First successful application for contingency fees made in Australian shareholder class action
Legal Development 17 February 2022 17 February 2022
On 1 December 2021, the Supreme Court of Victoria approved an application for a group costs order (GCO) in a class action for the first time. Reasons were published by the Court on 7 February 2022. The Court fixed the plaintiffs' solicitors' fees at 27.5% (inclusive of GST) of any award or settlement recovered in the proceedings. The order was made on the basis that the plaintiffs’ solicitors provided an undertaking that they would not seek a higher percentage rate in the future.
This case is the first successful application for a GCO since the Supreme Court Act 1986 (Vic) was amended by the introduction of s.33ZDA to allow for such orders in June 2020. The provision gives the Supreme Court of Victoria the power to order that the law practice representing the plaintiff in a class action be allowed to recover a contingency fee. The regime is an exception to the national prohibition on solicitors charging contingency fees and is only currently available in Victoria. The first applications for GCOs were determined in September 2021 and were unsuccessful.
G8 is an operator of early learning childcare centres. In November 2020, the plaintiffs as group (or lead) representatives filed a shareholder class action against G8 in the Supreme Court of Victoria. They allege that between 23 May 2017 and 23 February 2018, and in breach of G8’s continuous disclosure obligations under the Corporations Act, G8 failed adequately to disclose to the market the effects on its potential earnings of regulatory changes that required increased staffing at their centres and did not disclose the sensitivity of its earnings projections to the added costs of these changes and to competitive pressures in the childcare market. G8 is defending the proceedings.
The plaintiffs sought an order under s.33ZDA that the costs payable to the solicitors for the group members be fixed at 27.5% inclusive of GST of the amount of any award or settlement recovered in the proceedings. They also sought an order that liability for payment of the legal costs be shared among the plaintiffs and all group members.
G8 did not oppose the application. The Court, however, appointed a Contradictor who submitted that the Court should refuse the application.
The plaintiffs submitted that the criteria required by s.33ZDA were satisfied and that the GCO was appropriate or necessary to ensure justice was done in the proceedings. They submitted that the GCO would provide certainty of funding and avoid further delay. Without a GCO, they said the plaintiffs and their solicitors would need to seek third-party litigation funding and this would likely delay the proceedings. They submitted that a GCO was likely to deliver a better financial outcome to group members than third party litigation funding as the plaintiffs would receive a guaranteed return of 72.5% of any recovered amount.
At the time of the GCO application, the proceedings were being funded on a conditional “no win no fee" basis (NWNF). The solicitors’ retainer agreement confirmed that the NWNF funding arrangement was only a temporary, fallback arrangement subject to rights of termination. The intention of both the plaintiffs and their solicitors was ultimately to obtain either a GCO or third-party litigation funding.
The plaintiffs submitted that an outcome-based comparative analysis directed to whether group members would achieve a better financial outcome under a GCO or a NWNF arrangement should not be determinative of the application. Such a comparison depended on several highly uncertain assumptions and, depending on how the case developed, either model could provide a better outcome to group members.
The Contradictor submitted that the plaintiffs’ solicitors were obliged to continue acting on the existing NWNF arrangement which continued unless terminated. The Contradictor further contended that there was insufficient evidence to conclude whether a GCO or the current NWNF model would provide a better return to the plaintiffs. The Contradictor accepted that while the evidence indicated that a GCO was likely to produce a better financial outcome for members than third party litigation funding, that conclusion was affected by a considerable degree of speculation. As the plaintiffs could not show that either outcome was likely to eventuate in a better return, the Contradictor submitted that the application for a GCO should be refused.
Her Honour Justice Nichols accepted in principle that a GCO would likely provide a better return to group members than would result if they used third-party litigation funding. The Court said that as a matter of simple logic, a funding agreement which includes a commission likely to be in the range of 21% to 29%, before the further deduction of legal costs, will almost certainly be more expensive than a single deduction of 27.5% in all cases except those which resolve with very little legal work done, proportional to outcomes. Further, the Court found that if the plaintiffs embarked on a search for third party litigation funding it would be a lengthy and costly process and likely delay the proceedings further.
In accepting that a GCO was more appropriate than a NWNF agreement, the judge determined that while a NWNF agreement might provide a relatively marginal better commercial outcome for group members, that would only be the case if an extremely positive outcome was achieved. Such an outcome was uncertain and needed to be weighed against the advantages in certainty and transparency that a GCO would provide. Further, the Court accepted the real risk that if the GCO was not granted, the likely result would be that the solicitors would obtain third-party litigation funding, leading to the real prospect of a worse commercial outcome for group members.
In reaching this decision, her Honour emphasised that comparative outcomes modelling – and considering counterfactual funding scenarios - does not replace the evaluative inquiry required by s.33ZDA.
Mr Allen, who was one of the representative plaintiffs, gave unchallenged evidence including about his previous experience of having been a group member in another class action. In that case, the funding commission and legal expenses accounted for nearly 80% of the settlement amount of $25 million, with little over 20% of the settlement distributed to group members. Mr Allen gave evidence that he took comfort from the proposed GCO as it would ensure greater certainty and transparency for group members, particularly in circumstances where the settlement sum was not large. In this case, the judge placed significant weight on the benefits of certainty that a GCO could provide. However, Her Honour made clear that her determination should not be endorsed as a general rule that a plaintiff's preferences should automatically favour the making of a GCO.
Her Honour stated that at the conclusion of the proceedings, the plaintiffs and their lawyers would need to demonstrate why the proposed percentage was reasonable, should they be successful. Her Honour also noted that evidence would be required to demonstrate that the 27.5% rate appropriately reflects its assumption of risk with reference to the factual circumstances of the case (or, by way of example, an insurance-based actuarial calculation) and that the GCO percentage may be adjusted accordingly by exercising the power conferred for that purpose under s.33ZDA(3).
First and foremost, the decision illustrates what evidence will be sufficient to persuade the Supreme Court of Victoria that a GCO is appropriate or necessary under s.33ZDA and when a GCO should be made.
The making of GCOs is expected to give rise to greater competition between law firms prepared to act on a contingency fee basis on the one hand and litigation funders on the other. It may add to the popularity of the Supreme Court of Victoria as a venue for class actions and give rise to ‘forum shopping’ between that Court and the Federal Court.
The decision to allow GCOs in Victoria is to be contrasted with the current unavailability, at an interlocutory stage, of common fund orders for third-party litigation funders of class actions.  On one view, a law firm funding a class action in Victoria is at an advantage to a third-party litigation funder of a class action in any jurisdiction.
A Bill currently before the Australian Federal Senate would introduce a rebuttable presumption that a return to group members in a third-party litigation funded class action of less than 70% of the gross proceeds of a claim is not fair and reasonable. The proposed legislation will not, however, apply to law firms offering to act on a contingency fee basis in class actions. Some have argued that this will encourage greater competition with litigation funders and lead to more cases being run on a contingency fee basis. Funders have argued that the carve out of law firm contingency fee funding from the proposed regulation is unfair. It remains to be seen whether this legislation will be passed into law.