Supreme Court Denies First Applications for Contingency Fees

On 1 July 2020, the Supreme Court Act (Vic) was amended to allow for a group costs order (GCO) in class action proceedings.1 A group costs order allows the Plaintiffs' lawyers to charge a contingency fee on damages obtained on any award or settlement. The order is unique to Victoria.  To date no other Australian jurisdiction allows contingency fees.  Since the amendment, the number of class actions filed in the Supreme Court of Victoria increased markedly, and it is currently the second favoured venue in Australia for class actions.

In Fox v Westpac², the first decision under Victoria’s new contingency fee regime, Nichols J declined to make the order in two consumer class actions. The Judge determined that, based on the evidence presented, the proposed group costs order was not more advantageous to group members than the Plaintiff's current funding arrangement, No Win No Fee (NWNF). She concluded that the plaintiffs' lawyers had failed to meet the statutory threshold that the order was appropriate or necessary to ensure that justice was done in the proceeding.

Despite the failure of the applications on a preliminary basis plaintiff lawyers are unlikely to be deterred in seeking future GCOs. The decision confirms that the Supreme Court has established a rigorous process to test the plaintiffs’ lawyers claim that the GCO provides benefit to class members.

Clyde & Co Partners, Patrick Boardman, Janette McLennan, John Moran, Christopher Smith and Nicole Wearne look at the decision in detail.

Background

Following evidence given in the Banking Royal Commission, Maurice Blackburn filed two consumer class actions. Both actions concern flex commissions arrangements between banks and car dealers.

The first proceeding is against Westpac Banking Corporation and its subsidiary St George Finance Ltd. The second is against ANZ Banking Group, Macquarie Bank and Macquarie Leasing. The plaintiffs allege that the banks authorised the car dealers to set their own interest rates for loans introduced by them. If the dealer set a higher interest rate than the banks’ base rate, the banks paid the dealer a commission calculated as a proportion of the difference. The plaintiffs claim that the banks' conduct was unfair within the meaning of the National Consumer Protection Act 2009.

Maurice Blackburn is the solicitor for the Plaintiff in both proceedings. Initially, they agreed to commence the proceedings on a NWNF arrangement with group members. The agreement provides that the plaintiffs will only pay costs if the action is successful, with Maurice Blackburn charging an additional uplift fee of 25% on scale costs. In addition, Maurice Blackburn also agreed to indemnify the Plaintiff against the risk of adverse costs. 

To consider the merits of the application, the trial judge appointed two experienced class action barristers as contradictors. Once Maurice Blackburn filed proceedings, they sought a group costs order submitting that group members would be better off under a group costs order than an alternative third-party funding agreement. The use of contradictors is increasingly becoming commonplace in contested costs applications for class actions to protect the interests of the class members.

Legislation

Section 33ZDA of the Supreme Court Act provides as follows:

1. 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
   1. 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
   2. that liability for payment of the legal costs must be shared among the Plaintiff and all group members.

Consideration of the Statutory Test

In considering the application, Nichols J confirmed that s33ZDA provides the trial judge with significantly unguided discretion to do what is appropriate to achieve justice in the circumstance.  The Judge confirmed that statutory language made clear that the making of the order had to be both "appropriate" and "necessary". She confirmed that the Court must be satisfied that making a GCO must "be a suitable, fitting or proper way to ensure that justice is done in the proceeding". The Court's primary consideration must be the proposed order's effect on the group members.

Parties Submission

The Plaintiffs' submission was that a group costs order fixed at 25%, if successful, would satisfy the statutory criteria for the following reasons:

1. A GCO would provide a better return to the Plaintiff and group members than alternative funding arrangements for the proceedings;
2. A GCO would fairly distribute the burden of legal costs incurred in pursuit of common questions among all group members;
3. A GCO would make funding arrangements for the proceeding certain and transparent;
4. A GCO would not expose the Plaintiff to significant and disproportionate exposure to financial risks as a result of assuming that role; and
5. 25% was proportional to the risks to be incurred by Maurice Blackburn in funding the proceeding.

The Plaintiffs identified litigation funding as an alternative funding arrangement. They provided evidence that under a funding arrangement, it was likely that the resulting recovery by group members would be 45-64%, compared to the guaranteed return of 75% that the group members would receive with a GCO.  If unsuccessful with the GCO, Maurice Blackburn would seek to obtain third party funding and, failing that, would continue to fund the proceeding on an NWNF basis. The Plaintiffs did not seek to use the current NWNF arrangement as a comparison. Evidence led from Maurice Blackburn was that NWNF was intended to be an interim measure pending the GCO.

In contrast, the contradictor submitted that the existing NWNF agreement was not an interim arrangement and that the NWNF agreement was more favourable to the group members than the proposed GCO. The contradictor suggested that the Court should consider whether the GCO order was more advantageous than the NWNF agreement.  The Defendants largely echoed the submissions of the contradictor.

It was agreed that the way to assess the "better off" measure was to determine the tipping point or the point at which the estimated judgment or settlement amount required to provide the Plaintiffs with a better outcome under a GCO than on an NWNF agreement compared with the likely legal costs. The tipping point was to be assessed by comparing the estimated costs, uplift, disbursements and ATE premium divided by the agreed GCO percentage against the amount of settlement or judgment.

The Plaintiffs submitted that in addition to the "better off" measure, the Court ought also to have regard to the proportionality of costs, the lawyer’s rate of return, historical outcomes and returns to group members and the commission rates presently charged by third-party litigation funders concerning representative proceedings of similar size and risk.

The Defendants submitted that historical publicly available data from Maurice Blackburn showed that, on average, their legal expenses for class actions range between 12-15% of the recovered sum. As a result, the group members would do better under the NWNF agreement—however, the Defendants accepted that this did not address the particular circumstances of this case.

Judge’s Determination

The Judge accepted the submission of the contradictor that at this stage, the NWNF was the best funding alternative for the group members, and that should be the basis of the comparison with the GCO and not third-party funding.  This assessment was based on three key considerations:

• A close reading of the current NWNF agreement and her determination that the language was not interim or conditional.  Maurice Blackburn could not cease to act for the Plaintiffs if the GCO was unsuccessful, and the terms of the agreement only provided that the Plaintiffs may apply to the Court for a GCO.  Further, the agreement did not set out Maurice Blackburn's subjective intention of seeking third party funding if the GCO application was unsuccessful. 
• Maurice Blackburn had agreed to provide an indemnity to group members against adverse costs, which provided the same protection as a GCO.
• An analysis of the “tipping point” did not support a conclusion that the outcome would be better for the group members under a GCO. The Judge was not satisfied with the accuracy of the Plaintiffs' predictive modelling and the uncertainty inherent in the modelling at this stage of the proceedings.

The Judge accepted that there was nothing inherently unreasonable with the proposed rate of 25% considering factors outlined by the parties. In respect to the Crawford proceeding, she accepted that a rate of 25% would be reasonable on the face of the predictive modelling. Her Honour instead determined that a rate below 25% may be reasonable in the Fox proceeding, but she wished to hear from the parties further.

Although Her Honour refused to make the GCOs at this time, she agreed to adjourn the application to allow the Plaintiffs to consider their position further and to reformulate their application at a later time.

Analysis

Class action lawyers have been anticipating this decision and the Court’s guidance to the matters to be taken into account in making a GCO.  The failure of the applications on a preliminary basis is unlikely to deter plaintiff lawyers seeking GCOs, as the outcome  would likely have been different if minor changes to the terms of the NWNF agreement  and better modelling had been provided  to assist the Court.  Plaintiff firms are likely to re-consider how they structure arrangements with representative group members to ensure that they are not hoisted on their own petard.  

The applications show that the Victorian Supreme Court will rigorously examine the merits of a GCO and that Plaintiff lawyers will have to carefully establish that it ensures justice is done from the perspective of the group member not just in comparison to third party funding agreement.

If you would like to discuss Australia's class action landscape further or arrange for a presentation on our class action experience, don't hesitate to contact Patrick Boardman, Janette McLennan, John Moran, Christopher Smith, or Nicole Wearne.