First settlement approval by Victorian Supreme Court involving contingency fees 

What you need to know

• The Supreme Court of Victoria has approved a 27.5% Group Costs Order (GCO) as part of its approval of a class action settlement.
• This was the first time the Court considered its power to amend a GCO in a settlement context.
• The Court found no reason to vary the GCO having regard to a number of factors including financial metrics like the plaintiff lawyers' return on investment and internal rate of return, the actual costs to run the litigation and comparing the returns to class members with other funded proceedings.
• The approved settlement was $46.5 million with $12.8 million (27.5%) being payable to the plaintiffs' lawyers under the GCO.
• This decision is likely to continue the upward trajectory of class actions filings in Victoria with plaintiff lawyers feeling more emboldened to perform the role of funder and lawyer given the approach taken to deciding whether to vary contingency fee arrangements following settlement.

What is a Group Costs Order (GCO)?

In 2020, legislation was introduced in Victoria permitting the Court to make a GCO which allows a class action plaintiff's legal costs to be calculated as a proportion of the final settlement sum. Class members share in the liability for the plaintiff's legal costs.

GCOs are currently only available for class actions commenced in the Supreme Court of Victoria. There is blanket prohibition in all other Australian jurisdictions on lawyers charging contingency fees, albeit the Federal Court recently held that it had the power to make a "solicitor's CFO" which has a similar effect.

In the G8 Education class action, Nichols J delivered reasons in February 2022 for making the first GCO under Part 4A of the Supreme Court Act 1986 (Vic). The Court accepted that the proposed GCO, capped at 27.5% of any gross settlement or award, would provide greater certainty of outcome in relation to the costs of litigation compared to the alternative forms of funding. For further details see our earlier update here.

In March this year the parties to the G8 Education class action entered into a settlement deed and the settlement approval hearing was held in July.

Under the relevant legislation, the Court can, during the course of the proceeding, amend a GCO, including varying the percentage ordered. While none of the parties (including a contradictor that was appointed to act in the interests of class members) argued for any variation to the GCO, Justice Watson said he was still required to consider whether the GCO should be amended in the settlement approval context.

Varying the Group Costs Order – relevant factors

The Court pointed to the following factors as relevant to its decision as to whether to amend the GCO:

• The costs payable to the plaintiff's lawyers under the GCO should remain proportionate in terms of risk and reward in light of facts known at the time of settlement (noting that GCOs are typically made at an early stage in the litigation on the basis of "imperfect information").
• Return on investment (ROI) and internal rate of return (IRR) metrics are useful in assessing the proportionality of GCOs.
• Similarly, evidence from the plaintiff law firm regarding the hours worked (here, just shy of 13,000), actual costs incurred for labour and overheads and its hourly costs are also helpful for the Court's analysis.
• A key consideration is whether the GCO is likely to produce greater returns for class members than if the litigation was funded by a third party.
• The absence of any party seeking to amend the GCO will also weigh significantly in favour of not amending the GCO.

Justice Watson observed that evidence from the plaintiff law firm indicated that its costs in running the litigation (including disbursements) were approximately $9.1 million. Under the GCO, the plaintiff lawyers would receive approximately $12.8 million, which was a reward of approximately $3.7 million or 7.9% of the settlement sum of $46.5 million. His Honour found this was a reasonable and not disproportionate reward for the effort and risk undertaken in running the litigation and was significantly less than the average litigation funding commissions of 23% to 24%. His Honour also found that the ROI and IRR values for the plaintiff lawyer were reasonable and appropriate.

His Honour also noted that the GCO percentage in this case was above the median of 24.5% but still safely described as mid-range and therefore less likely to be amended than a higher percentage.

Where to from here?

• For the first time, the Court in G8 Education has considered the factors relevant to amending a GCO at a settlement hearing.

• The Court is less likely to vary a GCO if it provides a more favourable outcome for class members than third-party funding arrangements.

• Plaintiff law firms will likely use the guidance in this decision in making future applications for Group Costs Orders.

• While this decision will likely increase the class action filings in the Victorian Supreme Court, it may not lead to the same flood of claims that we have seen over the last few years. This is because the Federal Court has recently confirmed that it has the power to make solicitor common fund orders which would allow solicitors to take a percentage of settlement proceeds in Federal Court class actions (see our earlier article here).

• However, until the High Court determines the availability of CFOs more generally (see our earlier article regarding special leave applications to the High Court here), we consider that plaintiff law firms will prefer the certainty offered by the GCO regime in Victoria, particularly as GCOs are made at an early stage in the proceeding.

• Notwithstanding the developments in the Federal Court, the emphasis in the G8 Education decision on GCOs providing better returns for class members and increased transparency and certainty for plaintiffs may renew calls for replicating the GCO model across all class action regimes in Australia (consistent with the research conducted earlier this year by the McKell Institute).

• It's still early days for GCOs and we are just starting to receive guidance from the court as to how they will be applied. In time, we may see plaintiff law firms struggle to carry the financial burden of long running and costly cases without the assistance of a funder and this could give rise to conflicts of interest.

Allen and Ors v G8 Education Ltd [2024] VSC 487

Authors: Ian Bolster, Partner; John Pavlakis, Partner; Angela Pearsall, Partner; Mark Bradley, Partner and Srishti Natesh, Senior Associate.