The first word on group costs orders in class actions

Significant first guidance on group costs orders 6 min read

The Supreme Court of Victoria has provided significant first guidance on the operation of its new group costs order regime for class actions.¹

The regime allows the court to make a 'group costs order' (GCO) in a class action proceeding, allowing a plaintiff law firm to charge legal costs calculated as a percentage of any damages award or settlement (as akin to a contingency fee) if the court is satisfied that a GCO is 'necessary or appropriate to ensure justice is done in the proceeding'.

Until now, the circumstances in which the court would be prepared to exercise this discretion were untested.

Key summary

Justice Lisa Nichols' judgment is the first to deal with the new regime. While in some respects the decisions turn on its particular facts, her Honour's reasons provide broader guidance as to the relevant considerations as to whether the court may make such orders in future.

The court held that its discretion to make a GCO involves a 'broad, evaluative assessment of the relevant facts and the evidence before the court', in which the interests of group members must be given primacy. The cost of funding to group members is a significant consideration, but not the only one. Other considerations may include the significance of members obtaining an indemnity against adverse costs, the requirement to give security for costs, and general considerations of reasonableness and proportionality.

In the circumstances of these first two applications for a GCO, the court determined that there was not a sufficient basis for the exercise of its discretion. The key factors in this decision were:

• that the plaintiffs had existing, stable funding arrangements covering the risks they assumed as representatives; and
• in the circumstances, the financial modelling put forward by the plaintiffs did not sufficiently persuade the court that it should make a fundamental change to those arrangements, or that members would be better off if GCOs were made.

Though the present applications were not successful, this is not likely to deter plaintiff law firms seeking GCOs, and indeed the guidance provided by the judgment will inform how plaintiff law firms frame future applications.

Background

The group costs order regime was introduced into the Supreme Court Act 1986 (Vic) last year, allowing the court to make an order in class action proceedings providing for, among other things, a plaintiff law firm to charge legal costs calculated as a percentage of any damages award or settlement. The introduction of the regime followed a heated political debate, with the government arguing the arrangement would increase access to justice by allowing a greater range of class action claims, and the opposition countering that it would encourage US-style 'entrepreneurial lawyering'.

The new section 33ZDA allows the court to make a GCO if it is satisfied that 'it is appropriate or necessary to ensure that justice is done in the proceeding'. A GCO has three conditions:

1. the legal costs payable to the law firm be calculated as a percentage of any award or settlement, and that liability for those legal costs be shared among the plaintiff and all group members;
2. the law firm becomes liable to pay any adverse costs orders; and
3. the law firm is required to give security for costs.

Following the introduction of the regime, we noticed a significant shift in the number of class actions being filed in Victoria, with a corresponding decrease in filings in New South Wales.

The proceedings and 'no win, no fee' arrangement

In July and August last year, two class actions led by Maurice Blackburn Lawyers were commenced in the Supreme Court of Victoria, alleging unfair conduct relating to ‘flex commissions’ in car loan agreements. The proceedings were case managed together by Justice Lisa Nichols.

Importantly for present purposes, the proceedings were each brought on a 'no win, no fee' basis, with Maurice Blackburn providing the plaintiffs with an indemnity against adverse costs orders and agreeing to pay any order for security for costs.

In its communications publicising the class actions, Maurice Blackburn foreshadowed (and its retainer and costs agreements contemplated) that the plaintiffs in each proceeding would apply for GCOs. Earlier this year, the plaintiffs each filed applications for GCOs seeking contingency fees of 25%.

The applications were heard and determined together, with her Honour appointing a contradictor to appear on behalf of unrepresented group members.

The discretion to make a GCO

Her Honour first considered the text and context of the new section 33ZDA, noting that the requirement that a GCO be made only if it is 'appropriate or necessary to ensure that justice is done in the proceeding' indicates that 'what is required […] is a broad, evaluative assessment', in which the court must be astute to protect the interests of group members. Her Honour stated there is nothing in the regime to suggest any presumptive caution in exercising the discretion to make a GCO – it is a provision that reflects a legislative intention to confer on courts the widest possible power to do what is appropriate to achieve justice in the circumstances.

Her Honour held that the criteria for making a GCO include:

• with respect to whether it is necessary or appropriate, that the court be satisfied that doing so would be a suitable, fitting or proper way to ensure, or be reasonably adapted to the purpose of ensuring, that justice is done in the proceeding; and
• with respect to ensuring justice is done in the proceeding, that the court have regard to the fees payable to the law practice representing the group.

Her Honour held that in the present applications, the answer to the statutory question turned on whether the proposed GCO was more advantageous to group members than the present funding arrangements. However, her Honour emphasised that this is not a general proxy for the statutory test, and that the facts of these first two applications may well be anomalous. Her Honour observed that other considerations may include the significance of members obtaining an indemnity against adverse costs, the requirement to give security for costs, and general considerations of reasonableness and proportionality.

The plaintiffs had argued the existing arrangements were interim and the appropriate comparator to funding costs under GCOs were third party funding arrangements. However, the court found that the existing 'no win, no fee' retainer and costs agreement were not interim and provided stable funding arrangements which already covered the risks the plaintiff had assumed as representatives. In these circumstances, the applications were essentially reduced to a comparison of predicted returns to members between the current 'no win, no fee' funding arrangements and the GCOs sought.

The financial modelling put forward by the plaintiffs did not persuade the court that members would be better off if the court made the GCOs in the form requested, based on the predictive modelling of outcomes, but also because of the inherent uncertainties in the modelling at this early stage of the proceedings.

In declining to make the GCOs, her Honour held that the plaintiffs did not have a sufficient basis for the exercise of the court's discretion. The applications were adjourned to permit the plaintiffs to further consider their position, including as to whether a reformulated application should be pressed at a later time.

Our assessment: no significant deterrent

While the court declined to order the GCOs sought in these applications, we do not think her Honour's reasons introduce any significant deterrent to plaintiff law firms seeking GCOs going forward. These decisions provide initial guidance as to the operation of the new regime and the circumstances in which the court may exercise its discretion to make a GCO. While the decision may cause plaintiff law firms to momentarily pause and regroup, we do not think it is likely to dissuade further such applications over the longer term.