Is a proposed settlement fair and reasonable – Federal Court

Class action lawsuits commonly resolve in a settlement between the members of a class and the respondents to a claim.  However, there are strict requirements to proposed settlements, including that they are ‘fair and reasonable’, which will be subject to judicial oversight.

The requirement that any settlement be fairness and reasonability Section 33V of the Federal Court Rules 1976 (Cth) provides as follows:

• A representative proceeding may not be settled or discontinued without the approval of the Court.
• 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.

Therefore, parties must apply to the Court to have proposed settlements approved.  When making such an application, the parties must persuade the Court that the proposed settlement:

• is fair and reasonable having regard to the claims made on behalf of the class members who will be bound by the settlement; and
• has been undertaken in the interests of class members, as well as those of the applicant, and not just in the interests of the applicant and the respondent(s).

Such is required on the basis that the lawyers for potentially large classes of people may be imperfect agents of the interests of each particular member of the class.  This was held in the case of Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 71 FCR 250 at [258]:

“The purpose intended to be served by s 33V(1) is obvious. It is appropriate for the court to be satisfied that any settlement or discontinuance of representative proceedings has been undertaken in the interests of the group members as a whole, and not just in the interests of the applicant and the respondent. In my view, s 33V proscribes not only complete settlement of proceedings without the approval of the court, but also settlement of claims against a joint respondent, or settlement of any substantive claim against a respondent.”

Therefore, the Court is empowered to onerously examine the terms upon which a class action may be settled and guard the interests of class members who may not be appropriately represented.

What constitutes fair and reasonable terms?

There are various factors, contained in the Class Actions Practice Note (GPN-CA), which will need to be addressed in an application for approval of a proposed settlement.  These factors represent a codification of the common law and require consideration be had to:

• the complexity and likely duration of the litigation;
• the reaction of the class to the settlement;
• the stage of the proceedings;
• the risks of establishing liability;
• the risks of establishing loss or damage;
• the risks of maintaining a class action;
• the ability of the respondent to withstand a greater judgment;
• the range of reasonableness of the settlement in light of the best recovery;
• the range of reasonableness of the settlement in light of all the attendant risks of the litigation; and
• the terms of any advice received from counsel and/or from any independent expert in relation to the issues which arise in the proceeding.

The Court must also be advised on the administration of the settlement, including how it is to be conducted as efficiently and expeditiously as practicable and its costs.

In Williams v FAI Home Security Pty Ltd (No 4) [2000] FCA 1925 the following was held at [19]:

“Ordinarily the task of a court upon an application such as this, is to determine whether the proposed settlement or compromise is fair and reasonable, having regard to the claims made on behalf of the group members who will be bound by the settlement.  Ordinarily in such circumstances the Court will take into account the amount offered to each group member, the prospects of success in the proceeding, the likelihood of the group members obtaining judgment for an amount significantly in excess of the settlement offer, the terms of any advice received from counsel and from any independent expert in relation to the issues which arise in the proceeding, the likely duration and cost of the proceeding if continued to judgment, and the attitude of the group members to the settlement.”

In Darwalla Milling Co Pty Ltd v F Hoffmann-La Roche Ltd (No 2) [2006] FCA 1388 the Court considered that each case is to be dealt with on its own merits and any fact which might raise serious concerns as to fairness.  The Court held at [39] that:

“The practical judicial approach has been … to identify any features of the settlement that are obviously unreasonable or unfair … [and] where some group members object to a settlement and state their reasons…, their reasons will provide a convenient focus by reference to which the court will decide matters of fairness and reasonableness.”

Takeaways

In recognition of the potential for members of a class action, particularly those who are unrepresented, to not have their interests adequately protected the Federal Court will onerously examine proposed settlement offers to ensure they are fair and reasonable.  Particular consideration will be had as to the reasonableness of the settlement in light of the best possible recovery and risks of litigation.

Links and further references

Legislation

Class Actions Practice Note (GPN-CA)

Federal Court Rules 1976 (Cth)

Cases

Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 71 FCR 250

Darwalla Milling Co Pty Ltd v F Hoffmann-La Roche Ltd (No 2) [2006] FCA 1388

Williams v FAI Home Security Pty Ltd (No 4) [2000] FCA 1925

Further information about class actions

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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