Dorajay Pty Ltd v Aristocrat Leisure Limited

constitution of the court 4 Before there could be any hearing of the application for settlement approval a preliminary matter had to be addressed. This was whether, as I had presided over a full hearing of the matter and had reserved my decision, the application should be heard by another judge. My concern was that, should I not approve the settlement, or should the settlement not proceed for any other reason, I might be embarrassed delivering judgment. In the course of hearing the application for settlement approval the Court will not only be apprised of confidential information, such as legal advice given to the parties by their respective lawyers but will also, from the proposed terms, become aware of the concessions that both parties are prepared to make. This may create a perception of bias should it then be necessary to deliver judgment in the matter.

5 On the other hand, the fact that I had heard full argument for and against the applicant's claims meant that I was in a position to make an informed decision as to the fairness of the settlement. Moreover, my familiarity with the applicant's claims and the circumstances that gave rise to them arguably made the process of approving settlement much more efficient with a consequent saving of costs for all concerned. It was for these reasons that the parties agreed that it would be appropriate, indeed desirable, for me to determine the application for approval of the settlement. The applicant expressed its position as follows: … the fact that all the evidence and submissions have been received allows the trial judge a singular advantage in assessing whether the proposed settlement is fair, reasonable and adequate in the interests of all group members. Her Honour has familiarity with the relevant issues and has seen them refined and brought into sharp relief at trial. Preliminary (and perhaps more than preliminary) views as to the strengths and weaknesses of the competing contentions have been formed. All of the advantages of this familiarity would be lost in the event the application was dealt with by another judge.

6 The respondent expressed a similar view. Prior to the hearing both parties gave informed consent to the Court receiving the confidential information, and waived irrevocably any objection they could otherwise have made to my delivering the judgment after having received confidential information in the course of the settlement hearing.

7 The right of parties to waive possible objections to the constitution of the Court was accepted in Smits v Roach (2006) 227 CLR 423. In their joint judgment Gleeson CJ, Heydon and Crennan JJ said, at 439-440: It has been held in this Court, on a number of occasions, that an objection to the constitution of a court or tribunal on the ground of apprehended bias may be waived, and that, if a litigant who is aware of the circumstances constituting a ground for such objection fails to object, then waiver will result. The general principle is not in contest in this appeal. The authorities on the point were examined by Dawson J in Vakauta v Kelly. It is unnecessary to repeat what was said by Dawson J. It is as well, however, to repeat what was said in the joint judgment of Brennan, Deane and Gaudron JJ in the same case concerning the justice of the matter, because it is directly in point. In Vakauta v Kelly, the ground of apprehended bias was related to certain comments made by a trial judge in the course of proceedings. Brennan, Deane and Gaudron JJ, in a passage quoted by Sheller JA in the present case, said: Where such comments which are likely to convey to a reasonable and intelligent lay observer an impression of bias have been made, a party who has legal representation is not entitled to stand by until the contents of the final judgment are known and then, if those contents prove unpalatable, attack the judgment on the ground that, by reason of those earlier comments, there has been a failure to observe the requirement of the appearance of impartial judgment. By standing by, such a party has waived the right subsequently to object. The reason why that is so is obvious. In such a case, if clear objection had been taken to the comments at the time when they were made or the judge had then been asked to refrain from further hearing the matter, the judge may have been able to correct the wrong impression of bias which had been given or alternatively may have refrained from further hearing. It would be unfair and wrong if failure to object until the contents of the final judgment were known were to give the party in default the advantage of an effective choice between acceptance and rejection of the judgment and to subject the other party to a situation in which it was likely that the judgment would be allowed to stand only if it proved to be unfavourable to him or her.

8 It was obviously an important factor in favour of my hearing the application that the legal representatives of both parties submitted that I should do so. Maurice Blackburn, however, do not act for all group members but only the "funded group members". These are the group members who have retained Maurice Blackburn and who, in addition, have entered into litigation funding agreements with IMF (Australia) Ltd. Those group members who have neither retained Maurice Blackburn nor entered into an agreement with IMF are referred to as "non-funded group members". Maurice Blackburn have a duty to the non-funded group members to conduct the proceeding in a manner consistent with their interests; King v AG Australia Holdings Ltd (2002) 121 FCR 480 per Moore J at 489. I accept the assurance of the applicant's solicitors, given both in writing and orally at the hearing of the application, that they are aware of this duty and, in submitting that I should hear the application, and in waiving their right to object to my delivering judgment, should that be necessary, they have taken the interests of the non-funded group members into consideration. 9 It is also necessary to consider that while a judge must recuse him or herself where bias is reasonably apprehended, it is equally fundamental that a judge not recuse him or herself where no such issue in reality arises; Ebner v Official Trustee In Bankruptcy (2000) 205 CLR 337 at 348. Having considered the issues and submissions discussed above, I was satisfied that the proper course was for me to hear the application for settlement approval.

approval of the settlement 10 In Taylor v Telstra Corporation [2007] FCA 2008 at [56]-[66], Jacobson J provided a most useful survey of the authorities concerning s 33V which I set out below. Section 33V(1) of the Act provides that a representative proceeding may not be settled or discontinued without the approval of the Court. The purpose intended to be served by s 33V was stated succinctly by Branson J in Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 142 ALR 177 at 184. Her Honour said: It is appropriate for the court to be satisfied that any settlement or discontinuance of representative proceedings has been undertaken in the interests of the group members as a whole and not just in the interests of the applicant and the respondent. In Lopez v Starworld Enterprises Pty Ltd [1999] FCA104, Finkelstein J pointed out at [16] that the Court's task under s 33V is an onerous one. His Honour observed at [15] that he was not concerned so much with the position of the applicant, who was represented by solicitors and counsel, but with other group members, many of whom are not protected in this way. In Williams v FAI Home Security Pty Ltd (No. 4) (2001) 180 ALR 459 at [19], Goldberg J said: Ordinarily the task of a court upon an application such as this, is to determine 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. Ordinarily…the court will take into account the amount offered to each group member, the prospects of success…, the likelihood of group members obtaining judgment for an amount significantly in excess of the settlement offer, the terms of any advice received from counsel and from any independent expert in relation to the issues which arise in the proceeding, the likely duration and cost of the proceeding… and the attitude of the group members to the settlement. His Honour referred to a nine-factor test which has been adopted in the United States in considering whether to approve settlements as fair and reasonable. In Darwalla Milling Co Pty Ltd v F Hoffmann-La Roche Ltd (No. 2) (2007) 236 ALR 322, Jessup J took a slightly different approach from Goldberg J. His Honour observed at [3] that each case is dealt with on its own merits and by reference to specific factors which might raise serious doubts as to fairness. His Honour said at [35] that he could see no particular warrant for incorporating into Part IVA of the Act the requirements of the rules of the court of an overseas jurisdiction. His Honour said at [39] that: The practical judicial approach has been…to identify any features of the settlement that are obviously unreasonable or unfair…[and] where some group members object to a settlement and state their reasons…, their reasons will provide a convenient focus by reference to which the court will decide matters of fairness and reasonableness. Jessup J at [41] proceeded on the basis of considering whether the overall settlement sum was reasonable having regard to: the manner of its calculation and its relationship to the best possible case outcome for the group as a whole; the prospects of achieving an outcome at or near the best probable case; the extent of the weaknesses, substantive or procedural, in the applicant's case; [and] whether the settlement sum falls within a realistic range of likely outcomes… The test applied by his Honour at [41] was to determine whether the settlement involved any actual potential unfairness to any group member or categories of group members having regard to all relevant matters, including: whether the overall settlement sum involved unfair compromises by some members or categories of members for the benefit of others; and whether the distribution scheme fairly reflected the apparent or assumed relative losses suffered by particular members or categories of members. Jessup J at [50] also said that he did not consider that it was the Court's function under s 33V to second‑guess the applicants' advisers as to the answer to the question whether the applicants ought to have accepted the respondents' offer. He also said at [50]: the court's function is, relevantly, confined to the question of whether the settlement was fair and reasonable. There will rarely, if ever, be a case in which there is a unique outcome which should be regarded as the only fair and reasonable one…the court should, up to a point at least, take the applicants and their advisers as it finds them…So long as the agreed settlement falls within the range of fair and reasonable outcomes, taking everything into account, it should be regarded as qualifying for approval under s 33V. More recently in Haslam v Money for Living (Aust) Pty Ltd (Administrators Appointed) [2007] FCA 897 Gordon J said at [19] to [20] said that she did not consider that the analysis undertaken by Goldberg J ought to be read as seeking to incorporate into Part IVA of the Act the requirements of the rules of court of an overseas jurisdiction. She said at [20]: The analysis provided and continues to provide a useful guide in considering applications for approval under s 33V…It should, in appropriate cases and subject to the circumstances of any particular case, continue to be employed as a useful guide.

11 The question whether this proposed settlement is fair, reasonable and adequate in the circumstances of all group members requires three aspects of the proposed settlement to be considered.

12 The first issue is the fairness, reasonableness and adequacy of the amount proposed to be paid by the respondent as compensation to the participating group members. In accordance with the Deed, that amount is: (a) $109 million in respect of the claims of funded group members, with Aristocrat retaining no right or interest to any part of that money after distribution to group members; and (b) $27 million in respect of the claims of non-funded group members, with any balance outstanding after distribution to be refunded to Aristocrat.

13 Those monies are to be distributed in accordance with the Scheme. The Deed incorporates the agreement between the applicant (representing its own interests and the interests of all other group members) and the respondent resolving the rights at issue in the litigation. The Scheme is directed to regulating the distribution of payments to be made by Aristocrat, and provides a "Loss Assessment Formula" for the calculation of each participating group member's entitlement to any distribution of the money under the proposed settlement.

14 Evidence concerning the Loss Assessment Formula was given in the affidavit of Mr Murphy referred to at [1] above. Mr Murphy is a principal of Maurice Blackburn, who, with others, has the care and conduct of the proceeding. According to Mr Murphy, the Loss Assessment Formula "operates to ensure that both categories of Participating Group Members [i.e. funded and non-funded] recover similar proportions of their estimated losses in the hand". Furthermore, The Loss Assessment Formula incorporates assessments made by Dorajay's legal representatives regarding certain risks associated with the proceeding. This information is privileged and confidential. The Loss Assessment Formula has not been, and under the Deed and the Settlement Distribution Scheme will not be, disclosed to Aristocrat. It is to remain confidential save that Maurice Blackburn may disclose it to group members upon receipt of signed confidentiality undertakings from them. 15 I ordered that the Loss Assessment Formula, which was annexed to the abovementioned affidavit, remain confidential. That order also applied to two other documents annexed to the affidavit, namely an opinion by the applicant's solicitors regarding the appropriateness of the proposed settlement and an opinion by the applicant's counsel regarding the fairness, reasonableness and adequacy of the proposed settlement. 16 Having read those confidential documents in conjunction with the affidavit to which they were annexed, as well as several other affidavits filed by the applicant in support of the settlement approval, I am satisfied that the amount proposed to be paid by the respondent to the participating group members is fair, reasonable and adequate. The two opinions make it clear that much thought has been given to advising the applicant in relation to the fairness, reasonableness and adequacy of the settlement, including issues such as the prospects of success on various issues in the dispute, risks if the matter proceeded to judgment and the reasonableness of the settlement sum. One can assume that the respondent is in a similar position.

17 The differentiation between funded and non-funded group members was explained by Mr Armstrong, counsel for the applicant, in the following way: … your Honour will see from the loss assessment formula the way that it is proposed, that an accommodation be developed for producing, as far as possible, a roughly fair distribution of a fixed settlement amount between the different group members, which gives allowances for the different possible outcomes in the case; allowances fixed by references to assessments of risks and strengths of the various arguments that were canvassed in great detail at the trial. The difference in the amounts allocated to funded and non-funded group members is explained by the fact that the funded group members have undertaken liability for costs of the action through the litigation funder. The explanation for not refunding to Aristocrat the balance of any money remaining after distribution to funded group members is that "$109 million is very close to the actual assessed value of the claims of the funded group members".

18 At the hearing of the settlement approval, Mr Lee, counsel for the applicant, observed that liability in the sense of Aristocrat having contravened its legal obligations was not seriously in dispute. He added: However, your Honour has limited guidance from intermediate courts of appeal in relation to the question of causation in a context of cases such as this and also in relation to how one goes about quantifying damages…

It is a matter in which there is a degree of - what might be described as ambiguity, at least until a matter such as this gets to the intermediate court of appeal stage or perhaps further… that [has] been taken account of in advising both parties, one assumes, by legal representatives in reaching the settlement that has been reached.

19 The ambiguity to which Mr Lee referred is tempered by the fact that, in the course of assessing a negotiated settlement, both parties (and indeed the Court) had the advantage of having heard full argument on the issues in dispute. The parties were thus in a position to perceive not only their opponent's best case but the weaknesses in their own. They can, I think, be understood to be rather better informed about the advantages and disadvantages of settlement than is usually the case. This is an additional consideration in my decision that the settlement amount that counsel and solicitors have agreed upon is in the interest of all parties, including the non-funded group members, and within the range of what I would regard as fair, reasonable and adequate.

The mechanics of the settlement 20 The second issue is the fairness, reasonableness and adequacy of what may be described as the mechanics of the settlement process. The Scheme contains a convenient summary of the steps involved which, omitting clause references, is as follows: (i) Maurice Blackburn will be appointed as Administrator of this Scheme; (ii) Participating Group Members will submit to Maurice Blackburn Proofs containing the Objective Data pursuant to Orders of the Court; (iii) Maurice Blackburn will construct a database collating the information submitted by Participating Group Members in their Proofs and upon which their claims to a distribution out of the Aristocrat Settlement Distribution Fund will be calculated; (iv) Maurice Blackburn will notify each Participating Group Member of the information which pertains to them in a Notice of Claim Data and give them an opportunity to notify any objections to it; (v) following the resolution of any objections to the Notice of Claim Data Maurice Blackburn will finalise the database and use it to calculate the entitlement of each Participating Group Member to a distribution out of the Aristocrat Settlement Distribution Fund; (vi) Maurice Blackburn will notify each Participating Group Member of the calculation in an Assessment Notice and give them an opportunity to notify any objections to it; (vii) each Participating Group Member will have an opportunity to object to its Notice of Claim Data or Assessment Notice; (viii) following resolution of any objections Maurice Blackburn will notify Aristocrat whether any part of the [non-funded group members] Fund is repayable to Aristocrat; (ix) interest on the Aristocrat Settlement Distribution Fund shall be applied to the extent necessary to payment of Administration Costs; (x) IMF will notify Maurice Blackburn of the amount of the payment which each Participating [funded group member] is required to make to it pursuant to the funding agreement between IMF and that Participating Group Member; (xi) Maurice Blackburn will deduct from the Aristocrat Settlement Distribution Fund any Administration Costs outstanding and then from the balance shall: (a) distribute the [funded groups members] Fund between Participating [funded group members], after paying to IMF the amounts payable out of each Participating [funded group member's] allocation; and (b) distribute the [non-funded group members] Fund between Participating [non-funded group members] (with any repayment to Aristocrat that might be required). I am satisfied that this is an accurate summary of the main features of the Scheme which, as I have mentioned, is concerned with the distribution of the settlement monies. 21 I do not need to review in detail each aspect of the Scheme. I will, however, comment on several key aspects of the Scheme and explain why I am satisfied that they are fair, reasonable and adequate. 22 Clause 3 of the Scheme provides that in acting as administrator Maurice Blackburn has an obligation to do so on behalf of group members as a whole, and may not act as lawyer for individual group members in relation to their particular claims. Maurice Blackburn has also undertaken not to seek to recover either from the settlement sum or from individual group members any costs they incur in acting for individual group members or in discharging their function as administrator (those costs are discussed in more detail at [30] et seq below). There is an exception to this in clause 7, which obliges a group member seeking review of Maurice Blackburn's assessment of the value of their claim to pay for the costs of that review assessment, and, if required by Independent Counsel, provide security for costs of the review assessment. Independent Counsel is defined in the Scheme as being "an independent member of the Victorian Bar empowered under this [Scheme] to finally determine any objection to an Assessment Notice or Notice of Claim Data". 23 It is apparent, however, that there is little scope for much serious dispute as to the value of individual claims. This is so because the Scheme primarily provides for the application for specific formulae to objective data. The only real scope for discretion on Maurice Blackburn's part is to be found in clause 4, which relates to submission and assessment of claims. As was explained by Mr Armstrong, [Clause 4.4] permits Maurice Blackburn as the administrator either to accept a proof [of claim] notwithstanding that some information might not be included or if there is information not included which the administrator considers is necessary then the firm is entitled to require a group member to provide that additional information and if they don't, they get assessed as having a nil value claim. 24 It is important to note, however, that this provision is for practical purposes now largely historical, as all proofs of claim to be considered have been received by Maurice Blackburn (and in relation to the funded group members, already assessed). Only the claims of the non-funded group members, including those late non-funded group members who were included in the proposed settlement as a result of my judgment of 26 August 2008, remain to be assessed. The Scheme additionally provides for Maurice Blackburn to send those group members who have not yet been assessed, a Notice of Claim Data inviting that group member to correct errors made on the basis of their proof. Once any issues have been resolved the value of the claim is assessed by applying the Loss Assessment Formula to the objective data. This task involves, in the words of Mr Armstrong, "the application of relatively simple equations to data that has been objectively verified. The number that is produced is the number that is produced". There is, as I commented at the hearing, scope for error but not for discretion. The group member is then sent a Notice of Assessment. Any dispute over a group members' assessment is to be reviewed by Independent Counsel, whose decision is binding except in relation to questions of law. As well as being a primary basis for my satisfaction as to the fairness, reasonableness and adequacy of the Scheme in general, the lack of discretion afforded to the administrator under the Scheme is an additional factor in favour of approving Maurice Blackburn to act as administrator. 25 The entitlement to seek a review assessment is extended to Aristocrat in clause 7.9. This raises an issue in respect of the $27 million made available for distribution to the non-funded group members. As mentioned above, any balance that remains following distribution is to be refunded to Aristocrat, which means that Aristocrat itself has an interest in challenging the assessments of non-funded group members' claims. If Aristocrat requests a review assessment, it is treated as a participating group member for this purpose, and accordingly bears the costs of the review assessment calculated on a solicitor/client basis (in addition to any other amounts Aristocrat is required to pay under the Deed). 26 Clause 10 of the Scheme deals with the litigation funder, IMF, which is a party to the Deed. Counsel for the applicant explained clause 10 in the following way: The funder has funding agreements with the funded group members which give it entitlements to, relevantly for these purposes, a share of the funded group members' individual recovery amounts. Clause 10 is designed to set up and regulate a process for letting the funder know as soon as possible how much its clients, as it were, are going to receive, and then for IMF to let the administrator know, 'This is what we are entitled to under our funding agreements with each of those individuals'. Clause 10.3 requires specific mention… because it is intended to require Maurice Blackburn to act on the information that they are given by IMF in relation to IMF's entitlements. The purpose for that is, if there is a dispute between the funder and a particular funded group member, they can sort it out separately. It should not hold up this process. 27 Clause 11 deals with the distribution of the settlement sum once the value of all claims, including preliminary payments to funded group members, has finally been assessed. It is unnecessary for me to comment on the details of this clause. I note, however, that clause 11.9 provides that the completion of the distribution of the settlement sum shall satisfy any and all rights, claims or entitlements of all participating group members and all other group members in or arising out of the proceeding. Those group members not participating in the settlement are nevertheless bound by the outcome of the proceeding, a point plainly made on several occasions in communications between Maurice Blackburn and non-funded group members. That all group members are bound is, as Mr Armstrong observed, "not only appropriate but necessary for the resolution of these kinds of proceedings and in the interests of justice, having regard, frankly, to Aristocrat's entitlement, to the finality of the claims against it so far as Part IVA permits finality to be given". 28 The final clause I wish to note, apart from provisions relating to costs and administration costs, is clause 12, which provides that Maurice Blackburn may refer any issues arising in relation to the Scheme to the Court. 29 I am satisfied in the circumstances that the Scheme provides for the fair, reasonable and adequate distribution of the settlement sum.

Costs and administration costs 30 In accordance with clauses 4.1(b) and 15 of the Deed Aristocrat is to pay Dorajay's reasonable legal costs of the proceeding up to an amount of $8.5 million, calculated on a solicitor/client basis in accordance with the retainer agreement between Maurice Blackburn and Dorajay. According to the affidavit of Mr Murphy, referred to at [1] above, the $8.5 million cap has been reached. On the basis of this affidavit, and that of independent expert costs consultant Mr Joseph Mazzeo, who was engaged to provide an opinion as to the reasonableness of the total amount of Dorajay's costs, I am satisfied that the total costs incurred by Dorajay were reasonable. Relevantly, Mr Mazzeo stated: I am satisfied that the accounts rendered by [Maurice Blackburn] for the time of its personnel have been properly and reasonably incurred and reflect the work reasonably done for the furtherance of the proceedings… In my opinion, [Maurice Blackburn] has properly charged its fees and disbursements pursuant to its retainer agreement. In my opinion no significant costs or disbursements have been incurred unnecessarily or inappropriately. Accordingly, I am of the opinion that the amount proposed to be recovered is fair and reasonable in the circumstances. 31 The amount of Dorajay's costs reflects the duration of the proceeding, which was commenced in 2004, the complexity of the matter and novelty of the issues raised, and what senior counsel for the applicant described at the trial as the "years of interlocutory skirmishing" leading up to the hearing. It also reflects the fact that settlement has only been able to be reached after the full hearing of the matter, rather than before, as is more common. 32 Administration costs are defined in the Deed (and very similarly in the Scheme) as: the costs and disbursements incurred by Maurice Blackburn, at the rates in Schedule A of the retainer between Dorajay and Maurice Blackburn dated 18 March 2005 (as updated in accordance with clause 7 of that retainer), in connection with the identification of Participating Group Members, the assessment of the claims of Participating Group Members, obtaining Settlement Approval, or administering the Settlement Distribution Scheme, including without limitation, counsel's and expert's fees. 33 The Scheme provides that, where the $8.5 million cap has been reached, administration costs will be paid from the interest which accrues on the settlement sum paid by Aristocrat, with any interest not so applied to be included in the distribution to group members. In accordance with clause 9.1, any payment of administration costs from the interest accrued on the settlement sum requires the approval of the Court. Mr Murphy stated in his affidavit: I consider that the interest accruing on the settlement monies in the Settlement Account will be significantly more than any Administration Costs. Accordingly, I expect that more than $136 million will be available for distribution among Participating Group Members. 34 In these circumstances, I am satisfied that the provisions in the Deed and Scheme in relation to costs and administration costs are fair, reasonable and adequate. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.

Associate: Dated: 21 January 2009 Counsel for the Applicant: M B J Lee with L W L Armstrong

Solicitor for the Respondent: Allens Arthur Robinson