FEDERAL COURT OF AUSTRALIA

Williams v FAI Home Security Pty Ltd (No 5) [2001] FCA 399

REPRESENTATIVE PROCEEDINGS – Court approval of proposed settlement – whether settlement fair, reasonable and adequate having regard to interests of group members – whether appropriate to amend definition of group to provide a more limited class of members.

TRADE PRACTICES – restraint of trade – provision requiring solicitors to enter into undertaking not to accept instructions to act – whether reasonable in interests of parties and public interest.

Federal Court of Australia Act 1976 (Cth):  Pt IVA, s 33V, s 33X

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 referred to

CSR Ltd v Rothfield (unreported, Hedigan J, SC of Vic, 3 April 1992) referred to

TIMOTHY WILLIAMS and SUSAN WILLIAMS v FAI HOME SECURITY PTY LTD & ANOR (No 5)

V 383 of 1999

GOLDBERG J

11 APRIL 2001

MELBOURNE

REASONS FOR JUDGMENT

Introduction

1                     The applicants and the respondents have reached an agreement, subject to the approval of the Court, as to the terms upon which this proceeding is to be settled.  The proceeding is brought pursuant to the provisions of Pt IVA of the Federal Court of Australia Act 1976 (Cth) (“the Act”) and by virtue of the provisions of s 33V of the Act the proceeding cannot be settled or discontinued without the approval of the Court.

2                     On 9 February 2001 the applicants filed a notice of motion in which they sought the following orders:

“1.       That pursuant to Section 33X of the Federal Court of Australia Act 1976 the Respondents be ordered to give notice of the proposed amendment of proceedings and proposed settlement of the amended proceedings in the form of the draft proposed notice annexed to the Affidavit of Vivian Waller sworn 9 February 2001 and filed herein.

2.         That the Applicants be given leave to amend the Application in the form of the proposed amended Application exhibited to the Affidavit of Vivian Waller sworn 12 December 2000 and filed with the Court on 12 December 2000.

3.         That pursuant to section 33 V of the Act the Court approve of the settlement of the proceedings as amended, in accordance with the terms of the proposed settlement of the amended proceedings exhibited to the Affidavit of Vivian Waller sworn 9 February 2001 and filed herein.

4.         That the proceeding herein be dismissed with no order as to costs.

….”

The motion came on for hearing on 12 February 2001 and after hearing from the parties, I declined to make the orders sought until advertisements had been published in newspapers relating to the proposed amendment of the proceeding and the proposed settlement.

Background

3                     In order to understand the issues which have arisen as a result of the proposed settlement, it is necessary to refer to some of the issues which have occurred in relation to the proceeding.  On or about 23 October 2000, the applicants and the respondents agreed to a settlement of the proceeding, subject to a number of conditions.  One of those conditions was that the Court approve the amendment of the proceeding and approve the settlement.  On 12 December 2000, the applicants filed a notice of motion seeking an order that the Court approve the proposed amendment of the proceeding and approve the settlement pursuant to s 33V of the Act.  The motion sought orders similar in terms to the notice of motion filed on 9 February 2001.  On 22 December 2000, I dismissed that motion:  Williams v FAI Home Security Pty Ltd (No 4) [2000] FCA 1925.  In short, I refused to consider approval of the settlement without notice of the proposed settlement being given to the group members as presently defined in the application.

4                     The group members to whom the proceeding presently relates are persons who:

·                    entered into a sales contract with the first respondent (“FAI Home Security”) on or after 9 July 1993 to purchase a Security Guard I or a Security Guard II home alarm system (“the alarm system”);

·                    entered into a loan contract with the second respondent (“FAI Finance”) on or after 9 July 1993 to finance the purchase of an alarm system;

·                    relied on a representation by the seller of the alarm systems to the effect that the alarm system was the latest technology available (“the representation”);

·                    suffered financial loss as a result of the purchase of the alarm system.

I will call these group members “the present group members”. 

5                     The proposed settlement involves the respondents paying money only to those present group members who made themselves known to Maurice Blackburn Cashman, the solicitors for the applicants, who signed a fee and retainer agreement with that firm and who had provided instructions to the firm that they purchased the alarm system from FAI Home Security and that the purchase was financed by a loan contract with FAI Insurance.  I refer to these group members hereafter as the “known group members”.

6                     In earlier reasons for judgment I indicated that I was not prepared to consider whether I should approve the proposed settlement until the correction notice which I ordered on 16 October 2000 was sent to specified persons:  Williams v FAI Home Security Pty Ltd (No 3) [2000] FCA 1438.

7                     In my reasons for judgment on 22 December 2000, I also indicated that if a further application was made to the Court to approve a settlement of the proceeding, I would require evidence as to the manner in which the amount proposed to be paid under the settlement to the applicant’s solicitors in respect of their costs and disbursements in the proceeding had been ascertained and evidence that those costs were fair and reasonable. 

8                     When the notice of motion filed on 9 February 2001 came on for hearing on 22 February 2001, I ordered that the respondents give notice pursuant to s 33X of the Act of the proposal to amend and settle the proceeding by placing advertisements in The Australian newspaper and in newspapers published in Melbourne, Canberra, Sydney, Perth, Hobart, Launceston and Darwin.  The advertisements were in the form of a notice to present group members that:

·                    the applicants and the known group members have reached a settlement of their claim with the respondents;

·                    the settlement is conditional upon its approval by the Court;

·                    on 28 March 2001 the applicants would ask the Court to order that the applicants be permitted to amend the application to confine the application in the representative proceeding to the applicants and known group members (which order would amend the representative proceeding to exclude some group members), and to approve the settlement pursuant to s 33V of the Act;

·                    if a person was a group member but did not, or no longer, instruct Maurice Blackburn Cashman to act for that person, no offer of settlement had been made to that person;

·                    it was proposed to amend the representative proceeding so that the applicants no longer represented such persons;

·                    if the settlement was approved, the known group members would have the benefit of the settlement and the rights of other present group members would be unaffected except as set out in the notice;

·                    if a present group member to whom no offer of settlement had been made wanted to object to the settlement or the proposed orders, that person could appear before the Court on 28 March 2001 to make that person’s objections known to the Court;

·                    present group members could obtain a copy of the documents which would be before the Court on 28 March 2001, including a copy of the terms of settlement, from the applicants’ solicitors.

9                     The notice was published in The Australian newspaper on 5 March 2001 and newspapers in the various cities on 13 March 2001.  As a result of the publication of the notice, 291 persons contacted the applicants’ solicitors about the subject matter of the notice.  Of these persons, 140 were identified by the applicants’ solicitors as not falling into the class of present group members.  Of the balance of 149 persons, two persons were unable to provide the applicants’ solicitors with sufficient information in order for them to ascertain whether they were present group members, and four persons who had contacted the applicants’ solicitors were not able to have contact re‑established with them.  Of the 145 persons who fell into the category of present group members, 57 persons did not object to the proposal to amend and settle the proceeding and did not oppose the settlement of the proceeding in respect of the known group members, or the proceeding coming to an end, and 88 known group members wished to object to the proposal to amend and settle the proceeding on the basis that no offer of settlement had been made to them. 

10                  The applicants seek leave to amend the application by deleting the definition of present group members to whom the proceeding relates and substituting the 495 known group members as being the group members to whom the proceeding relates.  The applicants seek a consequential order pursuant to s 33ZF of the Act that the Court declare that the persons who are bound by the settlement of the proceeding are the 495 known group members.

11                  The terms of the settlement reached between the applicants and the respondents, which is subject to the Court amending the definition of the group in the manner to which I have already referred (par 10 above) and the Court approving the settlement pursuant to s 33V of the Act and ordering the dismissal of the proceeding with no order as to costs, are as follows:

·                    The respondents will pay each of Maurice Blackburn Cashman’s 495 clients $1,000 within twenty‑eight days of a Court order approving the settlement provided that:

(a)        if any of Maurice Blackburn Cashman’s clients have a debt outstanding to FAI Finance, then the $1,000 will be applied in reduction of the debt;

(b)        if any of Maurice Blackburn Cashman’s clients did not purchase an alarm system or did not finance such purchase with FAI Finance, they will be excluded from the settlement.

·                    The respondents will, within twenty‑eight days of the date of a Court order approving the settlement, pay to Maurice Blackburn Cashman $415,000 on account of their costs in this proceeding, and in another Supreme Court proceeding, incurred up to and including 22 December 2000.  Of this sum, $376,135 is to be paid in respect of their costs and disbursements in this proceeding.  The respondents will also pay to Maurice Blackburn Cashman up to $25,000 in respect of their costs and disbursements incurred after 22 December 2000.

·                    On payment of the costs, Maurice Blackburn Cashman and their clients will provide a release to the respondents.

·                    The respondents will pay the costs of any notification to any group members other than Maurice Blackburn Cashman’s clients ordered by the Court in connection with the approval of the settlement.

·                    Three of the partners of Maurice Blackburn Cashman will enter into an agreement that they will not accept instructions from any person in relation to the sales practices of the respondents in relation to the alarm systems up to the date of settlement.

·                    The offer by the respondents covers persons who have contacted Maurice Blackburn Cashman after 23 October 2000 and who have entered into a fee and retainer agreement with Maurice Blackburn Cashman, provided that the total number of persons to whom the respondents are required to make payment does not exceed 495.

·                    The settlement is conditional upon:

(a)        The Court ordering that the definition of the group in the proceeding be amended so as to limit it to Maurice Blackburn Cashman’s clients who purchased an alarm system on or after 9 July 1993 with finance provided by FAI Finance.

(b)               The Court approving the settlement pursuant to s 33V of the Act and ordering that the proceeding be dismissed with no order as to costs.

·                    Without limiting the operation of s 33ZE of the Act, the respondents will conduct their response to any claims in respect of the issues the subject of the class action by persons who would, but for the amendment of the group, have been group members in the proceeding as if any limitation period in respect of those claims by those persons did not recommence to run until one month after publication of any notice ordered by the Court in connection with approval of the settlement pursuant to s 33V.

12                  When the matter was called on for hearing on 28 March 2001, the respondents, by their senior counsel, offered an undertaking to the Court to send a letter of offer to each of the 88 persons who were present group members and who had informed the applicants’ solicitors that they objected to the settlement.  The offer, in substance, was the same offer as had been made to the 495 known group members and had been accepted by them.  The offer to be contained in the letter was refined in the course of the hearing and as now proffered is in the following terms:

“The terms of FHS [FAI Home Security] and FFC’s [FAI Finance] offer to you, which will become the terms of a contract between you and FHS and FFC if you accept this offer, are as follows:

1.         In consideration of your agreement to the things described in paragraph 2, FHS and FFC will pay you a total of $1,000 within 28 days of the Effective Date, provided that:

(a)        if you have a debt outstanding to FFC at the Effective Date, then the $1,000, will be applied in reduction of that debt, and the balance of the amount of $1,000 after it has been applied in reduction of that debt (if any) will be paid to you;

(b)        if you did not purchase an Alarm System between 9 July 1993 and 9 July 1999, or finance the purchase of the Alarm System by entering into a contract with FFC, neither FHS nor FFC will be under any obligation to make any payment to you (or apply any amount in reduction of any debt you may owe to FFC).

2.         By accepting this offer, you agree:

(a)        not to pursue any objection to approval of the Settlement by the Court; and

(b)        to release each of FHS and FFC  from all claims, (however they arise) in respect of any alleged statements, representations or warranties made to you by any person in connection with your purchase of the Alarm System to the effect that the Alarm system was:

(i)         the latest technology available;

(ii)        the best on the market;

(iii)       for sale at much less than comparable systems.

3.         This agreement will be of no effect if a notice of motion dated 9 February 2001 filed in the Class Action is dismissed, or if the Federal Court of Australia otherwise refuses to approve the Settlement.

4.         You must not take any steps to give publicity to this offer, or any contract formed if you accept this offer.

5.         In this letter:

‘Alarm System’ means an alarm system identified by the names ‘Security Guard I’ or ‘Security Guard II’.

‘Class Action’ means Federal Court of Australia proceedings number V383 of 1999.

‘Court’ means the Federal Court of Australia.

‘Effective Date’ means the date Settlement Orders are made by the Court or the date you accept this offer (whichever is the later).

‘Settlement Orders’ means any orders made by the Court in relation to Federal Court of Australia proceeding no. V383 of 1999, the effect of which is to amend the description of the Class in which the Class Action to include only those persons subject to the settlement, approve the settlement, and make ancillary or consequential orders.”

13                  The undertaking was offered instead of amending the settlement agreement because amendment of the settlement agreement to include the 88 persons would have required the process of advertising the terms of the settlement to have been undertaken again.  I considered that any further advertisement was unnecessary.

14                  In my earlier reasons for judgment on 22 December 2000 (when I dismissed the first motion to approve the settlement), I observed that if I limited my consideration of the settlement to whether it is fair, reasonable and adequate in relation to the interests of the known group members who would be bound by it, and whose causes of action against the respondents would merge in the settlement agreement, if approved by the Court, I was satisfied that the settlement was fair, reasonable and adequate.  I reached this conclusion having regard to the nine‑factor test to which I referred, which had been adopted by the United States Court of Appeals for the Third Circuit and which was set out in In re General Motors Corporation Pick‑Up Truck Fuel Tank Products Liability Litigation 55 F.3d 768 (3rd Cir. 1995) at 785, and having regard to the advice of counsel and the technical expert obtained by the applicants’ solicitors referred to in my earlier reasons.  I have not changed that view.

15                  In my earlier reasons for judgment, I concluded that the notice of the application for approval of the settlement then sought, to be given pursuant to s 33X of the Act, was required to be given to the present group members, that is to the group members as presently defined in the application.  I concluded that the notice was to be given, not only to those present group members who would be receiving payments as part of the settlement, but also to all present group members, as presently defined, who have not made contact with Maurice Blackburn Cashman or signed fee or retainer agreements with them.  I was not satisfied for the purposes of s 33X(4) of the Act that it was just to determine the application for approval of the settlement without that notice being given to the present group members and, indeed, I considered that an injustice would be visited upon the present group members (other than the known group members) if I were to approve the settlement without present group members having been given notice of the proposed settlement.  My reasons for reaching that conclusion are set out in my earlier reasons for judgment.  In particular, I did not consider it appropriate or fair to present group members to allow the definition of the group to be narrowed for the purpose of achieving settlement for the narrowed group, without the members of the wider group being put on notice as to what was proposed.

16                  What concerned me, in particular, at the time of those earlier reasons for judgment was that no public notice had been published so as to alert persons who might fall into the category of present group members of the existence of the proceeding so that they might, if they wished, contact Maurice Blackburn Cashman about the matter.  As a result of the publication of the notice, all present group members have been put on public notice as to the existence of the proceeding and the application for settlement of it.  I was concerned about the interests of the present group members who were not known group members and who had not contacted the applicants’ solicitors or signed a fee and retainer agreement with them.

17                  That notice has now been given and although 88 persons falling into the category of present group members have indicated their objection to the settlement, their objection has been on the basis that the settlement is not available to them.  One present group member appeared in Court on the hearing of the application for approval and indicated that that was his position.  That basis for the objection to the settlement disappears with the undertaking given to the Court by the respondents to make the same offer to each of those 88 persons. 

18                  Although there may be present group members who have not contacted Maurice Blackburn Cashman as a result of the publication of the notice, all present group members have now been given the opportunity to do so.  In this respect, the observation I made in par 29 of my earlier reasons bears repeating:

“The policy of Pt IVA of the Act is against allowing a respondent in a representative proceeding to settle with a representative party, and not with other members of the group, in such a manner as to cut the proceeding adrift from the umbrella of Pt IVA of the Act, without giving the other group members the opportunity to maintain the character of the proceeding as a representative proceeding pursuant to Pt IVA.”

19                  The issue of the costs to be paid by the respondents to the applicants’ solicitors in respect of the costs and disbursements in the proceeding has now been resolved by the filing of an affidavit by an independent experienced legal costs consultant.  The consultant has reviewed the files of the applicants’ solicitors together with their time records and has satisfied me that the costs to be paid to the applicants’ solicitors are fair and reasonable and represent a reduction in the quantum of the costs and disbursements which the applicants’ solicitors would otherwise be entitled to charge their clients.  The applicants’ solicitors have not sought to charge the premium of 25% on the costs calculated on their hourly rates as provided for in s 98 of the Legal Practice Act 1956 (Vic) (and for which they had made provision in their fee and retainer agreements).  The consultant concluded:

“The sum proposed by way of costs to [the applicants’ solicitors] is significantly less than that which [they] would be entitled to recover if their full solicitor own/client costs were being allowed.  The proposed figure to be paid to [the applicants’ solicitors] for legal costs in this matter is fair and reasonable.”

I accept this evidence.

20                  Save for one matter which requires consideration, to which I shall refer, I am satisfied that the settlement is fair, reasonable and adequate having regard to the interests of the known group members and the 88 beneficiaries of the respondents’ undertaking to extend the settlement offered to them, who will obtain a financial benefit under settlement and  who will be bound by the settlement.  Although present group members (other than known group members) will be excluded from the settlement, if leave is granted to the applicants to amend the application to limit the group members to whom the proceeding relates to the known group members, any rights which the present group members, otherwise excluded from the settlement, will have against the respondents in relation to the alarm systems, the subject of the proceeding, will not be affected or diminished.  The limitation period for bringing proceedings against the respondents, which was frozen pursuant to s 33ZE of the Act, will not commence to run until one month after publication of the notice that the proceeding has been settled which I propose to order.

21                  The remaining matter which requires consideration is the provision of the agreement whereby the three solicitors who have been acting for the applicants in the proceeding undertake not to accept any instructions from any other persons to take proceedings against the respondents in respect of alarm systems they purchased during the period 9 July 1993 until 9 July 1999.  The relevant provision is in the following terms:

“Each of the partners of MBC, David Niven, Vivian Waller and Ben Slade will enter into an agreement by deed pursuant to which they warrant and undertake (and acknowledge that FHS and FFC will rely upon the said warranty and undertaking) that:

(a)        they will not accept instructions from any person in relation to the sales practices of FHS and/or FFC in relation to the SGI or SGII alarm systems upon to the date of settlement (being the date on which the last step is to be taken by any party in the Class Action with respect to orders made by the Court giving effect to its approval of the settlement pursuant to s33V of the Act or the date on which the said agreement is entered into, whichever is the later); and that

(b)               they do not hold instructions from any person in relation to FHS and/or FFC (other than the instructions in the Class Action).”

22                  I raised with the parties whether such a contractual provision might be an unreasonable restraint of trade and therefore unenforceable.  The applicable principle is that restraints of trade are contrary to public policy and unenforceable, unless it can be established that they are reasonable with reference to the interests of the parties concerned and the public interest:  Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 at 565; Bridge v Deacons [1984] AC 705 at 713; Adamson v New South Wales Rugby League Ltd (1991) 31 FCR 242 at 265, 292‑294.  I raised the issue whether the restraint to be imposed on the three solicitors was in the public interest from the point of view of the common law, and whether there might be an added public interest component having regard to the fact that the proceeding which was being settled was a representative proceeding brought under Pt IVA of the Act.

23                  In order to justify a covenant or agreement in restraint of trade, the covenantee must establish that it has a legitimate interest which is capable of being protected by a covenant in restraint of trade.  A bare covenant which protects a covenantee from competition is unenforceable as there is no legitimate interest to be protected:  Vancouver Malt and Sake Brewing Co v Vancouver Breweries Ltd [1934] AC 181.  Covenants entered into on the sale of a business protect the purchase of goodwill and trade secrets.  Covenants entered into by an employee in favour of an employer to restrain the activities of the employee after leaving the employment protect the acquisition and use of trade secrets and other confidential information:  Heydon, The Restraint of Trade Doctrine (2^nd ed, 1998) at 211‑213.  Over the years the scope of a relevant legitimate interest has been expanded and it has been said that the “categories of restraint of trade are not closed”:  Petrofina (Great Britain) Ltd v Martin [1966] Ch 146 at 169; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 306; Buckley v Tutty (1971) 125 CLR 353 at 376.  For example, in Queensland Co‑Operative Milling Association v Pamag Pty Ltd (1973) 133 CLR 260 at 279, Stephen J recognised that a covenantee had an interest justifying protection in obtaining and retaining customers by sole supply agreements.

24                  In CSR Ltd v Rothfield (unreported, Hedigan J, SC of Vic, 3 April 1992), an interlocutory injunction was granted restraining the defendant firm of solicitors from acting as solicitors in respect of claims that might be made against the plaintiffs arising out of their activities in relation to the manufacture and export of asbestos products.  The solicitors had acted for a number of plaintiffs against CSR Ltd and a number of proceedings were settled on terms contained in a deed of settlement.  Under the deed, the solicitors covenanted that for a period of five years from the date of settlement they would decline to accept instructions, or assist other lawyers, or in any other way pursue claims for exemplary and/or aggravated damages against CSR Ltd and other defendants arising out of exposure to asbestos at or from Wittenoom.  Hedigan J concluded that the estimation of the facts before him and their meaning “against the legal considerations, still developing, plainly raises a serious question to be tried”.  The submissions before the Court raised issues as to whether the covenant was in restraint of trade, whether it was a reasonable restraint, to what extent was the public interest involved and whether the covenant was entered into in protection of an interest of the plaintiff which the law would protect.  However, these matters were not the subject of detailed analysis by Hedigan J.

25                  Unlike that case, the issue of the enforceability of the covenant in this case does not arise at the present time.  Therefore, to that extent, it is premature to raise the issue whether the covenant is reasonable in the interests of the parties and in the public interest.  As Lord Reid observed in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (supra) at 297:

“One must always bear in mind that an agreement in a restraint of trade is not generally unlawful if the parties choose to abide by it:  it is only unenforceable if a party chooses not to abide by it.”

See also Buckley v Tutty (supra) at 379‑380; Attorney‑General of the Commonwealth of Australia v Adelaide Steamship Co Ltd [1913] AC 781 at 797.

26                  Although I am approving a settlement, I am not in any way validating, or passing judgment upon, the enforceability of the agreement entered into between parties.  Any question as to the enforceability of a particular provision of the agreement should await any particular point of time at which it may become a live issue.  The solicitors are prepared to enter into a covenant required of them as part of an overall settlement.  One can readily appreciate that by acting in the proceeding to date and by achieving the settlement they have achieved, they have accumulated a substantial amount of information and knowledge not only about the substantive issues in the proceeding in relation to the claims against the respondents, but also in relation to the extent to which, and the manner in which, the respondents are prepared to consider a compromise of such proceedings.  Although I have reservations as to whether that knowledge can found a legitimate basis for an interest to be protected by a restraint of trade clause (in the same way as a restraint on a retiring partner in a firm of solicitors is required to protect the goodwill of the practice which that retiring partner has sold to the continuing partners of the firm), I do not consider it appropriate to deal with the matter at this stage.

27                  I therefore propose to order that the applicants have leave to amend the application in the manner proposed and that the proposed settlement of the proceeding be approved, pursuant to s 33V of the Act.  I propose to declare that the persons who are bound by the settlement of the proceeding are the respondents, the known group members and the persons who are the beneficiaries of the undertaking proffered by the respondents and who accept their offer, and that the proceeding be dismissed with no order as to the costs of the proceeding or the costs of the motion.  There should also be an order for the publication of a notice that the proceeding has been settled.  I will hear the parties as to the form of that notice.

Associate:

Dated:              11 April 2001