Costs referee’s report rejected as judge finds multiple errors

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This was a shareholder class action against Woolworths Group Ltd (Woolworths). On 2 August 2022, Beach J made orders approving a settlement of the proceeding for the sum of $44.5 million. In this judgment, his Honour addressed the appropriate deductions from the settlement sum for: (i) the funder’s commission, and (ii) legal costs and disbursements.

Funding commission

His Honour ordered that the funder’s commission be set at $4.73 million, being its contractual entitlement at the date of settlement approval. The applicants had sought an order approving a higher funding commission of $7.42 million, which they submitted was the appropriate deduction because:

• at the time the in-principle settlement of the proceeding was agreed, the funder’s contractual entitlement was $7.42 million. However, after the settlement was announced, 7,000 class members who did not sign funding agreements with the funder registered to participate in the distribution of the settlement sum, thus diluting the funder’s contractual entitlement to $4.73 million;
• a commission of $7.42 million represented approximately 16.67% of the settlement sum, and was low relative to other funding commissions that had been approved;
• the funder assumed the significant risk of adverse costs, and paid security for costs of $2.5 million and was ordered to pay a remaining $1.5 million before the commencement of the trial;
• a commission of $7.42 million would deliver a multiple of the costs the funder had incurred which was considerably lower than the commonly required return of not less than three times the capital invested by the funder; and
• approximately 3,800 class members who had entered into funding agreements accepted a higher funding commission rate than what was being sought to be deducted.

However, his Honour rejected the applicants’ proposal, on the basis that they had not previously indicated they were going to seek a common fund order, and class members were not notified in the notice of settlement that they were going to seek such an order. His Honour thus found that the funder was only entitled to its contractual entitlement of $4.73 million.

Legal costs and disbursements

At the first return of the settlement approval application, his Honour considered that the total sum of the applicants’ legal costs and disbursements potentially was disproportionate and sent the matter out for assessment by a Court-appointed costs referee (Mr John White).

Ultimately, the referee’s report recommended a substantial reduction in the applicants’ legal costs and disbursements. In this judgment, his Honour set out his comprehensive reasons for rejecting the referee’s report in its entirety. Those reasons included the following.

First, his Honour found that the referee wrongly decided that the costs agreement of the applicants’ solicitors, Maurice Blackburn (MB), was void, with the result that he wrongly disallowed MB’s uplift fee of 25% and professional fees of $194,274.74 for investigation work. His Honour found that the referee’s decision was infected with three errors:

• The first error was wrongly finding that MB had failed to provide an updated estimate of total legal costs to class members in December 2020 or January 2021, as required by s 174(1)(b) of the Legal Profession Uniform Law (LPUL), and consequently this resulted in MB’s costs agreements being void pursuant to s 178(1) of the LPUL. MB had opted against sending an updated costs estimate because the costs incurred to that point in time were below the amount notified to class members in the previous estimate and would only significantly exceed the previous estimate if the matter went to trial. At the time, settlement negotiations were ongoing and prospects of settlement before trial were real. If the matter settled, class members would be provided with an updated estimate of legal costs in the settlement notice. In those circumstances, MB determined that it would be inappropriate to incur the costs of providing an updated costs estimate. As it happened, the matter did settle before trial and at the first return of the settlement approval hearing MB sought a deduction for legal costs and disbursements of $13.8 million, which exceeded the estimate of legal costs by approximately 7%. In all the circumstances, his Honour held that MB’s approach was justified and appropriate, there had been no breach of s 174(1)(b) of the LPUL and MB’s costs agreements were therefore not void.
  
  
• The second error was the costs referee’s finding that non-compliance with s 174(1)(b) of the LPUL would render MB’s costs agreements void ab initio. His Honour found that the proper construction of ss 174(1)(b) and 178(1)(a) of the LPUL is that a failure to provide an updated costs estimate as soon as practicable after there is a significant change to the previous estimate will result in the costs agreement being void in terms of its operation in futuro rather than ab initio.
  
  
• The third error was finding that, even if the costs agreement was void ab initio, MB was precluded from recovering its uplift fee. His Honour found that, in the event a costs agreement is void, “fairness and reasonableness” of legal costs “is the touchstone”, and “[t]here is no reason why an uplift fee could not be recovered if it was considered to be fair and reasonable” (at [71]).

Second, his Honour found the referee’s reasons for reducing MB’s professional fees for various periods throughout the matter by more than $1 million were not sufficient to enable the parties (and his Honour) to know that the reductions made were justified.

Third, his Honour found that the referee’s global reduction of 10% ($789,537.98) to MB’s professional fees for not being proportionate was not justified. His Honour observed that the referee had erroneously considered the quantum of the settlement compared to the quantum of costs, rather than “the amount that was reasonably expected to be recovered at the outset of and throughout the matter had the proceedings been successful, relative to the costs” (at [95]). His Honour also said that the figure the referee had used in his report did not reflect the costs actually claimed by MB, and he had failed to correctly apply the relevant case law, such as Blairgowrie Trading Ltd v Allco Finance Group Ltd (in liq) (No 3) (2017) 343 ALR 476; [2017] FCA 330 at [181] and Foley v Gay [2016] FCA 273 at [23]-[24]. His Honour found that “the referee misapplied the standard of proportionality and otherwise did not sufficiently reveal how and why the proposed reduction was made” (at [99]).

For the above reasons, his Honour rejected the referee’s report and ordered that MB’s legal costs and disbursements be allowed in full, in the amount of $14.6 million.

Wills v Woolworths Group Ltd [2022] FCA 1545

Federal Court of Australia, Beach J,
20 December 2022

Applicants’ Solicitors: Maurice Blackburn
Respondent’s Solicitors: King & Wood Mallesons
Applicants’ Funder: ILFP
Austlii Link: Available here

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