Legislation in Victoria specifically allows a law firm acting for a plaintiff in a class action proceeding in the Victorian Supreme Court to obtain orders that any legal costs payable be calculated as a percentage of any award or settlement obtained in the proceeding. This has become known as the contingency fee practice in Victoria and has led to many class actions being commenced in this jurisdiction.
In the latest case before the High Court in the class action space, the High Court was effectively asked the question: Does the class action regime in the Federal Court, which does not have such a specific legislative provision, allow the Federal Court to also award such contingency costs orders?
All judges of the High Court held that the answer is no and confirmed unanimously (but with four separate judgments) that such orders cannot be made in the federal jurisdiction due to the State and Territory regulatory regimes which prohibit contingency fee arrangements.
Common fund orders, however, made at settlement or judgment remain in place with the effect that third party funders can take their commission from a common pool of settlement funds if such an order is made.
Key takeaways
There are three key points:
- With the possibility of arrangements akin to contingency fees only available in the Supreme Court of Victoria, that jurisdiction is likely to remain an attractive one for class action plaintiffs and their lawyers
- Legislation will be required if class action contingency fees are to be introduced in other States or Territories
- For third party funders, the ability to obtain common fund orders only at settlement or judgment is a ruling that is here to stay, with the High Court declining to re-open its earlier decision in Brewster that the Federal Court and the Supreme Court of New South Wales could not make such orders at the commencement of a class action
The decision maintains the status quo of the litigation funding landscape in Australia, given common fund orders had been regularly made in class actions at settlement post Brewster, and Victoria’s popularity as a forum in which to commence class actions.
The background
A class action was commenced in the Federal Court against Blue Sky Alternative Investments Limited (in liq), some of its former directors and its former auditor.[1] The applicants initially commenced competing class actions, with the proceedings then being consolidated.[2] The applicants’ solicitors came to an in principle agreement about the conduct of the consolidated proceeding.[3] Among its terms was a proposal that the applicants would ask the Federal Court to make orders to the effect that:
- legal costs and disbursements be shared among the applicants and group members on a costs-equalisation basis (for instance, but without limitation, under section 33ZJ of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act)); and
- the solicitors be further remunerated for their risks in funding the legal costs and disbursements by payment of such percentage of the Resolution Sum as may be approved by the Court (Solicitors’ Common Fund Order or Solicitors’ CFO).[4]
A case was stated to the Full Court of the Federal Court as to whether the Federal Court Act empowered the Court to make Solicitors’ Common Fund Order on settlement or judgment of a class action. The Full Court answered that question in the affirmative and special leave was granted to appeal to the High Court.[5]
Court has power to make common fund order on settlement or judgment – but not for the benefit of solicitors
Under the Federal Court Act, a class action cannot be settled or discontinued without the approval of the Court. Subsection 33V(2) of the Federal Court Act provides:
“If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.”
The majority judgment in the High Court found that this provision did not say anything about who could be the recipient of any distribution, only that such orders will not be made unless they are “just”.[6]
As a result, the High Court held subsection 33V(2) does empower the Federal Court to make a common fund order (or funding equalisation order) in favour of a third party funder when approving a class action settlement. The High Court also held that the Federal Court can make a common fund order on judgment under subsection 33Z(1)(g) (which allows the Court to “make such other order as the Court thinks just”).
Why then did the Court hold that the making of a Solicitor CFO would not be “just”? It essentially came down to the existence of State and Territory legislation that prohibited solicitors from entering into such arrangements which the Court held was inconsistent with the nature of a Solicitor CFO.
Specifically, the High Court was concerned with the position in NSW and held that, where the solicitor acting for the representative applicant (or a group member) is subject to the Legal Profession Uniform Law (NSW) (LPUL), then the Federal Court is not empowered to make a Solicitors’ CFO.[7]
Section 183 of the LPUL was held to prohibit a Solicitors’ CFO.[8] That section provides:
“(1) A law practice must not enter into a costs agreement under which the amount payable to the law practice, or any part of that amount, is calculated by reference to the amount of any award or settlement or the value of any property that may be recovered in any proceedings to which the agreement relates.”
The majority judgment noted that (at [96]-[97] and [104]):
“If the Solicitors’ CFO were made, the Court would be giving effect to an agreement that was entered into contrary to s 183 of the LPUL and would be enabling the Solicitors to recover amounts which they are disentitled from recovering under s 185 of the LPUL. Such an order cannot be within the power of the Federal Court under s 33V(2) or s 33Z(1)(g). It cannot be ‘just’ to make an order that gives effect to an agreement that was unlawfully entered into and to enable a solicitor to recover amounts to which they are not entitled. Put another way, the Court cannot authorise what the LPUL forbids.
The prohibition in s 183 of the LPUL is a protective measure…
Contrary to the Applicants' argument, s 183 is not purely directed to the mischief of "undue influence". Section 183 is also about preventing conflicts and ensuring solicitors act in line with their fiduciary obligations. In sum, to read s 183 as not extending to costs agreements which are entered into, or amended, by application to the Court for orders which, absent the order, would be unlawful would not be consistent with those objectives.”
Importantly, the Court held that the prohibition on contingency fees cannot be circumvented by having a costs agreement structured so as to provide that the payment is to be made pursuant to a Court order as the costs agreement and the court orders are inextricably linked;[9] nor by characterising the payment as being for “risk services” rather than legal services (a distinction the majority thought to be “artificial”).[10]
Charging contingency fees is prohibited in other States and Territories, with Victoria being the sole exception where such a costs order can be made in a class action commenced under Victorian legislation.[11] As a result, in the absence of legislative changes, the decision effectively prevents the making of Solicitor CFOs in class actions other than those commenced in the Victorian Supreme Court.
Although reference was made to preventing conflicts as an underlying driver of section 183, in finding that the legislative regime meant it would not be “just” to make a Solicitor CFO, the High Court did not have to deal with the separate and additional argument raised that a Solicitors’ CFO would put solicitors in a position of conflict under the Solicitors’ Rules or in equity and was therefore not “just”.
Commencement CFOs are still off the table
Finally, the correctness of Brewster[12] – a previous decision of the Court where it was held by a majority that section 33ZF of the Federal Court Act (and its NSW counterpart) did not empower the Federal Court (or the Supreme Court of NSW) to make an order early in a class action allowing for part of a litigation funder’s remuneration to be recovered by way of a common fund order from both funded and unfunded group members[13] – was not disturbed. Gageler CJ[14] and Jagot J[15] held that it did not arise squarely for determination in this case, and the majority held that there was no basis to reopen or reconsider Brewster, nor to relitigate the availability of “commencement CFOs”.[16] They remain off the table.
We continue to watch this space.
Kain v R&B Investments Pty Ltd, Ernst & Young (a firm) v R&B Investments Pty Ltd, Shand v R&B Investments Pty Ltd [2025] HCA 28 at [36].
Kain at [36].
Kain at [37].
Kain at [37].
Kain at [49]-[50].
Kain at [71].
Kain at [63].
Kain at [81].
Kain at [103], although one of the Judges disagreed on that point despite ultimately agreeing that it would not be just to order a Solicitors’ CFO: Kain at [145], [148]-[149].
Kain at [101].
Kain at [91].
BMW Australia Ltd v Brewster (2019) 269 CLR 574.
Kain at [66].
Kain at [4].
Kain at [176].
Kain at [68].
