Contingency fee shift courting conflict

The Victorian government says class actions are good for justice; they’re mostly good for lawyers.

Conflict of interest? Former Victorian premier Steve Bracks. Picture: AAP

For Steve Bracks, this was the week of power and money. On Tuesday, he was vested with immense authority as joint administrator of the Victorian branch of the Labor Party. On Thursday, state parliament approved legislation that will enable the law firm he chairs to make millions of dollars in US-style contingency fees.

Bracks, who is a former premier, leads Maurice Blackburn, a Labor-aligned firm that dominates the class action industry. That makes it one of the biggest winners from Thursday’s change. Victoria is now the only state where class action law firms can lawfully take a percentage of their clients’ payouts.

These developments, according to the state opposition, placed Bracks in a hopeless conflict of interest. But did they? The former premier and the law firm he chairs will not even discuss the subject. They chose to remain silent when invited to put their side of this affair.

Yet this much is clear: Maurice Blackburn stands to benefit financially from a decision backed by the parliamentary representatives of a branch of the party to which it has given money. That branch is now jointly administered by the firm’s chairman, whose decisions will affect Labor members of parliament.

Edward O’Donohue, the opposition’s legal affairs spokesman, believes the removal of the ban on contingency fees for class actions is a reward for Maurice Blackburn’s financial support. The firm, which has been chaired by Bracks since 2018, made political donations to the Labor Party last financial year of $354,805.

Federal government research shows those donations were heavily geared to the Victorian branch. Last financial year the law firm made 65 donations to Labor and 39 went to the Victorian branch.

Soon after Bracks was appointed joint administrator, O’Donohue had urged him to reconsider. As well as the financial side of things, O’Donohue pointed out that state Attorney-General Jill Hennessy, who was responsible for the contingency fees legislation, was an adviser to Bracks before he retired from parliament in 2007.

After Thursday’s vote in parliament, O’Donohue accused Premier Daniel Andrews of being “more focused on repaying his rich Labor lawyer mates who have so generously donated to the coffers of the Victorian Labor Party, rather than vulnerable Victorians”.

John Emmerig, the national head of litigation at international law firm Jones Day, has no doubt that Victoria’s change is retrograde.

“I would liken it to watching a car crash unfold in slow motion that could have been avoided,” he says.

“It will be transformative — but in a destructive and negative way, and there will be casualties.

“For plaintiff law firms, it’s like winning the lottery — but the price that society and the legal system will pay to fund that bonanza will include more speculative class actions, and the introduction of incredible conflicts of interest of an order of magnitude that have not existed in our system before now between what’s good for the lawyer and what’s good for the client. It’s a most unfortunate outcome,” Emmerig says.

Even if the question of conflicts of interest is put to one side, two other issues have raised doubts about Victoria’s move.

This switch has divided the legal profession and left the Law Institute of Victoria isolated as the only peak body in the profession to support contingency fees. Within the profession, the opposition to this change is led by the Law Council of Australia, the peak national body, which believes it could compromise lawyers’ ethical obligations.

Law Council president Pauline Wright, with the backing of the organisation’s board, has described percentage-based fee arrangements as a system that would only benefit large law firms by allowing them to generate a premium with no commensurate increase in risk.

The Law Council has told a federal inquiry into class actions and litigation funding “it has not been shown that the risk of compromising the ethical obligations of members of the legal profession, and the impact that this can have on clients, can be satisfactorily overcome through regulation or court supervision”.

The Law Institute of Victoria sees things differently, telling the federal inquiry: “Removing the prohibition on law practices charging contingency fees would facilitate access to justice by providing another method by which legal costs can be agreed upon, thus enabling some claims to be brought which would otherwise not be brought due to lack of funding.”

Yet even if class action solicitors in Victoria are ethically more resilient than the rest of the legal profession, there is a much greater problem with encouraging class actions — one that is apparent to those in Canberra who are responsible for steering the nation out of the economic malaise triggered by COVID-19.

Federal Treasurer Josh Frydenberg has tried to slow the growth of anti-business class actions by temporarily changing the Corporations Act so companies and their officers will be liable for breaches of the continuous disclosure rules only in limited circumstances. Contingency fees, by contrast, are intended to encourage more class actions.

Even before Thursday’s change, the risk of anti-business class actions was so great that insurers have been reducing their exposure to Australian companies. As a result, insurance broker Marsh is aware of businesses that cannot obtain enough affordable insurance and are trying to protect themselves from the risk of payouts by holding back millions of dollars that could otherwise be used to create economic activity and jobs.

Now that class action lawyers are free to use contingency fees in Victoria, Marsh’s Craig Claughton believes it would be inconsistent if they were not required to take out an Australian Financial Services licence, and be regulated by the Australian Securities & Investments Commission.

This is how the government is dealing with litigation funders who, because they are not law firms, have been lawfully charging a contingency fee for financing class actions.

“If law firms are going to take on that role, why should they be any different?” Claughton says.

But when it comes to attributing blame for the litigation risk confronting business, Claughton points out that of all the class actions ever filed in this country just one has gone to judgment. Out-of-court settlements are the normal outcome.

Companies that settle class actions are not necessarily confirming allegations of wrongdoing. They may be clearing contingent liabilities from their accounts and eliminating future legal costs.

But Claughton believes it is time more companies took a stand and refused to buckle to the pressure of class action lawyers and their skilful use of the media.

“Why don’t companies defend? It’s like standing up to the bully in the playground. That needs to happen,” he says.

Imposing a federal licence on contingency fee lawyers is in line with a proposal from the Liberal Party’s Menzies Research Centre, but it is strongly opposed by the Law Council, which says lawyers are already heavily regulated by the states.

The fact the broader economic perspective has escaped the Victorian government should come as no surprise. The welfare of the national economy is not its responsibility. The Andrews government’s support for contingency fees rests entirely on the desire to increase access to justice — which reflects the limited world view of one part of the legal profession.

There is no doubt that in appropriate cases class actions are an efficient method of resolving disputes. But the proponents of contingency fees have taken this to extremes.

On their logic, class actions are good because they enable access to justice. So if some class actions are good, a large increase in the number of class actions — driven by contingency fees — must be very good. The most charitable way of describing this logic is self-serving, particularly after research made public this week shows law firms already rival their clients for the title of being the biggest beneficiaries from class actions.

That research, from the Menzies Research Centre, shows law firms received an average of 37 per cent of last year’s class action payouts compared with an average of 39 per cent that went to their clients. The remainder went to litigation funders.

Under the Victorian scheme, big, well-resourced law firms are now in a position to expand their influence by displacing litigation funders as the primary source of capital for class actions. This is said to be good because excluding funders could leave more for the clients.

But again, that ignores the fact litigation imposes costs on society such as quarantining scarce capital and increasing the cost of insurance — as the Marsh analysis indicates.

On Friday, Hennessy issued a statement that says three independent bodies recommended the introduction of contingency fees for class actions — the Victorian Law Reform Commission, the Australian Law Reform Commission and the Productivity Commission.

What Hennessy did not mention is that state’s unilateral move is at odds with 2018’s recommendation from the Victorian Law Reform Commission, which, while endorsing contingency fees, urged the Attorney-General to seek agreement from the other states at the Council of Attorneys-General.

The commission recognised that such a change required national agreement. That has not happened.

The Attorney-General also made no mention of the fact the scheme imposes no limit on the proportion of payouts that can be claimed by law firms — leaving it to a judge to determine how much lawyers should receive.

That is at odds with the approach recommended in 2014 in the Productivity Commission’s report on access to justice.

That report called for statutory caps on the percentage lawyers could take — which is one of the changes rejected by the government when the bill was before parliament.

To avoid handing “windfall profits” to law firms in high-value claims, the Productivity Commission wanted contingency fees subjected to a sliding scale of caps for retail clients with no percentage restrictions for “sophisticated” clients.

And while the Australian Law Reform Commission backed contingency fees, it proposed doing so in a way that would have had the effect of preventing any state being hit with a flood of class actions from interstate lawyers excited by the prospect of sudden riches.

The ALRC wanted to strip the state supreme courts of their ability to deal with most anti-business class actions. It called for the Federal Court to be given exclusive jurisdiction over class actions concerning claims under the Corporations Act and the Australian Securities & Investments Commission Act.

Jones Day’s Emmerig is concerned about what Victoria’s move means for the legal profession and the legal system.

“Whatever good is argued by some to flow from allowing contingency fees, experience in other jurisdictions shows that it is massively swamped by the plethora of problems it creates,” he says.

“We will all look back over time and see this reform as a turning point in Australian legal practice and wonder why on earth it was allowed to happen. But unfortun­ately by then much damage will have been done.”