Australia’s first group costs order explained

Allen v G8 Education Ltd  [2022] VSC 32

The group costs order (GCO) regime allows law firms in class actions to recover legal fees and expenses as a percentage of any award or settlement.[1] The first GCO was made in the shareholder class action, Allen v G8 Education Ltd  on 1 December 2021. The rate granted was capped at 27.5% (incl. GST).[2] The Ruling of Justice Nichols was published on 7 February 2022. This article discusses some key issues the Court considered in ordering Australia’s first GCO.

Undertaking as to rate

Her Honour granted the GCO at 27.5% on the plaintiffs proffering an undertaking not to apply to later increase the rate.[3] Her Honour noted that in a different case, an undertaking might not be necessary, but considered it appropriate to make the order given the undertaking.[4] The undertaking was proffered having regard to the Court’s discretion to later vary the rate at a later stage.[5]

Retainer

This matter was conducted under a ‘no win, no fee’ (NWNF) retainer that provided legal costs would be funded in one of three ways – (i) by a GCO, (ii) by litigation funding (if a GCO was not sought or obtained), (iii) by the law firm acting on a NWNF basis; and (iv) by a hybrid between litigation funding and NWNF.[6] There was no dispute about the construction of the retainer, other than considerations about the effect of the termination clause.[7]

Absent alternative funding, the law firm was bound to act on a NWNF basis subject to termination rights.[8] The law firm did not expressly say that it would terminate the retainer if alternative funding was not obtained, only that it would consider its position  in light of the facts at the time.[9] The right of the law firm to terminate was predicated on it forming a belief that the class action did not enjoy ‘sufficient financial support’ and further, allowed that the law firm may terminate if it had not yet made a decision  to act on a NWNF basis.[10]

The defendant submitted that the right to terminate should be exercised reasonably and that the law firm deciding not  to fund the action, would not  be a reasonable exercise of power – particularly where a GCO is made, the law firm would be paying any security for adverse costs (as required by s 33ZDA) and therefore acting on a NWNF basis, which would not involve the law firm assuming a risk that it had already  agreed to assume under its current NWNF retainer.[11]

The Contradictor submitted that it had not  been established that there was a real risk of the proceeding not  continuing due to a lack of funding because (i) the NWNF arrangement was continuing and (ii) if the GCO was refused and litigation funding not obtained, the law firm would have right to terminate but those rights would require consideration and a positive decision by the law firm – there was no evidence of the firm doing so; her Honour accepted that submission.[12]

Her Honour indicated that the right to terminate the retainer in the event the law firm decided it did not continue to fund the proceeding on a NWNF basis, was subject to uncertainty[13]. Further, the drafting of the retainer left much to be desired and noted that there would be a question of whether the firm’s ability to terminate was constrained by the firm’s obligations to plaintiffs and group members.[14]

Ultimately, the question of termination rights was not considered further as the law firm did not go so far as to say that it would  be entitled to terminate the retainer in the circumstances, only that it would consider its position.[15] As there was no dispute between the contracting parties on the question of purported termination, it was not appropriate to decide the issue on assumptions.[16]

Litigation funding

The retainer provided that the law firm could seek litigating funding as an alternative to a GCO. The law firm gave unchallenged evidence including that it was (i) reasonably confident that litigation funding would be obtained as there would be sufficient interest by the funders to obtain a reasonable and suitable offer[17]; (ii) the funding commissions were within the range of “market rates”;[18] and (iii) it would take about 6 months to obtain and expected to make an application for a temporary stay of the proceeding.[19]

Expert report

The plaintiffs relied on a report by, economist, Greg Houston, who researched funding and costs of class actions in Australia[20]. Mr Houston calculated the combined proportion of any award of settlement for legal costs and litigation funding commissions – for shareholder class actions, the median was 46% and the mean 44%.[21] The plaintiffs submitted that the proposed GCO capped at 27.5% would be better for group members than one with regard to the historical examples.[22]

Her Honour accepted that the analysis was an informative compilation of commission rates and outcomes in the Australian market for litigation funding and accepted the findings of Mr Houston as a general indication of the range of likely funding commissions.[23] Her Honour considered there was real prospect that if litigation funding was obtained, the commission was likely to be in the rage identified in Mr Houston’s report.[24] Further, it was not necessary to burden the plaintiff to prove available funding rates for this case, as it would require negotiations for a detailed and bespoke contract, which would be lengthy, costly and unlikely to produce terms which a funder would be prepared to commit.[25]

Stay of proceedings

There was no stay application on foot and therefore no question to decide, however her Honour did consider there was force in the submissions of the defendant and Contradictor – pointing out that unless the law firm terminated the retainer, it was bound to act for the plaintiff on a conditional basis even while litigation funding was sought.[26]

No win, no fee alternative

On the suggestion of the Contradictor to assist the Court, the plaintiffs put on further material setting out a range of potential post-trial outcomes, which detailed how the return to group members might vary under a GCO versus a NWNF arrangement, but submitted that the comparison lacked utility.[27] It was noted that there are significant limits of a direct comparison model for assessing a proposed GCO as it relies on forecast modelling where all inputs have significant uncertainty – because of that and given the early stage of the litigation, there was no utility in seeking further modelling.[28] The Contradictor ultimately concluded that it was possible a GCO would result in a better outcome for group members than a NWNF arrangement but equally possible that it may not.[29]

Proposed rate

The plaintiffs sought a GCO at 27.5% as a maximum that could be adjusted downwards if, for example, a very positive outcome delivered a disproportionate return to the solicitors.[30] The Contradictor accepted the prima facie  reasonableness of the proposed rate and the rate was not opposed by the defendant.[31] Her Honour indicated that plaintiffs and their solicitors must be mindful to assist the Court to scrutinise the appropriateness of the rate, after it is set at the time of the GCO application, as other measures and evidence might be informative.[32] For example, (i) an insurance-based actuarial calculation to assess why a proposed return is likely to be reasonable for an investor with the particular funder’s characteristics;[33] and (ii) addressing the appropriate reward for assuming risk, evaluated after the event  by reference to the reasons that informed the decision to take the risk.[34]

Conclusion

Her Honour remarked that a GCO was granted  in this case but refused  in the case of Fox v Westpac; Crawford v ANZ[35] despite similar circumstances.[36] The critical point to note is that Fox/Crawford concerned different evidence, a different retainer and different submissions.[37] Applicants are reminded that the Court will evaluate a GCO application on a case by case basis.

For more information please contact Paul Buitendag and Rena Solomonidis.