Limited settlement approved on basis that registered members should receive back 100% of losses

Federal Court finds the respondent has limited financial means to pay the settlement, however the low amount still provides for registered class members to receive 100% of their losses.

This is a class action arising out of ‘junk’ warranties issued by the respondent to motor vehicle purchasers between 1 July 2013 and 28 May 2015. In an earlier judgment (Evans v Davantage Group Pty Ltd [2019] FCA 884), Beach J answered certain separate questions and found, in the applicant’s favour, that the ‘promises’ contained in the warranties were illusory, in the sense that, notwithstanding that a claim might fall squarely within the terms of the warranty, the respondent had an overriding discretion whether or not pay the claim at all, and if so, in what amount.

In this judgment, Beach J approved a settlement of the proceeding in the amount of $9.5 million (inclusive of legal costs, expenses and disbursements, funding commission and interest), to be distributed as follows:

  • $7,500 for the applicant’s reimbursement payment;
  • $55,000 for the applicant’s future legal costs;
  • $159,500 for settlement administration costs;
  • $608,287.50 for costs incurred by the funder;
  • $2,384,978.63 for the applicant’s reasonable legal costs;
  • $2,733,266.13 for the funder’s commission; and
  • the remaining $3,554,035.15 to class members, subject however to the condition that the Settlement Distribution Scheme (SDS) be amended to in effect cap distribution to 100% of registered class members’ claims.

Some notable aspects of his Honour’s decision include the following:

  • His Honour acknowledged that the settlement sum of $9.5 million represented a small recovery when one had regard to: (i) the estimated $47.6 million aggregate value of all class members’ claims; and (ii) the applicant’s success on the determination of the separate question. However, his Honour was satisfied that $9.5 million represented the best recovery that could be achieved in circumstances where the respondent had no capacity to satisfy a substantial judgment at trial and each of its insurers had denied coverage. His Honour also observed that the $3.55 million to be distributed to class members was in fact greater than the $2.2 million aggregate loss of all registered class members, and as such registered class members were likely to recover 100% of their losses.
  • His Honour cautioned against simply focussing on the percentage of the settlement sum to be distributed to class members when assessing the fairness of class action settlements. His Honour observed that the return to class members in the present case would be 37.4% of the settlement sum, which “may shock the conscience of the uninformed” (at [64]). However, his Honour pointed out that registered class members would in fact recover 100% of their losses under the settlement. Furthermore, his Honour said that “the value of a group member’s claim is reflected not only in the prospects of success on liability and quantum but also on the prospects of recoverability. You cannot take an atomistic approach to value and hive off the last consideration” (at [69]). In cases where recoverability of any significant judgment against the respondent has very poor prospects when settlement is agreed, his Honour said that his view is that class members and the funder should equally bear the risk of recoverability after the subtraction of the applicant’s legal costs and other associated costs (apart from the funder’s commission). His Honour said that in such cases “the risk of recoverability should not be applied to the reasonable legal and other associated costs, which should come off the top as in essence a priority payment” (at [71]). On that scenario, his Honour observed that class members in the present case would receive more than 50% of the balance of the settlement after the deduction of legal and other associated costs.
  • His Honour made a common fund order under s 33V(2) of the Federal Court of Australia Act 1976 (Cth) (FCAA) to facilitate the distribution of the settlement sum. In doing so, his Honour said that “BMW Australia Ltd v Brewster [2019] HCA 45; (2019) 374 ALR 627 is not authority for the proposition that there is no power to make a CFO-type order under s 33V(2). Both its ratio and its considered majority dicta were all about the “gap-filler” s 33ZF(1)
  • As mentioned above, registered class members’ estimated losses were $2.2 million, and the amount available for distribution to class members under the SDS was $3.55 million. Even allowing for a further registration period, it therefore seemed likely that there would be a surplus of funds available for distribution. His Honour identified two solutions to deal with surpluses in class action settlements. The first solution is to draft the SDS such that any surplus is allocated according to its terms. Under this approach, no unallocated surplus can ever theoretically arise, and all that is necessary is an order under s 33V(2) of the FCAA approving the SDS. The second solution is for the Court to make a cy-prés type order for the distribution of the unallocated surplus, also under s 33V(2) of the FCAA. Under this approach, the Court would be required to consider whether the order would be ‘just’ with respect to the distribution of the surplus money. His Honour said that under either of the above scenarios, he would not consider it just or appropriate to make orders providing for any surplus to be distributed to class members if this would result in them recovering more than 100% of their estimated losses (and thus receiving a ‘windfall’). His Honour said that in his view it would be ‘more just’ to return any surplus to the respondent, or pay it to an appropriate charity or other body. Ultimately, in the present case, his Honour rejected the parties’ proposal to distribute the surplus according to the terms of the SDS, which would have resulted in class members being paid the surplus and thus likely receiving more than 100% of their estimated losses. Rather, his Honour ordered the parties to amend the SDS to: (i) remove the possibility of class members receiving a windfall; and (ii) require the parties to notify the Court of any unallocated surplus after distribution and seek further directions as to the exercise of the Court’s power under s 33V(2) of the FCAA.

Case details

Evans v Davantage Group Pty Ltd (No 3) [2021] FCA 70

Federal Court of Australia, Beach J;
05 February 2021;
Plaintiff’s Solicitors: Baker & McKenzie;
Defendant’s Solicitors: Herbert Smith Freehills;
Plaintiff’s Funder: Vannin Operations Ltd;
Austlii link: Accessible here

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