11 Jun 2013

A matter of practice: Agreed penalties face an uncertain future in Australia

by Linda Evans, Ian Reynolds, Aaron Johnson

If parties are unable to gain sufficient legal certainty from entering into negotiated settlements, the utility of the practice is significantly diminished.

Australia, like many other jurisdictions, has developed a practice of negotiated settlements between regulators and those who have breached laws, such as competition legislation and corporation rules. Such negotiated resolutions avoid the time, cost and uncertainty of protracted and complex litigation in civil penalty cases. However, a recent case has cast doubt on whether this approach will continue in Australia.

Agreed penalty

While Australia is not a jurisdiction that adopts a system of plea bargaining, it has supported a practice by which the relevant regulator and the defendants approach the court with an agreed statement of facts and offer an agreed penalty. The court then considers that punishment and determines whether it is within the range of penalties which a court would award in all of the circumstances. If it is, then the court accepts that agreed punishment and imposes it as an order of the court.

The NW Frozen Food case

This approach has been used by the Australian Competition and Consumer Commission (ACCC) over the last 15-20 years. The leading case accepting this approach was a decision of the Full Court of the Federal Court of Australia: NW Frozen Foods Pty Ltd v ACCC (1996) 71 FCR 285 (NW Frozen Foods), in which the court recognised the important public policy rationale behind the practice.

The court considered that when corporations acknowledge contraventions of law, very lengthy and complex litigation is frequently avoided. This frees both the courts and regulators’ officials to deal with other matters more efficiently. Negotiated settlements may include measures that assist in promoting compliant and beneficial conduct by market participants in the future.

The Full Court said that without predictable negotiated settlements and agreed penalties, these beneficial consequences would be jeopardised. Accordingly, courts should avoid departing from proposed agreed penalties where they were within the permissible range having regard to all of the circumstances. The Full Court held that courts should not depart from agreed penalty figures merely because they might have chosen another amount.

This line has been followed and, notwithstanding a few expressions of concern about the diminution of the court’s role, has become common practice in competition law matters.

The approach was not generally considered contentious and few in practice thought the approach was likely to be challenged by any superior court of record. However, that is what has now happened. In the ASIC v Ingleby [2013] VSCA 49 (Ingleby) case, the Court of Appeal of the Supreme Court of Victoria rejected the NW Frozen Foods approach, considering it to be bad law and held that in every case the court should determine the appropriate penalty. Any agreement by the parties on penalty should be about the appropriate range of penalties, rather than putting forward a particular number as an agreed penalty.

The Ingelby case was not a competition law case but one brought by the corporate regulator, the Australian Securities and Investment Commission (ASIC), for breaches of the Corporations Law by an officer of a company. Until the Ingelby case, the same principles had been applied in Corporations Law matters.

Ingleby concerns

At the heart of the concerns expressed in the Ingelby case was that it blurred the separation of powers between investigating agencies such as the ACCC and ASIC and erroneously treated the trial judge who imposes the pecuniary penalty as though they have an appellate role. In addition, the Court of Appeal was concerned that if the NW Frozen Foods approach was adopted, the trial judge would not be exercising their judicial authority to arrive at an appropriate penalty. It is the role of the judge at first instance to determine the exact amount of any pecuniary penalty to be imposed. It is for the appellate court to determine whether that exact penalty is within what the court would determine as the reasonable range if it is called into question by either of the parties on appeal.

The Court of Appeal also identified a range of other factors which caused them to reject the practice of agreed penalties. A number of them related to the lack of transparency inherent in negotiated settlements and a concern that agreed penalties may not be adequately grounded in fact and legal principle. Also of concern was that it made it more difficult for a court to determine whether the penalty which has been agreed is within the range that the court would fix, and that agreed penalties are not a good metric to measure whether that which is agreed in later cases is within the appropriate range of penalties.

Weinberg JA

The bench which decided the Ingelby matter included Weinberg JA, who, before he was appointed to the Court of Appeal of the Supreme Court of Victoria, was a Federal Court judge. As a Federal Court judge, Justice Weinberg had expressed his concerns with the NW Frozen Foods’ approach in regulatory penalty cases that came before him: Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd [2002] FCA 619 at [32]; Australian Prudential Regulation Authority v Derstepanian (2004) 60 ATR 518 at 525; Australian Competition and Consumer Commission v Australian Abalone Pty Ltd [2007] FCA 1834 at [121-122].

Justice Weinberg saw the approach of a court agreeing with the parties’ submitted penalty figure, provided it is within the permissible range, as promoting the “somewhat undesirable practice” of corporate regulators negotiating penalties with offending entities, which are then submitted to the court where they will be agreed to and ordered, or rubber-stamped. However, as a single judge of the Federal Court, he was bound by the decisions of the Full Court of the Federal Court in NW Frozen Foods and in Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72 (Mobil). But as an appellate judge of the Victorian Court of Appeal, Weinberg JA was not bound by those Federal Court decisions.

Judicial hierarchy

The hierarchy of Australian courts reflects Australia’s federal system of government. The Federal Court is a creature of the Commonwealth legislature and fundamentally has the jurisdiction conferred on it by Commonwealth statutes, whereas the state courts have inherent jurisdiction as courts of record. Issues of civil penalties can therefore be dealt with by both state courts and the Federal Court, depending on the underlying legislation concerned. State appellate courts and the Full Court of the Federal Court are of equivalent standing within their relevant jurisdictions.

Accordingly, the doctrine of precedent does not require either court to follow the other’s decisions. The doctrine of judicial comity does require both courts to follow decisions made by the other unless they consider a decision to be “plainly wrong”. The Victorian Court of Appeal considered that the doctrine of comity as set out by the High Court of Australia applied only to the interpretation of Commonwealth or uniform national legislation. The issue of penalty assessment was not such a matter and the doctrine of comity did not apply. Weinberg JA went on to say that even if the doctrine of comity did apply, this is a case where the relevant decisions of the Full Court of the Federal Court were clearly wrong.

There are now two different approaches to the role of agreed penalties between two appellate courts in Australia. This issue will only be resolved if the Full Court of the Federal Court overturns its previous decisions, which is very unlikely, or the High Court of Australia comes to consider this issue.

Adequacy of information

The irony of the Ingelby case is that this issue arose almost as a side wind. Mr Ingleby and ASIC had agreed that Mr Ingleby would pay a pecuniary penalty of A$40,000 and be disqualified as a director for 15 months. However, the trial judge considered that – based on the statement of agreed facts as presented – the proposed penalty was too harsh and not within the reasonable range. ASIC then appealed the case to the Victorian Court of Appeal, seeking reinstatement of the original agreed penalty.

The Court of Appeal said the appropriate course was actually for the trial judge to have asked for further information in order to understand the basis of the agreed penalty; a course of action expressly contemplated by the earlier decisions of the Full Court of the Federal Court. If he had done that, the basis for the agreed penalty would have become clear and would have been imposed as the Court of Appeal ultimately did.

The Federal Court cases that were criticised in Ingelby have always recognised the importance of proper information being before the court. In Mobil, 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 from the parties. The Full Court also identified the risk of unpredictable outcomes in the absence of adequate information:

“[in] each case, the court should be satisfied that it is being given accurate, reliable and complete information on critical questions. If not satisfied that it has sufficient information to support the ‘agreed’ approach, the court can request the parties to provide additional evidence or information. If that information or evidence is not provided, the court might well decide that it should impose a different sentence or penalty from that proposed by the prosecution or regulator (as the case may be).”

The adequacy or sufficiency of agreed statements of facts (the last issue that detractors of the negotiated settlement process had highlighted) was central to the Justices’ consideration of Ingleby. Speaking generally, Justice Weinberg said that “it goes without saying that cases which involve serious contraventions of the law cannot be ‘settled’ by agreed facts that do not present a fair and accurate picture of the relevant offending to the court”. The Victorian Court of Appeal found that the statement of agreed facts in this case was a “less than desirably sound basis on which to reach important decisions about appropriate penalties” (Justice Harper) and that it “represented … a watered down version of Mr Ingleby’s true level of culpability” (Weinberg). On this basis, the Victorian Court of Appeal found that Robson J was correct to have departed from the agreed penalty in this case and that it was to “his very great credit” that he “refused to rubber stamp an agreed penalty that made no real sense” given “a set of agreed facts that were…impossible to reconcile with what the documentary material plainly showed to be the true role played by Mr Ingleby”.

The ratio of the Ingelby case is therefore confined to some quite specific issues but the opportunity was taken to challenge the basis on which these matters are dealt with by regulators.

A backward step

As a general practice point, this decision is 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. 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 Australian Competition and Consumer Commission 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 on ACCC cases may be limited. Nevertheless, until the diverging precedents are resolved by higher courts, there will be residual undesirable uncertainty. This could have negative consequences for parties to proceedings, regulators’ enforcement priorities and administrative efficiency.


This article was first published in Competition Law Insight, 11 June 2013

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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.