In an early Christmas present for a class of Westpac Bank customers who borrowed to invest in Storm Financial, the Federal Court approved a $7.5M class action settlement against the Bank. With around $2.5M of that amount payable in costs to the applicants’ lawyers, group members were left with a relatively modest $5M for distribution.

In Issue

  • Whether a settlement sum was fair and reasonable.
  • The costs claimed by the applicants’ lawyers.

The Background

The case (which commenced in 2013) is one of a series of class actions against Australian banks by Storm Financial investors, following its collapse in 2009. Westpac defended the case, on the basis that it was merely a lender to Storm clients who had been advised to invest by Storm Financial advisers and had not taken up alternative avenues of finance promoted by Storm. A proposed settlement was ultimately reached which reflected the merits of the case and the costs and risks of proceeding to trial. The settlement involved Westpac paying the sum of $7.5M (inclusive of costs) in settlement of the claims of the applicants and group members. Westpac also agreed to pay an additional $15,000 to the applicants as compensation for their time and effort in agitating the action. The Federal Court was required to approve the settlement under s33V of the Federal Court Act for it to be effective.

The Decision at Trial

The court usefully summarised (applying Darwalla Milling Company Pty Ltd v F Hoffman-La Roche Limited (No 2) [2006] FCA 1388) the principles which must guide the exercise of the court’s “untrammelled” discretion to approve a settlement of a group proceeding. The court noted that it was not for the court to second-guess the commercial or pragmatic reasons for compromise in proceedings of this nature. Rather, it must be determined whether the proposed settlement falls within the broad range which might be considered to be “fair and reasonable”.

The court noted that the amount payable by Westpac under the settlement agreement was a relatively small sum in the context of actions of this nature. This reflected an assessment by both parties as to the strength of the applicants’ case. In that regard, the court took into account a confidential Queen’s Counsel opinion relied upon by the applicants in support of the settlement approval application. The court noted (without having to decide on the substantive issues) that Westpac perceived that the applicants had limited prospects of success. The court also acknowledged the submission made “not without some force” on behalf of Westpac, that as a matter of causation if Westpac had performed the duties which the applicants alleged it owed them and did not lend any money, the most likely consequence would be that the applicants would have borrowed elsewhere and invested regardless. Nevertheless, the court stated that there were “some levels of risk” either way in relation to the linked credit provider claims and the negligence claims.

The court concluded that there was no doubt the resolution of the matter was the result of “mature and rational consideration”, taking into account the extensive costs and risks were the trial to have run. Given the complexity, duration and risks involved, the settlement was “within the balance of that which might be described as reasonable and fair.” The absence of any objection from group members was also taken into consideration.

The proposed settlement distribution scheme required that the costs of the applicants’ lawyers and the scheme administration costs be approved by the court and deducted from the settlement before calculation of the individual group members’ entitlements. The court noted that many issues concerning legal costs in class actions might be overcome if applicants’ lawyers applied for directions for the appointment of an independent costs assessor before seeking court approval of those costs. Ultimately, the court was prepared to approve the claimed legal and scheme administration costs of around $2.5M which represented 30% of the settlement amount. If the settlement sum had been higher, the court might have been inclined to require some of it to be utilized in retaining an independent costs assessor to verify the evidence of a costs assessor belatedly engaged by the applicants.

Implications for you

Courts will approve relatively modest settlements in class actions as being fair and reasonable and reflecting the commercial desires of the parties, having regard to the underlying merits of the case and the costs/risks involved in proceeding to trial. Defendants to class actions and their insurers should consider in advance the costs aspects of any proposed settlement. If court approval of legal costs claimed by applicants is a component of a settlement, the early engagement of an independent costs consultant to verify claimed costs is advisable prior to any settlement approval application.

Lee v Westpac Banking Corporation [2017] FCA 1553