7-Eleven Stores Pty Ltd v Davaria Pty Limited & Ors

[2021] HCATrans 113

[2021] HCATrans 113

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M120 of 2020

B e t w e e n -

7‑ELEVEN STORES PTY LTD (ACN 005 299 427)

Applicant

and

DAVARIA PTY LIMITED (ACN 165 206 404)

First Respondent

KAIZENWORLD PTY LTD (ACN 163 833 565)

Second Respondent

7‑ELEVEN INC. (A TEXAS CORPORATION)

Third Respondent

OREN BIGOS

Fourth Respondent/Contradictor

Application for special leave to appeal

KEANE J
EDELMAN J
GLEESON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 25 JUNE 2021, AT 9.28 AM

Copyright in the High Court of Australia

____________________

MR N.J. YOUNG, QC:   If the Court pleases, I appear with MR A.N. McROBERT for the applicant.  (instructed by Norton Rose Fulbright)

MR O. BIGOS, QC appeared in person.

MR W.A.D. EDWARDS:   May it please the Court, I appear for the Association of Litigation Funders of Australia, pursuant to leave to intervene granted by the Court in April of this year.  (instructed by William Roberts Lawyers)

KEANE J:   Thank you.  Yes, Mr Young.

MR YOUNG:   Thank you.  The special leave question raised by this application goes to the power of the Federal Court to make a common fund order, either at settlement or at judgment.  That question, in our submission, turns on certain core characteristics of a common fund order that are always present regardless of the timing of the order.  It does not depend on the precise terms of a proposed order.  That, in our submission, was the way in which the majority of the High Court in Brewster approached this issue of power.

EDELMAN J:   Mr Young, do you not have a question that you need to address before that, which is whether or not the question itself is live?

MR YOUNG:   Yes, I accept that, your Honour.  I was going to immediately turn to that.  The question is a live question because it immediately impacts settlement discussions in this matter, which are ongoing at the moment, and more generally – and this is why it is a matter of general importance – it is a critical integer in settlement discussions in relation to any class action from the time of its inception until the time of resolution.

EDELMAN J:   That may all be correct, but why was it not within the power of the Full Court to conclude, as they do at page 59 of the application book and onwards, that as a matter of practice and procedure it was not appropriate to answer the question?

MR YOUNG:   For these reasons, your Honour.  The Full Court’s view was that it was premature without knowing the precise terms of a proposed common fund order at settlement, for instance, all the circumstances in which it arose.  That approach does not take account of the fact that whenever a common fund order is made it involves certain core characteristics which are objectionable and beyond power.

Likewise, whenever an order is made it falls outside the mischief being addressed by Part IVA or the purpose of any of the provisions of Part IVA.  If those submissions are right, then that raises a question of power which cannot be deflected on the basis that it is premature because there is not before the court a precise form of proposed order.

KEANE J:   Mr Young, even if one were to grant all that, why would we take a different view of whether or not to deal with this question as a matter of case management from that taken by the Full Court of the Federal Court?

MR YOUNG:   We would summarise it as follows, your Honour.  These are the reasons:  this is a proper vehicle.  There is unlikely ever to be a vehicle placed differently than this case in which these questions of power will arise.  In the meantime, these questions of power lie pretty much at the heart of every settlement negotiation and every class action because they seriously impact the financial outcomes.  So, if this question is deferred the question is will it ever arise again in circumstances other than the kind that arise here and the answer, in our respectful submission, is no ‑ ‑ ‑

EDELMAN J:   Is that right, Mr Young.  At page 59 paragraph 69, one reason Justice Lee gives is that:

neither the applicant nor the funder has participated in the hearing. 

Is your submission that you could never have a hearing in which the applicant or the funder would participate in?

MR YOUNG:   Our submission is that it is improbable that you will ever have a hearing in which the funder is raising a question as to the power to make the CFO, or a case in which it is likely that an unfunded party is raising an issue as to whether there is power, for reasons that I can elaborate on, your Honour. 

If there is a settlement, everyone is effectively a friend of the deal, and that is an expression that we have taken from a judgment of Justice Murphy.  Neither side will seek to critique the settlement because the significance of the CFO was already being taken into account in arriving at that settlement.  There is no incentive for any party to derail the settlement that they have agreed to in those circumstances. 

Secondly, a judgment – a similar position obtains, and may I first note that there has never been a judgmentCFO in the long history of Part IVA.  The reason is that on an adverse judgment on the common issues, the invariable result of that is a settlement and then if there is a settlement at that point in time with respect to all group members on some discounted basis, for instance, then they would all become friends of the deal and no one is going to oppose the making of a CFO if that is part of an agreed settlement. 

So, there will be no one with an interest in raising this issue in the context of settlement or judgment and they are the very real probabilities.  May I further say this.  From the perspective of an unfunded group member the CFO is apt to impose a significantly greater burden on unfunded group members as a group, producing a significant increase in return for the funder.  That is the entire justification for a CFO to improve the financial return to the funder, otherwise it would not be applied for.

But at that point of time is an individual unfunded member going to object to a settlement containing a CFO?  In circumstances where the individual impact on that person is small that person would need to weigh the individual impact against the costs of objecting to a CFO order – which is part of the agreed settlement – and then potentially taking on avenues of appeal and weighing that cost against the small individual incremental burden it is most unlikely that an unfunded group member is going to raise objections.

Now, that is no doubt why this question has never come up when there has been a judgment or a global settlement.  The realities are that the circumstances are not going to change if we are right about the legal position, that is, that there are fundamental legal objections because of the core characteristics of the CFO, and they are present now, they will be present later, they will not change depending on future facts and circumstances or the future terms of the CFO.

EDELMAN J:   Is your submission then that this Court would need to conclude that the decision of Justice Lee was not open to him or that it would be enough for this Court to conclude that a different decision ought to have been reached?

MR YOUNG:   It would be enough to conclude that his Honour has not taken into account the relevant legal considerations that impugn the validity of a CFO whenever made.  His Honour, for instance, referred to purpose at paragraph 38.  His Honour accepted that one of the grounds of objections identified in Brewster was that:

Pt IVA was not intended to address a perceived defect being the absence of sufficient incentive for funders to fund litigation -

Well, the rationale for a CFO at settlement or at judgment is to provide a greater incentive for funders to fund other pieces of litigation, that is to say, to improve their return beyond the return that the funders bargained for based on their own assessment of risk and reward, and they actually rang the action to finality based on their own assessment of risk, and then they come along at settlement or at judgment and want an increased return on the grounds that what they contracted for is now ex post to be judged to be insufficient.

So, it is the same rationale, and that rationale, the High Court in Brewster squarely found – five members of the Court – was outside the mischief and the proper scope of any of the provisions of Part IVA.  So, in our respectful submission, Justice Lee has not addressed that legal issue and that is the reason why his discretion has miscarried. 

Now, I can go through a number of aspects of Brewster which, in our respectful submission, were decisive against power, but were not taken into account in the analysis by the Full Court.

GLEESON J:   What do you say about paragraphs 60 and 61 of Justice Lee’s reasons where he discusses the issue of a comparison between a CFO and an FEO? 

MR YOUNG:   That comparison is mistaken.  The High Court in Brewster, at paragraph 86 if memory serves me – the plurality I should say – said that a CFO is apt to impose an additional cost, and they contrasted an FEO, which is simply equitably spreading amongst the group members the existing cost.  Justice Lee is mistaken in what he said.  The two cases he mentions do not establish the proposition that he points to in Carson.  That was a decision of Justice Murphy.  The CFO proposed a lower rate of commission than the contractual rate, but the case does not address the overall impact of applying that lower rate to a larger base, being the return to all group members.

Now, in Hodges, Justice Lee did address the impact of a lower rate applied to a different base.  There was a very marginal difference in the two total figures identified by Justice Lee in Hodges in favour of the CFO.  So, the total amount extracted by way of funding commission was less under the CFO order. 

But his Honour was mistaken in facing his contrast in this way.  The CFO reduced the funding rate from 40 percent to 25 percent.  His Honour compared that to an FEO at an assumed rate of 40 percent, but of course that assumes that if an FEO were to be made, the court did not retain power to reduce an exorbitant rate of commission to a lower rate.  There is clear authority in the Federal Court – Full Federal Court decision in Treasury Wines, that the Court has full power when making an FEO to reduce the rate.  So, the comparison his Honour made was based on an assumption that an FEO could not be made at a reduced rate and so the comparison was not a valid one for that reason. 

But you go back to the High Court, a CFO is apt to increase the overall return to the funder, and in all of the cases in which it has been made, at settlement, for instance, by Justice Murphy in a case referred to in our reply, the approach has been to say the contracted rate does not provide a sufficient return, therefore we are going to provide a greater return to the funder ex post, and the remarkable thing about that is that is after the event, after the funder, based upon its contractual assessment of risk and reward, has already borne the costs and borne the risks based on its contractual…..alone.  Then it is said they should be adjusted in favour of the funder, at the end of the day, by way of a CFO. 

Now, in our respectful submission, the position of a CFO is worse at settlement and at judgment than the early stage commencement CFO considered in Brewster, because at the later stage the funder has made his decision to proceed on the basis of his own assessment of risk and reward and ex post the court is asked to intervene, to go beyond the mischief addressed by the statute, and to award a greater rate, a greater overall return, to the funder by way of making this common fund order, to the prejudice of the unfunded group members.

Now, we would say that the High Court was clear in Brewster by a majority of five that the correct mechanism was an FEO, because that takes the contracted full cost and spreads it equally amongst the unfunded group members, and that is in full alignment with principles of equity for the reasons given by the majority. 

Could I point to a passage by the majority in Brewster at paragraph 86.  Paragraph 86 explains the appropriateness of an FEO.  The alignment with equity is given in the second half of paragraph 86, because the group members stand in a relationship to each other and it is appropriate for equity and for an FEO to adjust the position as between the group members by spreading that agreed cost amongst them.

The contrast is with a CFO, given in paragraph 87.  There is no reason to take an additional amount, and it is quite clear in the first sentence that it is applying across the board, regardless of timing, hence the words “much less” at the outset.  So, the proposition is it is beyond power at all points, much less at the outset, for the reasons expanded upon in the last two sentences of 87 and the first sentence of 88.  The short point is there is a viable mechanism.  It is not open to the criticism mounted by Justice Lee in the passage that Justice Gleeson directed me to, and these matters were not properly taken into account. 

I was going to point to four fundamental grounds whereby Brewster concluded that the CFO in that case was beyond power, but I see I have exhausted my time.

KEANE J:   No, you have three minutes.  That is the orange light.  It does look red, but it is orange.

EDELMAN J:   It is very loud as well.

MR YOUNG:   It certainly sounded very loud.  I thought I had triggered something.  The four grounds in the High Court were these, if I can list them.  The first is that – and this is the primary basis of the majority’s decision – the CFO imposed new obligations on unfunded group members requiring payments directly to the funder.  That is the plurality at 66 and 87 to 88 and Justice Gordon at 135, 141 and 143.  That vice exists at any time.

The second vice was that the rationale and justification for a CFO falls outside the scope of the mischief being addressed by the part and hence the statutory purpose of the part.  That criticism operates regardless of timing.  The rationale was that the CFO was required to provide a sufficient return.  That is the same rationale at judgment or at settlement if one were to…..but it is worse then because it is an ex post adjustment. 

The third ground was the authorised way of achieving equality of treatment aligning with equitable principles is an FEO.  That avoids free riding and there is no need for a CFO.  That is the plurality at 86 to 88 and Justice Gordon at 134 to 135 and 167 to 169. 

The last ground was the only one that was specific to timing.  The ground was that a commencement CFO was not supported by section 33ZF, either as a matter of the language or purpose of that provision.  It is only that last aspect that is touched by timing aspects and then not necessarily, although effectively on proper analysis we would say, the reasoning, the principal approach of the majority is against the validity of a CFO at any point of time.  If the Court pleases, those are our submissions.

KEANE J:   Thanks, Mr Young.  Mr Bigos, do you have anything to say in addition to what Mr Young has said in support of the grant of special leave?

MR BIGOS:   No, your Honour. 

KEANE J:   Thank you, Mr Bigos.  We do not need to hear you further.

MR BIGOS:   If your Honours please.

KEANE J:   We do not need to trouble you, Mr Edwards. 

This application does not present a suitable vehicle for the determination of the issue which the applicant seeks to raise.  The application is dismissed with costs. 

AT 9.50 AM THE MATTER WAS CONCLUDED