The contingency fee revolution in Australia
Tuesday 13 December 2022
Paul Buitendag
Johnson Winter & Slattery, Melbourne
paul.buitendag@jws.com.au
Rena Solomonidis
Johnson Winter & Slattery, Melbourne
rena.solomonidis@jws.com.au
Gerald Manning
Johnson Winter & Slattery, Melbourne
gerald.manning@jws.com.au
Introduction
Australia has a national prohibition on law practices charging contingency fees1 (being any arrangement whereby a law practice’s fee is calculated by reference to the amount of any award or settlement).2 Those forces against contingency fees reason that allowing lawyers to have a direct percentage financial stake in a matter in which they act undermines both the substance and appearance of lawyers’ professional and ethical responsibilities, and thus the due administration of justice.3
Despite this, an impetus for the introduction of the GCO regime was the Victorian Law Reform Commission’s (VLRC’s) report Access to Justice —Litigation Funding and Group Proceedings published in March 2018 (the Report). The VLRC considered whether removing the existing prohibition on law practices charging contingency fees would help to mitigate issues presented by the practice of litigation funding,4 and opined that, as a matter of principle, lawyers should be able to charge contingency fees – albeit caveated that the matter requires national consideration.5 This recommendation follows similar ones from a number of other government-initiated enquiries over the years.
Notwithstanding the need for national consideration, the VLRC distinguished class action proceedings. The Commission weighed the matters supporting the introduction of contingency fees in class action proceedings – including improving access to justice,6 introducing competition for litigation funders,7 providing simplicity and transparency for group members,8 and the courts’ strong supervisory role in class actions9 – and recommended the amendment of legislation to empower the Supreme Court of Victoria (the Court) to make GCOs.
Legislation
Following the Report, the Victorian State Parliament enacted legislation to insert a new section 33ZDA into the Supreme Court Act 1986 (Vic).10 Section 33ZDA took effect from 1 July 2020 and introduced Australia’s first contingency fee, the GCO.
A GCO means that (instead of charging on a time cost or other basis) the legal costs payable to a law practice representing the plaintiff and group members in a group proceeding, can be calculated as a percentage of the amount of any damages award or settlement in the proceeding. However, it is not available as of right. Rather, the onus is on the plaintiff to apply and satisfy the Court that a GCO is ‘appropriate or necessary to ensure that justice is done in the proceeding’.11
The section does not prescribe any percentage range that a GCO must be within. Rather, the Court may set any rate that it deems appropriate; it has the power to amend a GCO, including the rate,12 consistent with the Court’s supervisory jurisdiction. The Court’s strict control over GCOs has been described as a reason that the GCO regime is not inconsistent with the general prohibition on contingency fees.13
If a GCO is ordered, the law practice representing the plaintiff is liable to pay any adverse costs orders made against the plaintiff in the proceedings, and the law practice must provide any security for the costs of the defendant that may be ordered.14 These safeguards are legislatively enshrined to lower the lead plaintiff’s exposure to orders against it for adverse costs.
Cases
There is little guidance in the legislation as to how the Court should go about determining an application for a GCO. As such, the Court has had to develop applicable principles through hearing applications.
At the time of writing, the Court has heard and determined three GCO applications. The first application was refused.15 The second and third applications were granted, at rates of 27.5 per cent (including GST) and 40 per cent (including GST) respectively.16
While it remains an evolving area of law, the judgments provide much-needed guidance to plaintiffs and plaintiff law practices as to how a court will go about assessing an application for a GCO. Some of the key principles that may be gleaned include:
• the Court is to go about its assessment to determine what is ‘appropriate or necessary’ to achieve what is ‘just’ in a proceeding, not by an idiosyncratic approach;17
• the Court should carry out a broad, evaluative assessment, and in making that evaluative assessment the interests of group members are a primary consideration;18
• the Court has the widest possible power to do what is appropriate to achieve justice in the circumstances;19
• a GCO may (but not must) be put in place early in the life of the proceeding;20
• whether a GCO is more advantageous to group members than any present costs or funding arrangement is not a proxy for the statutory test; the section does not require that the GCO yield a better outcome than a counterfactual costs or funding arrangement;21 and
• the calculation of an appropriate GCO rate may properly take into account not only the value of legal services performed but the value of a reasonable return to the law practice for the financial risk assumed by it.22
It is commonplace for the Court to appoint a contradictor (independent counsel) to assess the appropriateness of the application and advocate the interests of group members. If the contradictor opposes the GCO application, it can be adversarial. However, even if the contradictor supports the GCO application, the Court still has its supervisory jurisdiction obligations and must be satisfied of the statutory requirements before it orders a GCO. Defendants otherwise have a limited role, noting they are not concerned with the plaintiff’s funding arrangements and the evidence may be confidential.
The three judgments so far have revealed key factors that plaintiffs and plaintiff law practices contemplating a GCO should have front of mind, including:
• a GCO may not be ordered if there is no real reason for it to be made – for example, if the existing costs or funding arrangement will continue and sufficiently protect plaintiffs from adverse costs exposures and there is no evidence group members would be better off under a GCO;23
• law practices’ obligations to group members may constrain them from terminating existing retainers (if a GCO is not ordered);24
• evidence from the plaintiff as to why they personally believe a GCO should be made may assist the Court;25
• the Court may require an undertaking not to apply for a higher GCO rate at a later date in order to, in effect, put in place a ceiling;26
• there is an expectation that a law practice (or associated funder) will present an investment evaluation analysis (or an explanation of its absence);27
• if a GCO replaces an existing arrangement with a third-party funder, the Court may require the funder gives an undertaking not to enforce any existing rights of recovery that it may have (to ensure the GCO is the only deduction from group members’ entitlements);28
• the legislation does not invoke an inquiry into the means by which the law practice chooses to fund its obligations, and it may enter novel arrangements to defray its risk (such as entering transactions with third-party funders, provided it does not act as a ‘mere front’ for the funder);29
• it may weigh in favour of granting a GCO if it seeks to replace an existing funding arrangement that has a considerable risk of being withdrawn;30 and
• if the GCO is contingent on a cost-sharing arrangement with a funder, the funder’s position on the commercial viability of the proposed GCO may affect the rate that is ordered (as was the case where the GCO was set at 40 per cent).31
Impact
The VLRC observed Victoria’s provincial class action regime was underutilised.32 Since the introduction of GCOs, at least five GCO applications have been brought in the Court, indicative of a marked increase in utilisation.
For plaintiff law practices, the GCO regime provides a mechanism to generate fees on an alternative basis to traditional time-based billing. Under a GCO, a law practice might recover more than it would from time-based billing. However, this should not be viewed as inequitable. A law practice funding a plaintiffs’ claim via a GCO takes a significant risk that it may have a total loss of investment if the proceeding fails, in addition to being out-of-pocket as a result of its obligation to indemnify the plaintiff for any adverse cost orders made in favour of the successful defendant. In class actions, this downside may be potentially financially ruinous for the law practice.33 As the Court recognises, the amount awarded pursuant to a GCO includes reward for these risks.
For plaintiffs and group members, the GCO regime may increase access to justice and, in certain circumstances, result in better returns to group members. For class actions funded by litigation funders, the median proportion of an award or settlement deducted by funders in respect of legal and funding fees has been 47 per cent, while the mean has been 46 per cent.34 The GCOs that have been ordered at both 27.5 per cent and 40 per cent are lower than these amounts and so the class is better off under a GCO on these metrics.
Despite having existed for almost two years now, no other Australian province has followed suit and enacted a GCO regime. The issue of contingency fees remains a hotly contested area with strong views on both sides. Those against claim that the benefits of such GCO regimes ‘have not been outweighed by the potential for their exploitation for the benefit of lawyers' profits, even with the existence of safeguards’.35
While there was no appetite for change under our recent governments, the change of federal government in Australia at the May 2022 election has seen a more left-leaning party elected to power. This might see the contingency fee debate enlivened again and GCOs introduced at the Federal Court level. If Victoria continues to see most class actions filed in its registries, lawyers in other states and territories may bring significant pressure to bear to make the necessary changes of laws in their provinces.
Conclusion
The introduction of the GCO regime marks Australia’s entry to a new era. While the contingency fee introduced is limited to just one state and one form of proceeding, it is foreseeable that eventually other states and territories, and federal government, may replicate the GCO regime to provide greater access to justice and increase competition for the funding of class actions.
As approximately four out of five class action proceedings are currently filed in the Federal Court of Australia,36 we expect the regime might next be introduced to Part IVA of the Federal Court of Australia Act 1976 (Cth). If it is, it may shake up the current litigation funding market in Australia. If not, we expect there will continue to be a marked increase in representative proceedings filed in Victoria as plaintiff law practices ‘forum shop’ given the allure of GCOs.
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1. See Legal Profession Act 2006 (ACT) s 285; Legal Profession Uniform Law (NSW) s 183; Legal Profession Act 2006 (NT) s 320; Legal Profession Act 2007 (Qld) s 325; Legal Practitioners Act 1981 (SA) sch 3 cl 27; Legal Profession Act 2007 (Tas) s 309; Legal Profession Uniform Law Application Act 2014 (Vic) sch 1 cl 183(1); Legal Profession Act 2008 (WA) s 285.
2. Contingency fees can be contrasted with conditional cost agreements (ie ‘no win no fee’ arrangements), which use time-based billing and are not nationally prohibited.
3. ‘Contingency Fees’ (Australian Bar Association), see https://austbar.asn.au/policy/contingency-fees; ‘Contingency fees opposed by Law Council’ (Law Council of Australia, 32 March 2020), see www.lawcouncil.asn.au/media/media-releases/contingency-fees-opposed-by-law-council, accessed 21 November 2022.
4. The issues of litigation funding identified during the reference included the selection of cases to fund, the amount charged, and the priority given to the funder’s commercial interests over the plaintiff’s or class members’ interests. Access to Justice —Litigation Funding and Group Proceedings (Report No 37, Victorian Law Reform Commission, March 2018) [1.9].
5. Ibid, xvii [33].
6. Ibid,63 [3.66]
7. Ibid,63 [3.69].
8. Ibid,66 [3.89].
9. Ibid,) 63 [3.67].
10. See Justice Legislation Miscellaneous Amendments Act 2020 (Vic) s 5.
11. Supreme Court Act 1986 (Vic) s 33ZDA(1).
12. Supreme Court Act 1986 (Vic) s 33ZDA(1).
13. Victoria, Parliamentary Debates, Legislative Council, 20 February 2020, 571 (Gavin Jennings).
14. Supreme Court Act 1986 (Vic) s 33ZDA(2).
15. Fox v Westpac [2021] VSC 573.
16. Allen v G8 Education Ltd [2022] VSC 32; Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201.
17. Fox v Westpac [2021] VSC 573 at [24]; Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [13(c)(ii)].
18. Fox v Westpac [2021] VSC 573 at [8(a)]; Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [13(c)(iii)].
19. Fox v Westpac [2021] VSC 573 at [25]; Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [12(b)].
20. Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [12(d)].
21. Fox v Westpac [2021] VSC 573 at [8(f)]; Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [12(e)].
22. Fox v Westpac [2021] VSC 573 at [20]; Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [12(f)].
23. See, for example, Fox v Westpac [2021] VSC 573.
24. Allen v G8 Education Ltd [2022] VSC 32 at [57].
25. Allen v G8 Education Ltd [2022] VSC 32 at [35]-[36].
26. Allen v G8 Education Ltd [2022] VSC 32 at [38].
27. Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [18].
28. Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [105(g)].
29. Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [101].
30. Allen v G8 Education Ltd [2022] VSC 32 at [105(a)].
31. Allen v G8 Education Ltd [2022] VSC 32 at [105(b)].
32. Access to Justice —Litigation Funding and Group Proceedings (Report No 37, Victorian Law Reform Commission, March 2018) 68 [3.98].
33. The law practice may however enter arrangements with third parties, such as litigation funders or after the event insurers, to minimise its risk exposure.
34. Allen v G8 Education Ltd [2022] VSC 32 at [72(b)]; Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201 at [70].
35. Litigation funding and the regulation of the class action industry (Parliamentary Joint Committee on Corporations and Financial Services, December 2020) 247-248 [14.173].
36. Professor Vince Morabito, Fifth Report: The First Twenty-Five Years of Class Actions in Australia (SSRN, July 2016), see https://ssrn.com/abstract=2815777, 22.