Precedent (Australian Lawyers Alliance)
COURT APPROVAL OF CLASS ACTION SETTLEMENTS
YOU WANT COSTS WITH THAT?
By Steven Lewis
Be prepared to have the court run the ruler over every element of the costs being claimed as part of a settlement.
The Federal Court of Australia has given a strong signal that it will closely scrutinise all aspects of a proposed settlement of a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (the Act), including legal costs and disbursements. The Court has indicated that, notwithstanding any agreement between the parties’ solicitors, settlement approval will be granted only once the Court is satisfied that all aspects of the proposed settlement, including the costs and disbursements to be deducted, are fair and reasonable and in the interests of group members. In this context, the decisions of Justice Gordon in Modtech Engineering Pty Limited v GPT Management Holdings Limited is required reading for practitioners involved in representative proceedings.
The applicant (Modtech) was a former holder of stapled securities in the respondent companies (GPT). It was alleged that GPT issued a forecast on 27 February 2008 which overstated the distribution per security for 2008. GPT issued a downgrade on 7 July 2008, following which the price of the securities fell. The group was defined as being those who purchased GPT securities between 27 February 2008 and 6 July 2008. Modtech alleged that it and group members acquired their securities at an inflated price and suffered loss by reason of GPT’s failure to disclose material information to the market.
The dispute, which had the backing of a litigation funder, went to trial over 16 days, and her Honour reserved. Prior to her Honour delivering judgment, the parties notified the Court that they had agreed to terms of settlement and to a settlement deed. Under the settlement deed, GPT would pay a settlement sum of $75 million inclusive of interest and legal costs. The parties to the settlement deed were Modtech, GPT, the applicant’s solicitors and the litigation funder. Modtech sought approval of the settlement under s33V of the Act.
Section 33V of the Act provides:
‘(1) A representative proceeding may not be settled or discontinued without the approval of the Court; and
(2) 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 Court.’
Her Honour noted the comments by Finkelstein J in Lopez v Star World Enterprises Pty Ltd, that the task of ascertaining if a compromise is a fair and reasonable compromise of the claims by group members as a whole, was ‘onerous’.
The Federal Court of Australia’s Practice Note CM17 provides that, when applying for approval of settlement of a representative action, the parties will usually need to persuade the Court that the proposed settlement is fair and reasonable. The proposed settlement must also have been undertaken in the interests of all group members, as well as the applicant, and not just in the interests of the applicant and the respondent.
As was seen in the Vioxx litigation, it should not be presumed the Court will simply wave through a settlement, even when all parties are in agreement as to a resolution of the dispute.
In Modtech, the proposed settlement had two elements: (1) the payment of the settlement sum under the settlement deed; and (2) a settlement distribution scheme, which provided for the payment of commission to the litigation funder, the payment to the applicant’s solicitors of its costs and disbursements and, finally, the distribution of the balance to the group members.
Her Honour noted that substantial material in support of the application for approval had been provided to the Court for the purposes of demonstrating the fairness and reasonableness of the payment of the settlement sum as a compromise between group members and GPT. Her Honour then examined the settlement distribution scheme and its application to the applicant’s costs, the funder’s commission deduction, and the applicant’s expenses claim.
In doing so, her Honour noted that approximately 92 per cent of group members had executed a legal costs agreement (retainer) with the solicitors, and a litigation funding agreement with the litigation funder. The legal funding agreement between the funder and group members provided that the funder would receive a commission of between 25 and 30 per cent of recoveries after reimbursement of litigation costs. These costs included all legal fees and expenses (on a solicitor and client basis).
The settlement distribution scheme provided that:
• the legal costs be approved by the Court and then deducted from the settlement sum prior to the calculation of individual group members’ entitlements. This meant that the Court-approved legal costs would be shared on a pro rata basis by all group members, irrespective of whether they executed a retainer;
• the commission due to the funder would then be deducted from the individual entitlements of all group members and paid to the funder, irrespective of whether the group member executed a funding agreement; and
• an amount representing a claim by the lead applicant for compensation for the time or expenses incurred by it in prosecuting the proceedings on behalf of all group members was to be deducted from the settlement sum prior to the calculation of individual group members’ entitlements.
Her Honour then proceeded to examine each element in turn.
The distribution settlement scheme provided that the legal costs be shared by all group members, including those who had not signed a retainer. This is not uncontroversial. As her Honour noted, the legal costs of running the proceedings were fixed and should be borne by all those who benefitted from the proceedings.
Her Honour then turned to the quantum of the professional costs and disbursements claimed by the applicants’ solicitors. Her Honour noted:
‘This is not a taxation. But it is unique. The solicitor is acting for itself – it seeks an order that its costs be approved by the Court and paid to it. There is no contradictor. The group members who are to share the liability for the fees and disbursements are unable to oppose the application. They are unable to oppose the application because although four group members obtained access, on a confidential basis, to the settlement distribution scheme, that document did not record the amount of fees and disbursements, the subject of the approval application or how the sums were quantified.’
Her Honour noted that the Court and the solicitors have important and distinct tasks when the Court’s approval is sought for fees and disbursements to be deducted from a settlement sum. The solicitors’ responsibilities are to ensure that the costs charged are in accordance with the retainer. Her Honour set out two questions for the Court to determine in assessing the fees and disbursements:
‘1. are the fees and disbursements of an unreasonable amount having regard to, inter alia, the nature of the work performed, the time taken to perform the work, the seniority of the persons undertaking that work and the appropriateness of the charge-out rate for those individuals; and
2. if the work is unreasonable in the circumstances, can the group members be considered to have approved (explicitly or impliedly) the costs claimed.’
Her Honour noted that it is the judicial officer and not an independent costs expert who is required to determine whether the costs and disbursements are reasonable, and that the information to be provided to the Court must be ‘sufficient’ to enable the Court to undertake that assessment.
The applicant’s solicitors approached the task by engaging a costs consultant, who provided an expert opinion on the reasonableness or otherwise of the legal costs and disbursements incurred up to the date of settlement and an estimate of the costs and disbursements likely to be incurred for work from the date of settlement, until distribution of the settlement proceeds. The costs consultant did not draw a bill of costs. Rather, he prepared what he called an ‘assessment of costs’ taking a ‘global approach’.
Her Honour had a number of concerns about the adequacy of this evidence. Her Honour did not accept that the costs consultant’s affidavit was sufficient. Her Honour was highly critical of the methodology adopted by the costs consultant and identified a number of concerns, including that the amounts claimed were substantially in excess of the costs and disbursements estimated by the solicitors in the retainer, and that no explanation was provided as to why the estimate (which her Honour identified as a factor of about three) was so wrong; the costs consultant did not identify the total costs and total disbursements claimed by the solicitors; where the costs consultant reduced or disallowed costs as part of his ‘assessment of costs’, his affidavit did not disclose the methodology adopted or the amount attributed to them which had been disallowed, and he did not identify the people who worked on the matter, their role or their hourly charge-out rate.
Her Honour had a particular concern with the costs consultant’s methodology in determining the fees charged by the solicitors for discovery. The costs consultant estimated the number of documents produced on discovery and also produced on subpoena. He estimated the number of documents which could be reviewed per hour and then applied the maximum hourly rate allowed under the Federal Court scale of costs. A loading of 50 per cent for skill, care and attention was then applied. The consultant calculated that a fair and reasonable amount for discovery was $543,675, applying an effective hourly rate of $825. However, the retainer provided for a rate of $605 for the equivalent of a partner’s time.
Her Honour rejected the costs consultant’s approach, finding that the rate adopted by the costs consultant was inappropriate: it had not been provided for in the retainer and raised serious questions about the seniority of staff undertaking discovery. While the retainer did not provide for a loading, her Honour noted that even if it was permitted, given that the costs consultant did not undertake an analysis of the work, the Court would have difficulty in allowing a loading, let alone a loading of 50 per cent for skill, care and attention.
Her Honour was not prepared to approve the deduction of the applicant’s legal costs and disbursements in the amount of $9,338,865 from the settlement sum. Instead her Honour approved this amount be deducted from the settlement sum and placed in an interest-bearing account. Her Honour directed that a Registrar of the Court be appointed to assess the solicitor’s costs on a solicitor/own client basis in light of her Honour’s reasons and consistent with s337M of the Act, and to provide the Court with an assessment.
The settlement distribution scheme provided that a funding commission be deducted from all group member entitlements and be paid to the funder, irrespective of whether a group member had entered into a funding agreement. The Court declined to approve the deduction of commission to the funder.
Her Honour noted that the funder made a commercial decision to fund the proceedings on the terms set out in the funding agreement. That commercial decision included deciding to fund the proceedings even though not all group members had entered into a funding agreement.
In support of the approval, the applicant’s solicitors submitted that the lead applicant had agreed to it; notice of the proposed deduction had been given to all group members and no objection had been lodged; the class action had commenced as a closed class but had subsequently opened and the Court had approved a similar application in a previous class action.
Her Honour rejected these submissions, noting that the first time group members had been notified of the intention to deduct commission from all group members was when they received a notice of the proposed settlement given following orders of the Court. Her Honour stated that whether a common fund order should be made is a matter to be addressed in each case. In the circumstances of this case, it was difficult to conceive of a circumstance in which it would be appropriate. Her Honour directed that the settlement scheme be amended and resubmitted for approval.
APPLICANT’S EXPENSES CLAIM
The third matter of concern for her Honour was the applicant’s expenses claim for $53,530.85, which was to be deducted from the settlement sum prior to the calculation of individual group members’ entitlements.
The applicant’s solicitors sought approval for payment to the lead applicant for compensation for time or expenses incurred by it in bringing the proceedings on behalf of all group members. In evidence put before the Court, the claim was framed as being the costs incurred by the lead applicant’s director. The evidence was that the majority of the director’s time devoted to the litigation was properly characterised as time expended on matters for the benefit of all group members, not just the applicant’s claim.
The solicitors took a novel approach to calculating the lead applicant’s costs. They calculated an hourly rate based on the director’s taxable income for the financial year to 20 June 2006 and calculated an hourly rate based on an assumed 40-hour working week over 48 weeks. The hourly rate was applied to the time expended by the applicant. The solicitors noted that this figure represented ‘the high end’ of claims for expenses in other class actions, but justified the figure on the basis of the director’s involvement, the length of that involvement and his position. The solicitors submitted that the expenses claimed were reasonable and properly incurred for the benefit of all group members.
Her Honour was troubled by this claim, pointing out that the claim was being made not by the lead applicant but by a director. Further, the claim was based on the director’s taxable income in the financial year before the applicant commenced trading in the GPT securities, but the expenses being claimed related to work undertaken between late 2008 and May 2013. No explanation was provided as to why the prior income provided a proper basis for making the claim. Nor was there any evidence that the earlier income was representative of the director’s later income.
Her Honour characterised the claim as one for lost salary as a result of the director’s involvement in the litigation. Her Honour was not satisfied that the Court had been provided with any material to enable her to determine the reasonableness of the costs and expenses (such as parking). The Court was not prepared to approve the claim. Her Honour refused to grant the applicant leave to file further supplementary evidence and instead referred the expenses claim to a Registrar to determine what information was required to assess the claim and to report back to the Court.
The Registrar prepared a report and the adjourned approval application was set down for further hearing before her Honour.
In dealing with the applicant’s expenses claim, her Honour accepted that it was fair and reasonable that the director receive some compensation for the time he committed to the proceeding in the interests of group members as a whole. Her Honour accepted the Registrar’s report and fixed the amount at $10,000.
Her Honour gave guidance as to what the Court would expect in future claims of this nature, saying:
‘... the claim cannot be reconstructed after the event. Consideration needs to be given at the commencement of the litigation as to how the claim might be made and, in particular, how the work undertaken might be contemporaneously recorded. If, for example, there is to be a claim based on an hourly rate on the basis that the work on the litigation impacted on the earning capacity of the lead applicant, then not only will the time need to be recorded, but a proper foundation for the rate or rates will need to be provided as well as sufficient particulars of the work undertaken to justify the cost being imposed on all group members. Of course, the rate may change throughout the life of the claim.’
THE SOLICITOR’S PROFESSIONAL FEES AND DISBURSEMENTS
The Registrar’s report to the Court was that the solicitor’s reasonable costs and disbursements on a solicitor and own client basis was $8,505,940.13 (inclusive of GST), as against the claimed amount of $9,066,545.28, a difference of $560,605. The applicant’s solicitors did not accept the vast bulk of costs and disbursements disallowed by the Registrar. The Registrar was provided with substantial material by the applicant’s solicitors which was not before the Court at the initial settlement approval hearing, including affidavits by the solicitors. At its request, the Court was provided with further submissions on the principles it would apply in considering the Registrar’s report. Her Honour found it was unnecessary to decide any disputed question of principle because, even applying the applicant’s solicitors stated principles, the Registrar’s advice should be adopted.
The solicitors did not rely on any independent report from a costs consultant, and conceded that the work originally undertaken by its retained costs consultant was inadequate. Her Honour observed that the solicitors failed to remedy those inadequacies in their additional evidence.
The Registrar categorised the disallowed costs under five categories: (1) costs incurred prior to the execution of the retainer (pre-agreement costs); (2) costs relating to the retainer and funding agreement; (3) the charging of an unreasonable rate; (4) charges for administrative tasks; and (5) unreasonable or excessive charges.
There was no express provision in the retainer for the recovery of costs incurred before the effective date of the retainer signed by the lead applicant. Her Honour found that while the definition of ‘litigation costs’ in the funding agreement may oblige the funder to reimburse the solicitors for fees incurred before the effective date of the funding agreement, it did not entitle the solicitors to recover from the settlement sum fees incurred before that effective date.
Her Honour rejected a submission by the solicitors that the relevant date should be the date upon which the first group member signed a retainer, rather than the date on which the lead applicant signed its retainer (approximately two months later). Her Honour had regard to the express terms of the retainer and the funding agreement and held that the solicitors were not entitled to legal fees incurred prior to the date on which the retainer was signed by the lead applicant. In seeking approval of its costs, the solicitors were claiming legal fees against all group members. Her Honour stated:
‘For practical purposes, it is necessary to identify a single date upon which to assess [the solicitor’s] entitlement to its professional fees. As the representative party, the date of the applicant’s [retainer] is an approximate proxy for this purpose.’
Her Honour also found that the incurring of pre-agreement costs were commercial decisions made between the solicitors and the funder before a decision had been made to commence the proceedings. Her Honour found that, while group members ultimately benefitted from that work, it would be unreasonable for group members to bear that cost.
Client advice – retainer and funding agreement
The Registrar disallowed $11,530.81 claimed for providing client advice on individual retainers. In assessing what costs were reasonable for the work done, the Court required evidence of not only the nature of the work but the time taken and the fees charged. Her Honour said there was insufficient evidence before her to enable the Court to assess each of those matters and was not satisfied that the costs were reasonably incurred: therefore, they were disallowed.
The Registrar also disallowed $13,334.79 claimed for liaising with the funder. The solicitors submitted that these costs fell within the definition of ‘legal work’ in the retainer and that they were largely concerned with settlement of the proceedings. While the definition of ’legal work’ was wide, the evidence filed by the solicitors disclosed that the majority of attendances did not relate to the settlement of the proceedings, nor did the evidence provide a sufficient basis on which the Court could be satisfied that these costs should be allowed. Her Honour disallowed that amount.
Unreasonable hourly rate
Her Honour accepted the Registrar’s report and reduced the hourly rate charged for time entries recorded by seven of the applicant’s solicitors’ staff, amounting to $15,814.52. Because the relevant timesheets were not before the Court in evidence, her Honour had difficulty in assessing the reasonableness or otherwise of the claim. Further, the evidence before her was given by the applicant’s solicitors and was therefore, in her Honour’s words, ‘hardly objective’. Her Honour said that the Court must apply an objective assessment in considering whether to approve the amounts claimed by the solicitors.
Her Honour accepted the Registrar’s report and disallowed $36,993.55 in fees for what the solicitors termed ‘file management’. The solicitors submitted that file management costs were recoverable under the terms of the retainer and that the costs should be approved because they related to a large-scale litigation involving over 2,000 group members: this had involved a large team of lawyers and adequate file management procedures were a necessary part of running large-scale litigation. The time billed included time by legal assistants in electronic filing of correspondence, including emails and key documents.
Her Honour acknowledged that effective file management is an essential part of conducting all litigation, especially so for litigation of the scale and complexity of the class action. However, her Honour noted that whether the costs associated with file management should be borne by the group members was a separate question. Her Honour found that file management costs formed part of a firm’s fixed overhead costs and, as such, are built into the hourly rates charged by the lawyers and recoverable on that basis. Her Honour found that it would be unreasonable to charge the amount to group members.
The Registrar’s report disallowed disbursements of $334,604.39 (exclusive of GST). Of this amount, $285,575 was in respect of counsels’ fees, which included $227,625 of fees charged by counsel for trial preparation. The Registrar indicated that, as a ‘general guide’, he considered two days’ preparation for each day of trial represented a ‘reasonable upper limit for the allowance’. The applicant’s solicitors retained two senior counsel and two junior counsel. The Registrar noted that a further allowance might be justified on account of the size and complexity of the representative proceeding; however, for counsel with no advocacy role the allowance in each case would be less. Her Honour accepted the Registrar’s assessment that there be a deduction of the allowed days for both senior and junior counsel.
Sometimes, the bizarre can arise out of the most ordinary circumstances. In a $75 million settlement, the Court was required to determine whether four other disbursements totalling $2,099.50 were fair and reasonable and should be deducted from the settlement sum and paid to the applicant’s solicitors. These disbursements concerned the purchase of a text book, telephone expenses incurred while one of the lawyers was overseas to take evidence, and catering for lunches during the hearing. Why these disbursements were pressed is not explained but, as her Honour pointed out, a lawyer’s hourly rate includes a component for the fixed overheads of the firm. A firm’s library, telecommunications costs and catering would ordinarily fall under the firm’s fixed overheads and would form a part of the hourly rate charged on a matter. As her Honour observed:
‘It is inappropriate for lawyers to seek to “double dip” by charging clients for those overhead costs as disbursements.’
Her Honour also observed that costs of an unusual sum or nature should not be allowed unless they have been authorised by the client after full disclosure, including that they might not be allowed on a party and party basis. Her Honour did not say that the expenses were not unreasonable, only that they were overheads and not expenses properly charged to group members. As a result, her Honour did not approve these expenses on the basis that they were unreasonable.
Further approval hearing
In Modtech Engineering Pty Limited v GPT Management Holdings Limited (No. 3)  FCA 680,her Honour dealt, inter alia, with a further application by the applicant’s solicitors that their costs and disbursements incurred in the review undertaken by the Registrar ($45,481.90), and of the adjourned approval hearing ($123,379.78), be approved and deducted from the settlement sum.
Her Honour found that the solicitor’s costs of the Registrar’s review were not incurred in performance of legal work as defined in the retainer, nor were they costs and expenses within the definition of expenses in the funding agreement. Her Honour declined to allow those costs to be deducted from the settlement sum. In relation to the adjourned approval hearing costs, her Honour noted that the solicitors were substantially unsuccessful and therefore there was no basis for the solicitors to be entitled to deduct their costs of the hearing. Her Honour noted:
‘The solicitor who unsuccessfully seeks more costs than the solicitor is found entitled to charge cannot properly expect those clients to pay for the solicitors’ unsuccessful attempts to secure that larger amount. The solicitor cannot get through the back door that which it could not obtain through the front door.’
While the Court’s incisive scrutiny of legal costs and disbursements must have been uncomfortable for the solicitors involved, it has provided clear guidelines for what it expects when approval is sought for a settlement of a representative proceeding which is inclusive of costs.
Practitioners must be able to establish to the Court’s satisfaction that the costs to be borne by all group members are fair and reasonable, and have been incurred in the interests of the group as a whole and not just the legal representatives. In discharging this duty, solicitors need to ensure that the evidence is of sufficient clarity and independence to assist the Court.
Care also needs to be taken to ensure that the retainer provides for the recovery of costs incurred prior to its execution by the lead applicant, and that costs estimates are accurate and updated.
Until there is clear authority from the Court, it should be assumed that any commission due to a litigation funder can be recovered only from those group members who have entered into a funding agreement.
Steven Lewis is a principal at ACA Lawyers. EMAIL email@example.com.
 Modtech Engineering Pty Limited v GPT Management Holdings Limited  FCA 626.
Modtech Engineering Pty Limited v GPT Management Holdings Limited (No. 2)  FCA 1163.
Modtech Engineering Pty Limited v GPT Management Holdings Limited (No. 3)  FCA 680.
 Lopez v Star World Enterprises Pty Ltd  FCA 104 at .
 Federal Court of Australia, Practice Note CM17 Representative Proceedings Commenced under Part IVA of the Federal Court of Australia Act 1976 (Cth) para 11.1.
 Peterson v Merck Sharp & Dohme (Aust) (No. 6)  FCA 447.
 In Peterson v Merck Sharp & Dohme (Aust) (No. 6)  FCA 447, Jessup J declined to approve a settlement under s33V of the Act in circumstances where the settlement was reached after the failure of the lead applicant’s case but before any of the claims of the other group members had been heard.
 Modtech Engineering Pty Limited v GPT Management Holdings Limited  FCA 626 at .
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 On 26 June 2013, the Court made orders including approving the settlement and the amended settlement distribution scheme and that the amounts of $9,338,865 and $53,530.85 be deducted from the settlement sum and held in an account controlled by the applicant’s solicitors until further order of the Court: Modtech Engineering Pty Limited v GPT Management Holdings Limited (No. 2)  FCA 1163 at .
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 Ibid at . Counsel fees in total were $2,213,197.30 or 52.5 per cent of the total disbursements incurred.
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 Modtech Engineering Pty Limited v GPT Management Holdings Limited (No. 3)  FCA 680 at .