16 Apr 2013

Where to now for negotiated settlements?

by Ian Reynolds

As a general practice point, this decision appears to be a backward step for negotiated settlements and for administrative efficiency in general.

Negotiated settlements with regulators such as the ACCC and ASIC avoid the time, cost and uncertainty of protracted and complex litigation in civil penalty cases. However, if the approach in the recent Victorian case of ASIC v Ingleby [2013] VSCA 49 is followed, it is unclear whether they will continue to be approved by the courts.

Mr Ingleby's proposed settlement

The case arose out of proceedings issued by ASIC against Mr Ingleby (the former CFO of AWB) for infractions of the Corporations Act 2001. ASIC and Mr Ingleby had negotiated agreed penalties pursuant to which Mr Ingleby would pay A$40,000 and be disqualified from managing corporations for 15 months. ASIC and Mr Ingleby negotiated a statement of agreed facts, which set out the contraventions of law and other material issues, and then approached the court to approve the settlement.

Refusing to ratify the settlement, the first instance judge instead imposed a pecuniary penalty of A$10,000 and a disqualification order of 4½ months. The trial judge considered that the agreed penalty was excessive, as he was unable to reconcile the statement of agreed facts with the documentary evidence as to Mr Ingleby's central role in the conduct. ASIC appealed the penalties to the Victorian Court of Appeal.

No obligation to impose an agreed penalty: The Victorian Court of Appeal criticises current practice

The usual practice in Australia is for courts to endorse an agreed penalty. The Full Court in NW Frozen Foods Pty Limited v ACCC [1996] FCA 1134 recognised the important public policy rationale behind the practice.

When corporations acknowledge contraventions of law, very lengthy and complex litigation is frequently avoided. This frees courts and regulators' officials to deal with other matters more efficiently. Negotiated settlements may also include measures which assist in promoting compliant and beneficial conduct by market participants in the future. The Full Court said that without predictability as to agreed penalties, these beneficial consequences could be jeopardised. Accordingly, it concluded that courts should avoid departing from agreed penalties where they were within permissible ranges in view of all the circumstances, except in clear cases.

However, this practice has attracted some criticism. The chief concerns were summarised in Ingleby as follows:

  • It is difficult for a court to determine whether the penalty which has been agreed is within the range that the court would fix;
  • Agreed penalties are not a good metric to measure whether what is agreed in later cases is within the appropriate range of penalties;
  • The lack of transparency in negotiated settlements may reinforce a perception that agreed penalties are not adequately grounded in fact and legal principle;
  • In some cases, negotiated penalties appear to be inappropriately low; and
  • Some courts have expressed reservations as to the accuracy and sufficiency of the statements of agreed facts presented to them to ratify agreed penalties. 

While the Victorian Court of Appeal acknowledged the benefits of agreed penalties, it said the NW Frozen Foods approach represents bad law. In particular, the imposition of a penalty is strictly a judicial power which should not be exercised by regulators. Courts should not merely act as rubber stamps for agreements between the parties.

In addition, the adequacy or sufficiency of agreed statements of facts was central in Ingleby. In this case, the Court found that the statement of agreed facts was a "less than desirably sound basis on which to reach important decisions about appropriate penalties" and that it represented "a watered down version of Mr Ingleby's true level of culpability".

The Court suggested that comprehensive and accurate statements of agreed facts are essential to a functioning negotiated settlement practice. If practitioners want an agreed penalty to be ratified, care will be required to negotiate and draft a clear, accurate and sufficiently detailed statement of agreed facts. It is only by giving courts robust statements of agreed facts that parties will be able to convince them that the levels of agreed penalties are appropriate in a particular case. We understand that the ACCC is currently preparing statements of agreed facts with additional care since the judgment in Ingleby.

Implications for negotiated settlements with the ACCC

In some respects, this is not a new development. NW Frozen Foods confirmed that courts have the option to depart from agreed penalties in clear cases. In a following case (Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72), the Full Court specifically stated that if the evidence with which a court is presented is insufficient to come to a decision as to penalty, the court has the power to request additional information. The Full Court also identified the risk of unpredictable outcomes in the absence of adequate information.

As a general practice point, this decision appears to be a backward step for negotiated settlements and for administrative efficiency in general. If parties are unable to gain sufficient legal certainty from entering into negotiated settlements, the utility of the practice is significantly diminished. Likewise, if statements of agreed facts must be more robust, negotiating and drafting settlements may be more difficult or lengthy in future. The associated risks for efficiency set out in NW Frozen Foods may very well result.

However, this is not the death of the agreed penalty in Australia. The Federal Court is the forum in which most ACCC settlements are approved, and single judges will follow the principles set out in NW Frozen Foods, unless the Full Court decides otherwise.

To that extent, the immediate practical effect of this judgment in ACCC cases may be limited. Nevertheless, until the diverging precedents are resolved by higher courts, there will be residual undesirable uncertainty, which could have negative consequences for parties to proceedings, regulators' enforcement priorities and administrative efficiency.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.