Lessons from Fox v Westpac; Crawford v ANZ [2021] VSC 573
The First Decision on Group Costs Orders
Background to Group Costs Orders
On 14 September 2021, the eagerly anticipated first decision on group costs orders (referred to as GCOs) under the new ‘contingency fee’ legislation was handed down by Justice Nichols of the Victorian Supreme Court.
The outcome? Insightful, yet incomplete and slightly confusing.
Section 33ZDA of the Supreme Court Act 1986 (Vic) was introduced last year and is unique in the sense that it allows a plaintiff’s lawyers in a class action to seek to recover their legal costs calculated as a percentage of any award or settlement amount (dubbed a ‘contingency fee’ arrangement), rather than billing on a time-based or fixed-fee model.
Generally, Australian lawyers are prohibited from charging contingency fees. This type of funding model is more commonly used in the United States, where the practice has its genesis. And whilst section 33ZDA does not amend the general prohibition in relation to contingency fees under the Legal Professional Uniform Law, it creates a new process in which plaintiff lawyers can seek a court order to that effect. There are some conditions, the law practice seeking the GCO:
1. is liable to pay any costs payable to the defendant; and
2. must give any security for costs to the defendant that the Court may order the plaintiff to give.
One argument in favour of GCOs is that they have the potential to increase group member returns by incentivising plaintiff law firms to run class actions without the financial backing, and consequently the need to pay a commission to, a third-party litigation funder. Thus, GCOs offer greater risk and (potentially) greater rewards for plaintiff lawyers, whilst also resulting in (potentially) greater returns for group members.
Summary of Facts in Fox v Westpac; Crawford v ANZ [2021] VSC 573
The decision of Fox v Westpac; Crawford v ANZ concerned two “Flex Commissions” class actions, where the plaintiffs allege that under various car dealer loan arrangements, car dealers were authorised by the banks to set their own (and higher) interest rates for loans provided by the banks to consumers, and that this amounted to unfair conduct. The plaintiffs in both proceedings are represented by the same law firm and sought GCOs under s 33ZDA of the Act. Given the commonality between the two applications, they were heard jointly by Nichols J.
The GCO applications sought an order that legal costs payable to the plaintiff’s solicitors would be calculated at 25% of any award or settlement reached in the class actions, and that liability of legal costs be shared amongst all group members. In attempting to persuade the Court to make the GCO orders, the plaintiffs’ solicitors argued:
1. legal costs at 25% would cause group members to be “better off” than under alternative arrangements, because calculation legal fees in this way would result in a better price, and therefore greater return for group members;
2. the calculation of fees in this way would not be disproportionate to the risks assumed by the plaintiffs’ lawyers; and
3. a GCO would provide greater transparency and certainty of funding arrangements.
Her honour rejected both GCO applications and found that the plaintiffs had not “established a sufficient basis for the exercise of the discretion conferred by s 33ZDA to make a group costs order”. In considering whether it is “appropriate or necessary to ensure justice is done in the proceeding”, her Honour said that this will depend on a broad, evaluative assessment of the facts and evidence and that the assessment of price is not the only consideration.
So what are the two key lessons from Justice Nichols’ approach?
Lesson 1 - The Appropriate Comparator and What Not To Do
Arguably, Fox v Westpac; Crawford v ANZ is a lesson of what-not-to-do when seeking a GCO.
The wording of the statute provides the court power to make an order for a GCO if it is “satisfied that it is appropriate or necessary to ensure justice in the proceeding”. The approach taken by the plaintiffs’ lawyers to satisfy this test was to argue that under the proposed GCO, group members would be ‘better’ off. They put this argument forward by submitting that the appropriate comparator to the proposed GCO was the assessment of costs and the likely returns to group members that would be achieved under an alternative funding model which involved a third-party funder. Evidence was put forward that third party funding generally delivers returns to group members in the range of 45-64%, therefore, the plaintiffs argued, a GCO guaranteeing 75% returns to group members would mean that group members would likely receive a better outcome under the GCO.
However, in this case, the plaintiffs’ lawyers had already entered into a no win, no fee funding agreement (referred to as NWNF) with the plaintiffs. And although they described this NWNF arrangement as an “interim” funding arrangement as they had intended to seek a GCO in the proceeding, importantly the NWNF arrangement was not conditional on a GCO being made and would not terminate if a GCO application was not successful.
Her Honour rejected the plaintiff’s characterisation of funding agreement as an interim arrangement. This meant that the NWNF arrangement already in place was a real alternative to the GCO, and instead of comparing the proposed GCO to a hypothetical funding situation (and one in which involved paying a third-party funder), her Honour found that in determining whether or not to make the GCO in this case, the question to be answered was whether the proposed GCO was more advantageous to group members than the present, NWNF arrangement. The answer to which was no.
Ironically, it seems that in following this logic, had the plaintiffs’ lawyers entered into funding arrangements with the plaintiffs that were less favourable to the plaintiffs from the outset, than their GCO application may have been successful. The plaintiffs’ lawyers submitted that the practical effect of that interpretation of the legislation may be commercially unworkable for plaintiffs, law practices and litigation funders, and contrary to the policy behind s 33ZDA.
This submission has some force, however, there are two ways in which plaintiff lawyers may respond to the mistakes made in Fox v Westpac; Crawford v ANZ.
The first, and arguably the less-risky approach, is to use the legal drafting lesson of Fox v Westpac; Crawford v ANZ and ensure that any pre-GCO application funding arrangements are carefully drafted and conditional upon the success of a GCO application.
Alternatively, the second response one may take from Fox v Westpac; Crawford v ANZ is to try to frame the GCO application in a different manner. Her Honour made clear that the plaintiffs’ lawyers failed to prove the proposed GCO would result in a better deal for the plaintiffs and group members. But her Honour did not conclude that this was the only way to frame the application. It is worth noting that her Honour repeated several times, that just because the question posed under the current GCO application was a comparative analysis of returns, such an approach was not a general proxy for the statutory test. Thus, section 33ZDA may not, as a matter of construction, require a plaintiff to demonstrate that the GCO would yield a better outcome than a counterfactual funding arrangement.
Lesson 2 – “back door” funding models may be ok
Previously, when the proposed contingency fee legislation was announced, class action lawyers hypothesised on how the proposed legislation may change the current norms in class action funding. It was said that some firms would not be able to carry the fees or risk of class action legal costs on their own under a GCO anyway and would therefore need to seek some sort of funding in the background. The attractiveness of this type of “back door” funding arrangement was exacerbated in a post-Brewster world where the prospects of recovery under a common fund order are far from certain.
However, it was unclear how the court might respond to a GCO application where there was a form of ‘back door’ funding arrangement, and plaintiff lawyers would likely be somewhat relieved at Nichols’ J response in Fox v Westpac; Crawford v ANZ. Here, the plaintiff lawyers had a “costs sharing agreement” in place with a litigation funder whereby the funder agreed to pay half the project and investigation costs, and once/if a GCO was made, the plaintiffs lawyers would pay the funder half the amount of any contingency fee awarded at settlement. The plaintiff was not a party to this agreement, and therefore the agreement was framed as if the funder was a financier to the plaintiff law firm, and not a third party litigation funder.
The respondents, in their submissions against the GCO application, claimed that s 33ZDA does not permit a GCO where a funder is involved as it is concerned with “legal costs payable to the law practice”. However, the contradictor appointed to protect group member interests, largely agreed with the plaintiff, arguing that in this case, the funder would not be receiving moneys in relation to ‘legal costs’ directly from the proceeding, and any separate financing agreement would not be relevant to the court’s power to make a GCO.
Her Honour also appeared to side with the plaintiff on this point, observing that there may be circumstances in which law firms may seek to reduce their risk associated with a GCO, and provided that the law firm was not acting as a mere front for a third-party funder, the existence of this type of back door funding arrangement would not in itself result in the court’s refusal to grant a GCO.
We’re looking forward to the next GCO decision. This will most likely be another decision of Justice Nichols in the Allen v G8 Education Ltd shareholder class action.
