FEDERAL COURT OF AUSTRALIA
Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. The further hearing of the proceedings be adjourned to a date to be fixed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
O’CALLAGHAN J:
1 These reasons concern two representative proceedings.
2 The first, VID180/2018 (the 180 Proceeding), concerns claims brought against 7-Eleven Stores Pty Ltd (7-Eleven), Australia and New Zealand Banking Group Limited (ANZ) and 7-Eleven Inc (a Texas Corporation) by franchisees of 7-Eleven stores. The applicants in that proceeding are Davaria Pty Ltd (Davaria Co) and Kaizenworld Pty Ltd (Kaizenworld).
3 The second, VID182/2018 (the 182 Proceeding), concerns claims brought by the natural person principals and guarantors of corporate franchisees against 7-Eleven and ANZ. The applicants are Pareshkumar Davaria (Mr Davaria) and Khushbu Davaria (Ms Davaria), who are the principals of Davaria Co, and Jatinder Singh (Mr Singh) and Suman Kaur (Ms Kaur), who are the principals of Kaizenworld.
4 The proceedings were set down for trial before Middleton J on 9 August 2021 on an estimate of 10 weeks.
5 The proceedings were mediated in June and July 2021 before the Honourable Susan Crennan AC QC, a former justice of the High Court of Australia.
6 On 3 August 2021, Mr Davaria, Ms Davaria, Mr Singh and Ms Kaur entered into settlement deeds with ANZ.
7 On 4 August 2021, a Settlement Deed was executed between Davaria Co and Kaizenworld, on their own behalf and on behalf of the group members in the 180 Proceeding, and the applicants’ directors/shareholders (Mr Davaria, Ms Davaria, Mr Singh, and Ms Kaur) on their own behalf and on behalf of the group members in the 182 Proceeding; Levitt Robinson Solicitors (Levitt Robinson); Galactic Seven Eleven Litigation Holdings LLC (Galactic or the funder) and 7-Eleven.
8 The parties agreed to settle the proceedings for $98 million.
9 By application dated 11 August 2021, subsequently amended on 17 December 2021 and 12 May 2022, made pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth), the applicants sought court approval of the settlement of the proceedings on the terms as agreed by the parties in the Settlement Deed, including for payment by 7-Eleven of the Settlement Sum to be distributed in accordance with the Settlement Scheme, set out in the Confidential Affidavit of Mr Brett Imlay sworn 23 August 2021 (Approval Application).
10 By interlocutory applications dated 22 October 2021, Galactic sought, among other things: (i) approval of a payment to it in the amount of $24.5 million (being 25% of the $98 million settlement sum) in the form of a common fund order, plus (ii) reimbursement for legal costs incurred and paid of approximately $20 million (and return of its security for costs which was paid into Court).
11 By their Further Amended Interlocutory Application for settlement approval dated 12 May 2022 the applicants sought a fund equalisation order, as follows:
17A. If the Court does not make [a common fund] order at the request of Galactic … then pursuant to sections 33V and (or alternatively) 33ZF of the [Federal Court of Australia Act], each of the group members who apply for and receive any payment out of the Settlement Sum in accordance with the Settlement Scheme (Settlement Scheme Payment) be required to contribute to the Funder’s Portion (as described below), to be determined as follows:
(a) the total of the Settlement Scheme Payments to be paid to all group members who have signed litigation funding agreements (Funded Group Members) with Galactic in relation this proceeding (LFAs) shall be computed;
(b) the sum of 35% of the sum in subparagraph (a) shall be computed (the Funder’s Portion);
(c) all group members who have not signed LFAs (Unfunded Group Members) and Funded Group Members shall be required to contribute an amount to the Funder’s Portion (including any Enhanced Funder’s Portion as described in subparagraph (d) below), so that an equal percentage of the Settlement Scheme Payment is paid by the Funded Group Members and Unfunded Group Members, with the calculation of that contribution made by the Administrator of the Settlement Scheme; and
(d) to the extent that any contribution by Unfunded Group Members increases Settlement Payments to Funded Group Members and so requires that Funded Group Members pay further monies to Galactic under the terms of the LFAs, and thereby increase the Funder’s Portion (Enhanced Funder’s Portion), the Unfunded Group Members shall each be required to contribute a further percentage of their Settlement Scheme Payments so that ultimately each of the Funded Group Members and Unfunded Group Members contribute equally to the Enhanced Funder’s Portion, and a calculation of that contribution and equal percentage shall be made by the Administrator of the Settlement Scheme.
17B The Administrator be authorised to pay to Galactic the Funder’s Portion including any applicable Enhanced Funder’s Portion, or such other amount as the Court deems fair and reasonable, out of the Settlement Sum in discharge of Galactic’s entitlements under the LFAs.
12 On 16 November 2021, I listed the applications for hearing to commence on 28 March 2022.
13 After a three day hearing, on 31 March 2022 I made the following orders (among others):
Approval of the settlement
1. Pursuant to sections 33V and 33ZF of the FCA Act that the settlement of this proceeding as against 7-Eleven be approved on the terms set out in:
a. the Class Action Settlement Deed dated 4 August 2021 between:
i. the Applicants (Davaria Pty Ltd and Kaizenworld Pty Ltd), on their own behalf and on behalf of the Group Members, and the Applicants’ directors/shareholders (Mr Pareshkumar Davaria, Ms Khushbu Pareshkumar Davaria, Mr Jatinder Pal Singh, and Ms Suman Meet Kaur) on their own behalf and on behalf of the group members in proceeding VID182/2018;
ii. Levitt Robinson;
iii. Galactic; and
iv. 7-Eleven; and
b. The Settlement Scheme annexed to these orders.
Administration of the settlement scheme
2. Steven Nicols of the accounting firm Nicols & Brien be appointed as the Administrator of the Settlement Scheme.
Payment of the settlement sum
3. 7-Eleven to pay the Settlement Sum of $98,000,000 to a trust account nominated by the Administrator within 14 days of the date on which:
a. the appeal period in respect of paragraph 1 of these orders (Approval Order) has expired without any appeal or application for leave to appeal having been filed; or
b. any orders from an appeal from the Approval Order have been Approved.
In this order, “Finally Approved” means that an application for leave to appeal or an appeal from the Approval Order has been filed and the ultimate outcome of that appeal (including any subsequent appeal or application for leave to appeal) is that the Approval Order is upheld or an order materially similar or substantially equivalent to the Approval Order is made.
Security for costs
4. The security for 7-Eleven’s costs and any interest thereon held in the Federal Court’s high-interest bearing account be paid to Levitt Robinson’s trust account, to be returned to Galactic forthwith, and the Registry is so directed.
Confidentiality orders
5. In addition to Order 1 of the Court made on 15 February 2022, pursuant to ss 37AF(1)(b) and 37AG(1)(a) of the FCA Act, until further order of the Court, in order to prevent prejudice to the proper administration of justice, the documents in the Consolidated Confidentiality Schedule as Annexure A to these orders be treated as confidential, not be published or made available and not be disclosed to any person or entity except as permitted by the relevant party identified with respect to the relevant document as set out in the Consolidated Confidentiality Schedule or by order of the Court.
Costs orders
6. There be no order as to the costs of the proceeding as between the Applicants and 7-Eleven.
7. All existing costs orders in favour of the Applicants as against 7-Eleven, or in favour of 7-Eleven as against the Applicants, be vacated.
Consequential orders
8. Pursuant to section 33ZF of the FCA Act or otherwise, the Applicants be authorised nunc pro tunc on behalf of the Group Members bound by these orders to enter into and to give effect to the Class Action Settlement Deed and the obligations, rights, releases and transactions contemplated in it for and on behalf of those Group Members.
The reasons for the making of those orders are to be found in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 11) [2022] FCA 331.
14 The proceedings were adjourned to dates in April and May 2022 for consideration of matters relevant to s 33V(2) of the Federal Court of Australia Act.
15 Mr D Pritchard SC appeared with Mr P Tucker, Mr NYH Li and Mr A Rizk for the applicants. Mr RG Craig QC appeared with Mr AN McRobert for 7-Eleven. Mr SG Finch SC appeared with Mr DTW Wong for the funder. And Mr JA Redwood SC appeared with Mr RK Jameson as the court appointed contradictor. Ms E Harris also appeared to assist the court in relation to her various costs reports in her capacity as referee.
16 It was agreed that it would be preferable for me to publish these reasons and then permit the parties to confer in relation to the form of the orders to be made to give effect to those reasons, before resuming any further hearing.
17 The applicants relied on the following evidence:
(1) affidavits of Stewart Alan Levitt, the Senior Partner of Levitt Robinson who had the ultimate conduct and carriage of the matter for the applicants, sworn:
(a) 13 March 2018;
(b) 1 December 2020;
(c) 14 October 2021 (including a confidential version);
(d) 28 October 2021;
(e) 16 December 2021;
(f) 17 December 2021 (including a confidential version);
(2) affidavits of Brett Richard Imlay, Special Counsel at Levitt Robinson, sworn:
(a) 30 September 2020;
(b) 26 November 2020;
(c) 25 January 2021;
(d) 17 May 2021;
(e) 23 August 2021 (including a confidential version);
(f) 6 October 2021 (including a confidential version);
(g) 13 October 2021 (including a confidential version);
(h) 20 October 2021 (confidential);
(i) 25 October 2021;
(j) 17 December 2021 (including a confidential version);
(k) 12 May 2022;
(3) affidavits of Jermir Schan Jehangir Punthakey, a solicitor at Levitt Robinson, sworn:
(a) 6 September 2019;
(b) 10 December 2019;
(c) 5 June 2020;
(d) 24 July 2020;
(e) 3 November 2021 (including a confidential version);
(f) 15 November 2021;
(g) 25 March 2022;
(h) 28 March 2022 (including a confidential version);
(i) 21 April 2022 (including a confidential version);
(4) affidavit of Steven Nicols, the administrator of the settlement scheme, sworn 30 March 2022;
(5) affidavits of Pareshkumar Chhaganlal Davaria, sworn:
(a) 21 October 2020
(b) 12 November 2021 (including a confidential version);
(6) affidavits of Jatinder Pal Singh sworn:
(a) 13 October 2020;
(b) 12 November 2021 (including a confidential version);
(7) affidavits of the following other franchisees:
(a) Sushil Kumar Sharma sworn 19 December 2018; 8 July 2019; 6 September 2019; 16 November 2021;
(b) Kirandeep Singh sworn 28 June 2019;
(c) Sajjadur Rahman sworn 26 June 2019;
(d) Atulkumar Nagjibhai Patel sworn 3 July 2019;
(e) Kailas Pujar sworn 4 July 2019;
(f) Nanette Wang sworn 4 July 2019;
(g) Ambika Nand sworn 6 April 2021 and a further affidavit affirmed 23 March 2022 (including a confidential version)
(h) Harjit Singh Salhan sworn 12 April 2021; and
(8) affidavit of Christopher David Hart, a remuneration consultant engaged by Levitt Robinson to prepare a report in connection with the applicants’ additional remuneration arising out of their hours worked, affirmed 12 May 2021.
18 7-Eleven relied on the following evidence:
(1) affidavits of Nigel David Jones, a Partner of Norton Rose Fulbright Australia, the solicitors for 7-Eleven, affirmed:
(a) 10 December 2020;
(b) 14 May 2021;
(c) 14 June 2021;
(d) 29 October 2021 (including a confidential version);
(e) 3 February 2022;
(f) 23 March 2022;
(2) affidavit of Abdul Muhit Ridwan Alam, a Group Reporting Analyst employed by 7-Eleven, affirmed 4 June 2021 (including a confidential version);
19 At the hearing on 22 April 2022, I agreed that I would make an order that on a date that was seven days after payment of the settlement sum, the proceeding would be dismissed as against 7-Eleven. On 2 May 2022, I made an order in those terms. On 2 June 2022, the first respondent made payment of the settlement sum. Accordingly, on 10 June 2022, I made an order dismissing the proceeding against 7-Eleven.
20 The funder relied on two affidavits of Fredrick Schulman, the Managing Director of Galactic, sworn 21 October 2021 and 1 February 2022 respectively. The latter was confidential.
21 Elizabeth Mary Harris was appointed as a referee pursuant to orders made on 15 September 2021. Ms Harris swore six affidavits, annexing four costs reports relevant to the applications (which are discussed at [136] below) and a further report pursuant to orders made on 11 October 2022 (see [325] below).
22 The contradictor also sought to rely on an affidavit of Ambika Nand, a franchisee. Mr Nand lodged an objection to the funding commission and legal costs, and gave evidence about his involvement with the proceedings and his reasons for objecting to the settlement. However, as I explain at [199] of these reasons, I accept that his objection can be properly put to one side.
23 7-Eleven objected to some parts of the applicants’ and the funder’s evidence. By agreement between the parties, certain passages of affidavits were not read, and others were admitted subject to s 136 of the Evidence Act 1995 (Cth) as either submissions, evidence of the deponent’s state or mind, or evidence of the deponent’s understanding of another person’s state of mind. The evidence the subject of those limitations was ultimately of little relevance.
24 The contradictor also objected to Mr Imlay’s 12 May 2022 affidavit. I deal with those objections at [307]-[309] below.
25 The funder and the contradictor also relied on expert evidence from Mr Houston and Mr McGing respectively.
26 A confidential opinion from the applicants’ counsel, being the same counsel who appeared for the applicants at the hearing, was also in evidence. It was an exhibit to the confidential affidavit of Mr Imlay sworn 20 October 2021. A supplementary confidential opinion was also filed, but it was not material.
27 The confidential opinion, in substance, expressed the following general opinions, which are not in themselves confidential.
28 As to the fairness and reasonableness of the proposed settlement, counsel expressed the opinion that the proposed settlement was fair and reasonable as between:
(a) the applicants and group members (on the one hand) and the respondent (on the other); and
(b) group members.
29 Counsel also expressed the opinion that the proposed settlement distribution scheme was fair and reasonable.
30 Counsel also considered that the settlement sum and proposed distribution of those funds, fairly reflected:
(a) the complexities, prospects and risks associated with the claims made in the proceedings;
(b) the time, cost and vicissitudes of a rigorously defended trial of those claims, and the potential costs associated with further hearings for groups members (including the potential for appeals);
(c) the losses and burdens (and benefits) that group members have suffered (or enjoyed) in the course of operating their franchises; and
(d) acknowledgment of the applicants’ costs of conducting the proceedings to date, and of administering the proposed scheme of distributing the Settlement Sum.
31 Counsel said that they had arrived at those opinions upon a frank assessment of:
(a) the applicants’ prospects of success in proving liability and damages (or entitlement to compensation or other favourable relief), and of group members generally;
(b) the exigencies of litigation generally, and specifically in respect of the proceedings; and
(c) the limited number of common questions that could be determined at trial for the benefit of all group members.
32 Counsels’ opinions in matters of this kind are kept confidential to prevent prejudice to the proper administration of justice.
33 That is so, including because such opinions routinely contain matters that are the subject of lawyer-client privilege. As the Victorian Court of Appeal (Tate, Whelan and Niall JJA) said in Botsman v Bolitho (2018) 57 VR 68 at 125 [270], [272]:
It is a common feature of an approval application for a compromise of a group proceeding that counsel for each of the parties will provide a confidential advice to the court that candidly exposes the strength and weakness of the competing contentions and explains why, in the opinion of counsel, the settlement is appropriate.
…
The candid exposure of the strengths and weaknesses of the lawyer’s own case is essential to the utility of the advice in the court’s deliberations. In principle, there is a sound reason for the maintenance of confidentiality over such opinions.
34 In Camilleri v The Trust Company (Nominees) Ltd [2015] FCA 1468 at [35], Moshinsky J said that there were several factors that may give courts confidence in relying on the confidential opinions of counsel, each of which is applicable in the circumstances of these proceedings:
(a) the proceedings are at a very advanced stage, with all the lay and expert evidence already filed.
(b) the settlement occurred virtually on the eve of the trial, which places the parties and their lawyers in a good position to assess the strengths and weaknesses of their cases.
(c) the lawyers who have expressed the opinions are very familiar with the detail of the case.
(d) the opinions are well constructed and reasoned, giving the court confidence in the opinions they express.
35 The following submissions were relied on:
(1) by the applicants:
(a) outline of submissions dated 14 October 2021;
(b) further outline of submissions dated 21 December 2021 (AS2);
(c) submissions in reply on confidentiality dated 14 February 2022 (AS3);
(d) submissions in reply dated 25 March 2022 (AS4);
(e) outline of supplementary submissions dated 14 April 2022 (AS5);
(f) a document entitled “Applicants’ note on intended submission of contradictor in respect of the FEO” dated 22 April 2022;
(g) submissions concerning admission of the affidavit of Brett Imlay sworn 12 May 2022 dated 23 May 2022;
(h) a supplementary note in reply in relation to the FEO calculation dated 24 May 2022;
(2) by 7-Eleven:
(a) outline of submissions dated 29 October 2021 (RS1);
(b) outline of submissions dated 15 November 2021;
(c) submissions on confidentiality dated 3 February 2022; and
(d) reply submissions dated 23 March 2022;
(3) the funder’s submissions dated 22 October 2021;
(4) by the Contradictor:
(a) preliminary outline of submissions dated 12 November 2021;
(b) submissions on confidentiality dated 6 December 2021;
(c) outline of submissions on confidentiality and the further settlement notice dated 7 February 2022;
(d) outline of submissions on proposed timetabling orders dated 14 February 2022;
(e) further outline of submissions dated 9 March 2022 (CS3);
(f) outline of submissions dated 14 March 2022;
(g) response to applicants’ submissions of 14 March 2022, dated 15 March 2022;
(h) a document entitled “Findings sought and not sought from the Court in respect of the evidence of Stewart Levitt” dated 11 April 2022;
(i) submissions regarding the applicants’ application for leave to re-open and the affidavit of Brett Imlay sworn 12 May 2022 dated 23 May 2022;
36 These reasons address these agreed questions:
(1) Is the proposed settlement distribution fair and reasonable inter se among group members or different categories of group members in both proceeding VID 180 and proceeding VID 182? The answer to that question turns on the following sub-questions:
(a) Is the allocation of the net settlement proceeds of 60% to proceeding VID 180 and 40% to proceeding VID 182 within a rational range?
(b) Is the allocation for the proceeding VID 180 claims of 80% for VID 180 Loss Claims and 20% for Rebates Claims within a rational range?
(c) Are the relative weightings for the VID 180 Loss Claims and the VID 182 Claims of 100%, 33% and zero rational insofar as they are based on: (i) limitation risk for franchisees who entered into a franchise agreement prior to 21 February 2012; (ii) whether the franchisee sold or disposed of their franchise before 1 October 2015; or (iii) whether the franchisee entered their franchise agreement after 1 October 2015?
(2) Are the legal costs of $16,657,588.44 incurred in the proceedings up to 4 August 2021 (being the date of the settlement agreement), as assessed by the costs referee, and sought to be recovered from the settlement sum, reasonable?
(3) Are the total legal costs, or any substantial part or category of those costs, proportionate to the expected benefits to be obtained in incurring those costs, and what are the consequences (if any)?
(4) Should each of the costs reports of the costs referee be adopted, varied or rejected, in whole or in part, or be the subject of other order(s) by the Court pursuant to s 54A of the Federal Court of Australia Act?
(5) Was there adequate disclosure and monitoring of legal costs throughout the proceedings, and what are the consequences (if any) if there was not?
(6) Were there any deferred fee arrangements in place between Levitt Robinson and Galactic in relation to legal costs, and what are the consequences (if any) if there were?
(7) Does the court have the power to make a CFO of the kind sought under s 33V(2) of the Federal Court of Australia Act, or in its equitable jurisdiction under s 5(2)?
(8) If the court has power to make a CFO of the kind sought, should it make such an order in its discretion in these circumstances?
(9) If the court considers such an order should be made in its discretion, is 25% of the gross settlement proceeds a fair and reasonable amount?
(10) What is the appropriate methodology to determine a fair and reasonable funding commission and what is the relevance in that regard of the expert reports of Mr Houston and Mr McGing to the Court’s determination of a fair and reasonable funding commission?
(11) If the court declines to make a CFO in these circumstances, should a FEO otherwise be made and, if so, what is, or should be, the aggregate amount of any FEO? The answer to that question turns on the following sub-questions:
(a) Does the court need to be satisfied as to Galactic’s asserted contractual rights under the funding agreements in order to make a FEO and, if yes, was there sufficient evidence adduced about the existence of binding funding agreements?
(b) To what extent (if at all) is Galactic entitled to a “gross-up” funding commission if a FEO is made?
(12) Are the costs of the solicitors for the applicants in respect of these approval applications reasonable?
(13) Does the costs referee’s reference extend to reviewing the reasonableness of the contradictor’s costs? Should it?
37 Because the answers to questions (1) and (11) turn on the answers to their respective sub-questions, when I get to them, I will deal with each of those sub-questions first.
NATURE OF THE CLAIMS MADE IN THE PROCEEDINGS
38 The matters set out under this heading are derived from a statement of agreed facts dated 26 May 2022. In what follows, I have adopted most of the extensive definitional terms used by the parties in that document.
39 In the 180 Proceeding, Davaria Co and Kaizenworld made four types of claim that related to their entry into a standard form franchise agreement with 7-Eleven.
40 First, there were claims for breach of contract by reason of 7-Eleven’s merchandise supply and inventory practices that were alleged to contravene one or more express or implied terms of the Franchise Agreement (together described as the “C-Store claims”), including:
(a) allegations that 7-Eleven did not obtain the lowest price or prices reasonably obtainable from Suppliers using its best endeavours (Best Endeavours Wholesale Price);
(b) requiring franchisees to purchase merchandise (Merchandise) for sale at 7-Eleven stores (Stores) through an online portal (Portal) from essentially one supplier, C-Store (an arm or related entity of Metcash Limited (Metcash)), whose prices were alleged to be in excess of the Best Endeavours Wholesale Price (this conduct described as “C-Store Practices”);
(c) subjecting Franchisees to:
(i) 7-Eleven’s automatic Merchandise ordering system, which generated Merchandise orders for Stores automatically (Suggested Orders) which was alleged to include excessive or unwarranted quantities and types of Merchandise;
(ii) allegedly unreasonable stock auditing practices;
(iii) allegedly unreasonable credit management and cashflow practices, through 7-Eleven’s Open Account system;
(this conduct is described as “Inventory Practices”)
(iv) an alleged failure to account to Franchisees in respect of rebates (Rebates) collected by 7-Eleven from Suppliers that related to Merchandise purchases made by Franchisees (Purchases).
41 Secondly, there were claims of misleading or deceptive conduct, by 7-Eleven allegedly:
(a) understating the true payroll cost of a 7-Eleven store by providing prospective Franchisees with average Store financial statements for Stores at State and national level (Average Store Financials) and financial statements for specific Stores (Individual Store Financials) that allegedly understated the payroll costs associated with operating a Store if employees were to have been paid in accordance with their lawful entitlements (Future Average Payroll Cost Representation);
(b) misstating that the Average Store Financials and Store Financials for the Campbelltown Store were accurate (Average Store Financials Accuracy Representation and Campbelltown Store Financials Accuracy Representation);
(c) overstating Stores’ true value (Goodwill Value Representation) by providing an allegedly inappropriate formula for the calculation of goodwill associated with Stores (Goodwill Formula) that was premised on a multiple of the annual gross income from Stores’ trading (Gross Income Multiple) and which had no regard to a Store’s operating costs;
(d) misrepresenting that Franchisees would be able to sell the goodwill in their franchise in the future to an incoming franchisee on the Gross Income Multiple (Renewal Representation);
(e) misstating that franchisees did not have an obligation to contribute to an advertising fund (Fund) (Advertising Fund Representation);
(f) misstating that 7-Eleven would enter into favourable agreements with Suppliers for the supply of Merchandise, based on volumes of Merchandise ordered by 7-Eleven or Franchisees (Volume Pricing Representation);
(g) misstating that 7-Eleven would provide franchisees with an extensive list of Suppliers and Merchandise from which franchisees could choose product lines to range in their Store (7-Eleven Supplier Representation).
42 Thirdly, there were claims for loss arising from 7-Eleven’s alleged breach of s 51ACB of the Competition and Consumer Act 2010 (Cth) (previously s 51AD of the Trade Practices Act 1974 (Cth)), by reason of 7-Eleven’s alleged non-compliance with its disclosure obligations under the relevant industry codes (Relevant Codes), stemming from the provision of information in disclosure documents alleged to be inadequate under the Relevant Codes (Code Disclosure Documents).
43 Fourthly, there were claims for loss arising from 7-Eleven’s allegedly unconscionable conduct, including allegations that:
(a) 7-Eleven made the representations that constituted the alleged misleading or deceptive conduct (Alleged Misleading or Deceptive Conduct);
(b) 7-Eleven knew: that Stores could not be operated profitably if all labour hours were remunerated at Award wages, but nonetheless promoted, by the Alleged Misleading or Deceptive Conduct, the purchase of Stores franchises; and that (notwithstanding) franchisees invested substantial capital and borrowed significant monies (usually from ANZ Bank) to acquire a Store franchise, the franchisees often had little or no understanding of Australian labour laws or Award obligations (at least until late in their Franchisee training with 7-Eleven, when Franchisees had committed to purchasing their Store franchise) and often also allegedly had reduced facility with the English language;
(c) franchisees were (consequently) obliged to supply their own unpaid labour in their Stores and, or alternatively, engage in unlawful employment practices, in order to survive financially;
(d) franchisees were also subject to C-Store Practices and Inventory Practices whilst they operated their Store franchises, 7-Eleven’s control over their Store operations and 7-Eleven’s control of the Open Account and Franchisees’ access to funds — all of which was alleged to further impede Franchisees’ ability to trade profitably or to “run their own business”; and
(e) franchisees were reliant upon 7-Eleven continuing to provide allegedly inaccurate information to prospective Franchisees in order for an existing Franchisee to recover and/or make a gain on their investment when they exit 7-Eleven’s franchise system.
44 The applicants alleged that, by reason of the above, 7-Eleven engaged in unfair tactics and acted without good faith.
45 7-Eleven denied the allegations that were made against it.
46 It was agreed before me that before they settled (subject to court approval), the proceedings were “vigorously contested”. As Mr Craig QC for 7-Eleven put it at the hearing on 30 March 2022, “[t]he litigation was deserving of that overused phrase ‘hard fought and vigorously defended’. There were at least 12 decisions of an interlocutory nature handed down by Middleton J, one application for leave to appeal to the Full Court, and … one referral to the Full Court on the question of power to make a common fund order”.
47 The Settlement Deed provides that 7-Eleven denies liability and makes no admission as to liability.
48 The 182 Proceeding was said to be “ancillary” to the 180 Proceeding, because it substantially relied on the facts pleaded in the 180 Proceeding to establish an entitlement to compensation for the natural persons who were Nominated Directors under the Franchise Agreements or guarantors of Franchisee’s obligations under the Franchisee Agreements or ANZ loans (Guarantors).
49 The 180 Proceeding was commenced by Originating Application and Statement of Claim, both dated 20 February 2018.
50 The pleadings in the 180 Proceeding were subsequently amended. Their final iteration was contained in the Third Further Amended Originating Application and the Third Further Amended Statement of Claim (3FASOC).
51 The 182 Proceeding was commenced by Originating Application and Concise Statement, both dated 20 February 2018.
52 The pleadings in the 182 Proceeding were subsequently amended. Their final iteration was contained in the Third Further Amended Originating Application and the Second Further Amended Statement of Claim (2FASOC).
MATTERS RELEVANT TO LIMITATIONS ISSUES (AND WEIGHTING OF CLAIMS MADE BY GROUP MEMBERS IN THE SETTLEMENT SCHEME)
53 The matters set out under this heading are also derived from the statement of agreed facts.
54 The applicants in both proceedings bring claims for breach of contract and damages pursuant to ss 236, 237 and 243 of Schedule 2 to the Competition and Consumer Act (the Australian Consumer Law) and ss 82, 87(1) and 87(2) of the Competition and Consumer Act (previously ss 82 and 87 of the Trade Practices Act).
55 Sub-section 236(2) of the Australian Consumer Law provides that an action for damages under sub-section 236(1) “may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued”. Sub-section 82(2) of the Competition and Consumer Act (previously of the Trade Practices Act) provides for the same limitation for an action for damages under sub-section 82(1).
56 Sub-section 237(3)(a) of the Australian Consumer Law provides that an application under s 237(1)(a)(i) for orders against a person that was engaged in a contravention of certain provisions of the Australian Consumer Law “may be made at any time within 6 years after the day on which … the cause of action that relates to the conduct referred to in that subsection accrued”.
57 The date that is six years prior to the commencement of the proceedings here is 20 February 2012.
58 An issue ventilated during the hearing of the Approval Applications was whether this date represented the correct date from which to assess the limitation defence advanced by 7-Eleven in the proceedings. That question is relevant because the proposed Settlement Scheme seeks to differentiate between claims said to be affected by the limitation period, and those which are not.
59 Under the Settlement Scheme proposed by the applicants in the amended interlocutory applications dated 12 May 2022:
(a) 60% of the net Settlement Sum available for distribution to eligible group members (VID 180 Settlement Sum) will be distributed to eligible group members in the 180 Proceeding (Eligible VID 180 Group Members); and
(b) 40% of the net Settlement Sum available for distribution to eligible group members (VID 182 Settlement Sum) will be distributed to eligible group members in the 182 Proceeding (Eligible VID 182 Group Members).
60 Under that proposed Settlement Scheme:
(a) The VID 180 Settlement Sum will be distributed to Eligible VID 180 Group Members having regard to the following claims that could have been made by those group members: Claims made in respect of monies lost in connection with acquiring a franchise (VID 180 Loss Claims); and Claims that 7-Eleven was obliged (and failed) to account to Franchisees for rebates received by 7-Eleven from merchandise vendors (Rebates Claims).
(b) Different relative weightings will be applied in the Settlement Scheme to the VID 180 Loss Claims of all Eligible VID 180 Group Members, having regard to: the date when the franchisee entered into their Franchise Agreement to acquire their franchise; and the date when the franchisee sold or disposed of the franchise (if they have sold or disposed of it).
61 Under that proposed Settlement Scheme:
(a) The VID 182 Settlement Sum will be distributed to Eligible VID 182 Group Members upon an assessment of the claims made by those group members (VID 182 Claims), having regard to: the hours the Eligible VID 182 Group Member spent in operating the relevant 7-Eleven store(s); the payment they received for those hours of work; and what additional monies the Eligible VID 182 Group Member might have been able to earn rather than devoting their time to operating the relevant 7-Eleven store(s).
(b) Different relative weightings will be applied to VID 182 Claims having regard to:
the date when Eligible VID 182 Group Members became Nominated Directors or Guarantors under a Franchise Agreement, or became Guarantors under an ANZ Bank loan contract; and the date when the relevant franchisee sold or disposed of the franchise(s) (or if the franchisee still retains the franchise(s)).
Time from when the limitations period might run and the time from which a franchisee acquiring a store is unlikely to have suffered a loss
62 The applicants allege that, for a period commencing on a date unknown to the applicants but ending in about late November 2015, 7-Eleven supplied guidance that goodwill for a store was 2.1x - 2.7x “Total Retail Income” (Goodwill Guidance).
63 Commencing on 29 August 2015, a series of articles were published in newspapers and online over several days concerning allegations of widespread wage underpayment within the 7-Eleven system.
64 On 31 August 2015, an episode of a program broadcast on free-to-air television called “Four Corners” and entitled “7-Eleven: The Price of Convenience”, also alleged widespread wage underpayment within the 7-Eleven system.
65 7-Eleven then appointed an independent panel to review underpayment claims. Approximately $173 million was paid to employees of 7-Eleven franchisees as part of the wage compensation program that resulted from the review. The Board also oversaw changes to 7-Eleven’s Store Agreements with franchisees across the network designed to offset the expected increase in their payroll costs. The changes were referred to by various names, including the “New Deal”, “New Model”, “MIG” and “MGI Guarantee” and were contained in variation agreements which provided non-fuel stores with a minimum level of Gross Income of $340,000 per annum and fuel stores with a minimum level of $310,000 per annum.
66 7-Eleven had ceased supplying the Goodwill Guidance by November 2015.
MATTERS RELEVANT TO THE MAKING OF A FUNDING EQUALISATION ORDER
67 There are 678 group members in the 180 Proceeding, including the two lead applicants, representing 811 stores (inclusive of the three stores operated by the lead applicants) and 1,232 group members in the 182 Proceeding, including the four lead applicants.
68 In his 12 May 2022 affidavit Mr Imlay deposed, and it was not disputed, that as at that date:
(a) there were 678 VID 180 Group Members, inclusive of the two lead applicants;
(b) there were 202 VID 180 Funded Group Members (ie those who signed funding agreements), which amounted to about 29.8% of the 678 VID 180 Group Members;
(c) the 678 VID 180 Group Members represented 811 VID 180 Stores, inclusive of the lead applicants);
(d) the 202 VID 180 Funded Group Members represented 251 VID 180 Funded Stores, which amounted to 30.9% of the 811 VID 180 Stores;
(e) of the 811 VID 180 Stores, after removing stores operated by entities that were deregistered (with no intention to reinstate them) and stores operated by entities that provided releases to 7-Eleven, there were 487 VID 180 Stores Without Releases, of which under the proposed Settlement Scheme: 144 had a 100% weighting; 172 had a 33% weighting; and 171 were zero-weighted;
(f) there were therefore 316 (144 + 172) VID 180 Loss Claim Stores, being VID 180 Stores of registered companies or individuals, without releases, that have valuable loss claims;
(g) of the 251 VID 180 Funded Stores, there were 190 VID 180 Funded Stores Without Releases, of which under the proposed Settlement Scheme: 58 had a 100% weighting, which amounted to 40% of the 144 VID 180 Stores Without Releases with a 100% weighting; 74 had a 33% weighting, which amounted to 43% of the 172 VID 180 Stores Without Releases with a 33% weighting; and 58 were zero-weighted, which amounted to 34% of the 171 VID 180 Stores Without Releases that are zero-weighted;
(h) there were therefore 132 (58 + 74) Funded VID 180 Loss Claim Stores, being VID 180 Loss Claim Stores operated by entities that had signed the funding agreement, which amounted to 41.7% of the 316 VID 180 Loss Claim Stores (132/316);
(i) there were about 1,232 VID 182 Group Members;
(j) there were about 316 VID 182 Funded Group Members (inclusive of the four lead applicants), which amounted to 25.6% of the 1,232 VID 182 Group Members (1,228 plus the four lead applicants in VID 182).
CONSIDERATION – QUESTIONS TO BE DECIDED
Question (1): Is the proposed settlement distribution fair and reasonable inter se among group members or different categories of group members in both proceeding VID 180 and proceeding VID 182?
69 In reviewing whether the settlement is fair and reasonable inter se among group members or different categories of group members in both proceedings, the court is primarily concerned to ensure that the interests of the lead applicants, or group member clients of the applicants’ solicitors, are not being preferred over the interests of other group members. See eg Camilleri v The Trust Company (Nominees) Ltd [2015] FCA 1468 at [5(e)] (Moshinsky J); Blairgowrie Trading Ltd v Allco Finance Group Ltd (No 3) [2017] FCA 330; (2017) 343 ALR 476 at 500 [85] (Beach J).
70 As Moshinsky J said in Camilleri at [40]-[41]:
… [A]s in many representative proceedings, the manner in which the settlement sum is to be distributed requires assumptions to be adopted and judgment calls to be made. There are different classes of claimants within the body of group members here, and it is necessary to arrive at some model that fairly and reasonably divides the settlement sum between those classes, recognising the differences in their respective claims. There is no single approach which alone can qualify as reasonable for sharing the fixed pool of funds among the claimants. Inevitably, adjustments in a given approach will be favourable for certain group members at the expense of others.
The question, therefore, can only be whether the model is within the bounds of fairness and reasonableness in its attempts to balance what are, unavoidably, conflicts between the interests of the different claimants.
Question (1)(a): Is the allocation of the net settlement proceeds of 60% to proceeding VID 180 and 40% to proceeding VID 182 within a rational range?
71 Under paragraph 24 of the Proposed Settlement Scheme, the Estimated Net Settlement Sum is to be divided amongst both proceedings VID 180 and VID 182 as follows:
(a) 60% to VID 180 eligible group members; and
(b) 40% to VID 182 eligible group members.
72 An “eligible group member” is a group member who has registered for the Settlement Scheme in accordance with its terms, and who has either not entered into a release with 7-Eleven or who has entered into a release but that release is determined by an independent barrister to be ineffective in accordance with the terms of the settlement scheme.
73 The contradictor submitted that VID 180 losses arise by reason of a “no transaction” case, and that by comparison “there is greater speculation involved in respect of VID182 claims which losses are to be calculated by reference to the ability of a director of a 7-Eleven franchisee who worked in-store to obtain alternative employment over the same time-period earning award wage rates, and who would have been prepared to work as hard elsewhere (capped at 70 hours) per week as they worked at their store”.
74 The contradictor suggested that “there are several other difficulties affecting the VID182 claim”, in particular that the loss claimed is less orthodox and more speculative, and that its prospects of success were, in the contradictor’s view, “low to very low and significantly worse than the VID180 proceeding”.
75 Accordingly, the contradictor submitted that:
[the] “60:40 allocation is very difficult to reconcile with a fair and rational assessment of the prospects for the VID 182 claim. It is respectfully submitted that a more rational allocation would be 80% to VID180 and 20% to VID182 (at its highest). We are not convinced … that there would have been a link between the loss claims in VID180 and VID182 which tends to reduce the significance of the split as between the two proceedings. For one thing, we are not satisfied the current state of the evidence on these applications justifies that reasoning. If anything, as 7-Eleven submit, we think issues of double recovery would inflict the VID182 proceeding and work in the opposite direction.
76 In the course of oral argument, the contradictor summarised his position this way:
So in respect of VID180, what I wanted to emphasise is that we’re not saying that the prospects are hopeless or poor, but for the reasons we’ve identified, we consider that VID180 was significantly better because it was a more orthodox claim, easier causation route, not as susceptible to individual circumstances – not so variable, in that regard.
…
And one only needs to think about some – and this isn’t, again, to be critical but some of the claims in terms of lost time with grandchildren and leisure and so on – now, that may be perfectly appropriate, but those are very difficult issues of quantification and far more difficult issues of quantification, we say, than affected the VID180 claim.
… [S]o we say that there’s just too great a degree of disconformity, on an assessment of all the material – that is what my learned friends have said – 7-Eleven’s perspective, the state of evidence as it existed at the time of settlement between VID180 and VID182, to justify an allocation of 60/40 and we think an allocation of 80/20 is not better but significantly better and accepting these are matters of judgment – fine judgment – we think that your Honour would be justified in making that kind of adjustment in the circumstances.
77 The applicants submitted to the contrary. Their submissions were as follows.
78 The applicants pleaded case in the 180 Proceeding was that they, and some or all, of the other franchisees would be unable to operate their store profitably and maintain their Minimum Net Worth unless the principals (and/or their family members) worked in that store without pay for an unreasonable and unsociable number of hours each week and/or covered night and weekend shifts without pay (or engaged family members to do so).
79 In the 182 Proceeding, it is alleged that had the franchisee not been induced into acquiring their franchise, then VID 182 Group Members would not have worked in their store for no wages, or lower wages and lower income than they would have earned from continuing their former (or from pursuing other) employment; or otherwise, they did not have the use and enjoyment (and so lost the benefit) of the hours that they worked in their stores.
80 The applicants do not accept the contradictor’s view of the hurdle facing VID 182 Group Members. They submitted in that regard as follows:
Accepting (as the Contradictor apparently does …) that the entry into the franchise gives rise to the Net Worth Trap, is that circumstance which caused VID182 group members to work excessive and unreasonable hours, and lose the ability to use those hours as they otherwise might have chosen (be it in other employment, or having those hours to spend in leisurely pursuits). It is not the case that VID182 group members suffered no loss if they were not to prove that they could have been employed elsewhere at a higher rate of pay. The Net Worth Trap left VID182 group members with no choice but to work in their stores for little or no pay. Even those persons who might have chosen not to work, and instead to use their time in a manner of leisure (as Mr Singh, for example, deposes) are entitled to be compensated, by virtue of being forced into working hours that they did not choose to in order to keep their franchise afloat. In addition, having invested a considerable sum by way of franchise fee (usually in excess of $100,000) and typically funded the investment with a high-leverage business loan (see 3FASOC [106(e)]), VID182 group members could not simply sell the business at or near the goodwill price paid without wearing a considerable loss. Instead, the VID182 group members were put in the unenviable position of continuing to run the store until the sales (and consequently, the goodwill price) increased to allow a sale that would allow a sufficient return on the investment.
To stipulate that proof of more valuable employment must first be demonstrated is to say that VID182 group members have no loss by providing their time for free or for little compensation in circumstances where they had no choice. At the least, those persons are entitled to be paid what they would have been paid by undertaking the same work for a third party at award rates (as the Proposed Settlement Scheme contemplates).
(Emphasis in original)
81 The applicants advanced two other reasons not to adopt the weighting of 80:20 of the Net Settlement Sum as between VID 180 and VID 182 proposed by the contradictor.
82 First, it was submitted, “the Net Worth Trap creates a “yin-yang” relationship with profits earned by stores … the less the [f]ranchisee principal and their family members are paid through payroll, the higher the “profit” of the franchise, which in turn decreases the amount paid under VID180 and increases the amount paid under VID182. That provides sound reason to maintain substantial parity of the Net Settlement Sum between VID180 and VID182”.
83 Secondly, it was submitted, there are a substantially greater number of VID 182 Group Members than VID 180 Group Members, 1228 versus 676 (a ratio of approximately 1.8:1), and which have estimated to produce 865 and 397 compensable claims respectively (a ratio of approximately 2.18:1). The Proposed Settlement Scheme contemplates a cap of 70 hours per week and a payment based on average hourly award wages, less income actually received.
84 The contradictor agreed (in part of the transcript set out above at [76]), that questions of this sort are matters of fine judgment. They are questions about which reasonable minds may differ. Here, as I have already mentioned, counsel for the applicants prepared a detailed confidential opinion setting out many reasons why the split they propose between the two proceedings is reasonable.
85 The contradictor posited a different, although not radically different, split.
86 So I am faced with a situation where experienced counsel take a different view of the world on matters of fine judgment. I have weighed the competing submissions in the balance, but it seems to me that I am quite unable to say that the 60/40 split proposed by the applicants, to adopt Moshinsky J’s words in Camilleri at [40]-[41], is not “within the bounds of fairness and reasonableness in its attempts to balance what are, unavoidably, conflicts between the interests of the different claimants”.
87 It is critical to keep the appropriate test in mind when assessing whether a particular term of a proposed settlement is fair and reasonable. In making such assessments it is emphatically not the case that something resembling a “mini-trial” of the proceedings, or issues in them, is to be conducted. To do so would plunge the settlement process into a de facto version of the very world that it is designed to avoid, and would be bound to work substantial unfairness to respondents in cases like this, where they cease being parties once the global settlement figure is approved.
88 For those reasons, the answer to question (1)(a) is: yes.
Question (1)(b): Is the allocation for the proceeding VID 180 claims of 80% for VID 180 Loss Claims and 20% for Rebates Claims within a rational range?
89 As to the 60% allocated to VID 180 then further being divided as to 80% for VID 180 Loss Claims and 20% for Rebates Claims, the contradictor submitted that “there would be force in a division of 90% to VID 180 Loss Claims and no more than 10% for Rebate Claims … Arguably, the Rebate Claims were too inchoate and speculative to be ascribed anything by way of distribution but we have real difficulty in an allocation any higher than 10% based on a fair assessment of the prospects of this claim. Nor are we able to accept that it is rational to ascribe a greater allocation to the Rebates Claim on the basis that it provides a foundation for all eligible group members to receive a financial benefit from the settlement. That strikes us as rather arbitrary”.
90 The applicants submitted to the contrary as follows:
The Rebates Claim had its genesis in the provision of information by 7-Eleven in August 2019, in response to a letter dated 5 June 2019 issued by the Applicants’ lawyers in which complaint was made about the paucity of information provided by 7-Eleven as to rebates. The responsive letter from 7-Eleven’s lawyers provided information that indicated that rebates were applied not only to a promotional or marketing fund, but that there existed other “Guaranteed” rebates and “Purchases Promo Rebates Shares” (presumably collected by 7-Eleven) in respect of purchases made by Franchisees.
Upon receipt of that information, inquiries of the Applicants’ retail pricing expert and the Applicants were made, in response to which:
(a) the Applicants said they had never received any similar document from 7-Eleven that set out that information; and
(b) the retail pricing expert stated that he was not able to discern the true nature of the rebates, or the basis on which the rebates had been provided, from the information provided by 7-Eleven.
On 28 October 2019 a request was made to 7-Eleven’s lawyers for more information, which letter included the foundational elements of the accounting obligation underpinning the Rebates Claim. By letter dated 18 December 2019, the request for further information was largely rejected by 7-Eleven’s lawyers.
The entitlement to the remedy of an account involves the existence of an accounting relationship between the applicant and the accounting party, and that the applicant is entitled to a sum from the accounting party but the applicant is uncertain as to what that sum is. The terms of the Franchise Agreement provide the foundation for the accounting relationship. 7-Eleven’s refusal to provide information as to rebates it received in respect of purchases made by Franchisees founded the need for an account. The fact that Franchisees were paying for goods under agreements arranged by 7-Eleven at prices higher than supermarket retail prices for the same goods provided a proper foundation to assert that Rebates were not being passed on to Franchisees (and particularly if it were the case that 7-Eleven had in fact negotiated appropriately favourable pricing with suppliers).
The subpoenas subsequently issued by the Applicants to Metcash and major suppliers were targeted in accordance with what the Applicants’ retail pricing expert informed the Applicants he needed to analyse the rebates. The information was sought on the basis that it would indicate that 7-Eleven had not negotiated appropriately favourable pricing and, or alternatively, that 7-Eleven was not passing on the economic benefit of rebates to Franchisees.
Virtually uniformly, third party subpoenaed suppliers of 7-Eleven required confidentiality undertakings, and in most cases, more circumscribed categories of information were negotiated for production.
Metcash stood in a category of its own, as 7-Eleven’s “primary” supplier. Metcash revealed (through applications resisting production under subpoena) that:
(a) it sold approximately $700M in goods to 7-Eleven franchisees in the 2018 year;
(b) Metcash’s business model was built on sharing a portion of rebates that it obtained from product suppliers with Metcash’s customers;
(c) its rebate arrangements with suppliers were complex and negotiated frequently; and
(d) Metcash shared relatively few rebates with 7-Eleven, because 7-Eleven had its own direct relationship with major suppliers of goods sold in 7-Eleven stores.
Metcash treated the terms of trade with its suppliers with secrecy and, consequently, provided information to the Applicants with reluctance (following two contested hearings) and over an extended period, because to retrieve the relevant information involved reviewing a large quantity of emails.
The institution of the Rebates Claim led to the filing by 7-Eleven of the affidavit of Abdul Ridwan Alam affirmed 4 June 2021 (Alam Affidavit), which contained information concerning rebates that had never before been provided by 7-Eleven. That affidavit revealed the extent of the rebates received by 7-Eleven and … further reason to believe that 7-Eleven had not passed on to Franchisees the full extent of rebates to which they were entitled. At this time, the Applicants’ retail pricing expert was reviewing the material received from suppliers and Metcash ….
…
In agreeing to the settlement figure of $98M, the Applicants considered that the Rebates Claim deserved (and was attributed) a value that is reflected in the 12% weighting (20% of 60%) that has been ascribed to the Rebates Claim in the Proposed Settlement Scheme.
…
Nothing in CS3 causes the Applicants to retreat from the weighting afforded to the Rebates Claim in the Proposed Settlement Scheme, from the utility of pursuing the Rebates Claim …
(Footnotes omitted).
91 Again, these are questions about which reasonable minds may properly differ. And here the differential proposed by the contradictor is not large. It is well within a “tolerance”. And the applicants make a detailed case for why they say their counsel’s opinion is within the range. In my view, the spilt proposed by the applicants is within the bounds of fairness and reasonableness in its attempts to balance the unavoidable conflicts between the interests of the different claimants.
92 For those reasons, the answer to question (1)(b) is: yes.
Question (1)(c): Are the relative weightings for the VID 180 Loss Claims and the VID 182 Claims of 100%, 33% and zero rational insofar as they are based on: (i) limitation risk for franchisees who entered into a franchise agreement prior to 21 February 2012; (ii) whether the franchisee sold or disposed of their franchise before 1 October 2015; or (iii) whether the franchisee entered their franchise agreement after 1 October 2015?
93 The gist of the contradictor’s submission as to (i) was that “the limitation issue is more finely balanced” than the applicants would have it and that there was “a cogent available argument that those group members who entered into Franchise Agreements prior to 21 February 2012 are not statute-barred, and a weighting of 50% more rationally and fairly reflects the risks associated with this issue”.
94 The contradictor further submitted as to (ii) that:
[A] relative weighting of 33.33% to loss claims of group members who sold or disposed of their franchise before 1 October 2015 appears irrational. It is very difficult to understand how those group members could have suffered any significant loss and have claims of any substantive value. A zero weighting should apply to those claims.
95 Again, quite correctly with respect, the contradictor accepted that “weightings cannot be approached with mathematical exactitude and that a margin of appreciation should be allowed for weightings falling within a rational range”.
96 The contradictor did not make any separate submissions as to (iii).
97 The weightings in respect of the VID 180 Loss Claims are:
(1) A relative weighting of 100% will be applied to VID 180 Loss Claims for Eligible VID 180 Group Members whose Franchise Agreement was entered into on or after 21 February 2012, and the franchise was sold or disposed of after 1 October 2015 or is still retained by the Eligible Group Member.
(2) A relative weighting of 33.3% will be applied to VID 180 Loss Claims for Eligible VID 180 Group Members whose Franchise Agreement was entered into before 21 February 2012, and the franchise was sold or disposed of after 1 October 2015 or is still retained by the Eligible Group Member.
(3) A relative weighting of 33.3% will be applied to VID 180 Loss Claims for Eligible VID 180 Group Members whose Franchise Agreement was entered into on or after 21 February 2012, and the franchise was sold or disposed of before 1 October 2015.
98 A relative weighting of zero will be applied to VID 180 Loss Claims for Eligible VID 180 Group Members whose Franchise Agreement was entered into before 21 February 2012, and the franchise was sold or disposed of before 1 October 2015 or was entered into after 1 October 2015.
99 There is no weighting in respect of the Rebate Claims. As the contradictor said, that is presumably the case in part because in respect of claims for breach of contract the limitation period commences from the date of breach.
100 The same weightings are applied in respect of the VID 182 Claims (with some differences to the terms of those weightings to account for the varied claims) as follows:
(1) A relative weighting of 100% will be applied to the VID 182 Claims made by Eligible VID 182 Group Members who became Nominated Directors or Guarantors under a Franchise Agreement entered on or after 21 February 2012, or who became Guarantors under a Bank Loan Contract on or after 21 February 2012, and where either the 7-Eleven store franchise the subject of that Franchise Agreement was sold or disposed of after 1 October 2015 or the Franchisee still retains that franchise.
(2) A relative weighting of 33.3% will be applied to the VID 182 Claims made by Eligible VID 182 Group Members who became Nominated Directors or Guarantors under a Franchise Agreement entered before 21 February 2012, or who became Guarantors under a Bank Loan Contract before 21 February 2012, and where either the 7-Eleven store franchise the subject of that Franchise Agreement was sold or disposed of after 1 October 2015 or the Franchisee still retains that franchise.
(3) A relative weighting of 33.3% will be applied to the VID 182 Claims made by Eligible VID 182 Group Members who became Nominated Directors or Guarantors under a Franchise Agreement entered on or after 21 February 2012, or who became Guarantors under a Bank Loan Contract on or after 21 February 2012, and where the 7-Eleven store franchise the subject of that Franchise Agreement was disposed of before 1 October 2015.
(4) A relative weighting of zero will be applied to the VID 182 Claims made by Eligible VID 182 Group Members who became Nominated Directors or Guarantors under a Franchise Agreement entered, or who became Guarantors under a Bank Loan Contract before 21 February 2012, and where the 7-Eleven store franchise the subject of that Franchise Agreement was disposed of before 1 October 2015 or who became Nominated Directors or Guarantors under a Franchise Agreement that was entered into after 1 October 2015, or who became Guarantors under a Bank Loan Contract after 1 October 2015.
101 The contradictor helpfully summarised the rationale for the weightings as follows.
102 In respect of franchisees who entered into a franchise agreement prior to 21 February 2012, the contradictor submitted that their claims are or would be at risk of being defeated by a successful limitation defence, which is advanced by 7-Eleven in its VID 180 Defence to the 3FASOC at [105A] and [121A] and in its VID 182 Defence to the 2FASOC at, principally, [19], which paragraphs were in these terms:
VID180
105A It says in further response to paragraphs 41 to 105 of the FASOC:
(a) that any Franchisee who entered into a Franchise Agreement before 20 February 2012 (or, in respect of the Goodwill Value Representation Contravention, before 2 March 2014) is statute barred from maintaining a cause of action:
(i) under section 237 or 243 of the ACL pursuant to sub-section 237(3) of the ACL; and
(ii) under section 236 of the ACL pursuant to sub-section 236(2) of the ACL; and
(iii) under sections 82 or 87 of the CCA or the TPA pursuant to sub-section 82(2) and 87(1CA) of the TPA or CCA;
(b) that the Second Applicant is statute barred from maintaining the Goodwill Value Representation Contravention, it having entered into the South Melbourne Store Franchise Agreement on 2 October 2013.
121A It says in further response to paragraphs 106 to 121 of the FASOC, that any Franchisee who entered into a Franchise Agreement before 20 February 2012 is statute barred from maintaining a cause of action:
(a) under section 236 of the ACL, pursuant to section 236(2) of the ACL;
(b) under section 237 or 243 of the ACL, pursuant to section 237(3) of the ACL;
(c) under sections 82 or 87 of the CCA or the TPA (to the extent applicable) pursuant to sub-section 82(2) and 87(1CA) of the TPA or CCA;
(d) under section 12GF of the ASIC Act, pursuant to section 12GF(2) of the ASIC Act; and
(e) under section 12GM of the ASIC Act, pursuant to section 12GM(5) of the ASIC Act.
VID182
19. To the whole of the SOC, it says:
(a) that save, for where a defence is pleaded, further and/or particular defences may be available to it in respect of a Nominated Director’s or Guarantor’s claims, which cannot be determined until after the Nominated Director or Guarantor has been identified; and
(b) any Nominated Director who entered into a Franchise Agreement before 20 February 2012 (or, in respect of the Goodwill Value Representation Contravention and the Renewal Representation Contravention, before 2 March 2014) and any Guarantors who entered into Guarantees before 20 February 2012 (or, in respect of the Goodwill Value Representation Contravention and the Renewal Representation Contravention, before 2 March 2014) are statute barred from maintaining a cause of action:
(i) under section 236 of the ACL pursuant to section 236(2) of the ACL;
(ii) under section 237 or 243 of the ACL, pursuant to section 237(3) of the ACL;
(iii) under section 82 or 87 of the TPA pursuant to section 82(2) or 87(1CA) of the TPA, alternatively section 82(2) or 87(1CA) of the ACL;
(iv) under section 12GF of the [Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act)], pursuant to section 12GF(2) of the ASIC Act; and
(v) under section 12GM of the ASIC Act, pursuant to section 12GM(5) of the ASIC Act.
103 In respect of franchisees who entered into their franchise agreements after 1 October 2015 (ie after 7-Eleven abandoned the Goodwill Formula), many of the representations said to give rise to the misleading or deceptive conduct (including the Goodwill Value Representations) had ceased by this time, and therefore it is said that those franchisees would not be entitled to relief in respect of those representations.
104 The contradictor submitted that the limitation issue is largely a legal issue, that I am in a position to assess its merits, and that I should reach a view about it.
105 The contradictor’s submission on the limitation issue was as follows.
106 The limitation defence was pleaded by 7-Eleven only in respect of the claims of misleading or deceptive conduct and unconscionability, under which the only relief sought is relief pursuant to ss 236 and 237 (and 243) of the Australian Consumer Law (and its analogues under the Trade Practices Act and the Australian Securities and Investments Commission Act 2001 (Cth)).
107 The relevant time limits in relation to such claims are that any action may be commenced at any time within 6 years after the day which the cause of action that relates to the conduct accrued. See eg Australian Consumer Law ss 236(2), 237(3)(a).
108 Both the applicants and 7-Eleven in their submissions submitted that the loss and damage in respect of the VID 180 Loss Claims and the VID 182 Claims accrued, for the purpose of ss 236 and 237 of the Australian Consumer Law, at the time of entering into the franchise agreements. That is because, it was submitted, when the franchisees were induced by misleading or deceptive and/or unconscionable conduct to enter into the franchise agreements, the true value of the franchises were in fact less than the purchase price paid for by franchisees. 7-Eleven put the argument this way:
For the purpose of sections 236 and 237, the cause of action accrues when damage is first suffered, regardless of whether the damage is then discovered or discoverable. A claimant pursuing the statutory action is responsible for formulating how such loss or damage as they claim to have suffered is to be identified. Damage being an element of the cause of action, a new cause of action generally does not arise in respect of different and separate items of loss and damage, there being, instead, only a single cause of action. “Once an applicant has suffered loss or damage relevant to the claim, time begins to run, even if damage continues to grow”.
…
In short, the applicants’ case was a ‘purchase of an asset at over value case’. On the case as pleaded, the applicants and Group Members bought something which was worth less than what they had agreed to pay and did pay. If that is so, then a Group Member could have brought a claim immediately after entering into their Store Agreement – their cause of action under sections 236 and 237 of the ACL would have accrued because they, on the basis of the allegations made, “had suffered an actual loss” at that time.
109 After citing and discussing passages from Bodycorp Repairers Pty Ltd v Holding Redlich [2018] VSCA 17 setting out and relying upon the principles propounded by the High Court in each of Hawkins v Clayton (1988) 164 CLR 539, Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 and Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388, and extensively from the judgment of Thawley J in Han Jing Pty Ltd v Nestle Australia Ltd [2021] FCA 143 at [30]-[31] and [44]-[45], the contradictor submitted:
[W]e consider there is a cogent alternative argument available to these group members that their claims are not statute-barred. It bears emphasis that limitation issues very much turn on the particular circumstances of the case. Analogies and generalisations by reference to otherwise decided cases only take the analysis so far. Importantly, as the High Court emphasised in Wardley, a general consideration is always whether it is unjust or unreasonable to expect a plaintiff to have commenced proceedings at a particular point in time. There is more than an air of unreality in the idea that group members should be expected to have commenced proceedings (let alone any group proceeding) against 7-Eleven shortly after entry into the Franchise Agreements.
More fundamentally, in the unusual circumstances of this case, we respectfully submit that there is considerable force in the argument that the loss here did not fully manifest until certain critical external events or circumstances came to pass; in particular, until after the public revelation of widespread underpayment within the 7-Eleven franchise system, the resulting abandonment of the Goodwill Formula, and the pre-existing market for exchange of franchisees under 7-Eleven’s direction and influence on a state of affairs uninfluenced by true payroll costs.
110 After setting out passages from the judgment of Brennan J (as he then was) in Wardley at 536-538, the contradictor’s submission continued:
It is strongly arguable in these particular circumstances that the die was not cast upon entry into the Franchise Agreement. The ‘adverse balance’ flowing from the entry into the Franchise Agreements did not transpire, and may never have transpired, until 7-Eleven altered the fundamental basis upon which exchange of franchisees occurred by abandoning the Goodwill Formula consequential upon the media reporting as to systemic underpayment within the system. Up until that point, group members who acquired a franchise prior to 21 February 2012 could have sold their franchise to an incoming franchisee for no loss; and indeed for a capital gain.
We think this argument also has the appeal of common sense and fairness. It is not reasonable and just to expect group members to have commenced claims shortly after entering into the Franchise Agreements, or well before the critical events of August-October 2015. This outcome is also consistent with the remedial and consumer context and purpose of the ACL. The shut out group members who entered into Franchise Agreements before 21 February 2012 from bringing claims against 7-Eleven under the ACL when the concrete foundation for the claims did not transpire until August-October 2015 is not consistent with the remedial purpose of the statute. Nor do we do think this argument is necessarily inconsistent with the no-transaction case and an assessment of true value at acquisition. The issues are not coterminous. One is a measure of loss; the other is an assessment of the time by which it was reasonable to have expected a claim to have been brought. In saying this, we recognise that for some franchisees there may be facts and circumstances individual to them that lessen the merits of their position on this issue. Davaria Co might fall into that category.
…
[W]e consider it appropriate for the Court to adjust this weighting if it agrees with the Contradictor’s submission that the assessment of “highly likely” (or a discount of 66.67%) is clearly a too pessimistic view of prospects on the limitation issue. Overall, our assessment of the issue is that there are reasonable arguments in either direction and a 50% weighting better reflects the difficulty of the issue and the prospects of these group members overcoming the limitation argument.
111 In response, the applicants’ counsel said that they “examined this issue extensively in [their] Confidential Opinion, and maintain[ed] their views there expressed”, that the matter “points more persuasively to a weighting of 33% rather than 50%”.
112 The opinion is confidential, so I cannot in these reasons set out the detail of counsel’s reasoning that led them so to conclude, for reasons explained above at [26]-[34]. But as the contradictor recognised, questions of the assessment of weightings and related risks are ones that are inherently likely to give rise to reasonable minds differing on the figure that they choose to reflect their risk assessment – or to repeat his words, “the Contradictor recognises weightings cannot be approached with mathematical exactitude and that a margin of appreciation should be allowed for weightings falling within a rational range”.
113 In my view, as the contradictor’s comprehensive and helpful submissions on the point made clear, questions of when causes of action accrue in cases involving facts of the type relevant here, are often not straightforward.
114 In part of his submission that I did not set out above, the contradictor submitted that the Victorian Court of Appeal did not state the law correctly when it said that a cause of action accrues when damage is first suffered, regardless of whether the damage is then discovered or discoverable, and that the true position is much more fact dependent, for reasons explained in detail by Thawley J in Han Jing.
115 Although the contradictor invited me to resolve the legal question thrown up by that submission, among others, I decline to do so. As the contradictor recognised, the true issue here is whether, taking into account the vagaries, uncertainties and intricacies of the relevant law concerning the accrual of a cause of action in cases of this type, the weightings proposed by the applicants are within the appropriate range. In my view, they are.
116 But in any event, courts have long cautioned against deciding limitation questions in the abstract or absent a full hearing. As Mason CJ, Dawson, Gaudron, and McHugh JJ said in Wardley at 533:
We should, however, state in the plainest of terms that we regard it as undesirable that limitation questions of the kind under consideration [s 82 of the Trade Practices Act] should be decided in interlocutory proceedings in advance of the hearing of the action, except in the clearest of cases. Generally speaking, in such proceedings, insufficient is known of the damage sustained by the plaintiff and of the circumstances in which it was sustained to justify a confident answer to the question.
117 In my view, it is equally undesirable to decide an issue such as whether a decision of a superior court is correctly decided in the context of a class action settlement approval application, in particular where the underlying issues are both factually and legally complex.
Group Members who sold or disposed of their franchise before 1 October 2015
118 The contradictor’s submission on this point was as follows.
119 Under the proposed weightings a relative weighting of 33% would be applied to those group members who entered into a franchise agreement on or after 21 February 2012 (ie not affected by any limitation issue) but sold or disposed of their franchise before 1 October 2015. In other words, the weightings treat the prospects of those who sold or disposed of their franchise before 1 October 2015 the same as those group members who entered Franchise Agreements before 21 February 2012. The contradictor submitted that “this is not rational. The risks associated with the limitation issue are not equivalent to the risks of those selling before 1 October 2015 having suffered no loss”.
120 The contradictor submitted that he had “grave difficulty in understanding how those who sold their franchise prior to 1 October 2015 could have suffered any substantial loss as they were able to sell their franchise under the prevailing Goodwill Formula mechanism unaffected by the events which followed”. The submission continued:
We are aware of no evidence identifying instances where group members who sold prior 1 October 2015 did so for a price significantly less than what they paid for that franchise after 21 February 2012. 7-Eleven (at RS1 [7.2]) appear[ed] to proceed on the hypothesis that those who were able to sell prior to 1 October 2015 can have suffered no loss. In the absence of further explanation and evidence … we find it hard to disagree with this assessment. If that is correct, it is not rational to ascribe a 33% weighting to this cohort. They should have a relative weighting of zero to reflect the very poor prospects of their claims.
121 The applicants countered that the contradictor’s approach was “too simplistic”, and contended as follows:
The Applicants accept that the group members in this category are likely to have suffered, on average, a smaller loss (and some may have suffered no loss) than group members in other categories because the Goodwill Formula mechanism prevailed during this period. But some group members in this category may still have suffered loss or damage on account of having bought their franchise upon the Goodwill Multiple if they were unable to recoup their franchise purchase monies on resale, which included a franchise fee of $100,000 or more. For example, the Goodwill Multiple advised to Franchisees may have been less than 2.1 to 2.7 times, and there is also some evidence that the Goodwill Multiple was being “phased out” prior to 1 October 2015. In other cases, the Franchisee’s agreement may have been terminated or the store might have been closed by 7-Eleven, notwithstanding that the Goodwill Formula mechanism prevailed.
122 Again, it seems to me that the questions raised by these competing submissions are matters of judgment about which reasonable minds may reasonably differ, and to reach some concluded view about the questions would involve conducting something akin to a full hearing of them, something I decline to do.
123 For those reasons, the answer to question (1)(c) is: yes.
124 For those reasons, the answer to question (1) is: yes.
Question (2): Are the legal costs of $16,657,588.44 incurred in the proceedings up to 4 August 2021 (being the date of the settlement agreement), as assessed by the costs referee, and sought to be recovered from the settlement sum, reasonable?
Question (3): Are the total legal costs, or any substantial part or category of those costs, proportionate to the expected benefits to be obtained in incurring those costs, and what are the consequences (if any)?
Question (4): Should each of the costs reports of the costs referee be adopted, varied or rejected, in whole or in part, or be the subject of other order(s) by the court pursuant to s 54A of the Federal Court of Australia Act?
125 As Murphy J explained in Petersen Superannuation Fund Pty Ltd v Bank of Queensland Ltd (No 3) [2018] FCA 1842; (2018) 132 ACSR 258 at 277 [88]:
In class actions the requirement for judicial supervision of legal costs proposed to be charged is obvious because: (a) the applicant’s solicitor is in a more dominant position vis-a vis a class member than in a solicitor-client relationship in individual litigation; (b) class members are commonly not told about the mounting costs as they are incurred and they suffer a significant information asymmetry in that regard; (c) it is not necessary for class members to retain the applicant’s solicitor and commonly they do not, yet they are usually made liable for a pro rata share of the costs; (d) even where class members retain the applicant’s solicitor they do not provide instructions as to the running of the class action and have no control over the quantum of costs, yet they are usually made liable for a pro rata share of the costs; (e) class members are unlikely to pay much attention to legal costs because they are usually only payable upon success and from the successful outcome; (f) it is usually not until after settlement is achieved that class members are told the total costs claimed, but they are not told (and it is commonly very difficult to accurately estimate) what their pro rata share of the costs will be; and (g) the Court has a protective role in relation to class members’ interests.
126 As J Forrest J explained in Downie v Spiral Foods Pty Ltd [2015] VSC 190 at [177]-[178] the need for the court, in the exercise of its protective role, to scrutinise the quantum of legal costs sought to be recovered from the amount available to group members is important for two reasons: “[f]irst, as the costs are deducted from the settlement sum, it has the potential to affect the reasonableness of the settlement. Secondly, the group members lack detailed information about the legal costs incurred so as to be able to challenge the plaintiff’s solicitor’s claimed costs”.
127 His Honour went on to explain at [179]-[180]:
In determining whether to approve the deduction of costs from the settlement sum, courts must be satisfied that the costs claimed are ‘reasonable in the circumstances’. This does not necessarily require a taxation of the costs claimed (although it may), but rather the tendering of ‘sufficient’ evidence so as to enable the court to make an assessment as to whether the costs were reasonably incurred. In group proceedings, usually this evidence will come from an independent solicitor or costs consultant.
… it is the Court, and not the independent costs expert who must determine whether fees and disbursements are reasonable.
See also Re Banksia Securities Ltd (Receivers and Managers Appointed) [2017] VSC 148 at [66] (Robson J).
128 The factors that may be taken into account include whether:
(1) the work in a particular area, or in relation to a particular issue, was undertaken efficiently and appropriately;
(2) the work was undertaken by a person of appropriate level of seniority;
(3) the charge-out rate was appropriate having regard to the level of seniority of that practitioner and the nature of the work undertaken;
(4) the task (and associated charge) was appropriate, having regard to the nature of the work and the time taken to complete the task; and
(5) the ratio of work and interrelation of work undertaken by the solicitors and the counsel retained was reasonable.
See generally Downie v Spiral Foods Pty Ltd [2015] VSC 190 at [181]; Re Banksia Securities Ltd (Receivers and Managers Appointed) [2017] VSC 148 at [66]; Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626 at [37] (Gordon J); Bolitho v Banksia Securities Ltd (No 18) (remitter) [2021] VSC 666 at [654]-[655] (John Dixon J).
129 Further, costs must be proportionate. As Beach J said in Blairgowrie Trading Ltd v Allco Finance Group Ltd (No 3) [2017] FCA 330; (2017) 343 ALR 476 at 521 [181]:
But what is claimed for legal costs should not be disproportionate to the nature of the context, the litigation involved and the expected benefit. The Court should not approve an amount that is disproportionate. But such an assessment cannot be made on the simplistic basis that the costs claimed are high in absolute dollar terms or high as a percentage of the total recovery. In the latter case, spending $0.50 to recover an expected $1.00 may be proportionate if it is necessary to spend the $0.50. In the former case, the absolute dollar amount as a free-standing figure is an irrelevant metric. The question is to compare it with the benefit sought to be gained from the litigation. Moreover, one should be careful not to use hindsight bias. The question is the benefit reasonably expected to be achieved, not the benefit actually achieved. Proportionality looks to the expected realistic return at the time the work being charged for was performed, not the known return at a time remote from when the work was performed; at the later time, circumstances may have changed to alter the calculus, but that would not deny that the work performed and its cost was proportionate at the time it was performed. Perhaps the costs claimed can be compared with the known return, but such a comparison ought not to be confused with a true proportionality analysis. Nevertheless, any disparity with the known return may invite the question whether the costs were disproportionate, but would not sufficiently answer that question.
130 As the contradictor submitted, in settlement approval applications the court has various options available to it as to the form and manner in which it receives assistance in its protective jurisdiction to determine whether the legal costs incurred are fair, reasonable and proportionate.
131 One such option is the appointment of a costs referee. Another is the appointment of a contradictor.
132 Both have important roles to play in the context of the consideration of legal costs. But as the contradictor correctly said: “where a costs referee and a contradictor are both appointed by the Court, subject to the particular terms of appointment … the costs referee should deal with the reasonableness of the costs first and foremost”.
133 Section 54A of the Federal Court of Australia Act provides:
Referral of questions to a referee
(1) Subject to the Rules of Court, the Court may by order refer:
(a) a proceeding in the Court; or
(b) one or more questions arising in a proceeding in the Court;
to a referee for inquiry and report in accordance with the Rules of Court.
(2) A referral under subsection (1) may be made at any stage of a proceeding.
(3) If a report of a referee under subsection (1) is provided to the Court, the Court may deal with the report as it thinks fit, including by doing the following:
(a) adopting the report in whole or in part;
(b) varying the report;
(c) rejecting the report;
(d) making such orders as the Court thinks fit in respect of any proceeding or question referred to the referee.
134 Rule 28.67 of the Federal Court Rules 2011 (Cth) in turn provides:
Proceeding on report
(1) After a report has been given to the Court, a party may, on application, ask the Court to do any of the following:
(a) adopt, vary or reject the report, in the whole or in part;
(b) require an explanation by way of a further report by the referee;
(c) remit on any ground, for further consideration by the referee, the whole or any part of the matter that was referred to the referee for inquiry and report;
(d) decide any matter on the evidence taken before the referee, with or without additional evidence;
(e) give judgment or make an order in relation to the proceeding or question.
(2) A party must not adduce in the Court evidence given in an inquiry.
135 In Gulf Conveyor Systems Pty Ltd v Gulf Integrated Systems Solutions Pty Ltd [2020] FCA 1245, Katzmann J set out the applicable principles applicable to the questions arising under the rule, relevantly as follows (at [12]-[21]):
On the face of things the Court is given a broad discretion, as the applicant submitted. But the exercise of the discretion is governed by principles drawn from the object and purpose of the relevant rules. Those principles are well-established … The relevant principles are these.
First, an application made under the relevant rule is not an appeal. The Court does not conduct a hearing de novo or a rehearing. A party who is dissatisfied with a referee’s report is not entitled to require the Court to reconsider and redetermine afresh matters, whether of fact or law, which the party wants to contest …
Second, the discretion to adopt, vary or reject a referee’s report is to be exercised in a manner consistent with the context and purpose of the relevant rules. The purpose of the rules is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, and it would frustrate that purpose to allow the reference to be treated as some kind of warm-up for the real contest …
Third, if the source of a party’s dissatisfaction with a report is a question of law or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.
Fourth, if the referee’s report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection … In this context, patent misapprehension of the evidence means a lack of understanding of the evidence and not the weight attributed to it; and perversity or manifest unreasonableness means a conclusion that no reasonable tribunal of fact could have reached …
But in general, the referee’s findings of fact should not be re-agitated before the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee has expertise. It is not enough for an aggrieved party to point to errors of fact which would be amenable to correction by an appellate court.
Fifth, even if it were to be shown that the Court might have come to a different conclusion in some respect from that reached by the referee, absent any error of the kind referred to above, it would not be a proper exercise of the discretion conferred by r 28.67 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.
Sixth, the Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee the evidence and submissions upon which they wish to rely.
Seventh, although the reasons given by the referee may appear to be adequate, where the party challenging the report contends that they are not because the referee did not deal with very significant evidence, the Court may examine the evidence to see whether the reasons were in fact inadequate because they omitted to refer to such evidence …
Eighth, if the Court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the Court may decline to adopt the report or examine the evidence to see whether the expense of a further proceeding before the referee is justified.
(Citations and internal quotations omitted)
136 Ms Harris prepared four reports in her capacity as costs referee.
137 Ms Harris’ updated first report is an exhibit to her affidavit dated 12 November 2021.
138 Ms Harris first report included a table setting out her assessment of the costs (professional fees and disbursements) of the proceeding incurred to 28 October 2021 and her allowances as follows:
139 Ms Harris’ second report is an exhibit to her affidavit dated 31 January 2022. She produced it as a result of matters raised by the contradictor in his submissions dated 12 November 2021 and as a result of requests he made for further information. As a result, the allowances were further reduced by a total of $202,465, as follows:
140 Ms Harris’ third report is an exhibit to her affidavit dated 24 March 2022. It was prepared to address further matters raised by the contradictor in his further outline of submissions dated 9 March 2022. It did not affect the quantum of her allowances.
141 Ms Harris’ fourth report is an exhibit to her affidavit dated 12 May 2022. In part, it was prepared at the request of the contradictor. The contradictor sought Ms Harris’ confirmation that the quantum of the actual and assessed costs covered the period up to 4 August 2021 (which was the date of the settlement deed), including in circumstances where Levitt Robinson had maintained a separate file for the approval application, recording work undertaken from 4 August 2021 on that file.
142 In light of that understanding, the final figure for allowed costs to 4 August 2021 was $16,657,588.44, calculated as follows:
143 As best as I could tell, it seems to have been accepted that a further sum of $87,037.05 should be added to that total in relation to additional subpoena costs that were later agreed. If I am wrong about that, the question will need to be revisited at the further hearing.
144 Ms Harris has not yet assessed the reasonableness of the costs incurred and paid by the funder of the settlement approval. Those costs up to 27 October 2021 were said (in a draft minute of order handed up on the final day of the hearing) to be $612,904.02.
Contentions about the reasonableness and proportionality of costs
145 The contradictor submitted that, as to the cost reports generally, I should “take comfort from the reports, having regard to their cogency and the extensive experience of [Ms Harris] in the area of costs consultancy services”.
146 He further submitted that her assessments “appear, in the main, [to be] reasonably made, and … for the very most part they are supported by logical analysis which is transparently exposed”. He agreed that Ms Harris had “undertaken a thorough review and applied a sound analytical framework” and that “the reasons for disallowance are sound and adequately explained”.
147 In that respect, the contradictor did not oppose the adoption of the costs reports (save for six paragraphs of the second costs report, which did not in my view have a material bearing on the critical conclusions).
148 Further, the funder and the applicants accepted the disallowance and thus the amount of $16,657,588.44. In that regard, I refer to Mr Finch’s closing address at transcript page 536, lines 16-24 and Mr Pritchard’s closing address at page 466, lines 1-2.
149 However, the contradictor submitted that there were “some matters within the [costs] reports which appear may warrant further analysis before the Court would give those matters too [great a] weight”.
150 In summary, those matters were as follows.
151 First, there were some areas where he had “concerns that the [costs] reports [did] not provide … sufficient information or reasoning to be satisfied that particular categories of work are reasonable and proportionate”.
152 Secondly, he said that he had “particular concerns about the proportionality of the total legal costs claimed and subject to further explanation and material from the [a]pplicants it might be appropriate for the Court to reduce the legal costs to be borne by group members by a further 15-20% …”.
153 It is not necessary to burden these reasons with a detailed recital of the contradictor’s submissions in those two respects.
154 In my view, as the applicants submitted, the four costs reports should be adopted in full, for these reasons.
155 First, the contradictor did not point to any relevant error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding.
156 Secondly, it is appropriate to have regard to Ms Harris’ extensive experience as a costs referee, including in respect of her numerous past and ongoing appointments as a referee to assess costs in class action settlement approval applications.
157 Thirdly, as Beach J said in Blairgowrie Trading Ltd v Allco Finance Group Ltd (No 3) [2017] FCA 330; (2017) 343 ALR 476 at 521 [180]:
Generally, let me say that my role is not that of a taxing registrar or master. Further, subject to the question of proportionality, if unchallenged expert opinion is put before the Court which sets out a commercial and reasonable methodology consistent with the terms of any retainer and which demonstrates that it has been accurately and thoroughly applied to sufficient and probative source records of the solicitors, then it is no part of my function to:
(a) reject that evidence as to whole or part without very good reason; or
(b) apply one’s own subjective view of what the legal work is “really worth”, divorced from the reality of the commercial context within which the work was carried out and the expenses incurred.
158 And fourthly, in my view, the legal costs were not disproportionate to the nature of the context, the litigation involved and the benefit of it. The proceedings were extremely complex and hard-fought; the value of group members’ claims was potentially very substantial; and the fact that significant legal fees were incurred is unsurprising. As the applicants submitted:
7-Eleven’s costs from the commencement of proceedings to 14 May 2021 were in excess of $17 million and its estimated total costs to the conclusion of trial would have been some $27.9 million: Nigel David Jones (14.05.21) [31].
There is significant parity between the Applicants’ costs up to 28 October 2021 of $19 million (Second Costs Report [1]) and 7-Eleven’s costs of $17 million up to 14 May 2021, noting also that the Applicants incurred actual subpoena costs in excess of $1 million (Second Costs Report [212]) and anticipated subpoena costs in the order of $490,000 (Second Costs Report [227]).
The parity of costs incurred by the parties provides a firm indicator that the Applicants’ legal costs and disbursements were proportionate.
Further, the Applicants’ legal costs and disbursements, as a measured as a percentage of the settlement sum, are well within the range that the Courts have found to be acceptable and proportionate in previous cases [citing, among many other cases, Findlay v DSHE Holdings Ltd; Mastoris v DSHE Holdings Ltd; Mastoris v Allianz Australia Insurance Ltd [2021] NSWSC 249 (legal costs and disbursements of $19,872,125, being about 79.5% of the settlement sum); Santa Trade Concerns Pty Ltd v Robinson (No 2) [2018] FCA 1491 (legal costs and disbursements of $1,500,000, being about 50% of the settlement sum); Kenquist Nominees Pty Limited ATF The Kenquist Superannuation Fund v Campbell (No 6) [2020] FCA 1388 (legal costs and disbursements of $3,435,901, being about 49% of the settlement sum); TW McConnell Pty Ltd ATF the McConnell Superannuation Fund v SurfStitch Group Ltd (administrators appointed) (No 4); Nakali Pty Ltd v SurfStitch Group Ltd [2021] NSWSC 121 (legal costs and disbursements of $5.290m being about 45.8%-63.7% of the settlement sum); and Francis v Powercor Australia Ltd [2020] VSC 405 (legal costs and disbursements of $2.250m, being about 45% of the settlement sum).
159 I am not persuaded that any further reduction in the legal costs is warranted.
160 I am conscious of the fact that I have not set out in detail each of the matters raised by the contradictor in aid of the contention that I might decide to the contrary, or as he put it, matters which appeared “may warrant further analysis”. I have given careful consideration to them, in particular the matters put at [237]-[284] of the contradictor’s further outline of submissions dated 9 March 2022. But, as the contradictor fairly conceded, Ms Harris’ costs reports are thorough, cogent, reasonably made, supported by logical analysis which is transparently exposed and applied a sound analytical framework and gave reasons for disallowance that are sound and adequately explained.
161 I am not persuaded that the matters raised by the contradictor for my consideration warrant further disallowance.
162 I am also satisfied that the total legal costs up to 4 August 2021 (namely, $16.657 million) are proportionate to the expected benefits to be obtained in incurring those costs.
Answers to questions (2), (3) and (4)
163 For those reasons, the answer to question 2 is: yes; the answer to question (3) is: yes and there are no such consequences; and the answer to question (4) is: the costs reports should be adopted in full.
Question (5): Was there adequate disclosure and monitoring of legal costs throughout the proceedings, and what are the consequences (if any) if there was not?
Question (6): Were there any deferred fee arrangements in place between Levitt Robinson and Galactic in relation to legal costs, and what are the consequences (if any) if there were?
164 I turn now to these two related questions raised by the contradictor.
165 The contradictor was prompted to raise these questions, principally because it emerged that Levitt Robinson had sent an invoice to the funder in respect of legal fees in the amount of $5.4 million, for work spanning a 5 year period, shortly after the entering into of the settlement agreement. The invoice was over 1,000 pages long.
166 In response to the contradictor’s (obvious enough) concerns about the invoice, Mr Levitt swore his 25 March 2022 affidavit, in which, among many other things, he denied that his firm had ever been part of any agreement, understanding or arrangement with the funder that any part of its costs or disbursements incurred during these proceedings would be deferred on any basis; told of the “intense pressure” which he and lawyers working on these proceedings had experienced; and described his firm’s billing practices. Relevantly, he deposed as follows :
I negotiated the funding terms with Galactic … in respect of these proceedings.
It has never been part of any agreement, understanding or arrangement that any part of Levitt Robinson’s costs or disbursements incurred during these proceedings would be deferred on any basis or for any reason, including, without limitation, for a “success event”.
Levitt Robinson, among class action firms, is relatively small. Its total fee-earning staff has only relevantly comprised 18 (eighteen) lawyers at any one time, during the currency of these proceedings, roughly half of whom worked on this matter.
During 2020 and in particular, 2021, the pressure on the 50% of lawyers in the firm who were working on these proceedings, was intense.
…
The sheer enormity of the legal and administrative tasks in which my firm’s legal personnel were engaged also required the engagement of additional junior counsel to supplement the efforts of the existing team.
To make the team more efficient, we replaced our Melbourne lead counsel with Sydney lead counsel in 2020.
In addition to David Pritchard SC, and Philip Tucker from the Brisbane Bar, who had been briefed since 2019, and Gerald Ng of the Sydney Bar who had been briefed since 2018, I retained Nathan Li, Julian Zmood and Ahmed Rizk, all junior counsel of the Sydney Bar.
Our Chief Financial Officer, Rosemary Tomasella, who has worked for me for nearly 30 years, suffered chronic ill-health during 2021, particularly until about October 2021. She has oversight of billing and finance. However, she was not so ill that she was not able to come to work at all.
The fee earners were recording their time individually and their own time records needed to be reconciled with the time recorded by other team members who had engaged in the same or similar activities contemporaneously. The final billing process started in early July, 2021 and took till early October, 2021, up to the point of provisional settlement of the proceedings.
The level of rigour and checking requiring in a bill of this magnitude requires significant input by senior staff, principally Special Counsel, Brett Imlay but also by me.
The intensity of the work undertaken on the proceedings by the committed legal team within Levitt Robinson in the 12 month period up to provisional settlement in June 2021 made it distracting and unnecessary in my view to prepare and finalise interim bills at that time.
The firm was able to sustain itself financially from the conduct of other matters. In my view there was no need to prioritise billing over applying our best efforts to prepare the proceedings for trial and for mediation.
…
The bill dated 6 October 2021 ran to approximately 900 pages in length and was itself a major work, which took 3 months to complete. The costs only component was $4,064,775.36 (GST excl.). It was produced in the aftermath of the mediation, which started in late June 2021 but spanned more than a month before the matter was finally settled subject to Court approval, then relieving substantial pressure from the senior practitioners primarily responsible for the conduct of the case and capable of editing, reconciling and finally checking the bill.
Despite my extensive Class Action experience, the 7-Eleven Class Action Settlement is the first commercially litigation-funded Class Action Settlement with which I have been involved. None of the other settlements reached in Class Actions in which my firm acted were litigation funded. They were either self-funded by the litigants themselves (in the majority of cases) or in the matter of Sherwood et Ors v Commonwealth Bank which settled in 2015, it was part-funded by the Lead Applicants and Group Members themselves and part-funded by me (without any premium or uplift being claimed or received by me).
Nevertheless, in all of the several Class Actions in which I have been involved, which settled without a litigation funder’s involvement, I have followed the same pattern of billing most of the firm’s costs at the end of the contested part of the proceedings. This was because of the same kinds of factors which I have identified with regard to 7-Eleven, namely that being a relatively small firm taking on much larger opponents, there was an imperative that we devote ourselves to work at winning the case.
It was necessary to generate the 6 October 2021 bill to obtain settlement approval, which involved finalisation of the costs claim for which approval was required to be obtained from this Honourable Court.
The Lead Applicants, with whom I spoke periodically, never enquired or complained to me about our fees or invoices, and still have not done so. Not a single Lead Applicant or Group Member had raised the question of our costs, directly with me personally as an issue, prior to lodging an Objection …
With 43 years of litigation experience, including 12 years of Class Action experience, I generally have a good feel for what the costs would likely be but was not able fully to appreciate early on in this matter, the need to add several more counsel to our team; nor did I envisage the number and scope of interlocutory applications, subpoena arguments and exorbitant claims for Subpoena compliance costs, or the extent of the lay evidence which would need to be prepared. Discovery proved to be an enormous undertaking, tying up half of my office for months. I spoke frequently with the Funder’s representatives and harboured no doubt about the Funder’s commitment or apprehension that I would be “left holding the baby” as to the costs being incurred beyond my original estimate.
From my experience, Levitt Robinson’s costs in such large-scale matters have been below market and compared favourably with the Respondent’s costs estimates.
I had periodically received W.I.P reports when either Rosemary Tomasella, our CFO, or Special Counsel, Brett Imlay, who would inform me how much unbilled W.I.P there was on the file. This prompted a substantial revision of my initial costs estimate, which I published to Group Members in August 2020, a year before the trial was ·scheduled to commence. This revised Disclosure elicited no adverse or critical response.
167 The applicants also sought to explain in their written submissions (AS5) that the deferred billing was not as bad as it might have initially seemed, because:
[w]hile it is correct that the first time-narrative narrative is dated 21 December 2016, only approximately 2% of Levitt’s Robinson’s fees within the 5 October 2021 memorandum of fees was for work completed prior to 31 July 2020. That is to say, approximately 98% of the time entries recorded in the 5 October 2021 invoice is for work completed by Levitt Robinson between 1 August 2020 and October 2021. As identified at AS4 [62], … the 12 to 14-month period following 31 July 2020 (which was captured in the 5 October 2021 invoice) was the most intense period in the proceedings.
168 The contradictor accepted the gist of that submission.
169 The contradictor cross-examined Mr Levitt in relation to the circumstances in which the invoice was sent, and in his closing submissions urged me to make the following findings:
(1) Mr Levitt was not a credible and reliable witness, including because many of his answers in cross-examination were often evasive, implausible, and defensively long-winded;
(2) Mr Levitt’s evidence regarding the billing practices of Levitt Robinson, including in respect of the invoice dated 5 October 2021 in the amount of $5.4 million, was unreliable and should not be accepted;
(3) Mr Levitt’s evidence to the effect that the billing practices of Levitt Robinson were not to the advantage of the funder was unreliable and should not be accepted; and
(4) Mr Levitt’s evidence to the effect that it has never been part of any agreement, understanding or arrangement that any part of Levitt Robinson’s costs or disbursements incurred during these proceedings would be deferred on any basis or for any reason, was unreliable and should not be accepted.
170 I do not accept that there is sufficient evidence to justify the making of any of those findings.
171 There is no doubt that the delayed billing was lamentable, whatever the burdens of his legal practice that Mr Levitt described. There is also no doubt, as the contradictor submitted, that the “practice of deferred billing is certainly inconsistent with a prudent and proactive practice of … actively monitoring legal costs relative to estimates given to group members, and providing group members with the capacity to monitor and comment upon those costs themselves as they go along”.
172 In an ordinary commercial context, it would in my experience be unthinkable to render an invoice for many millions of dollars for work performed over a period of years.
173 As Ms Harris said in her second report, “best practice in the conduct of class actions involves proactive management by both the lawyers and the funder, with monthly tracking of costs against a detailed budget”. Speaking for myself, such a practice should be regarded as the rule, because as Ms Harris said at [75], one “possible consequence of a failure to monitor costs, which is relevant to the requirement that costs be proportionately incurred and proportionate in amount … goes to strategic decisions about the conduct of a matter. If a lawyer does not actively monitor the costs, it is difficult to assess the likely cost/benefit of a particular step, application, or approach, having regard to the proportionality of the overall costs to the likely damages”.
174 Here, it seems, the funder adopted what Ms Harris described as a “hands-off” approach to the monitoring of the legal costs incurred by Levitt Robinson:
The Funder adopted a hands-off approach to the management of legal costs. I did not sight any correspondence from the Funder regarding the level of legal costs …
The “hands-off” approach was reflected in the relaxed approach on the part of Levitt Robinson to invoicing. The delay in invoicing professional fees would not have enabled the Funder to budget effectively or closely monitor costs. In my experience, this is unusual, as most funders take a very proactive approach to the management of legal costs, monitoring them closely against the agreed budget.
175 In this case, however, Ms Harris did not consider that the funder’s “hands-off” approach contributed to increased costs, reasoning as follows:
However, in this matter, I do not consider that this “hands-off” approach contributed to increased costs. This proceeding involved so many interlocutory issues and applications, and the extent of the evidence and breadth of issues to be addressed was such that the small team were, if anything, struggling at times to meet timeframes. There was little opportunity to adopt a “luxurious” approach which would have resulted in increased costs.
From early 2020 (and for periods in 2018 and 2019), weekly team meetings took place, with tasks managed through agendas and minutes. Counsel were often in attendance. This project management approach, which is now accepted as best practice in class action conduct, reduced the likelihood of duplication of work, and assisted the team in working effectively together. It also allowed team members to understand what other team members were doing and facilitated discussion about work priorities.
176 I accept Ms Harris’ characterisation of what occurred and her conclusion that the funder’s hands-off approach did not lead or contribute to an increase in legal costs. Further, in the particular circumstances of this case, I am not persuaded that Levitt Robinson’s failure to disclose and monitor legal costs on a regular basis during its conduct of the proceeding leading up to the signing of the settlement agreement had any particular prejudicial consequences. I am also not satisfied that there was in place a “deferred fee arrangement” between Levitt Robinson and the funder in relation to legal costs.
177 It follows that I do not accept the contradictor’s submission that “in all the circumstances, we say your Honour would be concerned as to whether it would do justice in the proceeding to approve [$]16.6 million in legal costs to be borne by group members and that some broad brush deduction [of 10-15%] is open for your Honour”. That said, the delay in billing and the lack of any scrutiny or ongoing monitoring by the funder that occurred here was not consistent with best practice, to say the very least.
Answers to questions (5) and (6)
178 For those reasons, the answer to question (5) is: no and none; and the answer to question (6) is: no and none.
Question (7): Does the court have the power to make a CFO of the kind sought under s 33V(2) of the Federal Court of Australia Act, or in its equitable jurisdiction under s 5(2)?
179 I turn now to issues that arise on the funder’s application for a CFO under ss 23, 33V and/or s 33ZF of the Federal Court of Australia Act or in the court’s equitable jurisdiction, in an amount equal to 25% of the gross settlement sum (being $24.5 million).
180 The funder relied on the following in support of the application:
(1) Affidavits of Mr Imlay sworn 23 August, and 6, 13 and 20 October 2021;
(2) Affidavit of Mr Levitt sworn 14 October 2021;
(3) Affidavits of Mr Schulman sworn 21 October 2021 and 1 February 2022; and
(4) Mr Houston’s expert report dated 2 February 2022.
181 I will deal with that evidence, to the extent that it was relevant, under question (8).
182 I turn to the legal question of whether the court has the power to make a CFO.
183 Although the decision of the High Court in BMW Australia Ltd v Brewster (2019) 269 CLR 574 was concerned with the power to make a common fund order at a preliminary stage of proceedings under s 33ZF, the reasoning of the majority points clearly enough to the conclusion that there is similarly no power to make a common fund order upon settlement under s 33V(2).
184 Justice Gordon was unequivocal about it. At 630 [141], her Honour said:
A representative proceeding may not be settled or discontinued without the approval of the Court. If the Court gives approval, s 33V(2) confers power on the Court to “make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court”. But that provision does not envisage a Court making orders with respect to the economics of a proceeding by ensuring that a litigation funder obtains a particular return on funds invested.
See too Gordon J at 628 [135] (“Courts do not have the power to make a [CFO]”) and 637 [166] (a CFO “is not an order that is appropriate or necessary to ensure that justice is done in a proceeding”).
185 Further, as Nettle J said:
(a) no provision of Part IVA of the Federal Court of Australia Act contemplates the Court making a CFO (at 624 [125]);
(b) the statutory context of s 33ZF “strongly implies exclusion of a construction of that provision that permits of the making of a CFO” (at 624 [125]); and
(c) the commercial interests of funders formed [no] part of the mischief that the introduction of Pt IVA was intended to confront (at 625 [126]).
186 The reasoning of the plurality (Kiefel CJ, Bell and Keane JJ) is not far removed from Gordon J’s view. At 612 [87], their Honours said that there is “no reason why the amount taken from unfunded group members’ awards should be directed to the litigation funder, much less that an order to that effect should be made at the outset of the proceeding”.
187 And, as their Honours said, there are good reasons why that amount should not be taken and directed to the funder, including:
(a) “[a]n application for a CFO invites the court to order the establishment of a complex relationship between group members and a litigation funder with whom the group members would otherwise have no relationship at all” (at 604 [66]);
(b) “[t]he funder has no right to that money under contract or under equitable principles” (at 612 [87]);
(c) “[a] CFO is apt to impose an additional cost on the group by requiring more money to be paid to the litigation funder than would otherwise be the case” (at 612-613 [88], emphasis in original); and
(d) “a CFO seeks to impose an additional cost by imposing new obligations on the unfunded group members” (at 613 [88]).
188 None of those considerations was expressed to be subject to any apparent temporal limitation – by which I mean they were not expressed to be dependent upon whether a CFO is contemplated to be made early on in a proceeding or upon a settlement of it.
189 The relevant authorities were considered in detail by Foster J in Cantor v Audi Australia Pty Ltd (No 5) [2020] FCA 637 at [310]-[421]. In that case, like this case, a contradictor submitted, and his Honour agreed, that this court did not have power to make a CFO at settlement.
190 With great respect to those who have expressed a different view (see, by way of example, Asirifi-Otchere v Swann Insurance (Aust) Pty Ltd (No 3) [2020] FCA 1885; (2020) 385 ALR 625 at 629 [15] (Lee J) and Hall v Arnold Bloch Leibler (a firm) (No 2) [2022] FCA 163 at [24] (Beach J)), I agree with Foster J’s consideration and analysis in Cantor, and in particular with his Honour’s conclusions that (i) this court does not have the power to make a CFO or order in the nature of a CFO at any time including at the conclusion of a group proceeding; and (ii) the making of a CFO, whether at an early stage of a group proceeding or at the conclusion of such a proceeding, cannot be supported by the equitable principles, for the following reasons he gave at [418]-[421]:
In summary, there are statements made in each of the judgments of the Justices who comprised the majority in Brewster which indicate that those Justices are of the opinion that, not only does this Court and the Supreme Court not have the power to make a CFO at an early stage in a group proceeding brought under Pt IVA of the FCA Act or Pt 10 of the CPA, but also the two Courts in question do not have the power to make a CFO at any time. It may be thought that the statements to that effect in the majority judgments are not part of the ratio decidendi of the decision actually made in Brewster. There is some force in that remark although the statements made by the majority Justices were made in the context of their reasons for arriving at the construction of the relevant statutory provisions which were germane to their decisions. It may also be fair to say, as Moshinsky J has said at [72]–[73] in [Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Limited (No 2) [2020] FCA 579], that the majority Justices favour the conclusion that the Courts do not have power to make a CFO at all but have not yet expressed a concluded view on the question of whether such an order can be made at the conclusion of a group proceeding.
It is not for me to speculate on what the High Court might do if it is called upon to decide the precise question of whether or not this Court and the Supreme Court have the power to make a CFO or an order in the nature of a CFO at the conclusion of a group proceeding. The reasoning of the majority Justices in Brewster would suggest that the Court would consider that question as involving the true construction of the relevant statutory provisions, in particular s 33V(2) of the FCA Act and s 173 of the CPA. As I have already mentioned, Moshinsky J said in Vocus that this precise question has probably not been finally answered in Brewster although clearly the majority Justices favour the view that the Courts do not have the power to make a CFO or order in the nature of a CFO at any time including at the conclusion of a group proceeding.
In my judgment, the making of a CFO, whether at an early stage of a group proceeding or at the conclusion of such a proceeding, cannot be supported by the equitable principles to which I have referred at [412(e)] above which addressed the sharing of reasonable legal costs expended in the creation of a court ordered trust fund and did not concern spreading the burden of a litigation funder’s profits amongst all the beneficiaries of the trust fund thereby created, or by notions of unjust enrichment. The question of whether the Court has power to make such an order at any time must be resolved by construing the relevant statutory provisions and not otherwise.
In my judgment, the reasoning of the plurality in Brewster which led to the conclusion that neither this Court nor the Supreme Court has power to make a CFO at an early stage of a representative proceeding, with its emphasis on the true construction of the relevant legislative provisions, probably forecloses resort to s 33V of the FCA Act and s 173 of the CPA as an appropriate source of the power to make a CFO at the conclusion of a representative proceeding. As I have already noted, the plurality rejected the idea that a CFO could be supported by reference to equitable principles of the kind to which I referred at [412(e)] above or notions of unjust enrichment. A question for the Court posed by an application for a CFO at the conclusion of a representative proceeding is whether such an order is “… just with respect to the distribution of any money paid under a settlement or paid into Court” in the case of an agreed settlement or one resulting from a payment into Court (as to which see s 33V(2)) and the true construction of s 33Z(1)(g), (2) and (4) in the case of a judgment. On 1 April 2020, when I made orders dismissing all of the funding applications, I was of the opinion that the reasoning of the majority in Brewster required me to dismiss the [CFO applications] because I did not have power to grant [them] …
191 For those reasons, the answer to question (7) is: no.
Question (8): If the court has power to make a CFO of the kind sought, should it make such an order in its discretion in these circumstances?
192 If I am wrong about the power question, I would not make a CFO order of the type or in the amount sought as a matter of discretion, in any event, for the following reasons.
193 The funder submitted that it “funded large legal costs and disbursements, provided security for costs, and was exposed to significant risks including the risk of substantial adverse costs orders. The proceedings were complex, and could not have been brought without Galactic’s funding. That funding has permitted the parties to reach a conditional settlement of $98 million, and will result in the establishment of a fund for the benefit of the representative applicants and group members”. So much may be accepted, and was not disputed by the contradictor.
194 The funder further submitted that an order that it be paid an amount equal to 25% of the settlement sum, being $24.5 million (25% of $98 million) should be made in the exercise of the court’s discretion, first and principally because “the amount of remuneration sought … has been held to be towards the ‘middle of the range of rates offered or accepted by funders for class actions in Australia’” (citing Asirifi at [25]). The submission continued:
The empirical studies conducted by Professor Vince Morabito [Professor Vince Morabito, “An Evidence-Based Approach to Class Action Reform in Australia: Common Fund Orders, Funding Fees and Reimbursement Payment” (January 2019); Professor Vince Morabito, “Remuneration to Litigation Funders in the Post-Money Max Era (14 October 2020)] an independent expert in the area, show that there is a generally consistent pattern of common fund orders being made at around this level of remuneration. There is no suggestion that matters have changed since Professor Morabito’s studies, and there no reason to depart from that analysis. Common fund orders made in recent proceedings are consistent with this level of remuneration. For example:
(a) in Kuterba v Sirtex Medical Limited (No 3) [2019] FCA 1374, the funder’s remuneration was 25% of the gross settlement sum;
(b) in Clime Capital Limited v UGL Pty Limited [2020] FCA 66, the funder’s remuneration was 22.5% of the gross settlement sum;
(c) in Webster (Trustee) v Murray Goulburn Co-Operative Co Limited (No 4) [2020] FCA 1053, the funder’s remuneration was 23% of the gross settlement sum;
(d) in Uren v RMBL Investments Limited (No 2) [2020] FCA 647, the funder’s remuneration was 25% of the gross settlement sum;
(e) in Court v Spotless Group Holdings Limited [2020] FCA 1730, the funder’s remuneration was 22.5% of the settlement sum (net of costs); and
(f) in Asirifi, the funder’s remuneration was 25% of the gross settlement sum.
The percentage sought also represents a discount from the rate initially agreed between Galactic and the solicitors for the applicants. The initial agreement (for group members who entered into a litigation funding agreement with Galactic) was for Galactic to charge a 35% funders premium [citing Mr Schulman’s first affidavit sworn 21 October 2021 at [11]].
195 I do not accept the funder’s submission that a funding commission should be determined principally by reference to a fixed or “benchmark” percentage of a settlement sum.
196 It is no doubt the case that funding commissions should avoid hindsight bias, and should be approved at levels that are commercially realistic, and which properly reflect the costs and risks taken by the funder. See, eg, Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 at 210 [82] (Murphy, Gleeson and Beach JJ).
197 Here, however, the funder did not adduce any sufficient evidence as to how it assessed its risk at the time it made its investment and committed to fund the proceedings.
198 The funder relied on the evidence given by Mr Imlay at [87]-[132] of his 13 October 2021 affidavit that group members had been provided with information as to the existing funding arrangements (for those who had entered into litigation funding agreements) and with notice about a possible application for a common fund order by Galactic. The funder relied in particular on Mr Imlay’s evidence that:
(a) from time to time, the solicitors for the applicants caused bulletins to be issued to franchisees who had retained them and published on their website, which explained that the funder’s premium would be 35%, and the intention to seek a common fund order;
(b) between December 2017 and 2019, the solicitors for the applicants received inquiries from current and former 7-Eleven franchisees concerning the proceedings and typically provided the iteration of the funding agreement then in use and explained the effect of the funding agreement and the intention to seek a common fund order at the conclusion of the proceedings;
(c) between about 5 December 2017 and 25 December 2019, the various iterations of the funding agreement included a clause to the effect that the lead applicants would, if instructed, apply to the court to seek a common fund order; and
(d) at a series of meetings on 22 March 2018, Mr Imlay explained that Galactic would seek a common fund order. Similar statements were made by Mr Levitt at a “Town Hall” meeting held in Brisbane on 8 May 2018, and at meetings with franchisees in Melbourne.
199 The funder also relied on the fact that there were very few objections to the funding commission from group members, and that to the extent objections had been lodged (in the end, there were 8 in all), they could be disregarded. I was provided with a document entitled “Aide memoire of objections to funding commission”. It was marked Exhibit MFI4. It is not necessary to set out the contents of it. I accept the funder’s submission that, for the reasons it gave in that document, each of the objections may properly be disregarded because they are inconsequential.
200 The funder submitted, and I agree that the facts establish, that group members have been provided both with information about the existing funding commission arrangements (for those who have entered into litigation funding agreements) and the intention to apply for a common fund order, and that they had no substantive objection to the information or the intention to apply for a common fund order.
201 The contradictor accepted, and I agree, that prima facie the security for costs it furnished, the considerable litigation risks it assumed, its adverse costs exposure and the large legal costs it has expended in financing the group proceedings, are all considerations that warrant a substantial funding commission reward to Galactic. But as he also said, “[a]t the same time, the range of what is ‘substantial’ is broad and a funding payment to Galactic of $10 million (profit), as an example only, would still be apt to be characterised as a substantial and handsome reward for the risks it has assumed”.
202 Mr Schulman gave evidence in a confidential affidavit dated 1 February 2022 the effect of which included that he believed, based on what Mr Levitt had told him, that courts in Australia regularly made common fund orders. It may be accepted that this evidence would be a factor that would weigh in favour of making a CFO if the court had power to make one. Compare Hall v Pitcher Partners (a firm) [2022] FCA 1524 at [9] (Beach J).
203 I now turn to the competing expert evidence.
204 The funder adduced evidence, in the form of an expert report dated 2 February 2022, from Mr Greg Houston, a founding Partner of the economic consulting firm HoustonKemp, with over 30 years’ experience in “the economic analysis of markets”. The contradictor called Mr Sean McGing, who operates the consulting firm McGing Advisory & Actuarial. He is an actuary and an expert in assessing financial rates of return. His expert report was dated 25 March 2022.
205 Mr Houston was asked to address three questions:
(1) What is the range of common fund orders that are made by the Courts in the Australian market?
(2) What is the range of return on investment for litigation funders?
(3) If the court does make a common fund order in the sum of 25%, what is the return on investment for Galactic?
206 Mr Houston’s evidence was only referred to fleetingly by counsel for the funder in closing oral submissions, and it was not relied upon in support of any particular proposition. It was of no assistance to the task at hand, because, apart from anything else, Mr Houston had assumed the appropriateness of a common fund order of 25% of the settlement sum.
207 But in any event, Mr Houston’s evidence was not expert evidence, and it was irrelevant. Evidence from Mr Houston along the same lines was adduced by the funder who had provided funding in Bolitho v Banksia Securities Ltd (No 18) (remitter) [2021] VSC 666. The learned judge who heard that settlement approval application (John Dixon J) explained in detail why Mr Houston’s evidence in that case was inadmissible on both those grounds. Those reasons included that:
(1) He failed to reason from those assumptions to the opinion that he expressed so as to reveal his opinion to be based upon relevant specialised knowledge ([1926]);
(2) His reasoning was in places that of a lawyer, not an economist ([1926]);
(3) He failed to identify a path of reasoning from his training, qualifications and experience as an economist to a methodology that enabled an assessment of a fair and reasonable funding commission ([1930]);
(4) He did not demonstrate that he drew on properly based specialised knowledge when identifying a litigation funding market ([1930]);
(5) His reasoning seemed to adopt his instructing solicitor’s self-serving assumption that settlement approval decisions in earlier court decisions were evidence of the market for funding commissions ([1935(a)]).
208 No effort was made before me by the funder in these proceedings to explain why the gist of that reasoning is not applicable here.
209 Further, and more substantively, as Mr McGing said, a reasonable return should not be determined as a percentage of settlement, including for the following reasons:
A percentage of settlement provided to the litigation funder does not explicitly consider what the litigation funder actually put in and when. This approach may not align the interests of litigation funder and plaintiff. There are no underlying financial principles in the determination of the percentage of settlement amount that splits the balance between the litigation funder and the plaintiff.
…
Targeting a percentage of settlement amount is inappropriate for determining a reasonable rate of return as it is inconsistent with investment and insurance principles of assessing risk vs return on capital invested and amount at risk, as the amount of return is unknown and not directly related to the capital required or at risk.
210 I therefore have no regard to Mr Houston’s evidence.
211 Mr McGing expressed his opinion on the approach to determining a fair and reasonable return that a return should be “linked strongly to the level of funding it provides, together with the time horizon and level of risk undertaken”. The “fundamental principle” underlying his opinion was that a fair and reasonable return for a funder should be driven by “inputs” specific to that funder. Mr McGing applied principles which are generally accepted in the investments and insurance environments, which he viewed as suitable in determining a return for a litigation funder.
212 In an investment environment, the core inputs that Mr McGing said drive the level of return an investor sees as fair and reasonable are: (i) the amounts of capital invested, held (notionally or physically) for amounts potentially at risk, and depleted to cover costs/expenses specifically attributable to the investment; (ii) the time horizon over which any capital is invested and/or subject to risk; and (iii) the risk undertaken over the time horizon. Mr McGing opined that the interaction of these elements determines the output for an investor – a fair and reasonable investment return, including return of the capital invested. Investors associate low levels of risk with low potential investment returns, and high levels of risk with high potential investment returns, and will make their assessment at the time of making a particular investment, although subsequent events will determine the actual investment returns. Mr McGing identified two measures of investment return – the internal rate of return, which he said was the most commonly used measure of investment performance in financial markets, and return on investment (or return on invested capital), which is a simpler measure than the internal rate of return but which does not consider time as part of measuring performance.
213 In an insurance environment, Mr McGing opined that the core inputs that drive the level of return that an insurer sees as fair and reasonable are the amounts of: (i) insurance/protection for the amount of loss at risk; (ii) risk undertaken; (iii) expected claims to be paid; and (iv) expenses. Again, it was the interaction of these elements that determine the output for an insurer – a fair and reasonable insurance premium, incorporating the profit and risk margin. And again, insurers associate low/high levels of risk with low/high levels of insurance premiums, and will form their views at the time of taking or not taking an insurance contract, although the actual payout will be determined by subsequent events. Mr McGing referred to the suitable return for an insurer as the “notional insurance premium”, being the suitable amount for an insurer to receive to meet the risks it is taking on, is a premium that is based on the best estimate probability of the loss occurring, and allows for the uncertainty around that best estimate, reflecting the size of the entity, and a profit margin.
214 Mr McGing said that the application of these investment and insurance principles is a fundamentally sound approach to determine a fair and reasonable return for a litigation funder, and that the inputs for a funder are the funding, or promise of funding, it provides. The output will be the amount of the return, including a refund of capital at risk actually invested, minus any deductions. Mr McGing also identified a range of other “specific inputs applicable to litigation funding”, including specialist “insurance-type risks” and “investment risks” undertaken by the funder which would affect the notional insurance premium and investment returns, as well as inputs relevant to determining the capital invested and the time that the capital is at risk.
215 Using the principles identified in his report, Mr McGing then calculated a notional insurance premium and required investment return, and calculated a fair and reasonable return for the funder as a percentage of capital at risk. These calculations were made in relation to four separate categories of capital invested: (i) legal fees incurred before settlement; (ii) legal fees incurred after settlement; (iii) adverse costs and related security; and (iv) the funder’s expenses for running the case. Relevantly, a “central reasonable key assumption” upon which those central estimates were based was that the probability of losing any invested capital committed before the date of settlement was 15 per cent (with a “reasonable range” being 10 to 20 per cent).
216 As I have said, Mr McGing also expressed the view that a reasonable return should not be determined as a percentage figure of the total settlement sum, as this does not take account of the range of inputs relevant to a particular proceedings.
217 The funder did not call any evidence about its return on invested capital or the rate of return on equity that a funder might reasonably expect given the level of risk it has assumed. As the contradictor correctly observed “[t]he inputs that drove Galactic’s initial investment decision to finance the proceedings are left unexplained and opaque”.
218 The funder primarily relied on Mr Schulman’s testimony in his second affidavit sworn 1 February 2022 at [35] that in deciding to fund the proceeding, he took into account various opinions of counsel as to prospects of success. Those opinions were in evidence. They were confidential. It is not, however, to breach that confidentiality to say that, in general terms, counsel said that the proposed causes of action had reasonable prospects of success and the like. The only other evidence adduced by the funder in relation to this investment decision was in Mr Schulman’s first affidavit sworn 21 October 2021, in which he described the factors which he considered in arriving at the 35% funder’s premium and said that he agreed to fund the proceedings “on this basis”. However, while this evidence explains some of the factors that Mr Schulman (and the funder) considered when deciding to fund the proceedings, it is only in relation to the funder’s premium to be included in the funding agreements, rather than the return on investment.
219 Mr Finch did not dispute the relevance of Mr McGing’s evidence, or his general methodology. His main point was that a 10-20% risk factor was not an appropriate number for him to assume, because that would mean that at the top end of the range (that is, there is a 20% risk of losing the invested capital) one would be assuming that the proceeding the subject of the funding or proposed funding had prospects of success of 80%, which it was submitted in this case at least (and generally) would be an unreasonable critical assumption to make in assessing a reasonable rate of return and thus an appropriate rate of commission.
220 Mr Houston and Mr McGing filed a joint statement (Exhibit F5) with a series of agreed tables which set out the implied fair and reasonable litigation funding commission adopting the methodology proposed by Mr McGing, but altering the instructed assumption as to the risk of loss during the pre‐settlement period of 15 per cent to show the implied fair and reasonable litigation funding commission if this risk is assumed to be 20, 25, 30, 35 and 40 per cent (while holding all other assumptions constant). That produced so-called “implied funding commissions” of $18.7 million, $20.3 million, $22 million, $24.1 million, $26.4 million and $29.1 million, respectively.
221 The funder’s submissions about what factors are relevant to a court in determining the amount of a settlement CFO were put at in a broad brush way. As Mr Finch put it in the course of his oral submissions:
As a reality check, let’s look at Mr McGing’s approach, rather than a top down approach which is roughly what’s wrong with percentages on outcome, and do a bottom up approach, which is, again, roughly what Mr McGing is doing. And my point about that is, as I’ve said before, if one does that and inserts a more reasonable integer for the risk, acknowledging the different type of investment that this is, then one gets a reality check of, well, that gives a roughly similar amount or sometimes more than the number I first thought of. That is a legitimate, with respect, perfectly proper exercise. And that’s the exercise, in short, that I’m going to ask your Honour to do.
…
Now, again … with respect, I think exactly the sort of thing that your Honour was talking about earlier, which is, you have to look at the dollars in question. If the settlement is $10, it’s a very different consideration than if the settlement is $100 billion. And percentages, whilst they might be the door through which one walks to get to the debate, are not the answer to the debate. They’re simply how you get to the numbers being debated. And one then applies your Honour’s discretion to the number which is thrown up by the various analyses.
And – as I say, I keep using the shorthand expression – the easy expression, “reality check”, but I – we mean what we say when we say that. That’s shorthand for your Honour’s discretionary exercise in saying, well, that’s how you got there. That’s – they were promised something like a 25 per cent return. In fact, most people who signed up – I think everybody who signed up to funding agreements, signed up to 35 per cent. Is 25 per cent a fair return when you do the numbers? Well, let’s look at the gross numbers. It’s 24.5 million in a settlement of 98. Measure that against the amount of costs paid. Well, they’re almost $20 million. They’re the costs actually paid so far. So it’s only a little bit above what the costs actually paid are.
222 Mr Finch continued:
Secondly, we say that no reasoned criticism can be made or has been made of the actual dollar amount, $24.5 million. Nobody has stood up to say that, in the context of this matter, a $98 million matter, where our costs actually paid approached 20 million on our own side and our cost risk must have been exactly – at least double that, or more – that the return of 24.5 [million] is self-evidently not reasonable, where that – as I say, that return is less than the potential adverse exposure that they might have had if they had lost, and, indeed, perhaps half of the exposure they might have had, and one doesn’t need to do any particularly arcane playing with numbers.
If we assume in round figures that our costs which we have paid approach 20 million – and let’s assume that the other side’s bill was going to be as much again as that – then one comes quickly to a potential exposure of our own loss, the other side’s costs, 40 million plus.
…
Secondly, 25 per cent, assuming that we’re not talking about a billion dollar settlement, seems to be a reasonable rate of return which is very often rewarded to funders in the Federal Court. That’s a relevant factor as well, because, as Mr McGing conceded, it is relevant to take into account, even using his bottom-up approach, the legitimate expectations of the investor.
223 As to Exhibit F5, Mr Finch submitted:
[W]hen your Honour comes to write a judgment, in the event, and to the extent, that it is of utility to refer to it at all, exhibit F5 was a document I asked the two experts in their hot tub to create. If one left Mr McGing’s approach effectively as it was – and I will shorthand that as a bottom-up approach, in a way that your Honour understands me, I think – but altering the risk from a 15 per cent chance of loss to chances higher than that. And being the sort of very conservative person I am, I asked him to stop at a 40 per cent chance of loss. One can imagine the figure might well be higher, but at that level, using his own approach, the implied funding commission ended up at $29 million.
So that is more than what is the return on the 25 per cent on gross. That’s the effective utility of that report. It’s only two pages long. In due course, your Honour can look at that. But that’s the purpose for which it is relevant; that is, if we look, as a reality check, at the dollars produced by 25 per cent on gross another way, look at it bottom-up, adopt everything Mr McGing says, but recognising this is a different type of investment, recognising that that inflates the risk from 15 per cent as a reasonable chance of loss to something higher than that, then you only need to change it a few notches, and the amount quickly goes above what we’re seeking anyway.
Now, there’s no magic in that. But again, your Honour can say, well, all of those chances of loss are within the realms of possibility, given what I have seen both as to what he was looking forward to from the start, and to what counsel, looking back, thought. And without retrying the case or trying the case for the first time in my own mind, none of those numbers is outside the bounds of the sorts of numbers that the experts have plugged into Mr McGing’s analysis, and the outcome of that analysis shows me that we are in the right ballpark in terms of outcome. That is, even if you do that analysis from an entirely different standpoint, we don’t get numbers which are wildly different.
224 So much may be accepted, but in my view, however, the following important matters would weigh heavily in the balance against the making of a CFO in the sum of $24.5 million.
225 First, as Moshinsky J said in Fisher (trustee for the Tramik Super Fund Trust) v Vocus Group Ltd (No 2) [2020] FCA 579 at [73], the majority in Brewster “express[ed] strong reasons for favouring a funding equalisation order over a common fund order. When the observations of Gordon J are added to those of the plurality, a majority of the High Court have indicated strong reasons favouring the making of a funding equalisation order over a common fund order”.
226 Secondly, even if the applicant’s late filed evidence in Mr Imlay’s 12 May 2022 affidavit were admitted into evidence (something I decline to agree to – see infra at [307]-[310]), and I accepted (which I do not) that the funder is entitled to total commission of $13.72 million under the funding agreements with the group members, a CFO order in the sum of $24.5 million would mean that the funder would be entitled to receive something approaching double what it would be entitled to under the funding agreements. It is not at all clear to me what rationale would justify the difference ($10.78 million) being paid to the funder, other than under some sort of “windfall gain” theory. (As Moshinsky J said in Vocus at [74], a differential of that order of magnitude goes further than is necessary to deal with the problem of “free riding”).
227 And, again as in Vocus at [74], although it can readily be accepted in this case that the funder played an important role in funding the litigation, and thus exposed itself to litigation risk for the benefit of group members, the applicant’s proposal for a FEO recognises that role and the risks it took.
228 Mr Levitt gave evidence about book building activities being conducted between mid-2018 and June 2021 in his confidential affidavit sworn on 14 October 2021. The gist of that evidence related to a belief that he held that 7-Eleven had at relevant times endeavoured in some fashion or another to “pressure” franchisees not to “sign up” to the class action, or to seek legal advice from Levitt Robinson, and that such supposed pressure made book building efforts more difficult than they otherwise would be.
229 But there was no evidence before me of that in fact occurring (as distinct from Mr Levitt’s state of mind about the matter), so the point goes nowhere.
230 As the contradictor submitted, “the fact of the matter is that the funder and Levitt Robinson signed up as many franchisees as were willing to enter into funding agreements with Galactic. There were sustained efforts including after Brewster, which was 18 months prior to the settlement. So this is not a case where Galactic’s contractual rights are insufficient by reason of the proceedings settling early, or it not having a sufficient opportunity to sign up as many group members as possible”.
231 The contradictor also submitted, and I agree, that Levitt Robinson had “adequate opportunity over a considerable period of time to build and sign up”, and despite the fact that “every effort was made … the best they could do was 38 per cent [of the number of stores operated by group members] … and that’s simply no reason to depart from the prima facie contractual position”.
232 The contradictor continued, and again I agree:
Now, the funder may not like that result, it may wish that more signed up, no doubt it would, but that’s not a reason for making a CFO instead of a … FEO.
Now, so our overall submission, then, on the discretion issue, is that your Honour’s squarely in the kind of territory of Moshinsky J in Vocus, informed by the strong remarks of the … majority of the High Court in Brewster, and that the appropriate order to make here is one pegged to the valid and binding contractual rights of the funder, as aggregated and then spread across the group through an FEO.
233 For those reasons, the answer to question (8) is: no.
Question (9): If the court considers such an order should be made in its discretion, is 25% of the gross settlement proceeds a fair and reasonable amount?
234 Because question (7) is answered in the negative, the answer to question (9) is: the question does not arise. But in any event, for reasons given in respect of question (8), the answer to question (9) would be: no, 25% of the gross settlement proceeds is not a fair and reasonable.
Question (10): What is the appropriate methodology to determine a fair and reasonable funding commission and what is the relevance in that regard of the expert reports of Mr Houston and Mr McGing to the Court’s determination of a fair and reasonable funding commission?
235 Because question (7) is answered in the negative, the answer to question (10) is: the question does not arise.
Question (11): If the court declines to make a CFO in these circumstances, should a FEO otherwise be made and, if so, what is, or should be, the aggregate amount of any FEO?
236 As is apparent from what I have said above, the applicants sought a FEO. They did not support the funder’s application for a CFO.
237 In turn, the funder disavowed any submission in support of a FEO. As Mr Finch put it:
[W]e simply rely on our contractual rights with those who have signed funding agreements, and there’s no dispute between us and them. So in due course, when they get money, they have to pay us under the contract. We don’t need to do anything about equalisation. We don’t need to do anything about the EO half of FEO because that’s a matter for the applicants to press if they want it. So far as we’re concerned, if your Honour says there’s no power to make a CFO, then we fall back on our contractual rights with those who have signed funding agreement.
…
And that’s not a live issue before your Honour. There’s no justiciable dispute because nobody is saying to us, “We won’t pay you under those agreements.”
238 The contradictor said that a FEO is appropriate if the court does not have the power to make a CFO or considers it should not make such an order in its discretion, and that there was “force in the Applicants’ position and its statements of principle in that regard are gratefully adopted”.
239 Those principles are well established.
240 The object of a FEO is to ensure that the funding group members are not solely burdened with the costs of funding a proceeding.
241 As Finkelstein J observed in P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4) [2010] FCA 1029 at [27]-[28]:
What is now proposed is a distribution which involves a “funding equalisation factor” by which non-funded class members will have deducted from their entitlement an amount equal to the commission payable to the litigation funder that would have applied had the non-funded class members’ funding agreements remained on foot.
It is said that fairness to the funded class members, without whom the proceedings could not have continued, requires that the non-funded group members are in no better position for having been unfunded for a matter of weeks prior to the in-principal settlement having been reached. The effect of applying the “funding equalisation factor” is to redistribute an amount equivalent to the commissions that would have been payable by the non-funded group members between all group members. I believe that, in the circumstances of this case, it would be unreasonable not to apply the proposed funding equalisation factor.
242 As to power, as Kiefel CJ, Bell and Keane JJ said in Brewster at 613 [89]:
A FEO is clearly available where a settlement is reached. A settlement must be approved by the court, and, in approving a settlement, the court must be satisfied that it is “fair and reasonable to all group members”. A settlement that allows some group members to ride for free would not be fair and reasonable to the other group members.
(Footnotes omitted)
243 The rationale for the making of a FEO was put this way by Murphy J in Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433 at [83]:
If not for the funding equalisation mechanism unfunded [group members] would receive more “in hand” than funded [group members] who effectively financed the proceeding by pooling their promises to pay the Funder a funding commission. This mechanism is fair and reasonable because it achieves equality of treatment between class members. I can see no good reason why funded [group members] should carry the litigation funding costs of the proceeding alone and unfunded [group members] should be permitted to take the benefit of the proposed settlement but not pay a proportionate share of the funding costs of achieving that settlement.
244 Or as Middleton J put it in Bradgate (Trustee) v Ashley Services Group Ltd (No 2) [2019] FCA 1210 at [15]:
[FEOs] achieve equality of treatment between group members because unfunded group members (that is, group members who have not entered into a funding agreement with a litigation funder) would not receive any more ‘in hand’ than funded group members … As has been espoused by the courts, there is no good reason why unfunded group members should be permitted to take the benefit of the proposed settlement without paying a proportionate share of the funding costs …
245 The applicants contended that, having regard to those principles and all of the relevant circumstances, I should be satisfied that it is appropriate to make a FEO because:
(1) it would address the “free rider problem” that was the subject of consideration by the High Court in Brewster (see also Botsman v Bolitho (2018) 57 VR 68 at 113-114 [214]-[216]);
(2) failure to do so would result in unfairness to Funding Group Members;
(3) the order for a FEO falls within the now orthodox and accepted solution for amortising the funding costs equitably between all group members, citing Clime Capital Ltd v UGL Pty Ltd [2020] FCA 66 at [11];
(4) the funding commission of 35% under the litigation funding agreements is not excessive, having regard to the basis and circumstances of its agreement, citing the affidavit of Mr Levitt sworn 14 October 2021 at [10]-[17]; and
(5) the return to the funder is unlikely to be as high as the amount sought pursuant to the CFO Application having regard to the number of funded group members, citing the affidavit of Mr Levitt sworn 14 October 2021 at [18]-[25]; the affidavit of Mr Imlay sworn 13 October 2021 at [133]-[140], Exhibit BRI-48 at 306.
246 The contradictor’s principal concern in his submissions dealing with this question related to whether the applicants (or the funder for that matter) had proved the extent of binding funding agreements. I now turn to that question.
Question (11)(a): Does the court need to be satisfied as to Galactic’s asserted contractual rights under the funding agreements in order to make a FEO and, if yes, was there sufficient evidence adduced about the existence of binding funding agreements?
247 There was no dispute that the court needs to be satisfied as to a funder’s asserted contractual rights under funding agreements in order to make a FEO.
248 In his submissions dated 9 March 2022, the contradictor contended, among other things, that there was no sufficient evidence adduced about the existence of binding funding agreements, or their terms, and that as things then stood, the making of a FEO could not be contemplated because there was “a serious question as to the content and quantum of any [FEO], or put another way, there is currently before the Court no direct evidence as to what contractual ‘funding’ commission is to be ‘equalised’”.
249 The contradictor further submitted:
The lack of the provision of signed and consolidated funding agreements (or alternatively signed counterparts properly referencing by incorporation the terms agreed to) gave rise to some concern on the part of the Contradictor as to the extent to which group members had been given proper notice of the terms of the funding agreements, and what their obligations were under them, before they signed the agreements and (purportedly) became bound by them. That concern was fortified in circumstances where, throughout the course of the proceedings, there had been a number of iterations of the funding agreements (set out below) and it was not apparent which version group members were signing up to from time to time based on upon the provision of only signature pages (albeit the Contradictor does observe that it appears the funding commission payable under each version of the funding agreements was 35%).
250 The contradictor also detailed his efforts to persuade the applicants’ solicitors to put on evidence about the existence of binding funding agreements and their terms.
251 In his oral submissions, the contradictor also quoted from a letter that he had sent to Levitt Robinson, including as follows:
[Y]ou have produced, amongst other things, a number of funding agreements, some of which contain only signature pages. It is also not clear to us that the production represents all funding agreements (as amended from time to time) signed up to by ‘funded’ class members. We expect the Court would have a similar difficulty in ascertaining that matter.
In circumstances where the funding agreements operate as your film’ s costs disclosure and fee agreement, we assume you have ready access to a list of each and every class member who signed a funding agreement, given that by reason of doing so that class member became a client of Levitt Robinson.
In those circumstances, we request that you: provide a list of each group member … who signed a funding agreement, and identify by reference to that list which funding agreement produced relates to that group member … and confirm how Levitt Robinson provided updated versions of the funding agreement to clients (or alternatively whether a client continued to be bound by an earlier version of the funding agreement if that was the version to which they signed up).
252 That request was apparently met with some resistance, which prompted the contradictor to write again to Levitt Robinson, including as follows:
[I]n circumstances where your clients seek a funding equalisation order, it seems to us that it will be necessary for them to prove to the court the extent of any funding commission payable by each of the funded group members under the executed funding agreements. That is proved, it seems to us, by first proving (amongst other things) that the funding agreements are properly executed and are binding (such that any commission payable under them is legally enforceable). That is matter to which our request was directed.
In those circumstances, it is a matter for your clients (and the funder) whether they adduce evidence of the kind sought by our request in the proceedings or not, including whether or not they seek to do so on an appropriate sample basis. We simply observe that if there is no direct evidence of binding funding agreements, then a submission – to the effect that the Applicants have not proved the existence of binding funding agreements and therefore any obligation on those group members to pay such a commission to the funder – is open to us to make. That has the flow on effect that an FEO is only capable of ‘attaching’ to such amount of funding payable under legally enforceable funding agreements.
253 No further evidence was forthcoming from Levitt Robinson.
254 That prompted the contradictor to submit in his 9 March 2022 written submission (filed two weeks before the hearing commenced) that I did not have the benefit of any sufficient and reliable evidence as to the existence of binding funding agreements, and that absent such proof, I should not countenance the making of any FEO because “in the absence of a proved contractual entitlement to funding, [it] would simply effect the equalisation of nothing”.
255 It is fair to say that there was considerable merit in that submission.
256 Presumably in recognition of the fact that the contradictor indeed had a point, the applicants eventually put on evidence about the issue.
257 Mr Punthakey is a senior associate employed by Levitt Robinson. In his affidavit sworn on 28 March 2022 – the first day of the hearing of these applications – he introduced the relevance of the affidavit, and sought to explain its late production, in this way:
2. I am not authorised to waive the Applicants’ (in both proceedings) client legal privilege and nothing in this affidavit should be construed as involving a waiver of that privilege.
3. I make this affidavit … in support of the Applicants’ amended applications dated 17 December 2021 seeking approval of a Proposed Settlement between the Applicants (in this proceeding and in proceeding VID182/2018), 7-Eleven … [Levitt Robinson] and the litigation funder, Galactic …
4. In particular, I make this affidavit in support of the Applicants’ prayers for a “Funding Equalisation Order” in the amended applications dated 17 December 2021, and having regard to [21] of the Contradictor’s submissions dated 7 February 2022, and [4(e)], and [294]-[310] of the Contradictor’s submissions dated 9 March 2022.
5. Exhibited to me at the time of swearing this affidavit and marked JJP-17 and JJP-18 are two bundles of documents to which I will refer in this affidavit, the latter being a confidential exhibit.
6. I am swearing this affidavit at the end of day one of the settlement approval hearing before the Honourable Justice O’Callaghan, owing to the fact that I have had limited time to prepare this affidavit over the last few weeks, in light of other pressing demands.
7. I refer to [28] of the confidential affidavit of Stewart Levitt sworn 14 October 2021 and pages 35-74 of Confidential Exhibit SAL-19 concerning the iterations of [Levitt Robinson’s] Costs Agreements provided to group members.
258 He then deposed to the following facts.
259 There were 16 iterations of the standard form funding agreement, which he described as follows by reference to various documents in Exhibit JJP-17:
(a) Version 1.1 (5 December 2017 to 19 February 2018) at pages 8-41 of JJP-17;
(b) Version 1.2 (20 February 2018 to 26 March 2018) at pages 42-75 of JJP-17;
(c) Version 1.3 (27 March 2018 to 29 April 2018) at pages 76-109 of JJP-17;
(d) Version 1.4 (30 April 2018 to 23 May 2018) at pages 110-144 of JJP-17;
(e) Version 1.5 (24 May 2018 to 27 November 2019) at pages 145-179 of JJP-17;
(f) Version 2.1 (28 November 2019 to 24 December 2019) at pages 180-218 of JJP-17;
(g) Version 2.2 (25 December 2019 to 26 April 2020) at pages 219-257 of JJP-17;
(h) Version 2.3 (27 April 2020 to 10 June 2020) at pages 258-296 of JJP-17;
(i) Version 2.4 (11 June 2020 to 10 August 2020) at pages 297-335 of JJP-17;
(j) Version 3.1 (11 August 2020 to 10 December 2020) at pages 336-374 of JJP-17;
(k) Version 3.2 (11 December 2020 to 4 February 2021) at pages 375-415 of JJP-17:
(l) Version 3.3 (5 February 2021 to 25 March 2021) at pages 416-455 of JJP-17;
(m) Version 3.4 (26 March 2021 to 9 May 2021) at pages 456-496 of JJP-17;
(n) Version 3.5 (10 May 2021 to 12 May 2021) at pages 497-558 of JJP-17;
(o) Version 3.6 (13 May 2021 to 18 September 2021) at pages 559-599 of JJP-17; and
(p) Version 4.1 (19 September 2021 to present) at pages 600-640 of JJP-17.
260 Mr Punthakey deposed that he had conducted a review of “about 330” executed funding agreements in Levitt Robinson’s records, to prepare a confidential summary, “pursuant to section 50 of the Evidence Act”. They were said to comprise all of the executed funding agreements by group members in both proceedings held in Levitt Robinson’s records, to the best of his knowledge and belief, as at 28 March 2022.
261 Mr Punthakey deposed that each executed funding agreement “appear[ed] to have been executed” by one or more companies (being franchisee companies who are group member in the 180 Proceeding) or one or more natural persons (being directors or guarantors that are group members in the 182 Proceeding). Some of the funding agreements were provided in their entirety, enabling him to identify which version (of the 16 iterations) it was. In other cases, only the execution pages were to be found, apparently because “[i]t was the practice of many group members to return only the execution pages … typically by email”.
262 Where the full funding agreement was available, in addition to using the date of the executed funding agreement and the document ID, Mr Punthakey deposed that he was able to match it with a version by looking at key parts of the funding agreement that changed over time (for example, clause 2.2 in versions 1.1 to 1.4, the date of letters setting out Levitt Robinson’s charge-out rates and the date of updated costs agreements).
263 For the funding agreements where only the execution pages had been provided to Levitt Robinson, Mr Punthakey deposed that in some instances he could “positively identify” the version by reference to the date the counterpart was returned and the document ID at the bottom of the signing page. For example, he deposed that version 2.1 had the document ID “p150623_1720.docx”, and no prior or subsequent version shares that document ID.
264 In other cases, some versions shared the same document ID or did not display a document ID (because of the way the counterpart was scanned), in which case Mr Punthakey deposed that he identified a number of versions that might be the version of that counterpart, based on the date of execution of that funding agreement. In these instances of ambiguity, he italicised and listed the set of versions that may apply to those agreements in the confidential summary. Where the group member only provided Levitt Robinson with the execution pages, those group members were separately identified in the summary.
265 Mr Punthakey deposed that about 60 of the 330 executed funding agreements were “superseded”, because that group member subsequently executed a later version of the funding agreement. Where the group member signed two different versions of the funding agreement, they were included in the count of the most recent version signed, but not included in the count of the earlier versions signed.
266 The confidential summary set out the number of group members in each proceeding that had executed the relevant version of the funding agreement, and the category in the proposed Settlement Scheme (being a weighting of 100%, 33% or zero) attributable to the store of the VID 180 Group Member who executed the funding agreement.
267 He also exhibited samples of executed versions of each of the iterations of the funding agreements.
268 Mr Punthakey updated the confidential summary in his affidavit sworn on 21 April 2022.
269 That effect of that summary, so Mr Punthakey deposed, was that there were a total of 271 funding agreements executed between 5 December 2017 and 19 September 2021. There were 78 stores with a loss claim weighting of 100%. There were 99 stores with a loss claim weighting of 33% and 72 stores with a loss claim weighting of zero.
270 In summary, Mr Punthakey produced (i) unexecuted copies of each of the 16 versions of the funding agreement; and (ii) samples of each version.
271 What I have described above is a sorry saga of delay in adducing self-evidently necessary evidence.
272 It is also a saga of Levitt Robinson’s appalling record keeping. It beggars belief that the firm (or for that matter, the funder) was unable to produce at the press of a button copies of all relevant funding agreements relied upon for the purposes of these applications. Further, the late production of the Mr Punthakey’s 28 March 2022 affidavit doubtless prejudiced the contradictor in the preparation of his case at that time. And Mr Punthakey’s explanation – that he had been too busy to attend to the matter – was, on its face, unpersuasive.
273 Despite those unsatisfactory features, by the terms of Mr Punthakey’s 28 March 2022 affidavit, updated in his 21 April 2022 affidavit, in my view the applicant has established that there were a total of 271 funding agreements executed between 5 December 2017 and 19 September 2021 and it has established the terms of the 16 iterations of the funding agreements, including that each of them prescribed a litigation funding commission of 35% of any monetary compensation received by the Funded Group Member who signed a funding agreement.
274 I understood the contradictor to have conceded as much in the course of his final address, as follows:
MR REDWOOD: … [T]he funder … didn’t adduce any evidence as to the funding agreements, but Levitt Robinson in the end produced the section 50 summary, and whilst it’s incomplete – whilst it’s not perfect … the upshot is that having looked at it, we’re happy to proceed on the basis that section 50 summary provides an adequate evidentiary foundation for the funding agreements. So we don’t take any issue in that regard.
HIS HONOUR: Well, it’s hardly a model document retention policy, is it?
MR REDWOOD: No … [but] we just want to try and be – to use that much-abused phrase – practical, but we – we have tested and been annoying enough on it and we – obviously, your Honour thought it was a pretty basic thing to be able to – if you’re going to have a contract – to prove existence and have it orderly arranged, but this is the best that can be done and we – we aren’t proposing to agitate it further.
275 I also need to say something about s 50 of the Evidence Act, to which Mr Punthakey and Mr Redwood both referred.
276 Sub-section 50(1) of the Evidence Act provides that “[t]he court may, on the application of a party, direct that the party may adduce evidence of the contents of 2 or more documents in question in the form of a summary if” it “is satisfied that it would not otherwise be possible conveniently to examine the evidence because of the volume or complexity of the documents in question”.
277 Two matters arise. First, the applicants did not make any application under s 50(1). The only reference to that provision in the materials was Mr Punthakey’s curious assertion in his 28 March 2022 affidavit that he had conducted a review of executed funding agreements “pursuant to section 50 of the Evidence Act”. Secondly, the applicants did not adduce evidence that “it would not otherwise be possible conveniently to examine the [funding agreements] because of the volume or complexity of the documents in question” – on the contrary, Mr Punthakey’s evidence was that he sought to rely on the summary of the evidence in his late served affidavits because he could not find, or did not have it in his power to produce, copies of all completed funding agreements.
278 It follows that the so-called summary evidence cannot to be admitted pursuant to s 50 of the Evidence Act, as the applicants seemed to have assumed it could.
279 I will, however, admit the evidence on the basis that it is relevant and probative to the question of the proof of the relevant terms of the many iterations of the funding agreements. And, as I have said, that evidence established the terms of the relevant funding agreements.
280 For those reasons, the answer to question (11)(a) is: yes and yes, respectively.
Question (11)(b): To what extent (if at all) is Galactic entitled to a “gross-up” funding commission if a FEO is made?
FEO calculations relied on by the applicants
281 Prior to the last day of the hearing, the applicants had sought to rely on two different estimated FEO calculations.
282 The first such calculation was contained in Mr Imlay’s 13 October 2021 affidavit and was said to result in an entitlement to a FEO in the sum of $13.034 million, plus a so-called “grossing up” amount. He deposed as follows (at [133]-[139]):
At [15] of my 6 October Affidavit, I deposed on information and belief that about 38% of the stores operated or formerly operated group members that are not deregistered and who have not signed releases in favour of 7-Eleven[ ]have signed funding agreements with Galactic (Funding Group Members).
The average compensation payments that I calculated at [65] of my 6 October Affidavit were premised on a common fund order being made.
If there is no common fund order, Galactic’s contractual entitlement under the funding agreements will be 35% of the gross proceeds of the settlement referable to the claims of the Funding Group Members.
Assuming that the value of the claims of the Funding Group Members is proportionate to their number (38% of the value of the claims of all group members who register for the Settlement Scheme), Galactic’s entitlement under the funding agreements will be 35% x (38% X $98,000,000) = $13,034,000.
If a common fund order is not made in favour of Galactic, without a FEO being made, the Funding Group Members will bear the sole burden of this commission payment
If an FEO were to be made (in the event a common fund order were not made) the Funding Group Members would be relieved by the unfunded group members of 62% of the burden they would otherwise bear, being $8,081,080 out of the figure of $13,034,000 that is payable to Galactic.
To the extent that this increases the returns to the Funding Group Members, this would, as I understand the operation of the funding agreements, entitle Galactic to a further “grossing up” commission of 35% of $8,081,080 or $2,828,350 which an FEO (if made) would then entitle the Funding Group Members to be relieved by the unfunded group members of 62% of that further burden or $1,753,577. This grossing up process would then continue with further funding commission payments to Galactic based on the additional benefits to the Funding Group Members.
283 The calculation he referred to was set out at Exhibit BRI-48 of that affidavit, as follows:
284 The second such calculation was contained in Mr Imlay’s 17 December 2021 affidavit. He deposed, in some considerable detail, to changes in relevant figures and weightings (the details of which do not matter), and concluded that in light of those changes, it was necessary to reduce the percentage figure attributed to the value of the claims of the Funding Group Members from 38% to 35%, which in turn reduced the claimed FEO sum from $13.034 million to $12.005 million, plus a so-called “grossing up” amount. At [60], Mr Imlay deposed:
In light of the above, after opt out there are 307 VID182 funding group members with non-zero weighted claims out of a total of 1,013 VID 182 group members with non-zero weighted claims, representing 30.3% of the store claims in the group. This is lower than the 39% of VID180 non-zero weighted store claims represented by funding group members. For the purpose of calculating an estimated FEO payment, I am informed by Mr Punthakey and verily believe that a percentage of 35% results in an FEO payment of $15.54 million after the grossing up calculation. A copy of the spreadsheet showing this calculation is at page 111 of BRI-52.
285 That is to say, in approximate terms, 35% was a figure half way between the different non-zero weightings of the claims in each proceeding (30.3% in the case of VID 182 and 39% in the case of VID 180). The calculation refereed to at page 111 of Exhibit BRI-52 was as follows:
286 In his 12 May 2022 affidavit, in evidence which the contradictor says should not be admitted because it was too late, untested and unexplained, Mr Imlay propounded yet different figures, as follows (at [8]-[10]):
I refer to [60] of my affidavit sworn 17 December 2021 (CB 4/3.21/2410) and page 111 of exhibit BRI-52 to that affidavit (CB 4/3.21/2508).
I am informed by Mr Punthakey and verily believe that he produced the spreadsheet at page 7 of BRI-58 calculating a FEO payment of $17,367,075 after grossing up (Updated Gross-Up Calculation), on the assumption that the Funder is entitled to payment on a grossed-up basis and that the value of the claims of the Funded VID180 Group Members and Funded VID182 Group Members amounts to a blended 40% of the Settlement Sum.
The figure of 40% has been chosen on the basis that VID180 claims have a higher weighting than VID182 claims under the proposed Settlement Scheme (currently proposed as a 60:40 split, although the Contradictor advocates an even higher weighting of 80:20), and the percentage of 41.7% of Funded 180 Loss Claim Stores referred to at [7(h)] above. I consider 40% is a conservative figure for the Updated Gross-Up Calculation for the following reasons:
(a) I expect the registration rate to be higher for Funded Group Members as compared to unfunded group members, as Funded Group Members have been more engaged in the proceedings (by providing documents, evidence and making enquiries) than unfunded group members;
(b) I expect the value of claims to be somewhat higher for Funded Group Members as compared to unfunded group members, on the assumption that group members who suffered greater financial loss were more likely to sign a funding agreement;
(c) related to the matters in (b) above, the percentage in [7(j)] above (that there are about 316 VID182 Funded Group Members, which amounts to 25.6% of the 1,232 VID182 Group Members) is not a reliable direct approximation of the likely value of claims of VID182 of Funded Group Members because those persons were more likely to have been directly engaged in operating Stores and so have valuableVID182 claims (rather than being persons who are Nominated Directors (under a 7-Eleven Franchise Agreement) or Guarantors (under a 7-Eleven Franchise Agreement or ANZ Bank Loan Contract) but did not actually work in a Store and so will have a nil-value VID182 Loss Claim under the Settlement Scheme).
287 The spreadsheet to which he referred was as follows:
288 For the reasons given below (see infra at [307]-[309]), I accept the contradictor’s submission that the applicants should not be permitted to rely on paragraphs [8]-[10] of Mr Imlay’s 12 May 2022 affidavit.
Whether court should have regard to applicants’ 24 May 2022 post-hearing note
289 In the dying seconds of the last day of the hearing (13 May 2022), the following exchange occurred between me and Mr Pritchard:
MR PRITCHARD: Sorry, your Honour. There is a concern about – the reason that – perhaps we will deal with it with Mr – this comes from my solicitors, your Honour – deals with in relation to the $12 million commission, it’s no more than the estimate, but can I put that in the note to your Honour, if we have an issue about that? It’s about –
HIS HONOUR: Yes, you can.
MR PRITCHARD: – thank you.
HIS HONOUR: You can because of the time.
290 What purported to be such a note was filed on 24 May 2022. It was 33 pages long, and contained detailed “reply” submissions.
291 The note commenced with matters said to be about “context and summary”.
292 One such matter was the assertion, not made before, that “the Court cannot and should not presently fix a sum for a FEO without first expressly making a determination that it has the power and a basis to vary the Funder’s contractual rights (a matter on which the Court did not receive substantive submissions)”. That proposition was footnoted as follows:
Different obiter views had been expressed by single judges of the Court as to whether the Court has power to vary the funding commission group members are required to pay pursuant to funding agreements they have entered into. See for example Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289 at [18]-[51] (Lee J). See also Earglow Pty Ltd v Newcrest Mining Limited [2016] FCA 1433 at [133]-[158] (Murphy J); Blairgowrie Trading Ltd v Allco Finance Group Ltd (Recs & Mgrs Apptd) (In Liq) (No 3) [2017] FCA 330 at [101] (Beach J); and Mitic v OZ Minerals Limited (No 2) [2017] FCA 409 at [27]-[29] (Middleton J). Appellate courts have noted the uncertainty surrounding this issue without resolving it: see Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183 at [63] (Lee J); Botsman v Bolitho [2018] VSCA 278 at [141], [375]-[383] (Tate, Whelan and Niall JJA).
293 After quoting [15.4] of the Federal Court Class Actions Practice Note (GPN-CA), and the judgment of Finkelstein J in P Dawson Nominees at [28], the note continued:
[T]he central concept of an FEO is to spread the burden of litigation funding equitably, so that no group member is in any better position than another having regard to the burdens that funded group members have assumed under litigation funding agreements (FEO Central Concept).
Relevant authorities explaining and endorsing the FEO Central Concept (with selected extracts) are set out in Schedule 2 to this note.
Achieving the FEO Central Concept in these proceedings involves:
(a) group members registering their claims under the Settlement Scheme (Registered Group Members, RGMs) by the Registration Deadline, which will be 52 days after the Court makes orders concerning the distribution of the Settlement Sum. Only RGMs (ie, those that register by the Registration Deadline) are eligible to make a claim on the Settlement Sum, not all group members. The fewer the number of RGMs, the more each RGM will receive out of the Settlement Sum (because that sum will be shared amongst fewer participants in the Settlement Scheme);
(b) individual assessment of each RGM’s claim by the Administrator appointed under the Settlement Scheme [citing Scheme at [25]-[33], [41]-[51] (VID180), [34]-[40], [52]-[54] (VID182), [55]-[60] (experts)];
(c) applying the relevant weightings to each RGM’s claim and then calculating each group member’s pro-rata share of the Settlement Sum;
(d) calculating the 35% burden of each Funded Group Member’s pro-rata share of the Settlement Sum under the LFAs (LFA Burden);
(e) applying the aggregated LFA Burden of Funded Group Members (Aggregated LFA Burden) across all RGMs so that each of them contributes in proportion to the value of their individual claim on the Settlement Sum; and
(f) calculating the Funder’s entitlement to “grossing up” under the LFAs, and applying any grossed-up sum as an additional Aggregated LFA Burden across all RGMs (the process of which is described below).
Unlike a class action involving a single class of securities in which group members share rateably in the settlement proceeds in proportion to the number of securities they hold (a recent example being Zantran Pty Ltd v Crown Resorts Ltd [2022] FCA 500 (Zantran), in which an FEO was ordered), in these proceedings, the quantum of each RGM’s claim under the Settlement Scheme will be unique.
The value of each RGM’s claim will depend on whether it is a VID180 claim or a VID182 claim, the weighting to be attributed to the claim in accordance with the Settlement Scheme, and the individual facts informing each claim. In particular:
(a) RGMs’ VID180 loss and damage claims will reflect the individual circumstances in which the group member acquired their store, the actual profits made in operating the store, and the value received in disposing of that store (or its present value if the store is retained);
(b) RGMs’ VID182 claims will reflect individual hours worked in their store and the remuneration received for that work.
Inevitably, there will be significant variance in the value of each RGM’s claim. This is demonstrated by the loss calculations that were prepared for a sample of VID180 group members for the purposes of mediation as explained in Imlay (06.10.21) at [72]-[86] (CB 2/3.4/800-803) and set out at page 136 of BRl-46 (CB 2/3.4/918). Those sample loss claims range from nil to $577,510.79.
Furthermore, as generally occurs where an FEO has been ordered, at the time of making the FEO in Zantran, the registration and assessment process required to determine the precise sum of the Funder’s contractual entitlement had already been conducted. The Applicants are not currently aware of any prior case where, as is the case here, an FEO has been ordered in circumstances where the registration and assessment process had not yet occurred.
294 The note then turned to the topic of “Limits to estimating quantum of a funding equalisation order”, and after summarising Mr Imlay’s three versions of what were defined as “Estimated FEO Calculations”, continued:
Each of the Estimated FEO Calculations was prepared by first identifying what percentage of claims the Funded Group Members may constitute. By way of example, in the Second Estimated FEO Calculation, Mr Imlay identified that at that point in time, Funded Group Members represented approximately 39% of the number of VID180 claims with a non-zero weighting, and 30.3% of the number of VID182 non-zero weighted claims. Those figures were to produce a base number of 35% on which the calculation was based.
Each of the Estimated FEO Calculations is also premised on an assumption that the value of the claims of Funded Group Members who lodge claims under the Settlement Scheme will be proportionate to the value of all RGMs’ claims (RFGMs Claims Assumption). The updated figures in the Second and Third Estimated FEO Calculations then simply reflect an increase in the number of Funded Group Members since the previous estimated FEO calculation was made, using the same methodology and approach.
The estimates are adduced only to give the Court an indication of the quantum of an FEO if the RFGMs Claims Assumption came to pass. The estimates do not, and cannot, calculate the actual value of the Funder’s contractual entitlements under the LFAs to which it would be entitled to under an FEO, being the aggregated LFA Burden. As is set out below, the Contradictor’s submissions on this matter misapprehend this central proposition.
The RFGMs Claims Assumption is an assumption of convenience. It has no “testable” foundation, because the value and number of Funded Group Members’ claims cannot be known until after registration and assessment of all RGMs’ claims by the Scheme Administrator. In other words, it is not possible to reliably estimate the Aggregated LFA Burden in advance of that sum being calculated following the assessment of all RGMs’ claims.
Contrary to the RFGMs Claims Assumption, it may be that the Registered Funded Group Members’ claims are significantly greater in number and value than those of Registered Unfunded Group Members [citing AS2 [202(e)] (CB 7/8.3/9687)]. This would increase the sum of the Aggregated LFA Burden beyond the figures contained in the First, Second and Third Estimated FEO Calculations.
By way of example, if Funded Group Members were the only group members that registered under the Settlement Scheme, then the value of their monetary claims would be 100% of the Settlement Sum and the total value of all claims made by RGMs. The Aggregated LFA Burden would therefore be 35% of that figure ($98m x 1.00 x 0.35), or $34.30 million. [A footnote reads: In this example, any FEO would not result in the Aggregated LFA Burden being shared with Unfunded Group Members, because there are no claims on the Settlement Sum by Unfunded Group Members. There would also be no need to consider or apply grossing up.] Similarly, if the total aggregate value of the monetary claims of Funded Group Members (without consideration of any grossing up) is calculated by the Administrator:
(a) to equal 50% of the total value of all claims made by RGMs, the Aggregated LFA Burden would be a minimum of $17.15 million ($98m x 0.5 x 0.35);
(b) to equal 60% of the total value of all claims made by RGMs, the Aggregated LFA Burden would be a minimum of $20.58 million ($98m x 0.6 x 0.35); or
(c) to equal 70% of the total value of all claims made by RGMs, the Aggregated LFA Burden would be a minimum of $24.01 million ($98m x 0.7 x 0.35).
For that reason, the Applicants made the following submission made at AS2 [202(e)] (CB 7/8.3/9687):
[T]he Applicants note that the precise sum payable to the Funder under the FEO is at this stage uncertain, as it will depend on the number of group members (both funded and unfunded) who make claims in the Settlement Scheme. A relatively low number of unfunded claimants under the Settlement Scheme could result in the return to the Funder under an FEO exceeding the sum sought by the funder as a CFO.
Again, achieving the FEO Central Concept involves determining each RGM’s individual claim (and their corresponding compensation entitlement out of the Settlement Scheme), and then applying the Aggregated LFA Burden across all RGMs so that each RGM contributes equitably (ie, proportionately to the value of their individual claims).
At the hearing on 13 May 2022, the Contradictor made the following submissions [a footnote reads: See also T476:46-47; T513:18; T517:7; T523:41-42; cf T548:31-46 (Finch SC)]:
(T473:2-5) Our position is that the court preferably in its discretion should aware [sic, award] an FEO of no more than 12 million, that is, the amount identified in the settlement notice and the amount per the 21 December affidavit that is the best evidence that the applicants and the funder have adduced as to the contractual rights
(T513:39-43) As I said, we – we are prepared to proceed generously for the funder, that – that the combination of Mr Punthakey’s section 50 summary and the calculations is such that the base level of – the best evidence is to the – the likely aggregate entitlement is 12 million, and – and that’s an appropriate starting point for the purposes of an FEO.
(T517:43-45) So we start then – our starting position, and our final position, is the 12 million, per the evidence of December, is the best evidence that the – those that the applicant and the funder have put on as to the likely funding commission.
(T523:29-30) The best evidence that has been put forward is that the aggregate contractual entitlements are 12 million, and any FEO ought to be made upon that basis.
(T524:1-5) I mean, if there really were genuine problems and gaps and deficiencies in working out what the FEO amount would be with some reliable accuracy, then further analysis would need to be undertaken by the administrator, wouldn’t there. Now, we don’t say that’s the case, because we say that the evidence is – is what it is and it’s sufficiently reliable and it’s 12 million.
The Court should reject these submissions. The Court would not be proceeding “generously for the funder” in fixing the FEO at $12m. It is not the case that the “best evidence” before the Court reliably demonstrate to the Court that the Funder’s contractual entitlements are $12m.
Rather, the adoption of these submissions is apt to defeat the FEO Central Concept and would lead the Court into error. The submissions overlook (or misunderstand) the basis on which Mr Imlay’s estimated FEO calculations were prepared, and that the Aggregated LFA Burden can only be determined upon assessment of all RGMs’ claims under the Settlement Scheme. The Court should accept that further analysis is required by the Administrator in order to determine the sum of the FEO.
Concisely stated, and as set out … above, the estimated FEO calculations cannot anticipate the actual value of the Funder’s contractual entitlements under the LFAs. The submissions of the Contradictor misstate the effect of the evidence before the Court.
Further, without having a power or basis to vary the Funder’s contractual rights, and without making an order that any payment is in complete satisfaction of those rights, making an order for an FEO in a sum of $12m (or any fixed sum), as proposed by the Contradictor, would not achieve the FEO Central Concept. It would leave Funded Group Members potentially liable to the Funder for any amount by which the Aggregated LFA Burden exceeds $12m (or any other fixed sum).
For that reason, [17A] and [17B] of the FAA (CB 1/1.8-1.9/99-24–99-41) are in the following terms: [those paragraphs, set out at [11] above, and then recited.]
FAA [17A(a)] contemplates calculation of all Funded Group Members’ claims, and FAA [17A(b)] then requires calculation of 35% of that figure (the “Funder’s Portion”).
FAA [17A(c)] contemplates the FEO Central Concept, by sharing the Funder’s Portion equitably between all group members by reference to an equal percentage payable by each group member (which means that each group member contributes an equal percentage of the value of their claims made under the Settlement Scheme).
FAA [17A(d)] also contemplates the FEO Central Concept, in the event that Funded Group Members may be subject to “grossing up” under their LFAs. As submitted at AS4 [106]-[115] (CB 7/8.6/9779-9782), FAA [17A(d)] does not contemplate determination of that question, but provides a mechanism to ensure that Funded Group Members are protected, by application of the FEO Central Concept, in the event that the LFAs (or some of them) mandate grossing up upon their proper construction.
FAA [17B] contemplates that the Administrator will pay out of the Settlement Sum “the Funder’s Portion” (ie, the Aggregated LFA Burden), or such other sum as the Court may deem fair and reasonable. As to those latter words, the Applicants submitted at AS2 [202(e)] (CB 7/8.3/9687) that depending on the value of the Registered Funded Group Members’ claims, the Aggregated LFA Burden could exceed the sum of $24.5m sought by the Funder under its application for a CFO.
It is the uncertainty attending the value of the Aggregated LFA Burden, and the inability to ascertain it until the Administrator undertakes the steps contemplated under FAA [17A], that renders adoption of the figure of $12m (or any other fixed sum) for an FEO inapposite. The adoption of such a figure as $12m would:
(a) be premised on the untestable assumptions inherent in the RFGMs Claims Assumption;
(b) leave Funded Group Members exposed to any shortfall between the Aggregated LFA Burden and $12m; and
(c) accordingly, fail to achieve the FEO Central Concept.
For these reasons, in the event that the Court was minded to make an FEO, the Applicants submit that the Court should not ascribe a figure to the FEO (whether $12m, $13.7m or otherwise), but instead order the steps contemplated by FAA [17A] so that the Aggregated LFA Burden is ascertained by the Administrator and shared equitably amongst RGMs.
(Emphasis in original)
295 The note then turned to the topic of “Grossing up”, as follows:
As already submitted [citing AS3 at [55]-[58]; AS4 at [112]-[115]; AS5 at [71]-[72]] the LFAs contemplate “grossing up”, because Funded Group Members are liable to contribute 35% of the value of any “Benefit” (which is defined in some LFAs to include “any financial concession or other financial benefit that the client receives or becomes entitled to receive”) [citing Punthakey (28.03.22), JJP-17 at 180-640 (CB 10/13.1/11636-12096)].
During the hearing on 13 May 2022, reference was made to previous authority concerning grossing-up under litigation funding agreements [citing Transcript T555:15-38, McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3) [2020] FCA 461 at [21] (Beach J); Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 at [56]-[57] (Murphy, Gleeson and Beach JJ)]. The prospect of grossing under litigation funding agreements was concisely articulated by Lee J in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183 (Davaria Appeal) at [59] (Middleton J and Moshinsky J agreeing at [1]-[4]), as follows:
When a percentage amount is deducted from unfunded group members and added back pro rata across all group members, that incrementally increases the recoveries for the funded group members. This allows a funder to assert, pursuant to the terms of most standard funding agreements, that they are contractually entitled to an additional amount (that is, a contractually mandated percentage on the incremental amount).
Accordingly, the initial sharing [of] the Aggregated LFA Burden equitably amongst all group members may, as described by Lee J in Davaria Appeal, itself give rise to a “Benefit” to Funded Group Members which is subject to 35% commission payable to the Funder (Benefit Commission).
In accordance with the FEO Central Concept, the burden of the Benefit Commission should be shared equally between Funded Group Members and Unfunded Group Members.
The sharing of the burden of the Benefit Commission may be considered to give rise to a further “Benefit” to Funded Group Members, which is also subject to 35% commission payable to the Funder (Further Benefit Commission). That burden should also be shared equally between Funded Group Members and Unfunded Group Members.
This “cycle” of sharing of the burden of any Further Benefit Commission continues until it becomes di minimis. An example of how this cycle of Benefit Commissions and sharing of the associated burden operates is found in the First, Second and Third Estimated FEO Calculations (references at [15(a)]-[15(c)] above).
296 There next followed a one page “Schedule 1” entitled “References to Applicants’ submissions on the FEO Central Concept”.
297 “Schedule 2” was entitled “Authorities on the FEO Central Concept”. It comprised selected quotes from seventeen separate authorities.
298 As the majority said in NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at 159 [192] (McHugh A-CJ, Gummow, Callinan and Heydon JJ): “It is impermissible to file further submissions without leave, and this cannot be evaded by adding on to submissions filed with leave other material for which leave should have been obtained.”
299 And as Allsop P (as the Chief Justice then was), Giles JA and Tobias AJA said in Bale v Mills (2011) 81 NSWLR 498 at 514 [57]-[61]:
It is useful … to remind the parties (and through the publication of these reasons the profession and public generally) of the correct position that has been stated, over and over again, by the courts. The High Court, intermediate courts of appeal and other courts have deprecated in strong terms the filing of material after an appeal without, or outside, any leave given …
Notwithstanding these clear statements the practice still occurs. That the practice still occurs notwithstanding the regular statements of the courts that it should not is no reason not to continue to state clearly to the profession and the public the correct position.
Not only have the parties and their legal representatives no right (whether they agree among themselves to do it or not) to place before the court without prior leave further material after an appeal has been heard, it is wrong. It undermines and derogates from the principle of the open administration of justice. The practice is not legitimated by sending the material and in that material seeking leave. The proper course (unless prior leave, statute or court rule permits otherwise) is for the proceedings to be relisted so that an application to enlarge the record can be made and determined in open court …
The appeal is not an occasion merely for a discussion of the issues so that the parties can go away to marshall and develop their ideas further, bearing in mind the discussion with the court. It is the time and place when and where argument, and sometimes decision, occurs. Once the appeal is reserved, the parties’ rights to argument and to be heard have been exhausted.
The consequence of this is not only that sending submissions to the court is wrong, but also the court may (and generally will) ignore what has been sent.
(Citations omitted)
300 In my view, almost all of the 33 page document that was filed purportedly pursuant to the leave granted to file a note “in relation to the $12 million commission” was outside any conceivable scope of that leave. Consistently with the cases to which I have referred, I have thus largely ignored it.
301 I say that I have “largely” ignored it because I should deal with the submission made in the note that the court should accept that further analysis is required by the administrator in order to determine the sum of the FEO – effectively, that the court should “wait and see what happens” before fixing an amount for the FEO. I deal with the point because it was also (albeit fleetingly) touched on in other earlier written submissions filed by the applicants.
302 I do not accept the submission that the court should “wait and see”, for these reasons.
303 First, the case was conducted on the basis that, were a FEO to be made, a sum would be fixed at this stage of the proceedings. As Mr Imlay swore in his 17 December 2021 affidavit, “I am informed by Mr Punthakey and verily believe that a percentage of 35% results in [a] FEO payment of $15.54 million after the grossing up calculation” (emphasis added), which figure when reduced by the so-called “gross-up” amount, was $12.005 million. As Mr Pritchard said in the course of his opening, “[o]ne of the benefits of a funding equalisation order is you get certainty”.
304 Secondly, it can and should be assumed, as Mr Redwood said in his closing address, that “the only stable basis upon which [the court] can proceed is to assess the amount of FEO on the assumption that those entitled to a distribution do, in fact, come forward to exercise their entitlement from the settlement fund”.
305 Thirdly, in the further settlement notice distributed by the applicants to the group members pursuant to an order of the court made on 15 February 2022, they were informed that if a FEO were to be made, the funder “could be entitled to a payment of approximately $12 to $16 million from the Settlement Sum”. That range of figures is clearly enough a reference to the calculations set out in the exhibit to Mr Imlay’s 17 December 2021 affidavit, set out above (ie $12.005 million without a grossing up and $15.54 million with it). There was no suggestion in that notice that the total amount could be as high as $17.367 million.
306 Fourthly, there must be an end to this process somewhere along the line, and I am unconvinced that in fixing a fair and reasonable sum by way of a FEO it is necessary or desirable to further adjourn the hearing of the settlement applications in the unrealistic expectation that a significant number of group members would not make a claim.
Applicants’ application to re-open their case to adduce further evidence
307 I agree with the contradictor that the applicants’ last minute attempt to lead evidence seeking to justify a FEO in an amount significantly in excess of the $12.005 million figure propounded in Mr Imlay’s 17 December 2021 affidavit should not be allowed, including because, as the contradictor said in his written submission filed on 23 May 2022 (that evidence being Exhibit BRI-58 and paragraphs [8]-[10] of Mr Imlay’s 12 May 2022 affidavit), was too late, untested, and unexplained.
308 The contradictor’s submissions in relation to those points were, with respect, compelling, and I accept them. It is worth setting them out in full:
[Mr Imlay] identifies an FEO of approximately $12 million (or approximately $15.54 million on the Applicant’s grossed-up calculation). Importantly, those calculations in turn informed the disclosure group members received in the second, corrective settlement notice. The effect of the new evidence is materially prejudicial to group members. On the new calculation, funded group member claims increase by, it is said, about $4.5m (from $34.5m to $39m). The FEO figure increases from approximately $12 million to approximately $13.7 million. And, the final ‘grossed up’ FEO figure (that is the figure highlighted in the calculation at Exhibit BRI-58) has increased by almost $2 million from $15.54m to $17.37 million. In other words, the effect of Mr Imlay’s new evidence is to substantially increase the amount Galactic would receive under an FEO, contrary to the interests of group members.
Moreover, this material increase in Galactic’s entitlements under the funding agreement does not appear to be the product of a simple update to the number of funding agreements. Rather, it results from a shift from 35% to 40%, being the percentage of funded group member claims and a key integer in the calculation of a contractual funding commission. Paragraphs 8 to 10 of [Mr Imlay’s 22 May 2002 affidavit] introduce, for the first time, what appears to be a new methodology and basis for calculating the estimated FEO. Mr Imlay adopts a figure of 40% (rather than 35%) to represent the value funded group members across the two proceedings, and Mr Imlay indicates that the figure of 40% ‘has been chosen’ as an assumption as to the value of the claims of ‘Funded VID180 Group Members’ and ‘Funded VID182 Group Members’.
Mr Imlay then opines for the first time why he considers such a percentage to be conservative, including based upon Mr Imlay’s expectation that the rate of registration of funded group members would be higher than unfunded group members given they have been more engaged in the proceedings. It may immediately be noted, as the Contradictor submitted in closing submissions (T523:29ff), that any calculation that proceeds from the premise that some group members will not exercise their entitlement to a distribution under the settlement is an unstable premise for the Court to proceed in assessing the likely amount of an FEO compared to the CFO sought of $24.5 million.
The previous calculation of 17 December 2021, upon which the settlement notice was based and the Contradictor has framed his submissions and forensic decisions, does not appear to have involved any such subjective analysis by Mr Imlay for the purpose of calculating the FEO (for the benefit of the funder). The process previously adopted appears to calculate the number of funded VID180 and VID182 store claims with a non-zero weighting as a percentage of total claims, and the approximate mid-point between the two then appears to be used for the calculation. At Imlay 17.12.2021 [60], VID182 funded store claims (with a non-zero weighting) were approx. 30.3%, and VID 180 funded store claims (with a non-zero weighting) were approx. 39%, and for the purpose of calculating an estimated FEO payment, a percentage of 35% results in an FEO payment of $15.54 million after the grossing up calculation.
In light of this change in methodology with material consequences to group members, no explanation has been provided at all for why evidence of this kind was introduced at 4:20pm on the day before closing submissions by the Contradictor. There is no explanation for why this evidence could not have been included in Mr Imlay’s evidence of 17 December 2021. Far less is there any explanation for why it could not have been introduced ahead of the hearing from 28-30 March 2021. Paragraphs 8-10 must be rejected for this reason alone. No further hearing dates are scheduled (nor should they be in the circumstances) and there is no ability to test the evidence of Mr Imlay. The untested and unexplained evidence means it is therefore of little, if any, utility to the Court.
309 As to his submission that the new evidence is simply too late, the contradictor submitted (and again I agree):
There must be finality in the conduct of legal proceedings. The Applicants, and Galactic, had ample opportunity over many months to adduce evidence as to their best estimate of the likely amount of an FEO arising from Galactic’s aggregate contractual entitlements under the funding agreements. In the end, the best evidence, and the evidence upon which the Court should rely in answering the issues for determination as to the relative merits of an FEO versus a CFO of $24.5 million, is contained in Mr Imlay’s affidavit of 17 December 2021 (i.e., $12 million). It is far too late in the day to seek to rely on new evidence calculating the expected amount of any FEO on a different basis yielding a substantially increased amount for the Funder. That is so whether or not the new basis is better or more accurate, as to which the Contradictor is in no position to assess given the nature and timing of the new affidavit.
310 I therefore will have no regard to paragraphs [8]-[10] of Mr Imlay’s 12 May 2022 affidavit.
Is the funder entitled to a “gross-up”?
311 As set out earlier in these reasons, the further amended application for settlement approval sought a FEO order that each of the group members who apply for and receive any payment out of the Settlement Sum in accordance with the Settlement Scheme be required to contribute to the Funder’s Portion, to be determined including as follows:
[T]o the extent that any contribution by Unfunded Group Members increases Settlement Payments to Funded Group Members and so requires that Funded Group Members pay further monies to Galactic under the terms of the LFAs, and thereby increase the Funder’s Portion (Enhanced Funder’s Portion), the Unfunded Group Members shall each be required to contribute a further percentage of their Settlement Scheme Payments so that ultimately each of the Funded Group Members and Unfunded Group Members contribute equally to the Enhanced Funder’s Portion, and a calculation of that contribution and equal percentage shall be made by the Administrator of the Settlement Scheme.
312 In McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3) [2020] FCA 461 at [21], Beach J said that the question whether a FEO should be made depends upon an number of variables, including:
[W]hether, if a funding equalisation mechanism was used, the funder would receive a greater share in any event. When a percentage amount is deducted from the unfunded group members and added back pro rata across all group members, that incrementally increases the recoveries for the funded group members. Litigation funders may then assert that they are contractually entitled to an additional amount, that is, a percentage on the incremental amount. The Full Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd [2016] FCAFC 148; (2016) 245 FCR 191 considered the prospect that, under contract, the funder could say to a funded group member that if the group member received an additional increment arising from a funding equalisation mechanism (a pro rata part of the deduction from the unfunded group members added over all funded and unfunded group members), the increment itself would be part of the “recoveries” of the funded group member on which the percentage commission rate would be payable. The Full Court was told that in all cases where a funding equalisation mechanism had been applied, the funder had also obtained a percentage of the increment added back to the recoveries of funded group members. It is not clear to me whether other judges who applied such mechanisms were ever aware of this. Their reasons do not expressly say so. Moreover, from the arithmetic applied in those cases, it seems implicit that they may not have been so aware.
(Emphasis added)
313 In my view the funder is not entitled to a so-called grossing up amount on top of the $12.005 million, in the figure sought by the applicants in Mr Imlay’s 17 December 2021 affidavit or at all.
314 Leaving aside possible public policy considerations that might be said to tell against why such gross-ups should be permitted, it seems to me that there are two insuperable problems with the proposition that the funder is entitled to a gross-up in this case.
315 First, the funder itself does not assert any right to it. The funder was resolute in its position that it was entitled to a CFO, and that it sought no other alternative order. As Mr Finch said: “We don’t need to do anything about the EO half of FEO because that’s a matter for the applicants to press if they want it. So far as we’re concerned, if your Honour says there’s no power to make a CFO, then we fall back on our contractual rights with those who have signed funding agreement”.
316 Secondly, as the passage from the reasons of Beach J in McKay Super Solutions set out above makes clear, a critical anterior step is to determine whether the terms of the funding agreement permit “grossing up”. Here, the applicants never explained by reference to any of the 16 iterations of the funding agreements how such a contractual entitlement might be said to arise. The closest they came to any such explanation was in these Delphic submissions in AS4 at [114], and in AS5 at [71], as follows:
In relation to those group members who have signed a litigation funding agreement … the effect of clause 6 may be that group members are [entitled] to a “grossing up” in the event that a FEO were to be made, because in each instance where funded group members burden is shared with unfunded group members, that would constitute a separate and additional benefit in respect of which Galactic is entitled to its commission at the rate of 35%. The sequential sharing of that additional benefit with unfunded group members is outlined in the calculation appearing at Imlay (13.10.21), BRI-48 p306.
…
The relevant clauses of the funding agreements which relate to whether Galactic has an entitlement under an FEO to gross-up the funding commission are the definitions of “Additional Sum”, benefit/”Benefit” and “Final Amount”, as well as clauses 6.2- 6.3/6.5.2.61 There appears to be a greater claim for an entitlement to gross-up in respect of the executed funding agreements which contain clause 6.5.2 [a clause that was said to be “found in V2.1 of the funding agreement dated 28 November 2019 onwards”].
317 I therefore decline to make any gross-up order.
318 For those reasons, the answer to question (11)(b) is: Galactic is not entitled to a “gross-up” funding commission on a FEO.
319 For those reasons, the answer to question (11) is: yes and $12.005 million.
Question (12): Are the costs of the solicitors for the applicants in respect of these approval applications reasonable?
Question (13): Does the costs referee’s reference extend to reviewing the reasonableness of the Contradictor’s costs? Should it?
320 The administrators sought an order that the costs of the approval application should be costs of the administration. I did not understand there to be any disagreement about that. But there is presently no evidence before me to enable me to answer question (12).
321 The contradictor did not dispute that the costs referee should determine whether his fees are reasonable.
322 Subject to hearing further from the parties and the contradictor if necessary, I therefore have it in mind to make orders along these lines (together with the usual consequential orders):
The legal costs and disbursements charged or sought to be charged by the solicitors for the applicants in relation to the approval of the Settlement from and including 28 October 2021 be costs of the Administration.
Pursuant to Order 9 of the Orders made on 15 September 2021, the Referee is further directed to inquire into and report in writing on the questions set out below, and on any further questions that may later be ordered:
a. Are the legal costs and disbursements charged or sought to be charged by the solicitors for the applicants in relation to the approval of the Settlement from and including 28 October 2021 reasonable?
b. Are the costs charged or sought to be charged by the Contradictor reasonable?
d. If not, by what amount should those costs be disallowed?
Answers to questions (12) and (13)
323 For those reasons, the answers to questions (12) and (13) are: the reasonableness of the costs of the solicitors for the applicants in respect of the approval applications, and the reasonableness of the contradictor’s costs, are to be determined by the costs referee.
324 I now need to turn to a separate matter, concerning the orders that I made on 11 October 2022.
ORDERS MADE ON 11 OCTOBER 2022
325 By an interlocutory application dated 29 September 2022, the administrator sought orders pursuant to ss 33V and 33ZF of the Federal Court of Australia Act 1976 (Cth) to the effect that:
(1) the administrator be permitted to transfer temporarily the settlement funds from the “settlement distribution account” into higher interest-bearing accounts; or
(2) alternatively, the settlement scheme be amended to allow the administrator the discretion to transfer temporarily the settlement funds from the settlement distribution account into higher interest-bearing accounts.
326 On 11 October 2022, I made the following orders in respect of that application:
1. Pursuant to sections 33V and 33ZF of the Federal Court of Australia Act 1976 (Cth), the Settlement Scheme annexed to the orders of Justice O’Callaghan dated 31 March 2022 be amended to add the following paragraphs:
57A Subject to, and in accordance with this Settlement Scheme, the Administrator may, in his discretion, temporarily transfer part or all of the Settlement Sum to and from the Settlement Distribution Account into and out of accounts in any bank or financial institution licensed as an authorised deposit-taking institution, for the purposes of Part 2, Division 1 of the Banking Act 1959 (Cth), for the purpose of seeking more favourable terms, including accruing higher rates of interest.
57B. The Administrator has general liberty to apply to the Court for directions or orders as to the management and administration of the Settlement Scheme.
2. The costs of the Administrator’s application dated 29 September 2022 be costs of the Administration.
3. The Administrator have leave to file and serve any evidence about the question of the amount of costs referred to in order 2, to be approved, by 4 pm on 21 November 2022.
4. The Administrator and parties have liberty to apply.
327 I said that I would give reasons for making those orders later. These are those reasons.
328 As discussed earlier in these reasons, on 31 March 2022, I made orders approving the settlement of the proceedings on the terms set out in the Settlement Deed and the Settlement Schemes. See Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 11) [2022] FCA 331.
329 The settlement sum was $98 million. Clause 2 of the Settlement Deed is headed “Settlement Payment”, and relevantly provides:
2.1 Within ten (10) days after the making of the Approval Orders, the Administrator must cause to be opened the Settlement Account and will provide the First Respondent with account details and information sufficient to facilitate payment of the Settlement Sum in accordance with this Deed.
…
2.4 The Administrator must hold the Settlement Sum together with all interest accrued thereon on trust, in accordance with this Deed for the Group Members and the Funder until the Settlement Sum is distributed pursuant to the Settlement Scheme.
330 “Settlement Account” is defined as “an interest-bearing controlled money account opened by the Administrator with an Australian trading bank held on trust in accordance with clause 2.1”.
331 The Settlement Scheme in each proceeding provides relevantly as follows under the section headed “Scheme Administrator”:
56 The Administrator will fulfil his obligations under the Settlement Scheme in the interests of all Group Members.
(a) The Administrator will, subject to and in accordance with this Settlement Scheme, hold the Settlement Sum and interest earned thereon on trust until the Net Settlement Distribution Fund is distributed; and distribute the Net Settlement Distribution Fund, as expeditiously as possible.
…
57 Following the Distribution Order and the transfer of the Settlement Sum into an interest-bearing trust account controlled by the Administrator called the 7-Eleven Class Actions Distribution Fund Account (Settlement Distribution Account) the Administrator will hold the Settlement Sum on behalf of the Group Members in the Settlement Distribution Account subject to and in accordance with the provisions of the Settlement Scheme.
332 The “Net Settlement Distribution Fund” referred to is “the amount available to distribution of Eligible Group Members [sic]” after all allowable deductions have been calculated and paid in full.
333 On 2 June 2022, 7-Eleven transferred the settlement sum of $98 million into the Settlement Account as defined in the Settlement Deed. The proceedings were then dismissed as against 7-Eleven.
334 On 17 June 2022, I made a further order that, as an interim payment out of the settlement sum, pending the making of the distribution orders, the administrator procure payment to Galactic of the legal costs and disbursements paid by Galactic on behalf of the applicants in the sum of $10 million. See Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (No 12) [2022] FCA 699. Accordingly, the available settlement sum was $88 million, plus any accrued interest.
335 The administrator sought orders to the effect that he either be permitted, or that the settlement scheme be amended to allow him the discretion, to transfer temporarily the settlement funds from the settlement distribution account into higher interest-bearing accounts. The administrator submitted that such a transfer would result in a significantly higher accrual of interest, and therefore increased funds available for distribution to group members once the distribution approval application had been determined and distribution orders made.
336 The administrator was the only party who appeared at the hearing on 11 October 2022. The contradictor consented to the application, and the funder neither consented to nor opposed the application, “on the condition that there is no delay with respect to the funds being released to [it] as soon as final orders are made”.
337 Notwithstanding that 7-Eleven is no longer a party to the proceeding, Levitt Robinson, the legal representatives for the applicants and the administrator, provided a copy of the application, Mr Nicols’ two affidavits, and a copy of his submissions dated 9 October 2022 to the legal representatives of 7-Eleven via email. At the hearing on 11 October 2022, Mr Pritchard, who appeared on behalf of the administrator, told me that his instructor had telephoned the legal representatives for 7-Eleven to confirm that the email had been received. The legal representatives for 7-Eleven indicated that they were obtaining instructions, but did not make any further contact prior to the 11 October 2022 hearing.
338 Group members did not receive any notice of the application. The administrator did not believe (and I agree) that such notice was necessary because the contradictor had been notified of, and did not oppose, the application; the application was heard in open court; and it was for the benefit of and in the interests of group members.
339 The administrator swore two affidavits, dated 29 September and 6 October 2022, on which he relied in support of the application. He deposed as follows:
(1) When the orders were made on 31 March 2022, the cash rate maintained by the Reserve Bank of Australia (RBA) was 0.10%.
(2) The interest rate for the Settlement Account was 0.01%. Accordingly, interest was currently accruing on the available settlement sum of $88 million at the rate of about $24.11 per day or $8,800 per year.
(3) Between 4 May 2022 and 5 October 2022, the RBA increased the cash rate from 0.10% to 2.60%.
(4) The administrator and his staff undertook searches to consider the interest rates of term deposit accounts in major banks, and subsequently compiled business term deposit rates as at 28 September 2022.
(5) The interest rate on the Settlement Account was not as favourable as rates available in term deposit accounts. Term deposit accounts require funds to be invested for a specified term to obtain a specified interest rate, with interest paid at the end of the term. Withdrawing funds from the term deposit account has the consequence that the interest is not paid at the end of the term.
(6) As at 29 September 2022, Macquarie Bank appeared to have the highest rates in the six-month and three-month term deposits, being:
(a) 2.70% per annum for a six-month term deposit;
(b) 2.35% per annum for a three-month term deposit; and
(c) 1.75% per annum for an “at-call” account (whereby funds can be withdrawn at any stage without forfeiting any interest), which was more than three times greater than the best rate for a one-month term deposit provided by other banks.
(7) In his experience, banks do not always apply the changes to the RBA cash rate to term deposit accounts, and there is often a delay.
(8) His estimates of the minimum amount of time that would pass between the delivery of reasons on the distribution approval application and the following events was as follows:
(a) payment of a commission to Galactic under CFO – 1week;
(b) payment of a commission under a FEO – 7 months;
(c) reimbursement of approved legal costs and disbursements – 1 week; and
(d) payment of the net settlement sum to group members – 8 months.
(9) In line with those estimated time frames, the administrator estimated that a maximum amount of $38 million would be paid out shortly after the making of the distribution orders. The administrator estimated that the remaining sum, being the amount payable to group members, would not be distributed to the group members until at least six months after the making of those orders.
340 At the 11 October 2022 hearing, counsel explained that the distribution to group members would take at least eight months because the administration process required an assessment of each individual group member’s claim. The estimate also allowed for relevant appeal periods.
341 Accordingly, the administrator’s proposal was to allocate the settlement sum in a manner in which the necessary funds would always be available to meet the distributions required under the Settlement Schemes without delay. The proposal was thus:
(a) paying $38 million into an at-call account, so that those funds would be immediately available to meet any payments that may be required to be made within a short-time frame upon the distribution orders being made; and
(b) paying $50 million into a six-month term deposit, and thereafter, a three-month term deposit or the at-call account, depending on the progress of the administration – because those funds would only be required for distribution to group members, and would it be at least six months from the distribution orders being made for that distribution to occur.
342 The administrator considered it unlikely that there would be any delay in releasing funds to Galactic as a result of a desire to avoid forfeiting interest on a term deposit. He also considered that any such delay would be insignificant.
343 The administrator submitted that transferring the available settlement sum into the term deposit facilities, or even into an at-call account with Macquarie Bank, would result in a significantly higher accrual of interest. For example, at 1.75%, the annual interest accrued on $88 million would be $1.54 million, compared to the $8,800, which would otherwise accrue if the funds remained where they were.
344 The administrator also submitted (and I accept) that no recipient of any distribution or payment under the Settlement Scheme would be expected to be prejudiced by the funds being temporarily transferred from the Settlement Account to higher interest-bearing accounts under his proposed course of action.
345 Mr Pritchard, who appeared for the administrator at the 11 October 2022 hearing, submitted that, while it was arguable that the terms of the Settlement Schemes could be construed such that the court has power to make an order in the form of proposed order 1 (that is, an order that the administrator is justified in carrying out his proposal to place the moneys in a term deposit), the “better view … is that there is a problem … best … remedied by [the court’s] exercise of the statutory powers” under the Federal Court of Australia Act to amend the Settlement Schemes.
346 As the administrator submitted, the court has the power to amend the Settlement Schemes in the manner sought under the broad powers available under ss 33V and 33ZF of the Federal Court of Australia Act.
347 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.
348 These provisions are to be construed broadly. As Murphy J said in Uren v RMBL Investments Ltd (No 2) [2020] FCA 647 at [51]-[52]:
It should be kept in mind that:
(a) section 33V(2) is not a “gap filling” power. It is a broad discretionary power granted to the Court specifically in relation to the distribution of any money paid under a settlement or paid into Court. It contains no express limit on the identity of the recipient of money so distributed, and any implied limit arises only from and is bounded by the purpose for which the s 33V(2) power was conferred: see Kuterba v Sirtex Medical Limited (No 3) [2019] FCA 1374 (Kuterba) at [6] (Beach J);
(b) the words of s 33V(2) are not qualified in any way that can be regarded as analogous to the words of limitation in s 33ZF – that the order is “appropriate or necessary to ensure that justice is done in the proceeding” (emphasis added) – which the plurality in Brewster emphasised (including at [19], [21], [46] and [50]). The only precondition to the exercise of power under s 33V(2) is that the Court considers the relevant order to be “just” with respect to the distribution of money paid under a settlement or paid into Court …
349 In my view, the power to make orders with respect to distribution includes an order amending the Settlement Schemes in the manner sought by the administrator. I was satisfied that the making of the order sought was just in all the circumstances, including because it would increase the amount available for distribution to group members, which is self-evidently for their benefit and in their best interests. It would not result in any, or any significant, delay in payment being made to group members or Galactic.
350 I should also add that, although the order was not one which directed the administrator to make a distribution to a particular person, in my view, it is still an order that is “with respect to the distribution of any money paid under a settlement”, because it contemplates the movement of funds out of the Settlement Account while preserving the integrity of the trust over those funds.
351 In any event, s 33ZF empowers the court to make the order sought. It relevantly 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.
352 The power conferred by s 33ZF is also a broad one, and was described by Kiefel CJ, Bell and Keane JJ in Brewster at 599 [45]-[46] in the following terms:
In Johnstone v HIH Ltd [[2004] FCA 190 at [104]], Tamberlin J rightly said that the power conferred on the court by s 33ZF is not limited to the actual determination of the matter in question in the proceeding, “but extends to encompass all procedures necessary to bring the matter to a fair hearing on a just basis”. Section 33ZF has been invoked to support a wide range of procedural orders such as reinstating group members after they exercised the right to opt out under s 33J, requiring discovery from group members, regulating multiple class actions, and making a “funding equalisation order” … to redistribute settlement funds from unfunded group members to all group members.
The power conferred by s 33ZF is broad, but it is essentially supplementary. And the words of limitation should not be ignored. In McMullin v ICI Australia Operations Pty Ltd [(1998) 84 FCR 1 at 4], Wilcox J said:
“In enacting Pt IVA of the [Federal Court of Australia Act], Parliament was introducing into Australian law an entirely novel procedure. It was impossible to foresee all the issues that might arise in the operation of the Part. In order to avoid the necessity for frequent resort to Parliament for amendments to the legislation, it was obviously desirable to empower the Court to make the orders necessary to resolve unforeseen difficulties; the only limitation being that the Court must think the order appropriate or necessary to ensure ‘that justice is done in the proceeding’.
… The criterion ‘justice is done’, involves consideration of the position of all parties. An order preventing unfairness to a particular party may be necessary to ensure justice is done in the proceeding.”
(Footnotes omitted)
353 As Gordon J also said at 624 [124], s 33ZF is “in the nature only of a supplementary power to do what is necessary or incidental to achieve the objectives at which those other more detailed, specific provisions [of Part IVA of the Federal Court of Australia Act] are aimed”.
354 If, contrary to my view, s 33V is not sufficiently broad to permit a court to make an order of the kind sought by the administrator, it seems to me that s 33ZF is sufficient to fill such a “gap” to achieve the objectives at which the other provisions of Part IVA are aimed. The requirement that any such order be “appropriate or necessary to ensure that justice is done in the proceeding” involves consideration of the position of the parties and group members, and whether the order will assist in ensuring that “the proceeding is brought fairly and effectively to a just outcome”. See Turner v TESA Mining (NSW) Pty Ltd (No 2) [2022] FCA 435; (2022) 314 IR 214 at 222 [30] (Murphy J), citing Brewster at 599 [47].
355 In my view, having had regard to these considerations, that requirement is clearly is met here, because such an order is for the benefit and in the best interests of group members, and would not result in any, or any significant, delay in distribution.
356 For the reasons given above, I made the 11 October orders.
357 As to the costs of amending the Settlement Scheme, Ms Harris’ 21 November 2022 report (exhibited to her affidavit of the same date) reviewed the costs claimed (solicitors’ fees of $17,204, counsel’s fees of $24,750) and disbursements of $892.48. She opined that those costs and disbursements were fair and reasonable. I agree and will adopt that report.
358 After the conclusion of the hearing on 13 May 2022, my Associate received an email from junior counsel for the applicants, copied to all counsel, indicating that the applicants and the contradictor agreed (subject to my view) that it would be preferable for me to publish my reasons and then permit the parties to confer in relation to the form of the orders to be made to give effect to those reasons.
359 The funder did not express a contrary view, no doubt because the suggestion made in that email was a sensible one.
360 Accordingly, the only order that I will make now is that the further hearing of the proceedings be adjourned to a date to be fixed.
I certify that the preceding three hundred and sixty (360) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan. |
Associate:
VID 182 of 2018 | |
SUMAN MEET KAUR |
