Counting the cost: The first Australian ruling on contingency fee orders

In the first test of the Supreme Court of Victoria’s newfound powers to make a group costs order in a class action (or contingency fees in lay terms) , the plaintiffs’ application for contingency fees was rejected by the Supreme Court (for now).

The judgment

Last week in Fox v Westpac Banking Corporation; Crawford v ANZ Banking Group Ltd [2021] VSC 573 (two class actions relating to “flex commission” arrangements in retail lending for motor vehicle purchases), Justice Nichols ruled that the lead plaintiffs and their lawyers had not established a sufficient basis for the exercise of the Court’s discretion to make a group costs order under Section 33ZDA of the Supreme Court Act 1986 (Vic).  In short, the Court found that:

• Whether the making of a group costs order is appropriate or necessary to ensure that justice is done depends on conducting a broad, evaluative assessment of the facts and evidence in which the interests of group members must be given primacy.  The costs payable by group members are a relevant consideration, but not the only one.
• The plaintiffs’ lawyers argued that the 25% contingency fee rate they were seeking to apply would cause group members to be better off than under other funding arrangements (eg third party funders, who were said to deliver returns to group members of 45%-64% as opposed to the proposed 75% in the present case).
• It was argued and noted that the plaintiffs were already the beneficiaries of “no win no fee” agreements that were in place.  Justice Nichols found that not only were those “no win no fee” arrangements not interim arrangements, but that ordering a change from those arrangements to a contingency fee arrangement would not necessarily mean that the group members would be better off.  Whilst group costs orders might provide simplicity, certainty and transparency, Her Honour found that the predictive modelling relied on by the Fox group members did not indicate that they would be better off with a group costs order.  Her Honour found that the Crawford group members might be better off, however the underlying assumptions were still too uncertain and the evidence in support unsatisfactory.
• The plaintiffs can consider their position and re-apply for a group costs order at a later time, noting that the class actions are still not yet at the opt out stage and are some way off mediation and/or trial.

Comments

This judgment is interesting not only because it is the first application for a Court-mandated contingency fee arrangement (currently the only law of its kind in Australia) but also because of the outcome.  When this legislative amendment was passed in July 2020, industry commentary was very much focused on the inevitability of group costs orders being made along with anticipated “forum shopping” in Victoria to take advantage of this contingency fee opportunity.

It is interesting to note that in seeking a group costs order, on one reading the plaintiffs’ lawyers appeared to submit that contingency fees are a better costs model for their clients than both their own “no win no fee” agreements and any agreements that could be reached with third party litigation funders.  By way of example, it was submitted that it is better business for group members to be subject to a 25% contingency fee agreement than it is for them to be subject to third party funder returns of 21%-29% with an additional 24% (on average) for legal costs over and above the third party funder’s cut.  It remains to be seen how this competitive comparative analysis will be processed by third party funders who have long partnered with plaintiff law firms.

How the plaintiffs recast their submissions in the event of a further application for a group costs order will also be of interest, as will the form of pending group costs order applications in other class actions.  Consideration may also be given to how plaintiff law firms go about signing up lead plaintiffs in the future: does the current form of “no win no fee” agreements constrain plaintiff lawyers from pursuing contingency fees later on?

Finally, both Justice Nichols and counsel who appeared as contradictor noted that the power to order a group costs order under Section 33ZDA is largely a matter for the plaintiffs and their legal representatives as to how legal services are paid for, and does not directly concern defendants.  Nonetheless, defendants to class actions would be mindful both during negotiations and at settlement approval of where the money ends up, and whether a percentage of any settlement lump sum is proportionate and reasonable when it comes to legal costs.  Whilst defendant interests may be less concerned as to how individual group members are compensated pursuant to court approved settlement distribution schemes, the idea that a group costs order may result in a “windfall” to plaintiff lawyers does tend to trouble most defendants, which was certainly borne out by the submissions of the defendants in the present case.  Her Honour commented that “the profit return to a law practice under a group costs order does not appear on its face to be properly a matter affecting the interests of defendants”.  Those who are negotiating in good faith on the quantum value of the class and then signing the settlement cheques may have a different perspective.