FEDERAL COURT OF AUSTRALIA

Caason Investments Pty Ltd v International Litigation Partners No.3 Ltd [2018] FCAFC 176

ORDERS

THE COURT ORDERS THAT:

1.    Leave be granted to rely on the Proposed Amended Notice of Appeal in the form behind tab 11 of Part A of the Appeal Book, with the Proposed Amended Notice of Appeal to be taken as filed with no further steps required by the parties.

2.    The application for leave to appeal be allowed.

3.    The appeal be dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

THE COURT:

1. Introduction

1    This appeal concerns a dispute between a litigation funder, International Litigation Partners No.3 Ltd (‘ILP’), and a corporation whose litigation it funded, Caason Investments Pty Ltd (‘Caason’). Caason is a sophisticated entity. It is the manager of the Caason Group which is a large and diverse investment group with interests in international trade, direct investment and sustainable development across multiple sectors and markets. One of the businesses in which it is involved is share trading. ILP, on the other hand, is a well-known litigation funder incorporated in Singapore.

2    The litigation in which Caason was involved and which ILP funded was an investor class action brought by Caason as a joint lead applicant on behalf of all persons who acquired shares in Arasor International Ltd (‘Arasor’) between 11 October 2006 and 12 May 2008. Arasor was a corporation whose shares had been traded on the Australian Stock Exchange until 26 February 2009. The respondents to the representative proceeding were Arasor’s directors and auditors.

3    On 17 July 2017, a settlement of that proceeding was reached under which the directors and auditors agreed to pay $19.25 million. The settlement required Court approval under s 33V of the Federal Court of Australia Act 1976 (Cth) (‘FCA Act’). The Court granted approval on 6 December 2017 after a hearing over two days: Caason Investments Pty Ltd v Cao (No 2) [2018] FCA 527.

4    A large number of issues were canvassed in the approval judgment. One of these concerned a dispute between ILP and Caason. In the course of approving the settlement the primary judge resolved certain aspects of the dispute between ILP and Caason notwithstanding that ILP was not a party to the representative proceeding. Caason disputed the jurisdiction of the Court to resolve the dispute. The primary judge was satisfied that the Court had jurisdiction. The main issue on the appeal is whether his Honour was correct in that conclusion.

2. The Dispute between ILP and Caason

5    As a lead applicant, Caason had a larger role than the other members of the group. For example, it was in frequent contact with the solicitors acting in the proceeding in relation to matters such as giving instructions on behalf of the group members. It is well-established in the case law of this Court that a lead applicant may be entitled to an additional part of any settlement to reflect the heavier burden it has typically borne: see, e.g., Modtech Engineering Pty Limited v GPT Management Holdings Limited (No 2) [2013] FCA 1163 (‘Modtech’) at [10] per Gordon J.

6    Typically, the amounts in question have been relatively modest. The primary judge noted that the average amount awarded in Australia to lead applicants jointly (i.e. not to lead applicants individually) in Part IVA proceedings was $68,785, a figure he obtained from Professor Vince Morabito’s article “An Empirical and Comparative Study of Reimbursement Payments to Australia’s Class Representatives and Active Class Members” (2014) 33(2) Civil Justice Quarterly 175 at 186. No point was taken about this before us, but we would not wish necessarily to be seen as endorsing his Honour’s use of an average figure rather than the median (in this case $15,071 in a range from $285 to $268,243.31) given the small sample size of 18 class actions considered by the study.

7    In this case, the primary judge awarded $26,730 to Caason as a reduction of its claimed amount of $80,073.88. The difference between using the mean and the median for comparison and the impact on his Honour’s reasoning will be apparent. In any event, it is convenient to refer to this as the Reimbursement Claim. The critical features of the Reimbursement Claim were that it was about the cost of work done by Caason as lead applicant and it was to be paid out of the settlement sum. The primary judge set out a breakdown of the Reimbursement Claim at [179] as follows:

‘(a) $8,183.13 for reading and writing emails from and to [solicitors];

(b) $59,752.75 for reading and writing attachments to emails from and to [solicitors];

(c) $6,666 for telephone calls from and to [solicitors]; and

(d) $5,472 for attending the mediation on 11 April 2017.’

8    Another important feature of the Court’s ability to award such an amount is that it has been held to arise from s 33ZF of the FCA Act which, inter alia, permits the Court to make any order ‘the Court thinks appropriate or necessary to ensure that justice is done in the proceedings’: see Modtech at [11].

9    Apart from that claim for expenses Caason, however, also had a contractual arrangement with ILP to be paid by ILP for Caason’s own legal, accounting and administrative work on the proceeding. This agreement was contained in a letter dated 7 December 2012 which was a side agreement to a funding agreement entered into between ILP and Caason on the same day.

10    The relevant portion of the Side Letter was as follows:

‘Caason will be entitled to be paid its reasonable costs for its own legal, accounting and administrative work including Craig Astill’s time when and if necessary, such costs will be calculated on a reasonable hourly rate which will not be more than 60% of the hourly charge out rate of the senior lawyers in the funding agreement.

In order to obtain the benefit of the above variation, Caason must also file BAS statements that recover the full GST component of the Legal Costs (as defined in the Caason Funding Agreement) paid by ILP, and must make the amount equal to the GST component of the Legal Costs available to ILP.’

11    These two paragraphs are at the centre of the two interrelated disputes which now exist between Caason and ILP. As to the first paragraph, Caason has made a claim on ILP under the Side Letter for its costs in the sum of $690,608.26 together with a further $70,000 in costs it estimates it will incur in the future. It is convenient to refer to this claim as the Side Letter Contractual Claim. Because it will presently be relevant, it is to be observed at the outset there is a close relationship between Caason’s Side Letter Contractual Claim for costs from ILP of $690,608.26 (with a further $70,000 to come) and its more modest Reimbursement Claim for its expenses out of the settlement sum for its role as lead applicant of $80,073.88. Both are concerned with Caason’s work on the representative proceeding. The connexion between the two was recognised by the primary judge who took into account when determining the Reimbursement Claim the fact that Caason also had a contractual entitlement to be paid its costs by ILP under the Side Letter. This suggests that the quantum of the Reimbursement Claim was affected by the existence of the contractual claim under the Side Letter.

12    The second paragraph of the Side Letter set out at [10] above concerned Goods and Services Tax. Caason retained solicitors in the representative proceeding. In the Funding Agreement signed the same day as the Side Letter ILP had agreed to pay Caason’s legal costs which included the costs liabilities which Caason had incurred and would incur in the future in retaining solicitors to act on its behalf in the proceeding. There is no question that the supply of legal services to Caason as lead applicant was a supply of services within the meaning of s 9-10(2)(b) of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (‘GST Act’) and, since made by that firm for consideration, a ‘taxable supply’ within the meaning of s 9-5(a).

13    Although the invoices rendered by the solicitors to Caason were paid by ILP pursuant to the Funding Agreement this had no effect on the existence of consideration for the purpose of s 9-5. This is because ‘consideration’ is defined in s 9-15(2) in such a way as to make clear that the consideration need not come from the recipient of the supply (here Caason). The result of the solicitors making a taxable supply was that they were liable to pay GST on that supply (s 9-40) and to do so at the rate of 1/11 of the GST inclusive price (s 9-75) or, in practical terms, 10% of GST non-inclusive price.

14    The immediate consequence of the making of a taxable supply to Caason was that Caason was then taken to have made a ‘creditable acquisition’ under s 11-5 since it was registered for GST and the other requirements of that section were met. That fact then entitled Caason to an ‘input tax credit’ for each such creditable acquisition: s 11-20. By s 11-25 the amount of input tax credit was the amount of GST payable on the supply.

15    In each tax period s 17-5 then required the calculation of a figure referred to as the ‘net amount’. This was the difference between the GST the taxpayer was liable to pay in that tax period and the input tax credits to which it was entitled in the same period. Where that amount was a positive number the taxpayer was required to pay the amount to the Australian Taxation Office (‘ATO’) and where it was a negative number a refund was due. It will be seen that the input tax credits are merely an input into the machinery of s 17-5 and are not an item of personal property which may be disposed of. Useful comparison may be made to the position of franking credits in the dividend imputation system: Federal Commissioner of Taxation v Thomas [2018] HCA 31 at [9].

16    The second paragraph of the Side Letter required Caason to lodge business activity statements ‘to recover the full GST component of the Legal Costs (as defined in the Caason Funding Agreement) paid by ILP, and must make the amount equal to the GST component of the legal costs available to ILP’. What did this mean? Clause 15 of the Funding Agreement between Caason and ILP provided:

‘Input Tax Credits on Legal Costs

15.1     In this clause 15 the following expressions shall have the following meanings:

(a)    ATO means the Australian Taxation Office;

(b)    BAS means a business activity statement;

(c)    Creditable Acquisitions has the same meaning given to the term “creditable acquisitions” in the GST Act;

(d)    Input Tax Credit has the same meaning as the expression “input tax credit” as in the GST Act;

15.2     [Caason] must not claim any Input Tax Credit for the GST paid or payable with respect to any Legal Costs unless such a claim is made by [Caason] for an on behalf of ILP for the benefit of ILP pursuant to clause 15.3.

15.3     In the event that [Caason] is entitled to any Input Tax Credit for the GST paid or payable as part of the Legal Costs [Caason] must:

(a)    when legally entitled to do so, lodge with the ATO a BAS for each tax period during the course of this Agreement and must do so within the prescribed timeframes;

(b)    include in its BAS for the relevant tax period the amount of Input Tax Credit that it is entitled to claim in respect of its Creditable Acquisitions that were paid for as part of the Legal Costs; and

(c)    repay to ILP the amount of the Input Tax Credit referred to in clause 15.3(b):

(i)    within 7 days upon receipt of the refund from the ATO; and/or

(ii)    in the event that the ATO credits the amount of any such Input Tax Credit to which [Caason] is entitled against any other tax liability of [Caason], then within 7 days of notification by the ATO that such a credit has been made.

15.4    For the avoidance of doubt, [Caason] acknowledges that ILP is beneficially entitled to the Input Tax Credits referred to in this clause 15 and undertakes to provide ILP with the benefit of all the Input Tax Credits received.’

17    The drafting of cl 15.3(c)(ii) makes clear that ILP was entitled to receive an amount equivalent in amount to all of the input tax credits received by Caason even if those were ultimately consumed as an offset against GST collected by Caason. This underscores that the credits are just that, credits in a running account with the ATO.

18    Returning then to the Side Letter it can be seen that Caason and ILP agreed to make Caason’s entitlement to be reimbursed by ILP for its costs contingent upon Caason filing its business activity statements ‘within the prescribed timeframes’ as required by cl 15.3(a) of the Funding Agreement.

19    The dispute between Caason and ILP that arose in parallel to the settlement may now be described. Caason claimed $690,608.26 for its own costs from ILP (together with a further $70,000) under the first paragraph of the Side Letter set out at [10] above. ILP said, however, that Caason failed to comply with its obligation to lodge the business activity statements in a timely fashion and no such liability arose because that condition precedent had not been satisfied. In any event, ILP said that Caason had not, as it had been required to do, paid to it amounts equivalent to the input tax credits it received. Caason, in response, submitted that there was an amendment to the Side Letter so that Caason could set off its admitted obligation to pay amounts equivalent to the input tax credits to ILP against its claims for its own costs under the second paragraph of the Side Letter. In addition, it also claimed to be entitled to set them off in equity.

20    The practical consequences of this have been as follows. First, Caason received $397,251.51 from the ATO over the years up to 30 June 2017. It is not clear whether this is the same as or less than the amount of any input credits with which it was credited during that period which, in turn, depends on whether Caason itself made any taxable supplies in that period. Leaving that issue to one side, however, Caason did not pay any such amount to ILP. Secondly, since 30 June 2017 it had lodged more business activity statements in respect of the same period for further input tax credits of $220,385. The ATO had not yet accepted these claims which may have been out of time.

21    Indeed, it is this last potentiality which most likely founds ILP’s contention that Caason was not entitled to its costs under the Side Letter since it appears not to have complied with the requirement that such statements be submitted in a timely fashion. In any event, the point is that Caason may yet receive further input tax credits. The total of the actual and future potential refunds appears to be less than the amount claimed by Caason for its costs under the Side Letter. This means that if the set-off was justified it would provide a basis for not paying ILP any amounts equivalent to the input tax credits.

22    Thirdly, to make the picture more complex, the ATO was at the time of the application for leave to appeal conducting a review of Caason’s entitlement to claim the input tax credits. One possible outcome of that inquiry may be that Caason is required to repay some part, or perhaps all, of the $397,251.51 already received as input tax credits.

23    With that background it can be seen that the issues between ILP and Caason were:

(a)    did Caason lodge the business activity statements as required by the second paragraph of the Side Letter;

(b)    if not, was ILP relieved of the obligation to pay Caason its costs under the first paragraph of the Side Letter; and

(c)    if ILP was required to pay Caason’s costs under the first paragraph of the Side Letter, was Caason entitled to set off those costs against any amounts Caason owed ILP in respect of input tax credits it had accrued (either under the contract or in equity).

24    It was these issues which were simmering between ILP and Caason when the primary judge heard the application by the parties to the representative proceeding (Caason and the directors and auditors of Arasor) for approval under s 33V of the FCA Act. Importantly, ILP was not and had never been a party to that proceeding. Nevertheless, it did appear as an intervener on the application.

25    Its intervention was principally directed at the presently tangential issue of whether the Court should, as part of the settlement process, make a common fund order. The making of that order requires a minor digression. The representative proceeding was an open class action. By the time of the settlement, there were 677 group members who had registered to participate in the settlement. Of these, however, only 105 had entered into funding agreements with ILP and the remaining 572 had not done so. As the funding agreements had been drafted, ILP was to be refunded its expenses out of any settlement sum and it would also be entitled to take, relevantly, a funding commission of either 35% or 40%. The effect of this provision was that the economic burden of the cost of the litigation would rest on the 105 funded members whilst the other 572 members would incur no expense.

26    The primary judge decided to require the unfunded group members to be bound as if they had signed a funding agreement of the kind signed by the funded members but he decreased the commission rate from 35% or 40% to 30% (he also abolished another fee altogether). This appears to have favoured ILP in that it recovered more by charging a lower rate to a much larger pool of individuals. Whilst the Court had power to bind the non-funded group members in this manner under s 33ZF, its power to vary the contractual arrangements which already existed between ILP and the funded group members was much less clear. However, this became irrelevant since ILP proffered an undertaking as intervener to impose the lower commission rate, in part, as the price of obtaining the common fund order. In the same vein, the funded group members were unlikely to complain about the arrangement because it reduced the rate of their funding commission and decreased their share of the legal costs.

27    It was in its capacity as an intervener on the topic of the common fund order that ILP came to be before the Court.

3. The Input Tax Credits

28    It is now necessary to return to the topic of the input tax credits. At the hearing a view was expressed that that it was the group members who were, or should be, entitled to the economic benefit of the input tax credits accrued by Caason. This view emerged from cl 11.1(a) of the Funding Agreement:

‘11.1    Upon Resolution, the Claimant will pay to ILP or its nominee, from the Resolution Sum:

(a)    an amount equal to the Claimant’s proportion of the payments the Funder has been required to make pursuant to clause 6 of the Agreement and the equivalent provisions in the Other Funding Agreements for any Other Claims that are determined or settled together with the Claims. The Claimant’s proportion is determined by reference to the Gross Recovery of each of those Funder Persons who entered into those Other Funding Agreements;

…’

29    Clause 6 included ILP’s obligation to pay the invoices rendered by the solicitors including their GST component. Parenthetically, it should be observed that once the primary judge made the common fund order under s 33ZF, the same obligation rested on the unfunded members to pay ILP its legal costs out of the settlement sum. In practice, this meant that ILP was to be refunded all the legal costs it had paid including GST out of the settlement sum.

30    ILP took the view that once that had occurred it ought to hand over to the group members whatever it obtained from Caason in respect of the input tax credits. Since Caason was refusing to hand any amounts over to ILP it could not take that step.

31    The primary judge reasoned that quite apart from its willingness to do so ILP was, in effect, also legally obliged to do so. His Honour reasoned this way:

‘229    Under the funding agreement the GST component of the legal costs paid by the Funder forms part of the outlay that the Funder is entitled to recover from the applicants and funded class members. Clause 11.1(a) of the funding agreement provides for the applicants and funded class members to pay a pro rata share of the legal costs and GST the Funder paid, from any settlement or judgment achieved. To the extent that the Funder does not recover the GST it has paid, it is entitled to be reimbursed that amount from the settlement monies pursuant to cl 11(a).

230    If the result of the ATO review is that Caason was not entitled to claim GST refunds then it will be obliged to pay back to the ATO the amounts it received and prima facie the Funder will have no entitlement to any amount from Caason in respect of the GST refunds. Under cl 11(a) of the funding agreement the Funder would be entitled to be reimbursed from the settlement fund for the GST it paid, which would reduce the monies available for distribution.

231    If the result of the ATO review is that Caason was entitled to claim GST refunds then it is obliged under the funding agreement to remit any such amounts received to the Funder and the Funder will not then be entitled to be reimbursed from the settlement fund.’

32    In approving the settlement under s 33V the primary judge was, no doubt, obliged to consider whether the settlement was fair and reasonable: Australian Securities and Investments Commission v Richards [2013] FCAFC 89 at [7] per Jacobson, Middleton and Gordon JJ; Kelly v Willmott Forests Ltd (In liq) (No 4) [2016] FCA 323 at [3] per Murphy J. On the primary judge’s view of how cl 11.1(a) operated, he could not know at the time of the settlement approval hearing the actual amount that would be received by the group members in total since he did not know how much of the amount referable to Caason’s input tax credits they would ultimately receive.

33    His Honour therefore concluded that he needed to determine whether Caason had to pay to ILP (who was then bound to pass that on to the group members on the primary judge’s reading of cl 11.1(a)) amounts equivalent to the input tax credits it accrued.

34    There were some procedural problems which lay in the primary judge’s path. First, whilst Caason accepted that it was obliged to pay an amount equivalent to the input tax credits to ILP it was refusing to do so because:

(a)    it alleged that ILP owed it $690,608.26 for the work it said it had done on the case and for which it alleged ILP was contractually liable under the Side Letter (together with a further $70,000); and

(b)    it alleged it was entitled to set that amount off against its admitted obligation to pay an amount equivalent to the input tax credits because:

(i)    Mr Astill on behalf of Caason and Mr Lindholm on behalf of ILP had agreed that Caason could set off the amounts it was owed against the amounts it received in relation to the input tax credits; or

(ii)    alternatively, the two sums were so closely related that Caason was entitled to an equitable set-off.

35    The primary judge took the view that the existence of this nest of disputes was preventing the amounts in respect of the input tax credits from making its way from Caason to the group members (via ILP) and hence was directly impeding the Court’s ability to determine whether the settlement was reasonable under s 33V. The primary judge therefore sought to resolve enough of the dispute between ILP and Caason as was necessary to allow the amounts in respect of input tax credits to flow to the group members.

36    At this point, Caason submitted to the primary judge that the Court had no jurisdiction to determine the dispute between it and ILP about the input tax credits because there was no federal matter. This was because:

(a)    ILP was not a party who was before the Court so there could be no matter between it and Caason; and

(b)    the claims made by Caason and ILP against each other were, in any event, purely contractual in nature and hence lacked a federal element which could bring the matter within federal jurisdiction.

37    The primary judge rejected these arguments on two bases. First, the question of whether Caason was now obliged to disgorge the amounts it had received from the ATO in respect of input tax credits directly affected how much the group was going to receive and fell therefore within the federal issue thrown up by s 33V, namely, whether the settlement was reasonable and should be approved.

38    Secondly, Caason’s contractual claim for remuneration from ILP under the Side Letter arose out of the same substratum of fact as Caason’s claim for additional remuneration for fulfilling the role of lead applicant, that is, Caason’s Reimbursement Claim under s 33ZF. In particular, ILP opposed both claims at least on the common basis that Caason’s record keeping was unsatisfactory. The primary judge thought that the overlapping nature of the two claims raised the possibility that there could be inconsistent findings of fact if they were resolved in separate proceedings and that this was an indication that the same substratum of fact was involved in both: Re Wakim; ex parte McNally [1999] HCA 27; 198 CLR 511 (‘Re Wakim’) at 585-586 [140]-[141]. His Honour therefore accepted that the resolution of the dispute was in federal jurisdiction. We would also observe, in this regard, that his Honour explicitly took the existence of the Side Letter Contractual Claim into account in assessing the Reimbursement Claim.

39    Having concluded that the Court had jurisdiction, the primary judge then accepted that Caason was entitled to put on more evidence about the contractual claims under the Side Letter which he concluded he should not, at that point, resolve. Instead, his Honour made timetabling orders to prepare that issue for hearing.

40    Nevertheless, the primary judge did conclude that Caason had no right to set off the amounts which might be due to it by ILP under the Side Letter against its undisputed obligation to pay to ILP an amount equivalent to its own entitlement to input tax credits. The primary judge arrived at this position by concluding that Caason was not entitled to an equitable set-off. Caason also had a claim that it was contractually entitled to a set-off as a result of the discussions between Mr Lindholm and Mr Astill. His Honour had already held that to resolve that issue would require more evidence than was before him. One view might be that the existence of the alleged contractual set-off prevented his Honour from resolving whether Caason had to pay ILP an amount for input tax credits. No such argument was pursued, however, before this Court and we need pursue the point no further.

41    Procedurally what then occurred was that the primary judge gave effect to this decision (and several other unrelated decisions) by approving the settlement, making the common fund order and making orders for the establishment of a settlement distribution scheme. For present purposes, the critical features of the scheme were:

    the solicitor for Caason as lead applicant was appointed as the scheme administrator;

    Caason was ordered to pay the scheme administrator within seven days of the orders the amount it had received thus far from the ATO in respect of the input tax credits, i.e., $397,251.51;

    Caason was ordered to pay any future sums it received from the ATO to the scheme administrator;

    the amounts so received were to form part of the final settlement sum but were not to be distributed to the group members until the final determination of the ATO’s review; and

    the scheme administrator would deal with the funds held by her consistently with the ATO’s review (subject to any appeals). If the ATO concluded that Caason was not entitled to some or all of the input tax credits, the relevant portion of the fund would be repaid to the ATO and only then would any balance be distributed to the group members.

42    As at the time of the hearing of the application for leave to appeal the ATO review had not been concluded.

43    Some procedural objections may be perhaps be raised with the manner in which the primary judge approached these issues.

44    One concerns the issue of timing and the perceived necessity to resolve whether Caason had to pay ILP the whole of the amount equivalent to the input tax credits immediately. The primary judge reasoned that the Court had to do this in order to determine whether the settlement was fair or reasonable for the purposes of s 33V. There were two ways these amounts could impact on any such reasonableness analysis. One was simply whether the basic settlement sum of $19.25 million together with amounts equivalent to the input tax credits was a reasonable settlement of the underlying claims. However, because of the on-going ATO review process there was no way that the answer to that question could be known at the time that the primary judge approved the settlement. Consequently, the determination of Caason’s liability to ILP for amounts equivalent to the input tax credits could not impact on the determination of the reasonableness of the settlement sum as at the date of the orders. And, indeed, since the settlement was approved before the ATO review process was concluded, it is apparent that the input tax credits cannot logically have formed part of that analysis.

45    A second issue of reasonableness was whether it was fair or reasonable for ILP to be entitled to keep an amount equivalent to the input tax credits when it had been refunded all of the amounts of GST it had ever paid out of the settlement sum. This was a curious debate because, as already noted, ILP had indicated that it did not wish to keep these amounts but instead was going to give them to the group members. It was Caason which submitted (contrary to the interests of the group members it was leading) that ILP was not obliged to pay the input tax credit amounts to the group. The primary judge concluded that, contrary to Caason’s submission, ILP was bound to account to the group members for the amounts it received from Caason for the input tax credits. This conclusion was driven by the primary judge’s reasoning that it was necessary to resolve Caason’s liability to ILP in order to assess reasonableness under s 33V because it was necessary for ILP to pay any such amounts to the group members.

46    His Honour’s reasoning on why this obligation on ILP arose is set out above. In effect, the primary judge concluded that ILP could not have both the benefit of having had the amounts of GST it had paid refunded to it out of the settlement sum and also receive the benefit of the input tax credits. The primary judge did not explain why ILP’s obligation to pay the input tax credit amounts to the group members arose which may not be surprising given that ILP itself accepted that it was going to make those payments. But in terms of assessing what was necessary for the purposes of working out what was reasonable under s 33V there may be a difference between a payment that ILP was bound to make (as the primary judge held) and a voluntary payment.

47    In fact, determining precisely why ILP might have been obliged to pay the group members any amounts it received from Caason under cl 15.3 is not a straightforward legal undertaking. Whilst one can certainly see that the bargain embodied in the funding agreements might not have been a good bargain from the group members’ perspective if ILP were permitted to keep the amounts it eventually received from Caason, that is a long way short of what would be necessary to imply a term preventing that occurrence. Further, whilst some aspects of the group members’ payment of ILP’s GST payments are, perhaps, redolent of subrogation or trust, these are problematic. Neither was suggested on the appeal.

4. Jurisdiction: Grounds 1A and 1

48    It is not necessary for us to express a concluded view on those matters. If one assumes in Caason’s favour that the primary judge erred in concluding that ILP was obliged to account to the group members for the amounts it received from Caason, this may arguably have the effect, as Caason submitted, that it was not necessary in order for the primary judge to assess the reasonableness of the settlement under s 33V to resolve whether Caason had to pay ILP the amounts it received from the ATO in respect of its input tax credits.

49    But the relevance of that conclusion is only to remove a part of the primary judge’s reasoning on the question of jurisdiction. The part which, on this view, no longer functions is that part which depended for its efficacy on the necessity of resolving Caason’s liability to ILP in order to discharge the Court’s function of determining whether the settlement was reasonable under s 33V. However, the primary judge also concluded that the matter was in federal jurisdiction on the separate basis that Caason’s contractual claim under the Side Letter against ILP arose out of the same factual substratum as its claim for reimbursement as lead applicant out of the settlement fund.

50    We see nothing wrong with that conclusion. At stake in both claims is what work Caason did on the representative proceeding and the adequacy of its record keeping. Of course, Caason’s contractual claim on ILP is much larger than its claim out the settlement fund but that does not alter what the relevant factual substratum is. It would be unsatisfactory if a different court now had to determine the adequacy of Caason’s record keeping divorced from what has already happened in relation to the Reimbursement Claim. This is particularly so where the Side Letter Contractual Claim was expressly taken into account by the primary judge in assessing the Reimbursement Claim.

51    Of course, that leads to the conclusion that the Court had jurisdiction to determine Caason’s Side Letter Contractual Claim whereas its immediate objection was to the Court’s jurisdiction to deal with the set-off argument. But an essential step in that argument is Caason’s assertion that it should be relieved by way of set-off of its obligation to pay the input tax credit amounts because of its entitlement to the Side Letter Contractual Claim. The primary judge was therefore correct to conclude that the claims then made by Caason arose out of the same factual substratum as Caason’s claim for reimbursement for its expenses as lead applicant: Re Wakim at [140]-[141]. Subject to one matter, since the latter arose under s 33ZF the former was also necessarily in federal jurisdiction. Accordingly, Caason’s set-off defence involved the assertion of a claim which was in federal jurisdiction, that is, the Side Letter Contractual Claim.

52    The one matter was Caason’s claim that there could not be a federal matter because ILP was not a party to the proceeding. The first step in this argument was the observation that ILP was not a party to the class action proceeding brought by Caason against Arasor’s directors and auditors. Secondly, the scheme of Chapter III of the Constitution is such that it is not possible for jurisdiction to be conferred on a federal court unless there is a matter, in the constitutional sense. Thirdly, since ILP had not been joined to the representative action proceeding there could be no matter in respect of which the Court could have jurisdiction.

53    We would accept the first and second of these steps but not the third. There is no doubt that ILP was never made a party to Caason's proceeding. As already noted, the primary judge did grant it leave to intervene under r 9.12 of the Federal Court Rules 2011 (Cth) but, as was explained by Black CJ in Forestry Tasmania v Brown (No 2) [2007] FCA 604; 159 FCR 467 at 470-471 [12] and [16], a person granted the right to intervene on whatever terms is not a party under the Federal Court Rules 2011 (Cth) (compare the position under other regimes such as in Corporate Affairs Commission v Bradley [1974] 1 NSWLR 391). Likewise, the proposition that federal courts can only be conferred with jurisdiction with respect to matters of the kind referred to in ss 75-76 of the Constitution is uncontroversial: see, e.g., In re Judiciary and Navigation Acts [1921] HCA 20; 29 CLR 257 (‘Re Judiciary and Navigation Acts’) at 265.

54    Caason's submission that there can be no matter unless there are parties in dispute in the formal sense is, however, not correct. It is contrary to well-known statements (e.g. ‘we do not think that the word “matter” in sec. 76 means a legal proceeding, but rather the subject matter for determination in a legal proceeding’: Re Judiciary and Navigation Acts at 265). It is true that there are statements in the authorities which, taken out of context, might suggest that the claim of a litigant is necessary but, in truth, they do not so hold. Further, there is abundant authority for the proposition that a matter may extend well beyond the parties before the Court.

55    As to the former, Caason drew attention to the reasons for judgment of Mason J in Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd [1981] HCA 7; 148 CLR 457 (‘Philip Morris’) at 509 and, in particular, the statement that essential to the concept of a matter is a ‘claim of a litigant brought for determination in a legal proceeding’. In fact, the full quotation suggests that Caason’s submission was not what Mason J had in mind. The principal issue in Philip Morris was that of accrued jurisdiction. Philip Morris, a cigarette manufacturer, had sued the respondent over their use of the word ‘Marlboro’ on T-shirts and other garments. It alleged trade mark infringement and misleading and deceptive conduct which involved breaches of federal statutes and in respect of which the Federal Court had undoubted jurisdiction. It also alleged, however, that the same conduct constituted passing off. That claim did not involve a federal cause of action. The respondent submitted that the jurisdiction of the Court was confined to claims made in proceedings under the laws of the Commonwealth. That view was rejected by the Court. It was in the course of explaining why that narrow view should not prevail that Mason J observed (at 509):

‘The later decisions of this Court acknowledge that “matters” and “proceedings” are not necessarily co-extensive, that there is a distinction between “matters arising under and Act” and “proceedings arising under an Act” and that proceedings may involve more than one matter (Charles Marshall (1955) 92 CLR 529 at 540, 541-542; Carter v Egg and Egg Pulp Marketing Board (Vict) (1942) 66 CLR 557 at 578-580, 586-587, 601-602; Felton v Mulligan (1971) 124 CLR 367 at 382-383). But there is no inconsistency between these propositions and the conception of a “matter” which is expressed in the phrases “subject matter for determination in a legal proceeding” or “the claim of a litigant brought for determination in a legal proceeding”’

56    What the passage shows is that a matter is not necessarily co-extensive with a proceeding. It is true that a claim of a litigant in a proceeding will constitute a matter but the last sentence in the quoted passage is not saying that a claim of a litigant is a necessary element for there to be a matter in the constitutional sense. Put another way, a claim made by a litigant is a sufficient but not necessary element to establish the presence of a matter.

57    The High Court recently explained in Palmer v Ayres [2017] HCA 5; 259 CLR 478 at 490-491 [26] the same distinction between a matter and proceedings in these terms (references omitted):

‘A “matter”, as a justiciable controversy, is not co-extensive with a legal proceeding, but rather means the subject matter for determination in a legal proceeding - “controversies which might come before a Court of Justice” (emphasis added). It is identifiable independently of proceedings brought for its determination and encompasses all claims made within the scope of the controversy. What comprises a “single justiciable controversy” must be capable of identification, but it is not capable of exhaustive definition. “What is and what is not part of the one controversy depends on what the parties had done, the relationships between or among them and laws which attach rights or liabilities to their conduct and relationships”: Fencott v Muller (1983) 152 CLR 570 at 608.’

58    A potential implication for the distinction between a proceeding and the matter which may be embodied in that proceeding is that the matter may extend beyond the parties to the proceeding. In Re Wakim, Mr Wakim had sued the Official Trustee of his former bankrupt estate alleging breaches of duty by the Trustee under the Bankruptcy Act 1968 (Cth) in failing to sue a third party, Mrs Nader. That suit was brought in the Federal Court and was in federal jurisdiction as it involved direct claims against the Official Trustee under the Bankruptcy Act 1968 (Cth). Mr Wakim also commenced a separate proceeding in the Federal Court against the Official Trustee’s solicitor and a third case against the Official Trustee’s counsel (again in the Federal Court). The cases were all separate and had not been consolidated into one proceeding, nor had any order been made that they should be heard together.

59    It was argued by the solicitor and the barrister that Mr Wakim’s proceedings against them involved only allegations of common law breaches of duty and could not be in federal jurisdiction. Further, whilst it was true that in Philip Morris the Federal Court had been held to have accrued jurisdiction over the passing off case that case been brought in the same proceeding against the same party, Mr Wakim had brought no federal claims against the lawyers and there were no other parties in those two proceedings. Neither proceeding therefore appeared to have any federal element to it.

60    The Court concluded that both cases were within the Federal Court’s accrued jurisdiction because of Mr Wakim’s case against the Official Trustee. Gummow and Hayne JJ explained it this way (at 587-588 [145]-[147]):

‘145    As we have said, the bringing of separate proceedings and the joining of different parties will often be important facts in deciding whether there is a single justiciable controversy for the purposes of Ch III of the Australian Constitution. But there is no basis in principle for concluding that there can never be accrued jurisdiction where a new party is joined. To adopt such a rule would mean that third party proceedings could never be brought in a federal court unless those third party proceedings were founded in some federal claim. And that points to the underlying difficulty in principle. If the “matter” is to be identified from what the parties allege and how they conduct the proceeding (as Fencott and Stack hold) and if the “justiciable controversy” refers (in part, at least) to the factual dispute between them, there is no warrant for holding that federal jurisdiction ends as soon as a new party (against whom no federal claim is made) is added.

146    Each of these proceedings brought by Mr Wakim centres upon the making of claims and bringing of action against Mrs Nader and the prosecution and settlement of those claims and that action. Mr Wakim alleges against the Official Trustee that it was negligent and guilty of breach of duty in not continuing the action against Mrs Nader; he alleges against the solicitors that they negligently failed to advise the Official Trustee of its rights against her; he alleges against Mr Darvall that he negligently failed to advise the Official Trustee of its rights against her. It may be noted that nowhere in the Official Trustee’s defence to Mr Wakim’s claim does it allege that it acted in reliance on the advice of the solicitors or counsel and it makes no cross-claims against them. Indeed, the pleadings in the proceeding between Mr Wakim and the Official Trustee say nothing whatever about the role of the solicitors or counsel in the matter.

147.    The cases arise out of one set of events. Of most significance is the fact that the damage which Mr Wakim alleges he has suffered as a result of what he says are the various breaches of duty by the Official Trustee, the solicitors and Mr Darvall is, in each case, the loss of what he might have recovered in the bankruptcy had the claims against Mrs Nader been prosecuted differently. There is, then, but a single claim for damages that he seeks to pursue against each of the parties he has sued. And judgment and recovery against one will diminish the amount that may be recovered from the others. There is, in these circumstances, that common substratum of facts in each proceeding of which Mason J spoke in Philip Morris [175]. And it is the existence of that common substratum that leads to the conclusion that the three proceedings raise a single justiciable controversy. Accordingly, the proceedings against the solicitors and Mr Darvall are within the jurisdiction of the Federal Court.’

61    Gleeson CJ (at 546 [25]) and Gaudron J (at 546 [26]) agreed. It follows that it is not necessary that a person be a party to the proceeding which is in federal jurisdiction in order for that person to be part of that matter. That a person is not a party to the federal proceeding is not irrelevant – however, Re Wakim shows that it is not necessarily determinative.

62    The fact that ILP was not a party in the formal sense does not necessarily entail, therefore, that the dispute between it and Caason could not be part of the federal matter consisting of Caason’s Reimbursement Claim under s 33ZF. Indeed, the fact that the primary judge took Caason’s contractual claim against ILP into account in determining the Reimbursement Claim powerfully shows just how closely they were connected. In any event, they are sufficiently connected to be part of the same justiciable controversy. It follows that the Reimbursement Claim under s 33ZF and Caason’s contractual claim under the Side Letter arose out of the same factual substratum. Both were in federal jurisdiction.

63    For completeness, it should be noted that the fact that a matter may extend beyond the parties before the Court has, on occasion, provided the jurisdictional justification for joining a new party on a non-federal pendent claim: see, e.g., Kennedy v Australasian Coal and Shale Employees Federation (1983) 78 FLR 252. What that illustrates is that the true analysis in this case is not that there was no federal matter involving ILP but rather that ILP should have been joined as a party on a non-federal pendant claim.

64    It remains, in that particular regard, to note some matters which Caason did not pursue. It did not submit that ILP ought to have been made a party to the proceeding below. Such a joinder would have been appropriate under r 9.05(1)(b)(ii) of Federal Court Rules 2011 (Cth) which permits joinder of a person where the joinder ‘is necessary to ensure that each issue in dispute in the proceeding is able to be heard and finally determined’. Perhaps one reason why Caason did not suggest that ILP should be joined was because it would have immediately defeated its argument that the absence of ILP as a party meant that there was no matter. Another argument not pursued by Caason was that the absence of ILP as a party meant that no orders could be made which affected ILP (that is to say, the proceeding was not properly constituted). However, that argument would, if raised, only have resulted in the formal joinder of ILP. For present purposes the significance of these matters is that they underscore the purely jurisdictional nature of Caason’s objection in this appeal.

65    The jurisdictional challenge should be rejected.

66    By Ground 1 Caason submitted that neither jurisdiction nor power was conferred on the Court by any of ss 22, 33V or 33ZF of the FCA Act. Section 22 provides:

‘22 Determination of matter completely and finally

The Court shall, in every matter before the Court, grant, either absolutely or on such terms and conditions as the Court thinks just, all remedies to which any of the parties appears to be entitled in respect of a legal or equitable claim properly brought forward by him or her in the matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of proceedings concerning any of those matters avoided.’

67    It is established that s 22 is a source of power once jurisdiction exists and is not itself a source of jurisdiction: Philip Morris at 489 per Gibbs J. We would accept, therefore, Caason’s submission to that effect. But that has no impact on the outcome of the appeal since we are satisfied the Court had jurisdiction.

68    Caason made a similar submission about ss 33V and 33ZF. Section 33V provides:

‘33V    Settlement and discontinuance—representative proceeding

(1)    A representative proceeding may not be settled or discontinued without the approval of the Court.

(2)    If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.’

69    Section 33ZF provides:

‘33ZF General power of Court to make orders

(1)    In any proceeding (including an appeal) conducted under this Part, the Court may, of its own motion or on application by a party or a group member, make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding.

(2)    Subsection (1) does not limit the operation of section 22.’

70    Again, we accept Caason’s submission that neither of these provisions is a source of jurisdiction. It is true that the various class action provisions in the FCA Act are generally procedural, just as Gummow J observed in Poignand v NZI Securities Australia Ltd [1992] FCA 536; 37 FCR 363 at 365 (‘The new legislation exemplifies the distinction to be made between the jurisdiction of the court to hear and determine a matter and the powers and procedures of the court in relation to the exercise of that jurisdiction’). But that is not to say that those provisions cannot, on some occasions, affect the nature or, on some circumstances, even the content of the subsisting federal matter. Section 33ZF(1) is a good case in point. It authorised Caason to seek to be reimbursed for the expenses incurred by it in the discharge of its role as lead applicant. Although that issue did not form part of the justiciable controversy between the lead applicant and the respondents, the operation of s 33ZF created the potential for new rights and liabilities attached to or arising from the same fabric. By that mechanism, what was involved in the matter was expanded.

71    Caason also submitted that s 33V could not operate in this case at all. It submitted that this was a result of the language of s 33V(2) which permitted the court to make orders ‘with respect to the distribution of any money paid under a settlement’. Caason submitted that none of the orders which the primary judge had made to resolve the disputes between it and the Funder could be said to be with respect to the distribution of the $19.25 million settlement sum. Indeed, it pointed out that the amounts of the GST refunds were explicitly not part of the settlement sum.

72    This submission may sound persuasive when viewed against the text of s 33V(2) but it loses whatever lustre it has when s 33V(1) is brought to account: ‘A representative proceeding may not be settled or discontinued without the approval of the Court’. There can be no question that in assessing whether to grant leave under s 33V(1) the Court is not confined in its analysis only to an assessment of the reasonableness of any settlement sum divorced from a consideration of any the effects of the other proposed terms. Nor, in any event, would we read s 33V(2) as a limitation on the Court’s powers (although it is not necessary to decide that). The point for present purposes is that the Court, in deciding whether to grant leave, is fully entitled – indeed obliged – to examine the proposed settlement in all its detail. In this case, there could have been no proper consideration of the merits of the settlement without also considering who was going to receive the GST refunds given that the class members were going to be bearing that expense in economic terms. We reject the argument, therefore, that the primary judge was not permitted to examine the refunds issue in considering whether to grant leave.

73    A related argument about s 33ZF was that it was not sufficiently broad to resolve the debate between Caason and ILP. It is not in doubt that s 33ZF ‘was intended to confer on the Court the widest possible power to do whatever is appropriate or necessary in the interests of justice being achieved in a representative proceeding’: McMullin v ICI Australia Operations Pty Ltd [1998] FCA 658; 84 FCR 1 at 4 per Wilcox J. What s 33ZF authorises in a representative proceeding depends on what the interest of justice in the case require. Caason is correct when it submits that in many cases orders made under s 33ZF may have a procedural flavour to them but this is not a necessary feature of every order made under the provision. Bearing in mind that s 33ZF was not the source of jurisdiction to resolve those debates (jurisdiction deriving instead from s 39B(1A)(c) of the Judiciary Act 1903 (Cth)), once seized of jurisdiction it is clear that s 33ZF, to the extent necessary, provided power to make the orders the primary judge did.

5. Miscarriage of discretion: Ground 2

74    Ground 2, which dealt with a challenge to the primary judge’s exercise of discretion under ss 33V and 33ZF, was abandoned at the hearing of the appeal.

6. The Irrelevance of Clause 15.3: Ground 3

75    For the reasons we have given, the primary judge’s conclusion that Caason’s dispute with ILP was in federal jurisdiction was correct. Because we would find that federal jurisdiction arises from the common substratum of fact existing between the Reimbursement Claim and the claim against the ILP under the Side Letter it is not necessary for this Court to express an opinion on whether cl 15.3 required ILP to account to the group members for whatever it received from Caason. This is because that issue is not material to any extant issue. In particular, it is not material to this Court’s conclusions on jurisdiction and, since ILP agreed that it would pay the input tax credit amounts to the group members, it was not material to ask whether it was obliged to do so.

7. Result

76    It was for these reasons that on 18 June 2018 the Court granted leave to appeal but dismissed the appeal with costs.

Associate:

Dated:    18 October 2018