INSIGHT

Court refuses to approve class action settlement

By Belinda Thompson
Class Actions Disputes & Investigations

In brief

In a recent Federal Court decision, Justice Murphy refused to approve the settlement agreement between the parties to the Willmott class action, finding that the terms of the settlement were not 'fair and reasonable'. Partner Belinda Thompson and Graduate Lawyer Nathan Van Wees examine what this decision means for future class action settlements.

How does it affect you?

  • Kelly v Willmott Forests Ltd (in liq) (No 4)1 demonstrates that parties to class actions should be aware that courts will carefully consider settlement terms when considering whether an agreement ought be approved.
  • Class action settlements must be fair and reasonable having regard to the interests of group members. Settlement agreements that provide for differential treatment of classes of group members will be carefully scrutinised.
  • Particular attention needs to be paid to the terms of opt-out notices provided to group members at the beginning of proceedings. Courts may not accept settlement terms that go beyond what group members could have foreseen when they chose to participate in the class action.

Background

Willmott class action arose following the collapse of a managed investment scheme in forestry plantations managed by Willmott Forests. Commonwealth Bank and MIS Funding provided loans to investors to finance investments in the schemes. Following the collapse of the schemes, class action proceedings were brought against all three parties (the respondents), on the basis that the product disclosure statement did not disclose significant risks to investors. Group members sought damages, and also argued that their loans were not valid or enforceable.

A group member registration and opt-out process occurred in the proceeding. Under this process, group members could register and contribute to payment of security for costs (or establish a financial inability to contribute). Group members could also opt out of the proceeding, and would be excluded from the class action going forward. However, those group members who did not register but did not opt out would be bound by any judgment or settlement of the group proceeding without being entitled to participate in any proceeds from the judgment or settlement. Essentially, this process resulted in two classes of group members – participating and non-participating. This is not unusual in class actions. However, it became highly relevant to the settlement approval process in the circumstances of this case.

Before the proceeding reached trial, the parties reached a settlement that included the following terms:

  • No compensation was to be paid to the group members.
  • For most group members, there would be no reduction of their outstanding loans. Participating group members who invested in one of the schemes would receive a discount on loans. There was some provision for participating group members to obtain an extension on the period for loan repayments.
  • The respondents would pay a proportion of the legal fees incurred by the group members.
  • Group members would acknowledge that their loans were valid and enforceable. They would be barred from challenging this on any other basis in future proceedings (the enforceability clauses).
  • Group members would provide broad releases in favour of the respondents.
  • Group members agreed to indemnify the respondents against third-party claims (the indemnity clauses).

Settlements in class action proceedings require the approval of the court.2 A court will only grant this approval where it considers the terms of the settlement are 'fair and reasonable, having regard to the interests of the class members who will be bound to it'.3 In the Willmott proceedings, more than 3,300 investors were eligible to participate in the class action. Of this number, only 14 objected to the settlement.4 However, the court rejected any contention that group members' silence ought be treated as indicating approval or fairness of the settlement.5 Interestingly, in a novel step, the court appointed independent counsel as a contradictor to represent the interests of non-represented group members.6

The court's refusal to approve the settlement

Justice Murphy refused to approve the settlement, finding that the terms imposed significant detriment on group members but conferred little or no benefit. Participating group members would be refunded some of their legal expenses and may have gained some relief from loan repayments. Non-participating group members, however, received no such benefits, while being subject to the enforceability and indemnity clauses. His Honour held that:

the binding loan enforceability admissions will constitute a significant detriment for some registered class members and some non-participating class members. For some registered class members the detriment of the admissions will outweigh the benefits of the other terms of settlement. For non-participating class members the detriment will not be balanced by any benefit.7

 

In circumstances where the effects on different group members varied greatly and detriment tended to outweigh benefits, it could not be said that the terms were 'fair and reasonable'.

Fundamental to this analysis was Justice Murphy's view of the enforceability clauses. His Honour acknowledged that such clauses had been approved previously,8 and recognised that enforceability clauses may be fair and reasonable in some cases.9 However, he considered that approval of such provisions should be approached with great care. In reviewing the enforceability clauses, his Honour focused on the terms of the opt-out notice. He found that the opt-out notice in this case failed to notify group members that if they did not opt out they may lose the right to raise individual claims or defences regarding their loans. The notices did state that future claims may be barred, but this appeared only to apply to those common claims at issue in the class action.10

It was argued that the enforceability clauses merely gave effect to the principle of Anshun estoppel.11 Justice Murphy did not accept this argument. His Honour held that the principle of Anshun estoppel would not necessarily prevent future claims by individual group members, and that the statutory class action regime neither requires, nor even necessarily allows, group members to raise individual claims in the group proceeding.12 Furthermore, it would not be just to prevent individual claims being made later in circumstances where group members' choices were affected by an ambiguous opt-out notice.13

Also underpinning the refusal to approve the settlement was the court's concerns about inadequate case preparation and conflicts of interest. Justice Murphy was concerned that funding problems had compromised the proper preparation of the group members' case, and highlighted 'shortcomings' in counsel's submission as to the likely success of the action.14 His Honour stated that 'these matters must be addressed if (revised) settlements come before the Court for approval.'15

The court also identified a number of potential conflicts of interest raised by the settlement. Participating group members fared better under its terms, and were generally clients of the firm acting for the applicants. Non-participating group members gained no benefit from the settlement, and were not clients of the firm. This indicated that there was an unresolved conflict of interest between participating (client) and non-participating (non-client) group members, in circumstances in which a duty is owed to achieve the best outcome for all group members (so far as possible).16 Further, his Honour identified a potential conflict between the interests of the solicitors for the applicants, Macpherson + Kelly, in receiving legal costs and the interests of group members in minimising legal costs (or, at least, paying only reasonable costs).17

Lessons for future class action settlements

The law in this area will receive more attention in the near future, with the Victorian Court of Appeal currently considering Justice Robson's decision in Timbercorp Finance Pty Ltd (in liq) v Collins and Tomes, regarding the operation of Anshun estoppel in class action settlements.18 Regardless of the outcome in that matter, parties to class actions should consider approval of settlement terms to be a substantive part of the class action procedure. Courts will take an active role in scrutinising agreements, potentially with the assistance of an independent contradictor.

These issues need to be considered from the beginning of proceedings; the content of opt-out notices may be an important consideration when courts come to assess the reasonableness of settlement clauses. Opt-out notices must be unambiguously clear and use consistent language.19 The notices should enable group members to make an informed decision about whether to participate in a group proceeding and to understand the potential consequences of doing so.

Footnotes

  1. [2016] FCA 323 at [78]–[109].
  2. Federal Court of Australia Act 1976 (Cth) s 33V.
  3. Willmott [2016] FCA 323 at [3].
  4. Ibid at [27].
  5. Ibid at [56].
  6. Ibid at [4].
  7. Ibid at [97].
  8. See Clarke v Great Southern Finance Pty Ltd (in liq) (No 2) [2012] VSC 338; Clarke v Great Southern Finance Pty Ltd (in liq) [2014] VSC 569; Clarke v Great Southern Finance Pty Ltd (in liq) [2014] VSC 516.
  9. Willmott [2016] FCA 323 at [114(c)].
  10. Ibid at [169]–[175], [184], [187], [190].
  11. See Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589.
  12. Willmott [2016] FCA 323 at [240].
  13. Ibid at [239].
  14. Ibid at [235]–[236].
  15. Ibid at [12].
  16. Ibid at [316]–[321].
  17. Ibid at [333], [348].
  18. [2015] VSC 461.
  19. Willmott [126(c)], [156], [239].