a huge uptake of contingency fee models at all in those jurisdictions, with most cases sticking to the old funding models.

What Impact will the Introduction of Contingency Fees have on Insurers?

Insurers generally interact with class actions in two ways:

  1. They seek recovery of amounts they have paid to an insured entity, by way of subrogation. For example, if an insurer indemnifies various homeowners under their home and contents policies for damage sustained to the homeowners’ properties/contents in a bushfire or flood, the insurer may commence (or join) a class action against the party responsible for the bushfire or flood. In that way, the insurer is a plaintiff/group member in the class action.
  2. They indemnify insureds who have class actions commenced against them. Very frequently, in those circumstances, the insurer will appoint their own lawyers to represent the insured.

Insurer as plaintiff/group memberInsurers sometimes instigate subrogated class actions (particularly for large scale natural disasters), and other times simply insure group members who fall within a class action and therefore subrogate the losses of the group member. In the former case (where the insurer instigates the class action), they have far more influence over the proceeding as a whole than in the latter case.

Where an insurer instigates a class action, there is no advantage to it in seeking a contingency fee as contingency fees do not increase the size of the judgment or settlement pool (assuming the plaintiff is successful), so insurers will not receive a greater return if a contingency fee is ordered. Contingency fees benefit the lawyers not the insurers. In fact, contingency fees can be a detriment to insurers when they are plaintiffs to a class action as they diminish the content of the pool that is available for distribution (discussed further below).

There may be circumstances, however, where an insurer instigates a class action and is prepared to give its imprimatur to the law firm representing it to seek a contingency fee. Those circumstances might arise, for example, where an insurer does not consider the prospects of a class action to be significant enough to take on the risk of instigating it and a law firm does not consider the prospects of a class action to be significant enough to take the case on a no-win-no-fee basis, but the law firm approaches the insurer (to secure the insurer’s involvement and commitment not to opt out of the proceeding) and the law firm agrees to take on the (subrogated) class action in return for the insurer agreeing to accept a generous contingency fee[5], thus resulting in a more acceptable risk sharing for both parties (who then both have more “skin in the game”). It is not beyond the realms of possibility that an insurer would take the lead in instigating a class action in such circumstances, and then assist the law firm to lock in other insurers (to an agreement not to opt out of the class action) thus increasing the size of the potential pool (in return for which the insurer would negotiate a lower percentage of the contingency fee).

As discussed above, insurers will not always (or even often) instigate class actions. Sometimes an insurer finds that its insured (over whom it exercises rights of subrogation) is automatically a group member of a class action along with many other group members (by reason of Victoria’s opt-out, open class system), (which happened, eg, after the Victorian bushfires and Queensland floods). There is a risk to insurers that if they did not appoint the law firm acting for the plaintiffs, the law firm will want to seek a group costs order (to entitle them to a contingency fee), which will effectively deplete the pool that the insurer is recovering from as the law firm will take more from the pool.

When finding itself in that situation, insurers may not have as much influence over the law firm. However, insurers do still have some power in those circumstances, as the insurer can elect to opt-out of the class action. Where an insurer has a sufficiently large potential financial recovery in the class action, the insurer could conceivably use its position to influence the percentage amount of a contingency fee sought by the plaintiff law firm by weighing up whether to opt out of the class action or remain in it. If the insurer opted out (and had a sufficiently large potential financial recovery) the settlement pool for the class action could be significantly diminished, thus leaving the plaintiff law firm with a significantly diminished return because the contingency fee amount is a fixed percentage of the whole pool – so a smaller pool results in a smaller return. It is conceivable that insurers could leverage their position to influence the plaintiff law firm to seek a lower contingency fee percentage in return for the insurer agreeing not to opt out of the proceeding.

Insurer as defendant

If an insurer indemnifies a defendant to class action, theoretically the size of the settlement pool should not increase dependent upon whether or not a contingency fee is ordered in favour of the plaintiff law firm; that is, if a class action was capable of settling, eg, at $20m inclusive of costs, then that is all it will cost the insurer, and it is the individual class member plaintiffs that will take a hit to their damages if a contingency fee has been ordered. Likewise, if a class action was capable of settling, eg, at $20m plus costs, then the amount assessed as “costs” will not change if a contingency fee has been ordered. Therefore, the introduction of contingency fees will theoretically not cost the (defendant) insurer any more in a class action – although one does suspect that plaintiff law firms will “innovate” and are entrepreneurial enough to find ways to expand the pool.

Insurers may also anticipate that plaintiff law firms who commence class actions that are less meritorious may be less inclined to seek a group costs order/contingency fee as it would expose the law firm to the downside of both costs orders against the firm (rather than the plaintiff) and security for costs applications (see part one of this article published in April 2020), although, as mentioned above, plaintiff law firms may obtain ATE insurance to provide some protection in those circumstances.

Insurers who previously lamented the fact that they had little or no prospects of recovering costs from an unsuccessful plaintiff may take some comfort in the fact that if a plaintiff law firm is awarded a group costs order/contingency fee, the insurer will effectively receive an indemnity for any costs it is awarded from the plaintiff law firm (rather than the often impecunious plaintiff). The flip side of this is that smaller law firms may remain discouraged from commencing class actions as they may not be able to fund a cost order (or a security for costs order), or often significant premium of obtaining ATE insurance, and therefore may not be prepared to take the risk of commencing a class action (or, of seeking a contingency fee).

In conclusion, the Justice Legislation Miscellaneous Amendments Bill 2019, whilst very brief (at just 304 words) may pack a mightier punch than the length of the Bill suggests. It is likely to have implications for plaintiff law firms (who stand to face more risks but also more rewards if successfully applying for a contingency fee), litigation funders (who stand to be squeezed to even more of the periphery in Victorian class actions), claimants (who stand to lose an even bigger chunk of their settlement/judgment) and insurers (who stand to lose an even bigger chunk of their settlement/judgment in subrogated class action recoveries, but otherwise may notice that not much changes when they insure the defendant to a proceeding). It may even encourage entrepreneurial law firms who were previously not operating in the class action space to enter the space, although overseas experience in similar jurisdictions tends to suggest that the landscape may not change dramatically. We will continue to monitor the progress of the Bill and report to you when it is passed.

[1] In Victoria, the prohibition is contained in the Legal Profession Uniform Law Application Act 2014 (Vic) sch 1 (Legal Profession Uniform Law) s 183. It prohibits a law practice from entering a legal costs agreement under which a contingency fee is payable.
[2] Although, it should be noted that it is not common for litigation funders to fund class actions in Victoria.
[3] The BMW decision held that the Federal Court of Australia and the Supreme Court of New South Wales do not have the power to make common fund orders (CFOs) at an early stage of the proceedings. Subsequent decisions have indicated that CFOs are not dead for all time, but, rather, may still be available at settlement stage or may be superseded by funding equalisation orders. CFOs are orders which oblige all group members in a class action to pay a proportionate share of a litigation funder’s commission out of the judgment or settlement. This means that group members have to contribute to the litigation funder’s fees even if they have not entered into a funding agreement directly with the litigation funder. In finding that the Federal Court and NSW Supreme Court did not have the power to make such orders at an early stage of a proceeding, the High Court diminished a significant incentive for litigation funders to fund class actions because it took away an early guarantee of the amount of the return to the litigation funder from the judgment or settlement pool. Whilst immediately after the BMW decision it looked like litigation funders would now have to sign each class member up to a funding agreement (known as “book building”) which is a costly and slow exercise, it now appears that CFOs may still be ordered at settlement of a class action (although Justice Moshinsky of the Federal Court recently refused to do so in the Vocus class action) or may be replaced with a funding equalisation order.
[4] There is some speculations that legislation will be introduced to permit the Courts to make CFOs.
[5] The contingency fee amount would still have to be approved by the Court.

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