Court grants 40% Group Costs Order: impact of cost sharing between lawyers and funder

​Bogan v The Estate of Peter John Smedley (Deceased) [2022] VSC 201

On 26 April 2022, John Dixon J delivered judgment in the Arrium class action holding that a group costs order (GCO) at 40% (including GST) was appropriate to do justice in the proceeding.

This is the second successful GCO application, and is a rate that is 12.5% higher than the first (being 27.5%).[1]

It demonstrates that GCO rates are not limited to a maximum of 30% and that the Court is prepared to acknowledge the risks that law practices take when prosecuting complex commercial proceedings.

The key takeaways for plaintiff law practices are:

• future GCO applications will need to present an investment evaluation analysis to support the rate sought (or an explanation of its absence);
• the legislation does not direct an inquiry into the means by which the law practice chooses to fund its obligation pursuant to a GCO and law practices may enter costs sharing agreements with litigation funders or other transactions to defray its risk (provided it is not acting as a ‘mere front’ for a litigation funder); and
• in the case of proceedings with existing third party litigation funding, the GCO may be subject to a condition precedent that the litigation funder forego any accrued rights under the existing funding agreement.

Plaintiffs’ position

The Arrium class action has been brought on behalf of certain investors in Arrium Limited (Arrium) against four former directors of Arrium and Arrium’s former auditor.

The plaintiffs sought a rate of 40% (including GST). Prior to the plaintiffs’ GCO application, the proceeding was funded by third party litigation funding. The plaintiffs submitted that given the complex and expensive nature of the case, the funder would not continue funding on the existing arrangement but would agree to co-funding with the plaintiffs’ solicitors if a GCO was obtained at a rate of 40%.

Co-funding would involve the plaintiff law practice and the litigation funder entering a costs sharing agreement where the law practice would pay 50% of any payment it received pursuant to the GCO (after certain deductions) to the litigation funder.[2]

Determination

Justice Dixon determined that a GCO at 40% was appropriate to do justice in the proceeding. This determination turned on the circumstances of the case, including that:[3]

• if a GCO was not ordered, there was a considerable risk that the funder would conclude the funding agreement was not financially viable for it and would terminate pursuant to its contractual rights under the existing funding arrangement;
• if a GCO was not ordered at 40%, there would be a risk the funder would not enter into the proposed costs sharing agreement;
• there were significant impediments to engaging another funder at that stage – including that the existing funder would retain the right to recover any legal fees and disbursements it had already paid – such that it was not a realistic prospect;
• the GCO would govern all costs and litigation funding charges in respect of the proceeding in substitution for the rights and obligations that existed under the existing funding agreement(s) with group members;
• the GCO was reasonable and proportionate with the risk profile for the matter;
• the GCO appeared commercially viable because the law practice would be supported by the proposed costs sharing agreement; and
• the group members would receive the benefits of transparency and simplicity, a certain funding structure, the opportunity to present their claims for resolution (given the risk of uncertainty that the proceeding would continue), an equal sharing of the costs and burden of the claims, capped costs, relief from the obligation to provide security for costs, relief from exposure to the contingent liability to pay any adverse costs orders, and the opportunity to seek a review of the GCO should the circumstances change.

Investment principles

Justice Dixon provided further guidance for prospective applicants by considering investment evaluation principles “in the expectation that in future cases such an analysis will be presented to the Court …or its absence explained.”[4] This included discussion of the core risks that law practices face in prosecuting proceedings pursuant to a GCO[5] and an explanation of the components for determining a fair and reasonable risk premium.[6]

His Honour also considered methods for decision making regarding investments and opined that expert evidence of the rate of return obtainable in the market by insurers, private equity, and venture capital may assist to assess a rate of return for an investment by a law practice.[7]

Costs sharing

His Honour rejected any suggestion that the contemplated arrangement was one where the law practice was acting as a ‘mere front’ for a third party funder, and held:[8]

The statutory language does not invoke any inquiry into the means by which the law practice chooses to fund its obligations. A group costs order would result in the Funder having no direct agreement with the plaintiffs and group members and [the law practice] would be liable for the costs of the proceeding.

Conclusion

The Arrium judgment provides law practices contemplating prosecuting proceedings on the basis of a GCO and litigation funders considering co-funding a law practice’s GCO obligations, an assurance that the Court is prepared to recognise that a commitment to a GCO is an investment and that the returns need to be commensurate with other investment opportunities with similar risk profiles.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).