Group-work course, part of the group failing This question is based around a hypothetical, but realistic, scenario.

The situation revolves around a group-based course in which the main deliverable is a report. Every group member is responsible for the report. The report is graded as a whole and counts for the entire group but individual adjustments in grade can be made by the supervisor based on peer reviews and other considerations by the supervisor.
The issue arises when part of the group fails (due to the report grade) and another part passes the course. Let's assume the failing students did their part, just not enough to pass.

I am particularly wondering about the fairness or ethics of part of the group passing on contributions by the failing of the group.
I have taken part in many such courses and luckily the issue never arose in any of the groups I was part of. Thinking about it, I have mixed feelings about the situation the failing students (in this scenario) find themselves in.
On the one hand, you could say the failing students did not contribute enough to the report for them to pass the course. On the other hand, placing yourself in the failing students' shoes, their contributions are used to pass the other part of the group.
Concrete questions:

From a supervisor's point of view, should only those parts written by the passing students be considered to grade them so they don't fare on the work of the failing students?

This is almost impossible, you would first have to consider all the work (how else do your know some students won't pass?) then unconsider (if that's even a thing) part of it.
One option would be to either pass or fail the entire group, but that might be unfair on the hard-working group members (who do enough to pass if they were in a group of people who as hard as them).

From the failing students' points of view, it might seem unfair because their work is used to pass the others. Should those having received a failing grade be entitled to any compensation on the grounds that they did some work?

I'd compare it with starting a company, suppose three people build a company, two people do 40% of the work each, the other does the remaining 20%. While any two people in this case do over 50% of the work, I don't think they can just decide to dump the other person (this might depend on how the company was founded, but it seems unethical).
How this type of assignment works in my experience
A group of students is assigned a problem for which they need to write a report. The students get a list of requirements and it is up to them to divide the work and make sure everyone does their part.
If a student does very little work, the others can report that so a solution can be found (student has to make up for lack of work or quits the course). It's mostly encouraged to report bad group dynamics early so something can be done about it (that becomes harder as the project progresses).
The projects often have a tutor assigned to them, sometimes academic staff, sometimes a (more) senior student. Students also review their peers on how they felt the others participated. The tutor advises the one(s) responsible for grading the reports. Based on the report, the tutor's advice and the report itself, each student gets a grade (according to some rubric).
The courses I have in mind are mainly aimed at this report. The report will be the main deliverable and make up over 50% of the course's grade. The remaining part of the grade is made up by a combination of individual work and other group deliverables (e.g. presentations or computer code).
I assume you're asking about a situation where different members of a group are given different amounts of credit for a report that they all worked on. (For a different assumption, see the next paragraph.) The only way I can see this happening is if the professor has, in addition to the report itself, some information about the individual students' contributions to the report, information that forms the basis of the variation in the grades. In such a case , the students who pass are not doing so on the basis of the work done by the failing students but rather on the basis of what the professor knows about their individual work.

Another possible (though less likely) interpretation of the question is that all the students in the group got the same grade on this report but their other work (other assignments, exams, class participation) were different, so that some passed the course and others failed. In this case the ones who passed didn't benefit any more from the failing students' work than the failing students benefited from the passing students' work. The difference would be only that this work was, for some but not all students, enough to bring their overall grade for the course up to the passing level.

(Contrary to what you might infer from this answer, I'm not a fan of group work, except insofar as it makes grading easier. But my concern about its fairness is not the concern raised in this question.)