Access to Justice—Litigation Funding and Group Proceedings: Report (html)

5. Risks and cost burdens in class actions

Introduction

5.1 Class actions impose inherently disproportionate risks and cost burdens on the representative plaintiff. If the class action fails, the representative plaintiff is solely responsible for the costs of bringing the proceedings and any adverse costs orders. If the class action succeeds, the class members will share the costs of bringing the proceedings.

5.2 Generally, class members are under no obligation to contribute to costs unless or until a successful outcome is known; and in Victoria, the Supreme Court has found that security for costs cannot be ordered against them.^[1]

5.3 The practice of costs shifting is an essential feature of Australia’s legal system because it discourages legal action that has no merit or is speculative. However, the barrier it creates in class actions is likely to be insurmountable unless the representative plaintiff can reduce or remove the substantial costs of bringing the proceedings and the financial risk of losing.

5.4 Accordingly, law firms acting on a ‘no win, no fee’ basis, and litigation funders, have a crucial role in bearing risks in class actions and removing or reducing the cost burden. Their involvement, of course, will increase the costs of winning, as they are entitled to a commercially realistic return if the class action is successful.

5.5 While the legal retainer, legal costs agreement and funding agreement explain the costs that will be charged, not all class members will necessarily have seen or signed them. Those who have signed them are unlikely to have negotiated the terms. It is therefore important that the court has the power and capacity, when approving settlement, to ensure that the costs are fair and reasonable. The supervisory role of the Supreme Court of Victoria, and recommendations to strengthen it, are discussed in this chapter.

5.6 The Commission also recommends that the Court’s discretionary power to reduce the representative plaintiff’s exposure to adverse costs orders and security for costs orders in certain circumstances be recognised in legislation.

5.7 Although not a direct method of reducing risks and cost burdens, it is important that class members are made aware of the costs and risks of proceedings and their ability to object to the costs or opt out of the class action. In Chapter 4, the Commission recommends improvements to the information provided to, and communication with, class members. Recommendations to improve disclosures about litigation funding are discussed in Chapter 2.

The risks of losing

5.8 The financial risks that the representative plaintiff takes on are disproportionate not only to the risks borne by other class members, but also to the value of their own claim. In a large class action, the adverse costs risk and the costs of bringing proceedings will be millions of dollars, while the representative plaintiff’s claim will be far less. For example, in Camping Warehouse v Downer EDI, the average payout per class member was expected to be $633.29, whereas the legal fees were $2.85 million.^[2]

5.9 As noted in Chapter 4, this disproportionate risk structure can make the appointment of a suitable representative plaintiff difficult. The Commission has been told that, because of the risk, well-resourced class members will rarely agree to take on the role of representative plaintiff, even where they form a significant percentage of the class (such as superannuation companies in investor class actions) or where they seek a substantial percentage of the compensation (such as insurers in mass tort class actions).^[3]

5.10 Like other forms of litigation, the risks of losing that the representative plaintiff bears in a class action can be reduced by shifting them to a third-party. If the class action is one in which a litigation funder is willing to invest, the representative plaintiff may be fully relieved of the risks. While funding agreements vary, the standard practice is for the litigation funder to indemnify the representative plaintiff for the costs of bringing the class action and any adverse costs orders.

5.11 If a litigation funder is not involved in the class action, the representative plaintiff’s exposure to at least some of the risks may be mitigated by their lawyers, an insurer or another third party. The options available would be improved if, as recommended in Chapter 3, law firms could apply to the Court to be paid a percentage of any recovered amount on the condition that, among other things, they indemnify the plaintiff for adverse costs and do not charge separately for disbursements.

Liability for legal costs and disbursements

5.12 If the class action is not funded, the representative plaintiff is likely to enter into a costs agreement with their lawyers to be charged on a ‘no win, no fee’ basis. Under this arrangement, the representative plaintiff will not pay the professional legal costs incurred in bringing the proceedings if unsuccessful, but will still be liable for any adverse costs orders and possibly disbursements.

5.13 If disbursements are not covered by the ‘no win, no fee’ arrangement, the representative plaintiff’s liability can be mitigated by private contractual agreement. For example, in the Kilmore East/Kinglake bushfires class action, some class member insurers partly funded some disbursements.^[4]

Liability for adverse costs and security for costs

5.14 If the adverse costs risk is not directly covered by a litigation funder, ‘after the event’ insurance can be purchased once a dispute has arisen or specific proceedings are contemplated. It covers adverse costs orders and disbursements. It is very expensive and tends to be taken out by litigation funders and law firms, which in turn indemnify the plaintiff for any adverse costs risk. The premium is payable only if the class action is successful.

5.15 A related risk is that the defendant may obtain a security for costs order. The order is likely to be millions of dollars and well beyond the capacity of the representative plaintiff—unless perhaps it is a corporate entity. If security is ordered, but not provided, the class action will be unable to continue. Litigation funders normally cover this risk when they are involved in a class action. Security for costs in unfunded class actions is discussed at [5.103]–[5.115].

5.16 Whether an ‘after the event’ insurance policy will provide sufficient security for costs in a class action will depend on the circumstances of the case and the wording of the policy in question. For example, in Petersen Superannuation Fund Pty Ltd v Bank of Queensland, Justice Yates considered that, while an appropriately worded policy might be capable of providing sufficient security, the policy in question did not. Security was instead required by payment into court or a bank guarantee from an Australian bank.^[5]

The costs of winning

5.17 Unlike the costs of losing, which are solely borne by the representative plaintiff, the costs of winning a class action are shared among the class members. The type and amount of costs depend on how the risks of losing have been covered during proceedings.

5.18 Class members receive less money if the representative plaintiff’s risks have been covered by a litigation funder, or a law firm acting on a ‘no win, no fee’ basis during proceedings. This is because the litigation funder, or the law firm, will necessarily be rewarded from any settlement or judgment amounts for taking on this risk.

Litigation funding fee

5.19 Litigation funders charge a funding fee if the case is successful, which is typically charged as a percentage of any recovered amount. There may also be other charges, such as a project management fee.^[6]

5.20 The size of the funding fee, and the responsibility for paying it, is determined by contractual arrangement. Class members who sign a funding agreement agree to pay the funding fee, set at an agreed rate in accordance with an agreed formula, out of any money they receive from settlement or judgment.^[7]

5.21 Common fund orders remove the need for a contractual arrangement between the litigation funder and class members who pay the fee. All registered class members are required to pay, whether or not they have signed a funding agreement. The size of the funding fee is determined by the court, most likely at settlement approval. Common fund orders are discussed at [5.88]–[5.102].

Legal costs and uplift fee

5.22 A law firm that has reduced the financial risk of losing by acting on a ‘no win, no fee’ basis is paid for its legal services, plus an ‘uplift fee’, if the class action is successful. The way that legal costs are charged, including the uplift fee, is regulated in Victoria under the Legal Profession Uniform Law,^[8] and is determined by the legal costs agreement entered into between the client and the lawyers.

5.23 As set out in Chapter 3, the payment of legal costs in class actions is different to other litigation. If an ‘all in’ settlement is reached, legal costs will generally be deducted from any settlement amount prior to distribution to class members. Each class member effectively contributes part of their settlement amount toward legal costs, even if they have not signed a legal costs agreement.^[9] This is appropriate because all class members enjoy the benefit of the services for which the costs were incurred, as observed by Justice Gordon in Modtech Engineering Pty Ltd v GPT Management Holdings Ltd:

The legal costs were incurred and achieved a settlement for all group members. The group members who did not sign a LCA [legal costs agreement] with [the representative plaintiff’s lawyers] should not be entitled to receive a windfall by reason of their refusal to sign a LCA. To put the matter another way, the legal costs are fixed. Those legal costs should be borne by those who benefitted from those legal costs being incurred—the group members as a whole.^[10]

5.24 The uplift fee is generally set at the maximum legislative rate of 25 per cent of the legal costs.^[11] There have been examples of class actions in which other percentage loadings have been charged by the representative plaintiff’s lawyers, in addition to the 25 per cent uplift fee.^[12]

‘After the event’ insurance premiums and disbursement funding fees

5.25 If the litigation funder or the law firm acting on a ‘no win, no fee’ basis has taken out ‘after the event’ insurance to cover the risk that the representative plaintiff will be ordered to pay adverse costs, the premium will be deducted from any settlement or judgment amounts. The share is generally between 20 and 40 per cent of the policy indemnity limit.^[13]

5.26 Any disbursements not paid during proceedings are paid at the successful conclusion of the proceedings.^[14] If covered by a third party other than a litigation funder during proceedings, a fee may be charged for this.

Settlement distribution costs

5.27 The costs of winning a class action also include the costs of settlement distribution, which are incurred after settlement approval. The scheme administrator charges a fee for assessing individual claims and distributing amounts to class members. These costs are generally deducted from settlement amounts paid to class members. However, in large class actions with lengthy settlement distribution schemes, they may be paid from any interest earned on the settlement amount during the distribution period.^[15]

The role of the Court

Assessing costs

5.28 As discussed in Chapter 4, a class action settlement does not have legal effect unless it is approved by the Court under section 33V of the Supreme Court Act 1986 (Vic). The protective role of the Court at settlement approval extends to approving legal costs and funding fees which reduce the amounts available for class members.

5.29 The basis on which the two types of costs are calculated differ, as does the approach of the courts in assessing whether they are fair and reasonable. Legal costs are based on inputs: work done and time expended in pursuing the claim. Funding fees are based on the outcome: a share of the proceeds if successful. Legal costs are routinely reviewed and varied, while funding fees have been subject to less scrutiny. However, recent decisions of the Federal Court in funded class actions convey an increasingly active role in supervising funding fees in that jurisdiction.

5.30 This development has lent weight to the argument that courts should have a specific statutory power to review and vary all legal costs, litigation fees and charges, and settlement distribution costs to be deducted from settlement amounts in class actions. Views differ about how prescriptive the legislative provision should be, but unanimous agreement was expressed during the Commission’s consultations that the courts are both competent and well positioned to continue to oversee limits or approval processes for legal costs and funding fees in class actions.^[16]

5.31 The Commission agrees that an express power in legislation would be desirable, for reasons discussed below.

Assessing legal costs

5.32 In Victoria, where class actions do not typically involve a litigation funder, legal costs are generally the largest deduction from the settlement or judgment amount before the class members receive their share.^[17]

5.33 The Supreme Court’s authority to supervise legal costs in class actions is widely accepted in case law and well understood.^[18] Apart from the Court’s specific role in approving settlements, conveyed by section 33V of the Supreme Court Act, the authority is founded in the inherent jurisdiction of the Court and its power under the Civil Procedure Act 2010 (Vic) to make any order as to costs that it considers appropriate to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.^[19] This power is in addition to any other power it has in relation to costs and can be exercised at any time in a proceeding over any aspect of the proceeding.^[20]

5.34 In exercising its authority to supervise legal costs, the Court may assess:

• whether the fees and disbursements are of a reasonable amount having regard to, among other things, the nature of the work performed, the time taken to perform the work, the seniority of the persons undertaking that work and the appropriateness of the charge-out rates for those individuals

• if the work is unreasonable in the circumstances, whether the class members approved this by entry into the costs agreement.^[21]

5.35 The Court’s authority to intervene and control the legal costs that class members pay after settlement is not always as certain. The legal costs charged by the administrator of the settlement distribution scheme—which is usually the law firm that acted for the representative plaintiff— depend on the terms of the scheme. In its submission, the Supreme Court observed that there are particular aspects of settlement distribution schemes that need not attract fees based on the work of skilled lawyers, such as routine settlement administration, which can be carried out by paralegals. The Court needs to ensure that it is in a position to oversee the minimisation of settlement administration costs while also ensuring the process will be timely and efficient.^[22]

5.36 Introducing an express statutory power to review all legal costs incurred during proceedings and settlement distribution (as well as funding fees and charges) would strengthen the Court’s ability to intervene when appropriate. It would also complement the Commission’s recommendations in Chapter 4 to strengthen supervision during settlement distribution, and in Chapter 3 to allow a law firm to be paid a percentage of the recovered amount in class actions.

Assessing funding fees

5.37 Compared to legal costs, courts have been less involved in assessing litigation funding fees as part of settlement approval. It is uncontroversial that they have the power to refuse a settlement if the funding fee is not fair or reasonable, but they have been reluctant to intervene further and set what a reasonable fee would be in the circumstances.

5.38 The reasons for this reluctance are multifaceted. Reviewing a litigation funding fee requires the court to undertake a commercial assessment of the risk borne by the funder—a task it is not comfortable with, or necessarily appropriately placed to make. Litigation funding agreements are private and consensual contracts between two persons. Without strong evidence to the contrary, the courts have traditionally been unwilling to ‘relieve persons of full age and capacity from bargains untainted by infirmity’.^[23]

5.39 Judicial support is now apparent for the view that the courts can take a more active role. Recent decisions of the Federal Court suggest that, as part of settlement approval, the Court has the power to vary the amount paid to a litigation funder to ensure that it is fair and reasonable in the interests of class members.^[24] Reasons why court supervision of the funding fee is appropriate were set out in Money Max Int Pty Ltd v QBE Insurance Group Ltd:^[25]

• The funding fee is generally the largest single deduction from class members’ recoveries.

• Information asymmetry exists between the litigation funder and class members in relation to the costs and risks of the action.

• For some class members, the only chance to obtain legal redress is through a class action.

• Class members often have a limited or non-existent ability to negotiate the funding fee.

5.40 The source of the court’s power to set a funding fee at a rate other than that stipulated in the funding agreement, and the circumstances in which it would be appropriate to exercise this power, are unresolved.^[26] The issue has not been considered in decisions of the Supreme Court and is not addressed in the Supreme Court’s practice note on class actions. There is some recognition of the increased supervisory role of the Federal Court in its Practice Note on class actions, but not in the relevant Commonwealth legislation.

5.41 For this reason, the view was put to the Commission that, if there is any doubt that the Supreme Court has the power to review and vary litigation funding fees as part of settlement approval, it should be expressly provided in an amendment to part 4A of the Supreme Court Act.^[27]

5.42 Not all stakeholders agreed that such a power is desirable, or should be codified in legislation. Litigation Capital Management submitted that, by reducing the certainty of litigation funders’ contracts, it may increase the risk of financing class actions. Litigation Lending Services suggested that it could lead to a downward shift in funding fees, which may, along with decreased certainty for litigation funders, have an impact on access to justice.^[28] The Commission considers that these concerns have been adequately recognised by the Federal Court in recent decisions.^[29]

A statutory power to review and vary costs

5.43 A legislative power to review and vary legal, funding and settlement distribution costs in part 4A of the Supreme Court Act would underpin and strengthen the Court’s existing practice in reviewing costs as part of settlement approval in class actions. The Court is accustomed to assessing legal costs as part of settlement approval, and the Federal Court is taking a greater role in assessing, and in certain circumstances it may modify, litigation funding fees. The Commission endorses the view that this power is appropriately exercised as part of the supervisory function of the courts at settlement approval.

5.44 The protective role of the court at settlement approval is well established in case law, and extends to the legal costs and funding fees proposed to be charged to class members.^[30] A statutory power for the Court to review and vary costs would be consistent with this protective role.

5.45 It would also recognise, in a class action context, the Court’s broad powers under the Civil Procedure Act which may be applied when costs are unreasonable. The overarching obligations contained in the legislation apply to both lawyers and litigation funders, and include the requirement to ensure that costs are reasonable and proportionate.^[31] Compliance with the obligations is mandatory. If a breach occurs, the Court may make any order it considers appropriate in the interests of justice.^[32]

5.46 Some stakeholders proposed that criteria for the assessment of funding fees should be set out in legislation or the Supreme Court Practice Note.^[33] The Commission is not persuaded that this is necessary. The power to review and vary costs should be broadly expressed, so the Court can respond flexibly in approving settlement.

5.47 This is not to suggest that guidance for the courts will remain unnecessary in the future. As the jurisprudence on assessing litigation funding fees develops, it may be useful to include guidance in legislation or court guidelines. It may also become desirable to clarify certain aspects of the power. Some aspects which may present difficulties or need further clarification have been set out (extra-judicially) by Justice Lee. They include:

• the difficulty in establishing boundaries for court intervention if funding agreements are altered by the court at settlement approval

• the economic considerations that must be taken into account by a judge when assessing a commercially realistic return

• the foundational importance of certainty of contract in society.

5.48 The Commission agrees with Justice Lee that the courts will work carefully through the complexities posed by this power.^[34] For this reason, the Commission considers it preferable for guidance on exercising the power to be generated through case law rather than imposed from the outset.

5.49 Finally, while the power should be broadly expressed, the Commission is aware that in some settlement agreements, legal costs are negotiated separately to the settlement amount recovered by class members.^[35] The Commission’s recommendation is intended to enable the Court to supervise costs being deducted from the full amount paid by the defendant in resolution of proceedings. This includes supervision of any legal or other costs negotiated separately to the amount paid to class members.

Recommendation

24 Part 4A of the Supreme Court Act 1986 (Vic) should be amended to provide the Court with specific power to review and vary all legal costs, litigation funding fees and charges, and settlement distribution costs to be deducted from settlement amounts to ensure that they are fair and reasonable.

Costs experts

5.50 Costs experts assist the court when assessing whether the costs to be deducted from settlement are fair and reasonable. Their assistance in class actions appears to have been sought exclusively in reviewing legal costs.

5.51 In addition, the appointment of a contradictor at settlement approval can be of particular assistance in reviewing the costs arising from the terms of the settlement, or the settlement distribution scheme.^[36] Contradictors are discussed in Chapter 4.^[37]

5.52 There has been no demand for costs experts to assist the court in assessing funding fees in class actions, although this may change.^[38] Should courts begin to use a risk/reward calculus when assessing funding fees and rely less on the fees charged in previous cases, the demand for funding costs experts is likely to grow.^[39]

5.53 The appointment of legal costs experts in large class actions is widely seen as desirable.^[40] While mandatory appointment in all class actions is unnecessary, some support was expressed in submissions for a presumption of appointment to exist in class actions if legal costs are substantial.^[41]

Value to the class members

5.54 An important consideration in deciding whether to appoint a costs expert is the cost to the class members. The role of a legal costs expert is time-consuming and complex: large class actions may generate between 10,000 and 65,000 time recording entries. However, the alternatives to appointing the expert could be more expensive.

5.55 In the Kilmore East/Kinglake bushfires class action, costs experts supported the sum of $60 million being paid to the law firm running the case. Justice Forrest observed extra-judicially that the Supreme Court’s acceptance of the figure provided by the costs experts avoided the bill being sent to taxation, which in Victoria is another expensive exercise.^[42]

5.56 The value to the class members of the appointment of a costs expert was questioned in the submission by Simone Degeling, Michael Legg and James Metzger. They argued that, given the current methodology adopted for assessing legal costs, costs experts are ineffective in providing any real adjustments to legal costs in class actions. As long as there is expert evidence that the legal work was needed, carried out by a lawyer at the appropriate level of seniority and using rates in the retainer, the legal costs will be approved as fair and reasonable.^[43]

5.57 It is possible that the question of whether appointing a costs expert represents good value to the class members cannot be determined only by how much the lawyers’ bill is reduced, or by any net return to the class members after the expert’s fee is paid. Perhaps the prospect that a costs expert will be scrutinising the records helps to prevent unreasonable charges being made.^[44] However, the costs expert’s role is not to represent the interests of the class members; their interests are for the court to consider.

5.58 The Commission notes that the Federal Court recently observed that, subject to the question of proportionality, the courts will not reject expert evidence, or apply a subjective view of what the legal work is ‘really worth’ divorced from the commercial context, without very good reason.^[45] Clearly, the courts rely on the expertise of costs experts, which underscores the need for the assessments they give to be accurate and free of bias.

Independence

5.59 The costs expert is usually appointed by the law firm whose costs are being assessed, and the pool of experts with appropriate knowledge and skills in class action litigation is small. This can raise questions about whether the experts are free from bias because they are assessing costs for their clients, from whom they may want repeat business.

5.60 The independence of the costs expert is essential to their credibility because, as Simone Degeling, Michael Legg and James Metzger have observed, their assessments are largely unchallengeable by class members:

First, no group member has the wherewithal to be able to challenge an independent costs expert. The court will only receive expert reports commissioned by the applicant (really the lawyers) seeking approval of the legal fees. Second even if fees are greater than permitted by the Supreme Court scale, group members may be seen to have agreed to these fees through entering into a retainer with the lawyer. However, in a class action, lawyers set their own fees and group members have little ability to negotiate.^[46]

5.61 Costs experts are usually lawyers who have professional obligations to the court. In that capacity, and as expert witnesses, they must also meet the overarching obligations in the Civil Procedure Act.^[47] These obligations apply whether the expert is appointed by the Court or by the law firm running proceedings. The Commission has no reason to conclude that the costs experts who give evidence in class actions do not meet these obligations, a view supported by Maurice Blackburn:

Regardless of these legal and ethical obligations to act with honesty and independence, in our experience we have not observed any costs expert having been influenced by the prospect of repeat work. To the contrary, costs assessors who we have appointed have on occasion reduced our legal costs where they considered those costs to be unreasonably charged or incurred.^[48]

5.62 It is, however, crucial that costs experts are not compromised in their ability to act, or to be seen to act, impartially.

5.63 As illustrated in Williams v AustNet Electricity Services Pty Ltd (No 3),^[49] the Court is able to seek assistance from the Costs Court when assessing legal costs. This may be necessary if there is no costs expert appointed, or if the evidence provided by the costs expert is insufficient or requires review. As a demonstrably independent option, the Commission agrees with the Court that use of the Costs Court is an attractive option in ensuring that the costs claimed by the representative plaintiff’s lawyers are reasonably incurred, although its use poses some resourcing issues.^[50]

5.64 The independence of the costs expert is essential to their credibility and, in turn, a just outcome for the class members. The Commission considers that costs experts should be appointed by the Court to underpin, and demonstrate to class members, the importance of this independence.

Court guidance on use of experts

5.65 The Federal Court Practice Note includes guidance for the use of costs experts in class actions in reviewing both legal costs and litigation funding fees. In relation to legal costs, the expert will assess whether the total legal costs are fair and reasonable (by examining a sample of files or records); in relation to the litigation funding fee, the costs expert will assess whether the charges are appropriate, having regard to the terms of the funding agreement.^[51]

5.66 More extensive sampling of legal costs, or examination of the litigation funding fee, is suggested where the class members include persons who are not clients of the law firm; where the deduction per class member constitutes a significant proportion of the settlement amount otherwise payable to each class member; or where the funder imposes charges beyond the percentage fee set out in the funding agreement (for example, a project management fee).^[52]

5.67 The Commission considers that similar guidance should be given in the Supreme Court Practice Note. However, unlike the Federal Court Practice Note, the Supreme Court Practice Note should not specify what methodology the legal costs expert should use. The Commission was told that methodologies used by costs experts develop and change over time. In order to provide the most accurate assessment and thereby deliver value to class members, and to ensure best practice, it is important that experts have the flexibility to adopt the most appropriate methodology in assessing legal costs.

5.68 The Commission is of the view that the costs expert should be appointed by the Court, rather than the representative plaintiff’s lawyers.^[53] This is not specified in the Federal Court Practice Note.

Recommendation

25 The Supreme Court should consider amending its practice note on class actions to provide guidance for the appointment of an independent costs expert by the Court to assist in the assessment of legal costs and litigation funding fees. This should take into account the guidelines contained in the Federal Court practice note on class actions relating to the use of costs experts.

Costs budgets in class actions

5.69 Introducing costs budgets in class actions—where parties submit a legal costs estimate to the court at the first case management conference—was suggested as being a useful way of increasing certainty of legal costs in class actions, holding lawyers accountable to a predetermined budget, encouraging settlement, and ensuring control of legal costs from an early stage.^[54] The use of costs budgets may be of some assistance to the court in assessing the reasonableness of legal costs claimed at settlement approval.

5.70 Costs budgets are used by courts in England and Wales. In some proceedings, parties are required to submit costs budgets to the court and the other party before the first case management conference. If legal costs subsequently exceed the predicted budgets, parties are required to seek court approval for the increase. The courts have indicated that they will limit parties’ recoverable costs to the estimated amounts, where appropriate.^[55]

5.71 Although Victoria does not require cost budgets to be submitted in class actions, the Supreme Court has the power, under the Civil Procedure Act, to order lawyers to produce an estimate of costs and disbursements at any point of proceedings. This can also be for the benefit of the defendant or any party.^[56] This power does not appear to be regularly used in a class action context. Although the Commission does not consider there is any need to supplement the provisions of the Civil Procedure Act, guidance about use of this power in class actions may be usefully provided in the Supreme Court Practice Note.

5.72 It will not be necessary or appropriate for the Supreme Court to request an estimate of legal costs in all class actions. For example, in shareholder class actions, the likelihood that the case will be settled is exceptionally high (no shareholder class actions have proceeded to judgment). Providing a costs budget in these cases may be difficult, and of limited value, given the uncertainty involved in settlement.^[57]

Recommendation

26 The Supreme Court should consider amending its practice note on class actions to specify that, at the first case management conference, the Court, in exercising its powers under section 65A of the Civil Procedure Act 2010 (Vic), may ask the representative plaintiff’s lawyers to provide a memorandum of estimated legal costs and disbursements of proceedings to the Court.

Control of funding fees in class actions

5.73 The terms of reference direct the Commission to examine two specific processes for controlling the fees chargeable by litigation funders:

1) that limits be placed on litigation funders’ fees

2) that approval processes be put in place in respect of litigation funding fees.

5.74 Imposing a cap is one way of limiting the fees charged. The cap could be determined either by legislation, the court or a combination of both.

5.75 Approval processes that are already in place can affect the amount which litigation funders receive from class members. The court has the capacity to determine funders’ fees when a common fund to pay them has been ordered. Common fund orders require the applicant to seek court approval of a funding fee prior to it being deducted from the recovered amount. As all class members pay the fee, rather than only those who have entered a funding agreement, common fund orders also ensure that the costs of bringing litigation are evenly shared between all class members.

5.76 The Federal Court has demonstrated its willingness to use these methods in relation to litigation funding fees; whether they require express legislative provision in Victoria is discussed below.

Cost caps

5.77 Stakeholders generally endorsed the use of caps and sliding scales for litigation funding fees in class actions as a means of ensuring proportionality. There was also consensus that the court should determine how much the funder receives in each case.^[58] However, views differed about whether the fees should be subject to statutory limits.

5.78 Allens and Ashurst, for example, favoured the introduction of statutory caps and sliding scales. They suggested that caps could apply to both the percentage amount and the total dollar amount recoverable by the litigation funder. In applying these controls, consideration would be given to the net percentage of recovered amounts that class members would receive.^[59] Sliding scales could also be used to reflect the point reached by the proceedings and the expenses incurred by the litigation funder. The Court would retain its discretion to determine the appropriate fee in light of the circumstances of the case at settlement. This would ensure that funding fees below the cap are not automatically approved.^[60]

5.79 While agreeing that caps and sliding scales for funding fees may be appropriate in certain cases, other stakeholders identified the following reasons why it would be unhelpful to specify them in legislation.

5.80 First, a cap may simply turn into the minimum standard rates.^[61] Lawyers routinely charge the 25 per cent maximum uplift fee when acting under a ‘no win, no fee’ arrangement in a class action. It is reasonable to anticipate that a legislative cap for litigation funding fees is likely also to become the standard rate.

5.81 Secondly, it was proposed that a mandated cap or sliding scale may reduce access to justice. Funders who invest in high-risk or novel claims require a commensurately higher level of return. Litigation Lending Services and Slater and Gordon observed that, if a percentage amount is not high enough to justify the funding of higher risk or novel claims, there may be limited incentive for a litigation funder to take the case on, thereby reducing access to justice.^[62]

5.82 Thirdly, in class actions, the diverse risk profile of proceedings may require a nuanced approach to fees. IMF Bentham submitted that the considerations of the circumstances of the case, and an assessment of the market, is not conducive to fixed or inflexible methods or structures.^[63] The importance of this flexibility has been recognised by the Federal Court, which observed that, compared with regulation under idiosyncratic state legislation, the Court is well suited to the task of bringing flexibility and nuance to the assessment of the reasonableness of fees in class actions.^[64]

5.83 Finally, if the trend toward increased judicial scrutiny of litigation funding fees at settlement approval continues, the need for legislative caps and sliding scales—whether desirable or not—is reduced in class actions. As part of this increased scrutiny, the Federal Court has demonstrated that it is prepared to use the necessary mechanism, whether a cap or sliding scale, to ensure that the funding fee is fair, reasonable and proportionate.^[65]

Conclusion

5.84 For these reasons, and in the interests of ensuring national consistency and avoiding ‘forum shopping’, the Commission considers it appropriate that the Supreme Court continue to develop its expertise in applying caps and sliding scales to funding fees. There is no need for legislative guidance.

5.85 The Commission’s recommendation to recognise, in legislation, the Supreme Court’s ability to review and vary all litigation funding fees and charges complements the exercise of this discretion without imposing inflexible parameters.

Common fund orders

5.86 Australian courts have developed a range of mechanisms and practices to ensure that the costs of bringing a class action are fairly distributed among class members at settlement:

• Closed class actions, which can limit participation in a class action to those who have signed a funding agreement, ensure that only class members who agree to contribute to the costs share in any settlement or judgment amounts.

• Class closure orders, which require class members to register by a particular date, allow all class members sharing in settlement to be identified and so help to ensure that costs are allocated fairly.

• Funding equalisation orders, which deduct an amount equivalent to the funding fee from the settlement payments of class members who have not signed a funding agreement and distribute it back (pro rata) to all class members, ensure equality of treatment between class members. Class members who have not signed a funding agreement do not receive a windfall at the expense of those who have.

5.87 Most recently, the Federal Court has approved the use of a common fund for litigation funding costs in class actions. If the court makes a common fund order, all registered class members are required to contribute part of their settlement amount to the litigation funder, even if they have not signed a funding agreement. This represents a fundamental reform to how the costs of class action litigation are set and approved, and how they are shared among class members.

Common fund orders for litigation funding fees

5.88 Unless a funded class action is closed for the duration of the proceedings, it will comprise both members who have signed the funding agreement (funded class members) and those who have not (unfunded class members). If the class action is successful, only the funded class members are required to pay the funding fee, at the rate set in the funding agreement. To avoid this burden being placed only on funded class members, a representative plaintiff can apply for a common fund order, which requires all class members to contribute to paying the funding fee, at a court-approved rate.

5.89 A significant advantage of common fund orders is that they spread the cost of litigation funding across a greater number of class members than would be the case under contractual arrangement, and reduce the need for the litigation funder to book build. As a result, an applicant for a common fund order should seek a lower funding fee than would be the case if payment depended on execution of a funding agreement. Class members who have already signed a funding agreement may be better off.^[66]

5.90 Similarly, a common fund order should not result in class members who have not signed a funding agreement paying a higher rate than those who have. This would effectively penalise class members for failing to sign a funding agreement, and would allow the litigation funder to receive an increased return without a corresponding increase in risk.^[67]

5.91 Critically, if a common fund order is made, the court has the power to set the size of the funding fee, which may be at a lower rate than would otherwise be payable. Unlike a funding equalisation order, in which the amount payable by unfunded class members will likely be equivalent to the contractually agreed funding fee,^[68] a common fund order clearly provides for court approval of the funding fee. This is likely to occur later in proceedings, such as at settlement approval or distribution of damages.^[69]

Common fund orders for legal costs

5.92 In Australia, common fund orders have been formally applied only to proceedings involving litigation funders, where the funder’s costs are contractually determined and the funding fee is charged as a percentage of the settlement or judgment amount.

5.93 In Chapter 3, the Commission recommends that lawyers be able to apply for common fund orders for litigation costs, which include legal costs and disbursements and coverage of the risk that the court will order the representative plaintiff to pay adverse costs or provide security for costs.

Use of common fund orders

5.94 As discussed at the Commission’s roundtables and recognised in submissions, common fund jurisprudence in Australia remains in its infancy.^[70] Approval of common fund orders was given by the Full Federal Court in October 2016,^[71] and the source of the power to make common fund orders has not yet been appealed to the High Court.

5.95 While applications for common fund orders are now standard practice in Federal Court class actions,^[72] there is limited case law regarding their use. The Supreme Court has not made common fund orders for litigation funding costs in Victorian class actions.^[73] However, the Commercial Court has made orders, and approved settlements, requiring all class members to contribute to funding costs, including those who have not signed a funding agreement.^[74]

5.96 Most stakeholders expressed strong support for the continued use of common fund orders for approving and sharing the cost of litigation funding. Reasons cited for this support included:

• Common fund orders encourage the use of open class actions, which are consistent with the opt-out basis of Australia’s class action regimes and promote finality for defendants.^[75] Views differ as to whether they will reduce the number of competing class actions filed.^[76]

• Common fund orders have the effect of spreading the cost of the litigation among a broader group, but with the protective oversight of the court. The court is able to ensure that common fund orders are implemented in a way that is fair and reasonable, given that a larger group of claimants are contributing to the funder’s recovery.^[77]

• Common fund orders provide for increased judicial involvement in the determination of a ‘reasonable’ funding fee, and enable courts to set the funding fee at a different rate to that stipulated in the funding agreement, if appropriate. This is in keeping with the supervisory role of the Court under part 4A of the Supreme Court Act and may result in lower costs for class members over time.^[78]

• Common fund orders avoid the disadvantages associated with a prescriptive regulatory approach to litigation funding fees, and allow courts to react to diverse funding situations.^[79]

5.97 Not all submissions were in favour of common fund orders. They represent only one means of ensuring that the costs of litigation funding are shared equally between the class; other methods, such as funding equalisation orders, may achieve the same result but produce a better outcome for class members in the circumstances of the case. Allens noted that common fund orders represent a departure from freedom of contract, in that they create a binding arrangement between persons who have not expressly agreed to be bound.^[80] Common fund orders may also result in an adjustment of a funding fee already agreed to under contract. Some litigation funders noted the increased commercial uncertainty introduced by common fund orders: if a funding fee is subject to court approval at settlement, there is less certainty regarding the rate of return.^[81]

Express legislative power to make common fund orders

5.98 The court’s power to make common fund orders arises from its broad discretion to make orders as appropriate or necessary. The basis of the Federal Court’s power has been identified in case law as arising variously from sections 23, 33V(2) and 33ZF of the Federal Court Act.^[82] Section 23 is a general power to make orders as the Court thinks appropriate; section 33V(2) empowers the Court to make orders as are just with respect to the distribution of money paid under a settlement or paid into court; and section 33ZF is a power to make any order that is appropriate or necessary to ensure that justice is done in the proceeding.

5.99 The Supreme Court’s power to make common fund orders has not been judicially considered, but the Supreme Court Act contains equivalent provisions. In the absence of an express power to make a common fund order, the Court’s ability to do so may be challenged at a future point in time.

5.100 The Commission is of the view that common fund orders are of significant advantage in ensuring that funding fees are subject to court oversight, and that the costs of winning litigation are evenly distributed among class members. In allowing proceedings to be run on an open basis, and removing the need to book build, they offer the advantage of increasing access to justice over other methods of sharing costs between class members, such as funding equalisation orders.^[83] As set out in Chapter 3, they also provide a framework for allowing lawyers to obtain a percentage share of the recovered amounts in class actions, with appropriate court control. As part of a broader framework of ensuring disproportionate cost burdens for litigants in class actions, their use should be encouraged.

5.101 Judges consulted from both the Federal Court and the Supreme Court indicated that an express legislative power to make common fund orders, although unlikely to change practice, may be useful.^[84] The Commission agrees.

5.102 A secure legislative basis for common fund orders should not be inflexible or prescriptive.^[85] The legislation should allow for the nuanced and multifaceted nature of common fund orders. As submitted by Maurice Blackburn, a ‘one size fits all’ solution for common fund orders would inevitably fail to account for the diverse situations in which class actions may require third-party financing, and could risk restricting access to funding.^[86]

Recommendation

27 Part 4A of the Supreme Court Act 1986 (Vic) should be amended to specify that the Court has the power to approve a common fund order, on application by a representative plaintiff, whereby all costs of proceedings are shared by all class members if the litigation is successful.

Other means of reducing risk

The Court’s discretion in making security for costs and adverse costs orders

Security for costs in unfunded class actions

5.103 Security for costs orders provide an important protective mechanism for defendants in proceedings. If a defendant seeks an order for security, the plaintiff is essentially required to show that they will be able to meet any adverse costs order made against them. This is generally achieved by paying an amount of money into court, although it may also be satisfied by a bank guarantee or, in some cases, evidence of a comprehensive insurance policy.

5.104 The significant costs involved in class action litigation mean that defendants may be strongly motivated to seek some security at an early stage of proceedings.^[87] In recognition of this, the Australian Law Reform Commission (ALRC) recommended in its 1988 report on grouped proceedings that an order for security should not be made on the basis that the proceedings are brought for the benefit of someone other than the plaintiff.^[88]

5.105 Although the courts have a largely ‘unfettered’ discretion to order security for costs in proceedings,^[89] early decisions from the Federal Court indicated a reticence to order security against a representative plaintiff in unfunded class actions for fear it would force class members to contribute to these costs and remove the immunity from costs orders that they enjoy under part IVA of the Federal Court Act. It was also considered that the costs of security could potentially prevent a proceeding from continuing, thereby reducing the public interest purpose of the regime.^[90]

5.106 Since 2003, however, the Federal Court has been willing to order security for costs in unfunded class actions, requiring contribution from some class members.^[91] In doing so, the Court has differentiated contribution to security from other costs orders. Depending on the circumstances, the Federal Court has indicated that ordering security may not be incongruous with class members’ immunity from costs orders:

It is one thing for a group member to be saddled with an order for what might be joint and several liability for a very substantial costs order at the end of the hearing of a representative proceeding, but it is another thing to have the choice of contributing what might be a modest amount to a pool by which the applicant might provide security for costs.^[92]

5.107 The impact of such orders on class members’ participation in the proceedings can be significant. For example, in Kelly v Willmott Forests, class members who did not make a contribution to security—because they did not show an inability or reasonable unwillingness to contribute, they refused to contribute, or did not respond to the request to contribute—were excluded from sharing in the recovered amount (despite being bound by the result of proceedings).^[93]

5.108 It has been observed that the process of requiring class members to contribute to security for costs, and excluding those who do not pay and do not provide a reasonable reason for failing to do so, ‘cannot be seen as a positive in terms of access to justice’.^[94] The reasons for this include:

• Individuals without resources are potentially excluded from accessing justice.^[95]

• If class members cannot raise sufficient security for costs, the case may be brought to an end. The claims of interested class members and those with resources are therefore stopped by the other class members’ lack of interest or resources.

• Investigating which class members should contribute to any security for costs is a cumbersome, expensive and time-consuming process.^[96]

• Proceedings are made significantly more expensive initially, thereby discouraging class action litigation.^[97]

• The representative plaintiff may be forced to accept a poor settlement.

• It provides an incentive for class members to remain unknown in proceedings (and not contribute to security for costs), thereby exacerbating the ‘free rider’ problem in class actions.^[98]

• It goes against the intention of the ALRC in its 1988 report on grouped proceedings, which stated that security for costs should not be ordered simply on the basis that persons other than the representative plaintiff stand to benefit from the proceeding.

• It may encourage class actions to be restructured to avoid the need to pay security for costs, thereby increasing costs and delays in class action proceedings.

5.109 The Supreme Court’s discretion to order security for costs in Victorian class actions appears to be different from that of the Federal Court. Although there is limited authority supporting the power to order security for costs in class actions, the Court has found that section 33ZD of the Supreme Court Act, which allows costs to be ordered against a representative plaintiff, enables security for costs to be ordered in appropriate cases.^[99]

5.110 However, the Court does not have the power to directly order class members to provide security. While the Federal Court Act provides that, except as otherwise provided by part IVA, nothing in part IVA affects the operation of any law relating to security for costs,^[100] there is no equivalent provision in Victoria, New South Wales or Queensland.

5.111 In Matthews v SPI Electricity Pty Ltd (No 9), Associate Justice Derham found that the Supreme Court of Victoria is denied the power to order security for costs against class members by section 33ZD(b) of the Supreme Court Act, which provides class members with immunity from costs orders except for individual or sub-group claims.^[101]

5.112 A different approach was taken by the New South Wales Supreme Court in De Jong v Carnival PLC.^[102] Although Justice Beech-Jones found that the Court is prohibited from ordering security against class members, he indicated that security could be ordered against the representative plaintiff which might require contribution from class members.^[103] As noted by Legg and McInnes, this has the same effect as ordering security against class members.^[104]

5.113 The Commission acknowledges the legitimate policy objective of protecting the interests of defendants in class actions through security for costs orders, and that factors to consider when ordering security are continuing to develop through case law.^[105] It considers, however, that security should be ordered only by reference to the resources of the entities and individuals who are contributing to the costs of proceedings, such as a litigation funder, a group of well-resourced class members, or a corporation. In the interests of access to justice, it is not desirable that security be ordered by reference to the resources of class members. They have no obligation to pay adverse costs orders and no control over the litigation.

5.114 The Commission’s recommendation that security for costs should not be ordered against class members is made in conjunction with other recommendations throughout the report, which include:

• Recommendation 8, which would enable lawyers to be paid a contingency fee in class actions, if, among other conditions, they agree to pay any security for costs order. Allowing lawyers to charge on this basis will reduce the number of proceedings in which the representative plaintiff is exposed to a security for costs order.

• Recommendation 14, which would enable the Court of its own motion to replace a representative plaintiff. If proceedings are brought in which well-resourced class members are standing behind a ‘person of straw’, this power would enable the Court to replace the representative plaintiff with the class member(s) who could meet an order for security. This would allow the action to continue—thereby promoting access to justice—while also preventing the undesirable situation in which all class members are exposed to security for costs orders due to the impecuniosity of the representative plaintiff.

• Recommendation 29, which recognises the Court’s discretion to order security for costs in class actions, including those that involve a novel area of law or are in the public interest.

5.115 Finally, the Commission acknowledges that there may be proceedings in which class members agree, or volunteer to contribute to the costs of bringing proceedings, including security for costs. The Commission’s recommendation does not interfere with the ability of class members to do this; rather it prevents the Court ordering contribution from class members who have not agreed to do so, and are not required to contribute to other costs, with the result that they do not share in any recovered amount.

Recommendation

28 Section 33ZD of the Supreme Court Act 1986 (Vic) should be amended to specify that the Court may not order a class member to provide security for costs.

Adverse costs in unfunded class actions

5.116 As discussed in Chapter 2, while litigation funders are frequently involved in class actions in the Federal Court, they are far less prevalent in those brought in the Supreme Court. Most representative plaintiffs in Victorian class actions will not be indemnified for the risk that, if the litigation is unsuccessful, they will be liable to pay adverse costs.

5.117 The Commission’s recommendation in Chapter 3 that lawyers be able to apply to be paid a percentage of any recovered amount if, among other things, they indemnify the representative plaintiff for adverse costs, will mitigate this risk.

5.118 The Commission considers it desirable that further measures be taken to reduce the adverse costs risk for the representative plaintiff in class actions that concern a matter of public interest or a novel area of law. Class actions of this type may not be seeking a monetary award, or may be seeking an amount that is too low to attract the financial support of a litigation funder or lawyer.

5.119 When determining whether to make an adverse costs order, and the conditions of the order, the Court has wide discretion. An initiative that could be useful in Victoria would be to introduce a statutory provision that expressly recognises public interest criteria that the Court can take into account. Although it would not remove the risk, it would reduce it, with the possible result that:

• the role of representative plaintiff becomes less daunting, which encourages suitable volunteers to take on the challenge

• third parties consider providing financial support when they otherwise would not have been prepared to bear the risk.

5.120 Such a provision exists in Ontario, where the Class Proceedings Act, SO 1992 sets out the court’s discretion in awarding costs in class actions.^[106] When exercising its discretion, the court may consider whether the class action is a test case, raises a novel point of law or involves a matter of public interest. This provision applies in conjunction with the general civil procedure cost rules, which the court will take into account when determining costs.

5.121 This legislative discretion has resulted in a very cautious approach to awarding adverse costs in public interest class actions. Where awarded, adverse costs orders have been significantly reduced. The Commission was told that this cautious approach to awarding adverse costs has allowed Ontario’s public fund for class actions, the Class Proceedings Fund, to operate successfully in bringing class actions in the public interest.^[107]

5.122 The Commission’s proposed statutory provision, which would also apply to orders for security, is discussed in the next section.

Statutory discretion in making these costs orders

5.123 To overcome the disincentive caused by costs shifting so that, potentially, a greater number of low-value class actions will be pursued, the costs rules could be amended to specify that the Supreme Court has a discretion when awarding adverse costs and security for costs orders in class actions to take into account factors relating to access to justice and the public interest. These factors would apply in conjunction with those relating to the court’s discretion to award costs developed through case law.^[108]

5.124 The provision could be drawn from the statutory discretion in the Ontario Class Proceedings Act. The Commission considers that it should specify that it applies to both adverse costs as well as security for costs. This view is consistent with the findings of the New South Wales Law Reform Commission. In its 2012 review of security for costs and associated costs orders, the New South Wales Law Reform Commission recommended that, in considering an application for security for costs in a class action, the court should take into account, among other factors, the immunity from costs orders provided under the legislation and the function of class actions in providing access to justice.^[109]

Recommendation

29 Part 4A of the Supreme Court Act 1986 (Vic) should be amended to specify that in making an adverse costs order, or a security for costs order in class actions, the Court may take into account, among other factors:

(a) the function of class actions in providing access to justice

(b) whether the case is a ‘test’ case or involves a novel area of law

(c) whether the class action involves a matter of public interest.

Public fund for class actions

5.125 The extent to which the market can be relied on to facilitate access to justice is necessarily limited by the commercial nature of the financial products and services offered. The Commission sought comments from stakeholders on ways to improve access to justice through funding arrangements, other than by lifting the ban on lawyers being able to charge contingency fees.

5.126 Several responses referred to the idea of establishing a public fund, akin to the Ontario Class Proceedings Fund and previous proposals for assistance of this type.^[110] The notion that public funds should be available to support class actions has been a topic of discussion and debate for many years. In its 1988 report, the ALRC argued that, without public funding, the purpose of the class action regime in providing access to justice would be undermined by the operation of the costs-shifting rule and the burden this places on the representative plaintiff. Public funding was seen as an appropriate acknowledgment of the public purpose of many class actions, the burden of which should not rest with the representative plaintiff.^[111]

5.127 The ALRC recommended a public fund to address the disproportionate cost burdens faced by the representative plaintiff. The fund was envisaged as self-financing to some extent, although it was also expected to receive any money that remained unclaimed by eligible class members in proceedings.^[112]

5.128 Since then, the need for a public fund for this purpose has been reiterated in commentary from members of the legal profession, the judiciary, and academics. The Commission was among the proponents. In its 2008 review of the Victorian civil justice system, it recommended a self-funding Justice Fund to provide financial assistance to parties with meritorious claims in the public interest, in conjunction with law firms charging on a ‘no win, no fee’ basis.^[113]

5.129 A public fund that provides financial assistance to plaintiffs in meeting the costs of litigation already exists in Victoria. Law Aid, which has been operating since 1996, is a charitable trust established under part VIA of the Legal Aid Act 1978 (Vic) to cover disbursements for meritorious civil claims, where lawyers are acting on a ‘no win, no fee’ or pro bono basis and the plaintiff would be otherwise unable to afford litigation. It is managed by the Law Institute of Victoria and the Victorian Bar Council. The Commission suggests that there could be scope for it to fund, in part, class actions.

5.130 Law Aid commenced with $1.68 million in seed funding, which has been more than sufficient for its continued existence. In return for covering the cost of disbursements, Law Aid has a statutory entitlement to a fee of 10 per cent in successful cases. However, it has not been necessary for this amount to be charged. It commonly charges 5.5 per cent.^[114]

5.131 Law Aid does not appear to be widely used. When it was created, it was expected to handle about 380 applications a year but the most it has received was in 2010, when it received 314 applications for funding.^[115] The Commission was told that there have been no requests to use Law Aid to fund disbursements in class actions.

5.132 In comparison, the Ontario Class Proceedings Fund provides financial support to approved class actions, to cover adverse costs awards as well as disbursements. Cases are selected on the basis of the merits of the claim and the public interest involved.^[116] In practice, the Class Proceedings Fund has rarely been required to cover adverse costs because the court has exercised its statutory discretion not to order them.

5.133 The fund was established in 1992, under the Law Foundation of Ontario, with seed funding of $500,000 (about a third of the seeding amount that Law Aid received) and has since been self-funded. As at June 2017, it had a balance sheet of around $19 million.^[117] After 20 years in operation, the fund had supported over 82 class actions (from a total of 131 applications) representing 10 per cent of all class actions in Ontario. Of the funded matters, 30 per cent went to trial (rather than settling) to serve as test cases, establish novel legal principles in class action case law and address issues of broad public importance.^[118]

5.134 The Class Proceedings Fund charges a fee, which is capped at 10 per cent of the settlement amount, for its services in successful litigation. The Fund has had a 2:1 success rate.^[119]

1. Matthews v SPI Electricity Pty Ltd (No 9) [2013] VSC 671 (9 December 2013) [162] (Derham AsJ). Costs orders may not be imposed on class members unless they relate to individual or sub-group claims: Supreme Court Act 1986 (Vic) s 33ZD(b).

   ↑

2. Camping Warehouse v Downer EDI [2016] VSC 784 (21 December 2016) [27], [98] (Digby J).

   ↑

3. Roundtable 1 (professional stakeholders).

   ↑

4. See, eg, Matthews v SPI Electricity Pty Ltd (No 9) [2013] VSC 671 (9 December 2013).

   ↑

5. Petersen Superannuation Fund Pty Ltd v Bank of Queensland Ltd [2017] FCA 699 (21 June 2017).

   ↑

6. The Commission was told anecdotally that although project management fees have been charged in the past, they are less likely to be charged in recent class actions. As discussed in Ch 2, project management fees and other fees charged by litigation funders may not crystallise until certain points in proceedings, or may depend on certain criteria being met.

   ↑

7. Submission 18 (Adley Burstyner) suggested that funding fees, as an unavoidable cost of many class actions, should be recoverable under the costs-shifting rule. While this would recognise, in a practical sense, the ubiquity of litigation funding in many class actions, it could lead to distortions in the way that proceedings are filed, or funded. For example, in the United Kingdom, prior to 1 April 2013, success fees under conditional fee arrangements and ‘after the event’ insurance premiums were recoverable under the costs-shifting rule. The review of civil litigation costs undertaken by Lord Justice Jackson in 2009 found that recoverability of these costs imposed disproportionate cost burdens on defendants, while plaintiffs’ were able to litigate essentially ‘risk free’. This led to a reversing of the rule (subject to some exceptions) effective from 1 April 2013: Herbert Smith Freehills, ‘Conditional Fee Agreements (CFAS)/After-The-Event (ATE) Insurance’ on Litigation Notes <https://hsfnotes.com/litigation/jackson-reforms/conditional-fee-agreements-cfas-after-the-event-ate-insurance/>. See generally Lord Justice Jackson, Review of Civil Litigation Costs, Final Report (The Stationary Office, 2010) 80–93.

   ↑

8. Legal Profession Uniform Law Application Act 2014 (Vic) sch 1 (Legal Profession Uniform Law).

   ↑

9. Consultation 3 (Judges of the Supreme Court of Victoria).

   ↑

10. Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626 (21 June 2013) [24].

    ↑

11. Legal Profession Uniform Law s 182.

    ↑

12. See, eg, Williams v AusNet Electricity Services Pty Ltd (Ruling No 3) [2017] VSC 528 (4 September 2017).

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13. Rebecca LeBherz and Justin McDonnell, ATE Insurance and Implications for Class Actions in Australia (30 September 2014) King and Wood Mallesons <www.kwm.com/en/au/knowledge/insights/ate-insurance-and-implications-for-class-actions-in-australia-20140930>.

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14. Counsel engaged by the representative plaintiff’s lawyers may agree to work on a ‘no win, no fee’ basis in a class action. If so, they will be reimbursed upon settlement or judgement (but are not entitled to charge an uplift fee).

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15. For example, in the Kilmore East/Kinglake and Murrindindi/Marysville bushfires class actions, the settlement distribution costs were deducted from interest earned on the settlement amount during the distribution period before reducing settlement amounts payable to class members: Submission 13 (Maurice Blackburn Lawyers).

    ↑

16. Roundtable 3 (professional stakeholders). Whether court approval should remain the only mechanism available for limiting or approving funding fees, or whether, as suggested by many stakeholders, national regulation of litigation funders should be introduced is discussed in Ch 2.

    ↑

17. Submission 25 (IMF Bentham Ltd).

    ↑

18. Submissions 13 (Maurice Blackburn Lawyers), 15 (Phi Finney McDonald), 30 (Supreme Court of Victoria).

    ↑

19. Civil Procedure Act 2010 (Vic) s 65C(1).

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20. Ibid.

    ↑

21. This approach to assessing legal fees was adopted in Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626
    
    (21 June 2013) [32]. As reiterated by Justice Gordon, it is the judge, and not the independent costs expert, that is required to determine whether the fees and disbursements are reasonable, and the information provided to the judge must be sufficient to enable them to undertake that assessment: [35]–[37]. This approach was approved by the Supreme Court in Matthews v AusNet Electricity
    Services Pty Ltd [2014] VSC 663 (23 December 2014) [352], [355] (Osbourne JA).

    ↑

22. Submission 30 (Supreme Court of Victoria).

    ↑

23. Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386, 434–5 (Gummow, Hayne and Crennan JJ).

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24. See, eg, Mitic v OZ Minerals Ltd (No 2) [2017] FCA 409 (21 April 2017) [26]–[31] (Middleton J); Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (2017) 343 ALR 476, 504 (Beach J); Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433 (28 November 2016) [133]–[134], [157] (Murphy J).

    ↑

25. (2016) 245 FCR 191, 208 (Murphy, Gleeson and Beach JJ).

    ↑

26. It has been observed that the power of the court to vary a litigation funding fee is likely to be challenged in the future: Ray Finkelstein, ‘Class Actions, The Good, The Bad and The Ugly’ in in Damian Grave and Helen Mould (eds), 25 Years of Class Actions In Australia: 1992–2017 (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2017) 415, 432 n 54.

    ↑

27. Submissions 9 (Professor Simone Degeling, Associate Professor Michael Legg, Dr James Metzger), 13 (Maurice Blackburn Lawyers).

    ↑

28. Submissions 7 (Litigation Lending Services), 14 (LCM).

    ↑

29. See, eg, Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191, 210, 221 (Murphy, Gleeson and Beach JJ).

    ↑

30. See, eg, Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd [2017] FCAFC 98 (20 June 2017) [90] (Jagot, Yates and Murphy JJ).

    ↑

31. Civil Procedure Act 2010 (Vic) ss 10, 24.

    ↑

32. Ibid s 29.

    ↑

33. There was some support from submissions for increased guidance for the Court when assessing the reasonableness of a funding fee, although the importance of avoiding overly prescriptive or exhaustive guidance was noted: 12 (Allens), 13 (Maurice Blackburn Lawyers), 14 (LCM), 15 (Phi Finney McDonald), 18 (Adley Burstyner), 22 (Dr Michael Duffy), 25 (IMF Bentham Ltd). A range of factors relevant to the Court’s assessment of a funding fee were set out by the Federal Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) FCR 191, which some submissions thought could provide the basis for Supreme Court Practice Note guidance: Submissions 9 (Professor Simone Degeling, Associate Professor Michael Legg, Dr James Metzger), 12 (Allens), 14 (LCM), 15 (Phi Finney McDonald).

    ↑

34. Justice Michael Lee, ‘Varying Funding Agreements and Freedom of Contract: Some Observations’ (Speech delivered at the IMF Bentham and UNSW Class Action Conference, Sydney, 1 June 2017).

    ↑

35. See, eg, Camping Warehouse v Downer EDI [2016] VSC 784 (21 December 2016).

    ↑

36. Consultation 3 (Judges of the Supreme Court of Victoria).

    ↑

37. The Commission recommends that the Supreme Court consider including guidance on appointing a contradictor in its Practice Note:
    
    see Ch 4.

    ↑

38. Submissions 9 (Professor Simone Degeling, Associate Professor Michael Legg, Dr James Metzger), 27 (Ashurst).

    ↑

39. Roundtable 3 (professional stakeholders).

    ↑

40. Submissions 13 (Maurice Blackburn Lawyers), 15 (Phi Finney McDonald), 21 (Law Council of Australia), 30 (Supreme Court of Victoria); Roundtable 3 (professional stakeholders).

    ↑

41. Submissions 13 (Maurice Blackburn Lawyers), 27 (Ashurst).

    ↑

42. Justice Jack Forrest, ‘Issues in Case Management of Class Actions and Administration of Settlements—Kilmore East/Kinglake Bushfire Trial’ in Damian Grave and Helen Mould (eds), 25 Years of Class Actions In Australia: 1992–2017 (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2017) 71, 93.

    ↑

43. 43 Submission 9. The submission proposed, as a solution, altering the test of proportionality for legal costs. This matter may be relevant to the ALRC’s current review of costs charged by solicitors in funded litigation.

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44. It was observed that, if the law firm has robust internal processes for reviewing legal costs, unreasonable costs should be avoided regardless of, or prior to, review by an independent costs expert: Submission 13 (Maurice Blackburn Lawyers).

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45. Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (2017) 343 ALR 476, 521 (Beach J).

    ↑

46. Submission 9 (Professor Simone Degeling, Associate Professor Michael Legg, Dr James Metzger).

    ↑

47. Civil Procedure Act 2010 (Vic) s 10.

    ↑

48. Submission 13 (Maurice Blackburn Lawyers).

    ↑

49. [2017] VSC 528 (4 September 2017).

    ↑

50. Submission 30 (Supreme Court of Victoria).

    ↑

51. Federal Court of Australia, Class Actions Practice Note (GPN–CA)—General Practice Note, 25 October 2016, [15.2].

    ↑

52. Ibid [15.3].

    ↑

53. Submission 9 (Professor Simone Degeling, Associate Professor Michael Legg, Dr James Metzger).

    ↑

54. Submission 25 (IMF Bentham Ltd); Roundtable 2 (professional stakeholders). IMF Bentham supported the use of costs budgets in all proceedings, not just class actions or funded proceedings.

    ↑

55. CPR 3.12–3.18; CPR PD 3E (costs management); Elizabeth Harris, ‘Let’s Keep it Real: Judicial Management of Civil Costs’ (2013) 87(6) Law Institute Journal 45, 46.

    ↑

56. Civil Procedure Act 2010 (Vic) s 65A.

    ↑

57. Submission 13 (Maurice Blackburn Lawyers).

    ↑

58. Roundtable 3 (professional stakeholders).

    ↑

59. Submissions 12 (Allens), 27 (Ashurst). Submission 4 (Chartered Accountants Australia and New Zealand) noted a number of members supported a cap on the proportion of fees that a litigation funder could take. Submission 16 (National Union of Workers) submitted that the court should have some form of discretion through a formula that it can work to, once an order is made.

    ↑

60. Submission 12 (Allens).

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61. Submission 25 (IMF Bentham Ltd).

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62. Submissions 7 (Litigation Lending Services), 28 (Slater and Gordon Lawyers).

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63. Submission 25 (IMF Bentham Ltd). See also Submission 14 (LCM).

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64. Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (2017) 343 ALR 476, 514 (Beach J).

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65. See, eg, Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (2017) 343 ALR 476, 516 (Beach J); Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191, 221 (Murphy, Gleeson and Beach JJ).

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66. One of the ‘safeguards’ referred to by the Federal Court in approving a common fund order in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 was the floor condition that no class member could be worse off under the orders than she or he would be if such orders were not made: 196, 213–15 ( (Murphy, Gleeson and Beach JJ). This safeguard was applied in the context of a funding equalisation order otherwise being made. While subsequent case law has discussed the importance of not decontextualising the order, the counterfactual of a funding equalisation order need not necessarily always be used: Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (2017) 343 ALR 476, 504–5 (Beach J).

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67. For example, in a class action currently before the Federal Court, the application for a common fund order proposed that upon resolution, class members who had not signed a funding agreement would pay a 30% funding fee. Class members who had executed a funding agreement would pay a 20% funding fee. Both amounts were stated to be subject to determination by the Court: Capic v Ford Motor Company of Australia, Federal Court Proceedings NSD 724 of 2016.

    ↑

68. See, eg, Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191, 196. If, however, the contractually agreed funding fee is excessive, the deduction of an equivalent amount under a funding equalisation order will not be fair and reasonable. Recent case law indicates that in such circumstances, the court has the power to reduce the funding fee as part of settlement approval: see, eg, Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433 (28 November 2016) [7], [137] (Murphy J).

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69. A further ‘safeguard’ referred to by the Federal Court in approving a common fund order in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 was that the amount of the funding fee should be deferred until the end of the proceeding, when more probative and complete information would be available. However, the Court also considered accepting the funding fee rate proposed by the applicant with a view to reviewing it at settlement approval. It was observed it may not always be necessary or appropriate to decline to set the funding fee until settlement approval, but rather, it would depend upon the circumstances: 195, 221 (Murphy, Gleeson and Beach JJ).

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70. Roundtable 3 (professional stakeholders).

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71. Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191.

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72. Consultation 2 (Judges of the Federal Court of Australia).

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73. Consultation 3 (Judges of the Supreme Court of Victoria).

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74. See Re Banksia Securities Ltd (rec and mgr apptd) (in liq) (No 2) [2018] VSC 47 (16 February 2018) [72]–[95] (Croft J); Re Banksia Securities Ltd (rec and mgr apptd) [2017] VSC 148 (31 March 2017) [93]–[114] (Robson J); Camping Warehouse v Downer EDI [2016] VSC 784 (21 December 2016) [105]–[155] (Digby J); Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 (19 December 2012) [19]–[20] (Pagone J).

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75. Roundtable 3 (professional stakeholders).

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76. Roundtable 3 (professional stakeholders). Although the Federal Court has suggested that common fund orders could assist in reducing the number of competing class actions, this has not been reflected in practice to date. For example, in the class action brought against Bellamy’s Australia Ltd, competing class actions were filed, both proposing to seek a common fund order: Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191, 196–7 (Murphy, Gleeson and Beach JJ); McKay Super Solutions Pty Ltd v Bellamy’s Australia Ltd [2017] FCA 947 (18 August 2017) [8] (Beach J). See also Jenny Campbell and Jerome Entwisle, ‘The Australian Shareholder Class Action Experience: Are We Approaching a Tipping Point?’ (2017) 36 Civil Justice Quarterly 177, 193.

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77. Submission 13 (Maurice Blackburn Lawyers).

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78. Roundtable 3 (professional stakeholders).

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79. Submission 13 (Maurice Blackburn Lawyers).

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80. Submission 12 (Allens).

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81. Submissions 7 (Litigation Lending Services), 14 (LCM). See also Submission 28 (Slater and Gordon Lawyers). The Commission considers that such uncertainty is ameliorated by the flexible approach to setting a funding fee as part of a common fund order adopted by the Federal Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191, 210, 221 (Murphy, Gleeson and Beach JJ).

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82. Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (2017) 343 ALR 476, 507 (Beach J); Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191, 194, 225 (Murphy, Gleeson and Beach JJ).

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83. See, eg, Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) (2017) 343 ALR 476, 505 (Beach J).

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84. Consultations 2 (Judges of the Federal Court of Australia), 3 (Judges of the Supreme Court of Victoria). This is consistent with the view expressed in Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (2015) 325 ALR 539, where Justice Wigney, in refusing to make a common fund order, indicated that it would perhaps be preferable for a common fund approach to litigation funding to occur through legislative reform than via the Court’s general discretionary powers: 581.

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85. Submissions 14 (LCM), 17 (Adley Burstyner), 25 (IMF Bentham Ltd).

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86. Submission 13 (Maurice Blackburn Lawyers).

    ↑

87. New South Wales Law Reform Commission, Security for Costs and Associated Orders, Report No 137 (2012) 68.

    ↑

88. Law Reform Commission (now Australian Law Reform Commission), Grouped Proceedings in the Federal Court, Report No 46 (1988) 113, 165.

    ↑

89. G E Dal Pont, Law of Costs (LexisNexis Butterworths, 3rd ed, 2013) 973.

    ↑

90. Justice Bernard Murphy and Vince Morabito, ‘The First 25 Years: Has the Class Action Regime Hit the Mark on Access to Justice?’ in Damian Grave and Helen Mould (eds), 25 Years of Class Actions in Australia: 1992–2017 (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2017) 13, 30–1.

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91. See, eg, Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317; Madgwick v Kelly (2013) 212 FCR 1.

    ↑

92. Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317, 348 (Carr J).

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93. See Kelly v Willmott Forests Ltd (in liq) (No 4) (2016) 335 ALR 439, 448–50 (Murphy J).

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94. Justice Bernard Murphy and Vince Morabito, ‘The First 25 Years: Has the Class Action Regime Hit the Mark on Access to Justice?’ in Damian Grave and Helen Mould (eds), 25 Years of Class Actions in Australia: 1992–2017 (Ross Parsons Centre of Commercial, Corporate and Taxation Law, 2017) 13, 31.

    ↑

95. See, eg, Capic v Ford Motor Company (No 2) [2016] FCA 1178 (30 September 2016) [15] (Perram J).

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96. See, eg, Baker v The Partnership of Larter [2016] NSWSC 1194 (30 August 2016) [21] (Ball J); Capic v Ford Motor Company (No 2) [2016] FCA 1178 (30 September 2016) [15] (Perram J).

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97. Samuel Isaacharoff and Thad Eagles, ‘The Australian Alternative: A View from Abroad of Recent Developments in Securities Class Actions’ (2015) 38 University of New South Wales Law Journal 179, 200.

    ↑

98. Ibid.

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99. Matthews v SPI Electricity Pty Ltd (No 9) [2013] VSC 671 (9 December 2013) [84] (Derham AsJ). The Court’s power to order security for costs under part 4A of the Supreme Court Act 1986 (Vic) operates in conjunction with the provisions of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) o 62.

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100. Federal Court Act 1976 (Cth) s 33ZG(C)(v).

     ↑

101. Matthews v SPI Electricity Pty Ltd (No 9) [2013] VSC 671 (9 December 2013) [162] (Derham AsJ); see also [54]–[55].

     ↑

102. [2016] NSWSC 347 (1 April 2016).

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103. Ibid [6].

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104. Michael Legg and Ross McInnes, Australian Annotated Class Action Legislation (LexisNexis Butterworths, 2nd ed, 2018) 521.

     ↑

105. See, eg, De Jong v Carnival PLC [2016] NSWSC 347 (1 April 2016) [26] (Beech-Jones J); Madgwick v Kelly (2013) 212 FCR 1, 19–20 (Allsop CJ and Middleton J); Kelly v Willmott Forests Ltd (in liq) (2012) 300 ALR 675, 678–9 (Murphy J).

     ↑

106. Class Proceedings Act, SO 1992, c 6, s 31(1).

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107. Consultation 5 (Associate Professor Jasminka Kalajdzic). There is some evidence that this may be changing: in two recent class actions, significant adverse costs orders have been made against the representative plaintiff. As a result, defendants have twice been awarded adverse costs in class actions (for $1 million, and $2.3 million). These adverse costs orders have not been paid by the representative plaintiff: in one case, they were paid by the lawyers, in the other, the Class Proceedings Fund: Consultation 5 (Associate Professor Jasminka Kalajdzic).

     ↑

108. For example, the factors that have developed through case law relating to the courts discretion when ordering security for costs: see, eg, De Jong v Carnival PLC [2016] NSWSC 347 (1 April 2016) [26] (Beech-Jones J); Madgwick v Kelly (2013) 212 FCR 1, 19–20 (Allsop CJ and Middleton J); Kelly v Willmott Forests Ltd (in liq) (2012) 300 ALR 675, 678–9 (Murphy J).

     ↑

109. New South Wales Law Reform Commission, Security for Costs and Associated Orders, Report No 137 (2012) 68–72; Recommendation 3.3.

     ↑

110. Roundtable 4 (professional stakeholders); Submissions 10 (Victorian Legal Services Board and Commissioner), 12 (Allens), 13 (Maurice Blackburn Lawyers), 19 (US Chamber Institute for Legal Reform), 24 (Consumer Action Law Centre).

     ↑

111. Law Reform Commission (now Australian Law Reform Commission), Grouped Proceedings in the Federal Court, Report No 46 (1988) 126–8.

     ↑

112. Ibid.

     ↑

113. Victorian Law Reform Commission, Civil Justice Review, Report No 14 (2008) 614–22; Recommendations 133–40.

     ↑

114. Michael J Lombard, Law Aid, All You Need to Know (2018) Law Aid <http://lawaid.com.au/law-aid-all-you-need-to-know/>.

     ↑

115. Ibid.

     ↑

116. Consultation 5 (Associate Professor Jasminka Kalajdzic).

     ↑

117. Ibid.

     ↑

118. Class Proceedings Fund, 20 Years in Review (2012) 1.

     ↑

119. Consultation 5 (Associate Professor Jasminka Kalajdzic).

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