By Nieva Connell, Partner

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 addresses:

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

The concluding part of this article will be published in the May-edition of In MOtion and will address:

1. What effect will group cost orders/contingency fees have on the number of class actions issued?
2. What is the uptake likely to be?
3. What Impact will the introduction of contingency fees in Victorian class actions have on Insurers?

What are group cost orders/contingency fees?

With an admirable brevity of words, the Bill will amend the Supreme Court Act 1986 to allow the Court to make contingency fee orders (to be known as “group cost orders”) in class actions. Under such an order, plaintiff lawyers would receive a percentage (set by the Court) of any amount recovered in the class action as payment for legal costs – once made, it applies regardless of whether the case ultimately settles or a judgment is delivered. The Bill came hot on the heels of the Victorian Law Reform Committee March 2018 Access to Justice Litigation Funding and Group Proceedings Report (VLRC Report) which included recommendations relating to introducing contingency fees, but it does not implement all of the VLRC’s recommendations[3].

If a contingency fee order is made, the law firm representing the class/group members[4] in the class action will be permitted to deduct a fixed percentage (the Court will approve the percentage figure) from the settlement before the settlement sum is distributed to the group members. Whilst the Bill does not specifically state it, it is clear that the contingency fee is expected to be inclusive of the plaintiff law firm’s costs and disbursements; it is not the case that a contingency fee of, say, 25% of settlement sum will be ordered, and then the plaintiff law firm will be able to claim its costs and disbursements in addition to the 25%.

Additionally, it appears from the wording of the Bill that if a defendant ultimately does not pay the full amount of a judgment or settlement (for example, because of impecuniosity), the plaintiff law firm will not be able to deduct its full legal fees and then pay whatever is left over to the group members – it will have to share the pain with the group members.

No doubt questions will arise as to what happens in practice when a settlement is reached on a “plus costs” basis (noting judgments are always “plus costs”). It can take some time for costs to be determined. Will group members have to wait until the outcome of costs is known before receiving any payment (given the “pool” to which the contingency percentage applies includes any costs that are ordered)? It seems unlikely that would be the case. It seems rather more likely that interim distributions will be made prior to the costs being determined, as is presently the case for class actions that settle on a plus costs basis.

Is it intended the contingency fee will replace the administrative fees that plaintiff law firms currently claim for administering a settlement pool? The Bill is silent on this issue, but it is anticipated by the author that administrative fees will continue to be charged (that is, will be in addition to the contingency fee), just as they currently are in addition to legal costs.

Which class actions can such orders be sought in?

The Bill is confined to class actions under part 4A of the Supreme Court Act 1986 (Vic). Whilst the terms of reference to the VLRC suggested that contingency fees would not be appropriate in personal injury cases, the VLRC recommended that there not be a carve-out for personal injury, or any other type of case[5].

What conditions will be placed on orders allowing contingency fees to be charged?

Assuming the Bill passes in its current form (which seems very likely), a “trade-off” has been built in, so that if the Court makes an order permitting a plaintiff law firm to receive contingency fees, that law firm will also be responsible to pay any costs payable to the defendant in the proceeding, and must give any security for costs that the Court may order the plaintiff to give the defendant in the proceeding. The wording of the Bill is such that the plaintiff law firm would have to pay the defendant’s costs for both interim cost orders and any costs orders made in the defendant’s favour on final disposition of the class action. It is not clear if this liability to pay interim cost orders would only apply from the time the contingency order was made or not, although that is presumably the case. It is also not clear whether it will be necessary to join the plaintiff law firm to the proceeding, so that any defendant who has the benefit of a costs order (which a plaintiff law firm is responsible for paying), can enforce the cost order directly against the plaintiff law firm, although that is presumably not the case.

In what circumstances will a Court make an order for contingency fees?

The Court can make a contingency fee order if it is satisfied that “it is appropriate or necessary to ensure that justice is done in the proceeding”.

The words “if satisfied that it is appropriate or necessary to ensure that justice is done in the proceeding” reflect the wording used in existing section 33ZF of the Supreme Court Act 1986, which contains the general power of Court to make orders in class actions, and are similar to wording in the Federal Court class action scheme.  Those words have been considered on numerous occasions[6].

Interestingly, the High Court considered the same words (albeit in different legislation, in a different context) in its decision in which it invalidated common fund orders in the Federal and New South Wales class action schemes[7]. The majority decision included discussions of the words “appropriate or necessary to ensure that justice is done in the proceeding”. In the course of its decision, the High Court concluded that making a “common fund order” would not satisfy the definition of being “appropriate or necessary to ensure that justice is done in the proceeding”, rather, it is concerned with whether the proceeding is financially viable. The majority stated at [52] “Court approval of arrangements with a non-party in order to enable a proceeding to be pursued at all could only be said to be appropriate or necessary to ensure that justice is done between the parties to the proceeding if one were to assume that maintaining litigation, whatever its ultimate merit or lack thereof, is itself doing justice to the parties. That would be to make an assumption about process for its own sake rather than the outcome of the process.” This must cast some doubt on the merit of using the words “appropriate or necessary to ensure that justice is done in the proceeding” in the Bill as the only triggering words for contingence fee orders, as it casts doubt on how a Judge can ever be satisfied that a contingence fee order will “ensure” that “justice is done in the proceeding”, given the High Court has indicated (albeit in the context of common fund orders) that Court sanctioning of arrangements in relation to financing of cases does not “ensure justice is done in [a] proceeding”. Applying that line of reasoning, if a Court was satisfied that a class action would continue even if a contingency fee order was not made, it could not be satisfied that making a contingency fee order was “appropriate or necessary to ensure that justice is done in the proceeding”. It is notable that the Bill was drafted before the High Court’s decision was delivered, so the drafters did not have the benefit of reading the High Court majority’s decision.

At what stage of a class action will Contingency Fee/Group Cost Orders be made?

Interesting issues arise as to at what stage of a class action that a contingency fee order will be made. The question is interesting because it is readily foreseeable that the presence of a contingency fee order could impact on whether group members opt out of a class action[8].

Whilst the VLRC recommended that the application for a contingency fee order should be a two-stage process – first, of seeking an order at the commencement of the class action, and second, of the percentage amount being determined “at an appropriate time, most likely at settlement approval” – that staggered-approach recommendation did not find its way into the Bill. Instead, the Bill contemplates that the order granting leave for a contingency fee to be paid and the amount of the contingency fee percentage must be made in the same order. Such an order can be sought at any time in the proceeding.

The Bill, does however, specifically contemplate that a contingency fee percentage can be amended (by order) at any time in the proceeding. The VLRC specifically warned at [3.85] “Delaying determination of the fee until the size of the class is more certain protects against the lawyers obtaining a windfall profit if the size of the class grows beyond expectations”. The fact that the amount of the contingency fee percentage can be amended at any time protects against the “windfall” concern raised by the VLRC.

Interestingly, the Bill does not specify that an application for an amendment to the contingency fee can only be made on the application of the plaintiff. This potentially opens the door for group members, or sub-group members to apply for amendments to the contingency fee[9]. Even if the Court was to find that group members could not apply to amend a contingency fee under the new sections, it will presumably remain the case that the amount of the contingency fee will be relevant to considering any proposed settlement of a class action, in which case a group member would have the right to object to it as part of the usual objection process when a settlement is proposed[10].

Is there a Maximum Contingency Fee Percentage that can be Ordered?

No maximum cap is set in the Bill. The VLRC specifically recommended that no cap be introduced, as it was concerned that having a cap would lead to lawyers routinely seeking the maximum amount (as they currently do when they act on a “no win, no fee” basis and claim the full 25% uplift fee[11]). Both Maurice Blackburn and Slater + Gordon made submissions to the VLRC that a cap, if introduced, be set at 30% – 35% and 35% – 40% respectively.

The concluding part of this article will be published in the May-edition of In MOtion.

[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] For example, the VLRC noted at [3.55] that “… it is appropriate that legislation establishes boundaries specifically to protect clients from excessive legal costs or unfair contractual arrangements. This would seek to ensure that the onus is on lawyers not to cross the line, rather than on the client to seek redress when they do.” No such boundaries exist in the Bill (other than that the Court be satisfied “that it is appropriate or necessary to ensure that justice is done in the proceeding”.

[4] In this article I refer to those people who are in (or potentially in) the class action as “group members”.

[5] Canada has a similar scheme, which has carve-outs for family law and criminal matters.

[6] See for example Croft J’s summary in Re Banksia Securities Limited (Rec & Mgr Apptd) (in liq) (No 2) [2018] VSC 47 (16 February 2018) from [42], citing Robson J in Re Banksia Securities Limited (rec & mgr apptd) [2017] VSC 148.

[7] BMW Australia Ltd v Brewster & Anor; Westpac Banking Corporation & Anor v Lenthall & Ors [2019] HCA 45

[8] If a percentage contingency fee order had already been made before the opt out period closed, group members who were concerned that the percentage was too high, could opt out of the class action and try to obtain a more favourable outcome in their own proceeding.

[9] It is notable that the proposed s.33ZDZ(3) does not include a reference limiting such applications to “a party”, unlike s.33ZF.

[10] In its report recommending that contingency fees be permitted, the VLRC said at [3.85] “As has been the practice with common fund applications in the Federal Court, the applicants would propose a percentage share, but this would be subject to review at a later stage of proceedings, most likely at settlement approval.”

[11] A 25% maximum “uplift fee” is set in the Legal Profession Uniform Law Application Act 2014 (Vic).