The ruling by Court of Queen's Bench Justice Perry Schulman affects more than 30 lawyers and agencies across Canada and will result in some survivors reimbursed for fees they paid.
"Given my view of the correct legal characterization of agreements between form-fillers and ... claimants, I have concluded that those agreements are presumptively void and unenforceable," Schulman wrote in his decision released last week.
"Apart from considerations of illegality, agreements to pay form fillers in circumstances of unequal bargaining power and where an improvident deal was made, such as the two examples in the record before this court, are unconscionable."
The case was brought before the court by the Independent Assessment Process, the organization that awards settlements in Indian residential school abuse cases. It said some victims were being overcharged.
Lawyers are entitled to a maximum legal fee of 30 per cent of an award, with the claimant and the federal government each chipping in half. But many claimants were paying additional fees to agencies that helped complete their paperwork.
Schulman ruled the bulk of that work should have been done by lawyers at no extra charge.
"In short, many of the services performed by form-fillers as outlined in the evidentiary record before me are within the role of claimant's counsel."
In one of the test cases before the court, Winnipeg lawyer Ken Caroll was also part owner of the form-filling company his firm used, though he says he abandoned that interest "very early in my involvement in the process."
Schulman found some survivors were confused and had been pressured into handing over money to the form-filling agency.
In one case, a terminally ill woman from northwestern Ontario travelled to Winnipeg to collect her cheque in person. She was followed from Carroll's law office to a bank by two workers with the form-filling agency so that they could get their cut.
The woman "was not sure what was going on and was too afraid to complain or object," Schulman wrote.
A press release from Carroll a day after the ruling, in addition to specifying he had abandoned his stake in the form-filling firm, said Carroll had advised the woman that "she had no other fees to pay to other parties" and that "she left our office with her bank draft and the person who travelled with her and no one else."
Schulman has declared null and void all agreements in which claimants are required to pay contingency fees to form-fillers, or to pay form-fillers through any means for legal work that should be done by lawyers.
He has given companies 30 days to respond to a proposed further order that survivors can be charged nothing other than legal fees.
Schulman has also ordered a review to establish a way to reimburse claimants for form-filling costs.
The $5-billion residential schools settlement agreement is believed to be the largest class-action settlement in Canadian history. It is designed to resolve claims of abuse at more than 130 residential schools across the country.
Carroll earlier told the court that as soon as he learned that the chief adjudicator was opposed to extra fees for form-filling, he changed his practices. He also reimbursed the claimants in the two test cases that were before the court.
The Merchant Law Group, which has handled thousands of claims, said it did not use form-filling agencies but defended their role. Form-fillers work in remote communities and are often aboriginal people who can help bridge language and cultural challenges, the firm said.