Supreme Court of Victoria grants first successful application to secure contingency fee class action funding arrangement

Allen v G8 Education Limited [2022] VSC 32 is the first successful application for a contingency fee funding arrangement since legislative reform to the Victorian class action regime in June 2020. This was only the second application of its kind since the new legislative provisions took effect. We have previously explained why the first application was unsuccessful.

Although the G8 decision reinforces that there is no prescriptive guidance as to when the court should make a Group Costs Order, it provides a clear indication of the types of factors that the court should consider in determining whether an application for such an order will be successful. But is this the beginning of a landmark shift in the way class action litigations are funded in Australia?

Contingency fees

We have also previously explained what contingency fees are and how they work, and set out the legislative reform permitting contingency fees in class actions in the Supreme Court of Victoria. In summary:

• Contingency fees are a method of billing for legal services through a percentage of the amount recovered in the litigation (either by judgement or in the form of a settlement sum) rather than through, for example, time-based billing.
• In most courts, Australian lawyers are prohibited from charging a contingency fee.
• However, since June 2020 section 33ZDA of the Supreme Court Act 1986 (Vic) has empowered the Supreme Court of Victoria (VSC) to permit lawyers representing a lead plaintiff in a class action to recover a contingency fee (referred to as a Group Costs Order or GCO).
• Under section 33ZDA the VSC is able to grant a GCO if "satisfied that it is appropriate or necessary to ensure that justice is done in the proceeding". This reflects the Court's supervisory role in class actions to protect the plaintiff, and the group members on whose behalf the plaintiff brings the action.
• Section 33ZDA(3) permits the Court to amend an existing GCO at a later stage in the proceeding, including by amending the percentage rate.

The first successful GCO application

The lead plaintiffs in a shareholder class action against G8 Education made a GCO application seeking orders that their lawyers be permitted to charge a contingency fee of 27.5% percent of any award or settlement, and that those costs be shared between the plaintiffs and all group members. If granted, consistent with the terms of section 33ZDA, the application provided that the lawyers would be liable to pay any adverse costs order in favour of the defendant if the class action was unsuccessful.

In considering the CGO application, Judge Nichols had regard to the following key factors:

1. The plaintiffs' lawyers gave an undertaking that the 27.5% contingency fee rate was the maximum rate which would be sought and that they would not seek an increased rate at a later stage in the proceeding. This meant that any future adjustment could lead only to a reduction below the 27.5% rate (for example, where a large award or settlement led to a disproportionately large contingency fee having regard to the risk assumed by the lawyers or the legal work performed).
2. The GCO would provide the plaintiffs and group members with certainty about the funding position of the class action and avoid delay. The Court accepted that, as agreed with the lead plaintiffs in the retainer, if the proposed GCO was not granted by the Court, an alternative funding arrangement would need to be implemented, such as funding by a third party litigation funder or a "No-Win, No-Fee" arrangement. The Court noted the risk and uncertainty associated with the alternative funding arrangements on the part of group members and took comfort from the certainty of outcome associated making the GCO including that group members would receive a guaranteed minimum return of 72.5% of any recovered amount.
3. The Court relied on evidence concerning the potential legal costs and litigation funding commission costs that might arise if the GCO was not granted. The Court determined that, on the whole, the proposed GCO would likely deliver a better financial outcome to group members than the alternative funding arrangements referred to above. That said, the Court noted that a comparative analysis between potential funding arrangements will not be determinative of whether a GCO should be granted, noting in particular the inherent uncertainty of predictive modelling comparing different funding arrangements.

In doing so, the Judge emphasised that the making of a GCO depends upon a broad evaluative assessment of the relevant facts and evidence that apply in a particular case. Both the interests of group members and the legislative intent of section 33ZDA, which was to enhance access to justice by reducing potential barriers to commencing class actions, are important in that assessment. Ultimately, the Judge accepted that the GCO was "appropriate" to ensure that justice was done in the proceeding and granted the application.

Implications for future

Although the decision does not provide prescriptive guidance, it does provide an indication of the types of factors that the court will have regard in considering a GCO application. The Court engaged in detailed and complex analysis of the retainer as well as evidence from the plaintiff, the plaintiff firm and an economist. Future GCO applications are likely require the plaintiff to put forward similar evidence, which may draw attention away from the day-to-day conduct of the litigation. Plaintiff law firms will therefore need to carefully consider at what stage of a class action it is in the best interests of group members to make a GCO application (if one is to be made during the class action), particularly noting the Court's statement about the legislative intent of section 33ZDA.

This may be a significant development in which Australian plaintiff lawyers approach funding class actions and takes Victoria one step closer to foreign jurisdictions such as the United States and Canada where percentage-based fees are more commonplace.

In determining that the 27.5% contingency fee rate was appropriate, Justice Nichols had regard to the practice of courts in the United States and Canada, where contingency fees are common, where 20-30% is considered to be appropriate for percentage-based legal fees subject to factors such as the amount recovered for group members, the amount of time spent by the plaintiff firm, the legal complexity of the case, and the degree of skill and competence demonstrated by the plaintiff firm. The first two GCO applications in the VSC, including G8, were made at an early stage of the proceeding at a time when the Court's visibility over such factors was limited. However, we anticipate that it is only a matter of time before an application for a GCO is made at a later stage of a proceeding, when the Court’s visibility of these factors is significantly greater. It will be interesting to see what emphasis the Court places on these factors in such an application, and what impact these factors have on the percentage rate, if any.

The CGO in the G8 class action leaves group members with a minimum of 72.5% of any amount recovered in the proceedings. This figure is notable given that a bill presently before the federal senate (the Corporations Amendment (Improving Outcomes for Litigation Funding Participants) Bill 2021) proposes that there be a presumed minimum statutory recovery rate for class actions funded by third party litigation funders, such that group members receive no less than 70% of the judgment amount or settlement sum (subject to limited exceptions) and will likely fuel further debate on this topic.