Navigating through the principles and practicalities of GCOs (Group Cost Orders), CFOs (Common Fund Orders) and NWNF (No Win No Fee)

Commercial Law Association half-day seminar – The evolving class actions landscape in Australia: Impacts of recent judgments, legislative reforms and international developments – Friday 18 March 2022

The Hon. Justice Bernard Murphy, Federal Court of Australia
I.	INTRODUCTION
I have been asked to speak today on the principles and practicalities of group cost orders, common fund orders and no win no fee arrangements in class actions.
These issues must be understood against the background that the central aims of the representative procedure regime in Part IVA of the Federal Court of Australia Act 1976 (Cth) are to enhance access to justice for those in the community who have been effectively denied justice because of the high cost of taking action, and improving judicial economy by allowing a common, binding decision to be made in one proceeding instead of in multiple proceedings.  Similar purposes underpinned the introduction of the Victorian, New South Wales (NSW) and Queensland class action regimes which broadly copied the Part IVA regime.  Indeed, such purposes underpin class action regimes around the world.
Parliament chose to legislate an opt out over an opt in procedure on grounds of “equity and efficiency”, because it considered that an opt out procedure “ensures that people, particularly those who are poor or less educated, can obtain redress where they may be unable to take the positive step of having themselves included in the proceedings.”
But, as has long been recognised, there is a lack of equality between powerful, wealthy litigants and under resourced litigants, and “a first class court system and a first class legal profession are of no avail to a person who cannot afford to access them”.
Despite the intent of Pt IVA, without mechanisms such as no win no fee arrangements, third party litigation funding involving funding equalisation orders (FEO) or common fund orders (CFO), and group costs orders in Victoria, the costs and risks associated with class action proceedings put such litigation beyond the resources of ordinary Australians, and the object of enhancement of access to justice is not achieved.  In one way or another each mechanism allows the cost of litigation brought by similarly-situated claimants against large and well-resourced defendants to be shared amongst the claimants who benefit from the litigation, thereby allowing the case to be brought, and to an extent providing equality of arms and levelling the litigation playing field.
Thus, while such mechanisms may not be the most exciting topic for a seminar, they are central to achieving access to justice.  Each mechanism has its own consequences and, unsurprisingly, none are perfect.
II.	NO WIN NO FEE ARRANGEMENTS 

I will start with no win no fee arrangements (NWNF) between a lawyer and their client, as they are the most well-known and the oldest.  I expect that you are all familiar with such arrangements.
They are important because, unfortunately, the introduction of the Part IVA regime was not accompanied by any appropriate reforms of the available costs arrangements.  No attention was given to the question of legal costs notwithstanding that a moments reflection would have indicated that no ordinary Australian could possibly afford the huge expense and risk of the litigation contemplated by the regime.  Lawyers soon realised that the only way their clients’ group claims could be brought was through NWNF arrangements (called conditional fee agreements) which usually provide that the claimant’s solicitors carry the expense of counsel’s fees and other disbursements and their own professional fees; the solicitors are only reimbursed the expenses and unmet fees upon a “successful outcome” in the claim, with the legal costs allowed to be increased by an “uplift” of 25%.
Over the four or five year life of a large class action the 25% uplift is insufficient, including because it does not compensate lawyers for the risk of failure in the case.  In an average case, at the end of a unsuccessful trial the applicant’s lawyers will have spent, conservatively, more than $4 million in disbursements and counsel’s fees and have run up more than $6 million million in unpaid fees.
The available arrangements In Australia fall short of the ways in which other jurisdictions have addressed similar problems.  For example, the United Kingdom allowed conditional fee agreements which provided for an uplift or success fee of up to 100%; in Canada, Ontario case law provides that the fairness and reasonableness of the fee awarded in respect of class proceedings was to be determined in light of the risk undertaken by the solicitor in conducting the litigation and the degree of success or result achieved; and in the US, contingency fees are allowed in class proceedings.
In the early days of class action litigation many lawyers were, and many still are, unwilling or lack the financial capacity to conduct class action litigation on a NWNF basis.  Legal aid has proved unable to fill that gap, and as a result (before the advent of litigation funding) many victims of mass civil wrongs were denied access to justice.
Another difficulty is that even if a person is able to find and retain lawyers prepared to take on the significant cost and risk of bringing a class action on a NWNF basis, the applicant still faces a substantial adverse costs liability, which acts as a strong disincentive to taking on that role.  As Strathy J observed:
The grim reality is that no person in their right mind would accept the role of representative plaintiff if he or she were at risk of losing everything they own.
Related to the issue of adverse costs liability is the finding by the Full Court in Madgwick v Kelly that the applicants were required to put on security for costs and that the characteristics of the class members is relevant in deciding that question.
Some large firms have been and are prepared to bring class actions on a NWNF basis, but empirical research shows that when NWNF arrangements were the primary mechanism, the usage of the Part IVA procedure began to decline.  The period 2004 to 2006 marked the low point in the number of class actions filed.  In the view of academic researchers, Professors Waye and Morabito, the reduction in class actions occurred because “[c]lass actions were simply becoming too expensive and too risky for Australian law firms, which are prohibited from charging contingency fees, and which generally have limited access to capital markets.”
Empirical research shows that NWNF arrangements provide better returns to class members as the absence of litigation funding fees means that overall costs are lower.  Thus, if competent lawyers are willing, and have the financial capacity, to conduct class proceedings on a NWNF basis, such proceedings may be seen as the best option for class members.
The difficulties with the availability of NWNF arrangements; the applicant’s exposure to adverse costs and the problem of security for costs remain today, but such arrangements continue to be a valuable part of the suite of available mechanisms.

III.	THIRD PARTY LITIGATION FUNDING

In the late 1990’s commercial third-party litigation funders stepped in to fill the (unmet) legal needs of claimants who could not afford to meet legal costs, were unwilling to take on the burden of adverse costs liability and/or could not find a lawyer to conduct their case on a NWNF basis.  The millions of ordinary Australians who have made claims in funded litigation since that time tends to show that the unmet need was great.
In Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd the majority of the High Court endorsed third-party litigation funding, and the views of President Mason where his Honour approved the English Court of Appeal’s view that “it is desirable, in order to facilitate access to justice, that third parties should provide assistance designed to ensure that those who are involved in litigation have the benefit of legal representation”.

Closed class actions and opening and closing classes

But at that time litigation funders were not prepared to fund class action litigation on an “open” class basis. In their view it damaged their business model if class members who did not enter into a funding agreement had a “free ride”.  They preferred closed class actions. They reasoned, “why would class members sign a funding agreement and give up a percentage of their returns if they could enjoy the benefits of the action without doing so?”

That problem was addressed by the procedural expedient of defining the class by reference to those persons who had entered into a retainer or a funding agreement.

A number of successful closed class actions were conducted, but in 2007 in Dorajay Pty Ltd v Aristocrat Leisure Ltd Stone J held that closed classes subverted the clear legislative intention of Part IVA; being an opt out scheme, and the case was not permitted to continue on that basis.  For a period following that decision, class actions were commenced on an open class basis but the funder would first sign up sufficient class members to allow it to make a sufficient return if the case was successful; a process called “book building”.

i.	Multiplex

In 2007 the finding in Dorajay that closed class actions were impermissible was held to be wrong by the Full Court in Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd.  The Court held that the text of s 33C expressly provides that a proceeding can be commenced on behalf of some of the persons with the same, similar or related claims against a respondent, and that it is unnecessary for the class to comprise all such persons.

Multiplex was a green light for litigation funders because it meant that a class could be restricted to persons who had signed funding agreements, thus eliminating the difficulty of “free riders”.  Closed class actions then proceeded apace, and they became the preferred vehicle for funded class actions.  But closed classes had an unintended consequence.  As Lee J observed in Perera v GetSwift Limited, “like a ‘Whac-A-Mole’ game, where one mole is whacked by a mallet but another pops up, a further problem then emerged – if closed classes were allowed, how did a respondent obtain certainty against additional claims by settling only a closed class?”

That problem was addressed by another procedural expedient and the parties sought orders which provided for (a) the class to be “opened” by altering the class definition so that it covered all persons affected by the alleged civil wrong; (b) the class to remain open for a period during which class members were notified of their right to opt out and of a requirement to register their claims; and (c) all class members (except for those that opted out) to be bound in any settlement, while only class members who registered by the deadline were entitled to benefit under the settlement.

The parties submitted, and the courts were persuaded to accept, that such an order facilitated settlement by allowing both sides to have a better understanding of the total quantum of class members’ claims, and the respondent to achieve greater finality in the litigation by limiting exposure to future claims.

Some of the class closure orders made created their own controversies. In 2017 the Full Court in Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd endorsed what were known as “soft” class closure orders and decried what were known as “hard” class closure orders.  A soft class closure order provides for the class to be closed if a settlement is reached within a specified time frame, usually a month or two after the mediation.  But if a settlement is not reached in that timeframe the case reverted to an open class basis, such that both registered and unregistered class members would share in any settlement or judgment.

ii.	Haselhurst and Wigmans

For many years cases proceeded on the basis of the widely accepted understanding that class closure orders were within the Court’s power.  Then, in 2020 the NSW Court of Appeal delivered two decisions which departed from that understanding: Haselhurst v Toyota Motor Corporation Australia Ltd t/as Toyota Australia and Wigmans v AMP Ltd. 

In Haselhurst the Court held that the NSW cognate to s 33ZF of Part IVA was not a source of power to require class members to register their claims and to extinguish the claims of class members who failed to register by a specified date.  In Wigmans the Court held that the NSW cognate to the “notice” power in s 33X(5) did not provide power to require class members to register their claims and to give class members a notice to inform them that, if a settlement was later reached, in the settlement approval application the applicant intended to seek an order which, if made, would have the effect of extinguishing the claims of class members who failed to register by the specified date.

The question as to whether the decisions in Haselhurst and Wigmans should be followed came before the Full Federal Court in Parkin v Boral on 25 February 2022.  That decision is reserved so it would be inappropriate to say anything about it.  The decision should be delivered within a few weeks.
iii.	Multiplicity

Another problem arising out of closed class actions was the increase in overlapping or competing class actions; it became a regular occurrence that one closed class action would be brought on behalf of claimants who signed up with one funder and lawyer, and other closed or open class actions would be bought on behalf of other claimants who signed up with other funders or lawyers.  This accentuated the problem of multiplicity of class actions. In Wileypark Pty Ltd v AMP Limited Chief Justice Allsop said, and I agree:
…the running of multiple actions by different lawyers, with different funders is, in principle, potentially inimical to the administration of justice and, in particular, potentially inimical to the interests of group members, and potentially oppressive to [the respondent].
It is beyond the scope of this paper but in my view the various methods by which this problem has been addressed by judges of the Federal Court, while not a complete solution, have reduced the waste and oppression of multiple class actions.  If legislated, the 2019 Australian Law Reform Commission’s (ALRC) recommendations in this regard would strengthen the Court’s hand.
IV.	FUNDING EQUALISATION ORDERS

In Dorajay (No 2) a funding equalisation order was first made.  Such an order provides for a deduction to be made from a non-funded member’s entitlement under a settlement that is equivalent to that paid by funded group members to the litigation funder.  The deduction is then redistributed back on a pro-rata basis across the entire class, including to unfunded members. The total the funder receives is no more than that to which they are entitled under the signed agreements, and the cost of litigation is thus borne equitably between all group members.

In that case, and in many subsequent cases, the order was made at the applicant’s request, without opposition from the respondent and without a contradictor, on the basis that the class included funded and non-funded class members and that in the absence of such an order they would receive different amounts “in hand”.  Without descending into the detail as to why the order was sought, it was made as an “ad hoc innovation posited by practitioners” to expediently resolve a practical problem.

V.	COMMON FUND ORDERS
Pausing here, it is worth recalling that the ALRC report that led to the introduction of the Part IVA regime said that “[t]o achieve maximum economy in the use of resources and to reduce the cost of proceedings, everyone with related claims should be involved in the proceedings and should be bound by the result.”  Parliament legislated an opt out regime rather than an opt in regime, yet with closed classes the regime had become one which to a significant extent operated as a de facto opt in scheme.
This position changed in October 2016 when in Money Max the Full Federal Court held that the Court had power under s 33ZF to make a common fund order.  Such an order allowed open class actions to be commenced, without the time and expense of book-building; and with the funder, who bears the risks of the litigation, being recompensed from the common fund of proceeds obtained by the class as a whole.
In my view such orders have several benefits for class members.
First, the central benefit for funded class members is that the Court supervises the funding rate and will only approve a rate it considers it is fair and reasonable.  If a common fund order is not made the funding rate is the (unsupervised, and generally higher) rate set by the funder in the funding agreement.  Since Brewster it is clear that s 33ZF does not provide the Court with power to vary the funding rate in the contractual arrangements between funders and group members.
Second, the central benefit for non-funded class members is that they are not saddled with a deduction under a funding equalisation order at the (higher) rate set by the funder in the funding agreement.  Any deduction will be based on the (lower) Court-approved rate.
Third, if a common fund order is sought at an early stage, class members will be informed that a reasonable Court-approved funding commission will be deducted from any settlement or judgment that is achieved before they are required to decide whether or not to opt out of the proceeding.  If they do not wish to pay the a reasonable Court-approved funding rate, it is open to them to opt out.
Fourth, a common fund order is a fair and transparent method of sharing the costs of litigation across the class of persons who benefit from the litigation.  It is more transparent and readily understandable by group members than a funding equalisation order.
Fifth, closed class representative proceedings provide a reduced level of access to justice from that which Parliament intended by its choice of an opt out regime.  Limiting the ambit of class actions to those who have agreed to enter into a litigation funding agreement undermines one of the key rationales for an opt out class action procedure.  Closed class representative proceedings have “a number of undesirable policy consequences given that the class action procedure was designed as a means of obtaining a remedy for ‘all’ of those adversely affected by the conduct giving rise to the litigation”.
In March 2019 the Full Federal Court and the NSW Court of Appeal separately confirmed that s 33ZF and its NSW cognate provided power to make a common fund order at an early stage of a proceeding.  Then, in December 2019, a majority in the High Court in Brewster decided that s 33ZF does not provide such power.
In my view, while the decision in Brewster reduces access to justice, it is not as disastrous as some have suggested. I say that because:
•	the Pt IVA regime was in good shape before the decision in Money Max, and to the extent that the decision in Brewster takes the practical operation of the regime back to that point it is no disaster;
•	in “legacy” cases where a common fund order has been made, that order remains in full force and effect unless set aside or discharged: see State of New South Wales v Kable [2013] HCA 26; 252 CLR 118 at 133 [32]; and
•	the decision in Brewster concerned the power in s 33ZF to make a common fund order in the early stages of a class action, and not the existence of power to make a common fund order under s 33V as part of settlement approval.  Since Brewster, numerous single judges have accepted that the Court has power to make a common fund order, however it is named, as part of settlement approval orders.
Whether a CFO or an FEO is appropriate?

The topic that I was asked to address includes the practicalities of funding equalisation orders and common fund orders.  That is, when is one or the other the most appropriate or “fair and reasonable” pursuant to s 33V?  That question cannot, however, be answered in a vacuum.
That is because whether it is appropriate for the Court to make a common fund order rather than a funding equalisation order, or vice versa, will depend on the precise circumstances of the case: Davaria Pty Limited v 7-Eleven Stores Pty Ltd.  Different results for funded class members, non-funded class members and a funder under a funding equalisation order compared to a common fund order often depend upon the ratio of the value of funded class members’ claims to the value of non-funded class members’ claims, whether “grossing up” is permitted by the funding agreement, and the funding rate allowed in any common fund order: Money Max at [55]-[56].
There may also be a variety of other practical considerations to consider.  For example, if a funding equalisation order is proposed it will usually be at the funding rate in the funding agreements entered into by funded class members, and that agreement may have terms which impose other costs on class members.  Absent the proposed ALRC reforms the Court has no power to amend the funding rate or other funding terms.  Whereas, if a common fund order is sought the Court is in a better position to take all relevant considerations into account when considering what result is fair and reasonable.
Thus I can offer little guidance as to when one type of order or another will be appropriate. One thing is, though, clear.  The choice between types of order, and the funding rate to be applied, should not be a “race to the bottom”.  As Beach J observed in Blairgowrie at [160]:
…valuable services such as that which a funder provides have a commercial cost and if it can be justified, so be it. It would be short-sighted to chill investment by importing into the analysis some form of asymmetrical social philosophy when to do so would be antithetical to the purpose of Part IVA which is to enhance access to justice, which is what litigation funders have objectively brought about, albeit motivated by self-interest. If any exercise of power under Part IVA is to be in the best interests of group members, it is not conducive to that objective to take a step that would unnecessarily chill a mechanism that group members may need to access the regime under Part IVA in the first place. To do so would be counterintuitive if not contradictory.

VI.	GROUP COST ORDERS 

On 30 June 2020 the Justice Legislation Miscellaneous Amendments Act 2020 (Vic) introduced a new s 33ZDA into the Supreme Court Act 1986 (Vic).  It provides that, on application by a plaintiff in a class action, the Court may make a “group costs order” (GCO) (in effect a contingency fee) which allows the legal costs to be calculated as a percentage of an award or settlement, liability for which is to be shared among all class members.  The amendments override the prohibition on contingency fee arrangements in the Legal Profession Uniform Law.

Group costs orders are stated to have two objectives: (i) to “pave the way for class actions to proceed where they otherwise may not have been viable” and hence “promote greater access to justice” and (ii) to reduce the risk of a lead plaintiff being exposed to an adverse costs order or being required to provide security for costs.  If a group costs order is made, the law practice representing the representative plaintiff is liable to cover any costs payable to the defendant in the proceeding, and must give any security for the defendant’s costs as ordered by the Court.  Importantly, the Supreme Court of Victoria has power to amend a group costs order during the course of the proceeding, including the percentage set in the order.

The introduction of GCOs seems likely to have a significant effect on the practical operation of the regime.  While such orders are only available in Victoria, I expect that the Supreme Court of Victoria will have jurisdiction to hear the majority of class actions.  For example, class actions commonly concern the claims of people Australia-wide, and cases can be commenced with a Victorian resident as the representative applicant; the wrong may have partially arisen in Victoria; or the respondent may be resident in Victoria.  There are already signs that more cases are being commenced in that court.

In Fox v Westpac Banking Corporation; Crawford v ANZ, Nichols J refused an application for a GCO, finding that the plaintiffs had not established a sufficient basis to make the orders sought at the proposed rate of 25%.  Her Honour rejected the submission that the NWNF arrangements in place were interim.  Her Honour accepted the contradictor’s contention, that the correct comparator for the proposed GCO was the existing NWNF arrangement, rather than between the proposed GCO and the funding rates offered by commercial third party funders.

In February this year in Paul Allen v G8 Education Ltd Nichols J ordered a GCO that included a guarantee that class members would receive at least 72.5% of any recovery.  Her Honour accepted the evidence that the NWNF arrangement in place with the plaintiff was an interim one and rejected the contradictor’s argument. 

GCOs are likely to prove to be a valuable addition to the suite of mechanisms available to bring class action litigation.  Larger law firms, with the willingness and financial capacity to carry their own costs and meet substantial disbursements for 4-5 years; to assume substantial adverse cost liability; and to advance substantial security for costs, are likely to find them useful.  Provided such orders are appropriately supervised, and the early signs are that the Supreme Court will do so, it seems likely that the returns for class members will be better with GCOs than those presently available with commercial third-party litigation funders.  Amongst other things, the sometimes inefficient and expensive interactions between the applicant’s solicitors and the litigation funder will be removed from the equation, and only the solicitors will be seeking to make a return from the case.

GCOs are likely to improve access to justice by providing group members with a greater share of any success in the litigation, and also by allowing cases to be commenced where book-building is difficult (as in many consumer class actions and in cartel class actions) or where litigation funding is for some reason difficult to obtain or priced too high.

VII.	CONCLUSION

In my view the Part IVA regime operates reasonably well, which is also the view reached by the ALRC in 2019.  If the recommendations of the ALRC are implemented, any practical problems in the operation of the regime will be addressed.  With appropriate supervision by the Court, NWNF arrangements, funding equalisation orders, common fund orders and group cost orders all have a role to play in ensuring that ordinary Australians who suffer losses through mass civil wrongs have access to justice.  The choice of the appropriate mechanism is a matter for the parties, with Court supervision, and each may be appropriate depending on the circumstance.

The important thing to remember is that class actions are critical in ensuring that people can obtain redress for mass civil wrongs.  Laws which are not, in fact, readily capable of enforcement by ordinary Australians are little more than an illusion.  Any proposed reforms must keep that firmly in mind.