On 1 July 2011, the Federal Court of Australia approved the settlement of two shareholder class actions brought against Oz Minerals Ltd by, and on behalf of, shareholders. 

The settlement of the claims, which principally alleged that Oz Minerals had breached its continuous disclosure obligations and had engaged in misleading or deceptive conduct, will yield approximately $55 million in compensation for aggrieved investors - and around $5 million in costs for the applicants’ lawyers. 

The terms on which class actions are settled are subject to court approval.  Significant judicial consideration has gone into developing a sensible and helpful set of principles to guide the courts in exercising their discretion to do so.  However, a number of recent settlements afford an opportunity to consider how courts determine whether to approve those parts of a settlement agreement that provide for the payment of the plaintiffs’ lawyers’ costs.

The legislation

Section 33V of the Federal Court of Australia Act provides that a representative proceeding may not be settled or discontinued without the approval of the Court.  Similar provisions exist in the class action rules applicable to the Supreme Courts of Victoria and New South Wales.  They are designed to afford protection to plaintiff class members who may have no direct relationship with active participants in the litigation, who may have played no role in settlement negotiations but who will be bound by the outcome.

The courts generally discharge this onerous task by considering “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”: Williams v FAI Home Security Pty Ltd (No. 4) [2000] FCA 1925 at [19].  They consider such factors as the amount offered to group members, the applicants’ prospects of success, the likelihood that group members will obtain judgment that is significantly more favourable than the settlement terms, and the advice of counsel and any independent expert. These factors have been adopted in the Federal Court’s Practice Note (see our Alert).

Usually, the principal focus is on how much group members will receive.  However, the payment of legal costs almost invariably forms part of the documentation recording the settlement and courts naturally turn their minds to the appropriateness of those contemplated payments. 

How is the appropriateness of payments to lawyers determined?

A practice has arisen whereby an expert costs assessor is engaged to prepare an independent report in relation to the reasonableness of the legal costs to be paid.  In Courtney v Medtel Pty Limited (No 5) [2004] FCA 1406, Justice Sackville had suggested that the evidence be directed to the following matters, particularly in situations where unusually large amounts of costs were claimed by lawyers:

  • the reasonableness of the terms of the fee and retainer agreements (including the provisions for ancillary services, interest and an uplift factor);
  • whether the fees and disbursements actually charged by the solicitors have been calculated in accordance with the fee and retainer agreement;
  • confirmation that, so far as the costs consultant can determine, no significant portion of the fees and disbursements charged by the solicitors have been inappropriately or unnecessarily incurred in conducting the proceedings.

When such evidence is adduced, it is generally taken at face value.  Judges rarely go behind the expert’s report to question the particular bases grounding the opinion he or she has formed.  The defendant has no interest in doing so for fear of upsetting settlement arrangements already negotiated.  Indeed, in approving the recent settlement in Wheelahan & Anor v City of Casey & Ors [2011] VSC 215, Justice Emerton said: “[i]t is not the role of the Court on an approval of a settlement to go behind the agreements that have been made regarding legal costs or to engage in a costing exercise of any kind. It is fair and reasonable, in my view, that the settlement scheme provide for the payment of the plaintiffs’ legal costs in accordance with the relevant costs agreements”. 

The Amcor class action

The recent Amcor settlement, which yielded an unusually high $25 million payment for legal fees and disbursements, gave Justice Jacobson the opportunity to review the relevant principles.  His Honour said that “[t]he question of whether legal fees and disbursements are fair and reasonable is a separate question from whether the settlement is fair and reasonable” because no part of the former is available to group members.  The Court was provided an affidavit sworn by an independent costs consultant, in whose opinion the applicant’s lawyers accounts rendered were “properly and reasonably incurred and reflected work reasonably done for the furtherance of the proceeding” and that disbursements (including for counsel’s fees and expert witnesses) were also properly and reasonably incurred. 

The costs expert assessed the total amount of reasonable fees and disbursements as around $26.3 million - $1.3 million higher than provided for in the settlement.  Justice Jacobson did not go behind the costs consultant’s expert opinion: his Honour saw no reason to do so.  His Honour did, however, express a degree of concern about the quantum, including a fee of $1.7 million paid for an expert report which he had described as “staggering” in the course an interlocutory dispute last year.  Justice Jacobson “[did] not resile from that description even though [he] approved the disbursements figure” upon settlement.  His Honour did so “upon the basis of [the cost expert’s] opinion and having regard to the terms of the settlement”.

Despite his Honour’s hesitation in approving such a large payment to the applicant’s lawyer, he ultimately concluded that:

"...the enormity of the costs was explained by the complexity of the litigation and the hard fought nature of the proceeding which brought it before the Court on a large number of occasions for the determination of interlocutory disputes, in particular disputes about the scope of discovery.  It also needs to be borne in mind that there was no litigation funder for this proceeding. [The applicant’s law firm] conducted the proceeding on a conditional fee basis and therefore took upon itself the risk that the proceeding may not be successful.

In the ordinary course, however, courts may not be so indulgent of high legal fees.  While the terms of the settlement may carry some weight, Justice Jacobson observed that in the absence of extenuating circumstances justifying high awards, “the ordinary approach to the way in which costs are incurred ought to be dictated by the overarching purpose of civil litigation which includes the requirement that proceedings be conducted as quickly, inexpensively and efficiently as possible”.

The Court has, however, displayed some willingness to examine the amounts payable to lawyers by way of costs and disbursements.  In considering the proposed settlement of a class action regarding the suspension of Pan Pharmaceuticals’ licence, Justice Flick considered the evidence of the independent legal costs consultant and an affidavit filed by the representative applicant and concluded that legal costs which were characterised as “unidentified” (as opposed to being allocated against the representative element of the proceedings or to the particular company’s case) were not approved.  Total costs of over $5 million were approved on 25 March 2011.