Davaria Pty Limited v 7-Eleven Stores Pty Ltd

THE COURT ORDERS THAT: Approval of the settlement

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 in proceeding VID180/2018 (Davaria Pty Ltd and Kaizenworld Pty Ltd), on their own behalf and on behalf of the group members in that proceeding, and their 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 this 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
Steven Nicols of the accounting firm Nicols & Brien be appointed as the Administrator of the Settlement Scheme. Payment of the settlement sums
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 Finally 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
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, and the Registry is so directed. Confidentiality orders
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the documents in the Consolidated Confidentiality Schedule as Annexure A to these orders be treated as confidential, not be published or made available and not be disclosed to any person or entity except as permitted by the relevant party identified with respect to the relevant document as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
There be no order as to the costs of the proceeding as between the Applicants and 7-Eleven.
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
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.
All existing undertakings (save for confidentiality undertakings provided in respect of the production of documents under subpoena) be discharged.
The further hearing of this proceeding be adjourned to 9.30am on 22 April 2022.
Liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

O'CALLAGHAN J: 1 On 1 April 2022, following a hearing that occupied in excess of three days, I made the orders set out above. 2 These are my reasons. 3 The applicants seek orders for the approval of a settlement, the terms of which are contained in a settlement deed executed on 4 August 2021, of two related proceedings (VID 180/2018 and VID 182/2018) pursuant to ss 33V and 33ZF of the Federal Court of Australia Act 1976 (Cth) and related orders. 4 The proceedings were brought by the applicants against the first respondent, 7-Eleven Stores Pty Ltd (7-Eleven), pursuant to the class action provisions contained in Part IVA of the Federal Court Act. 5 Proceeding VID 180/2018 was brought in respect of claims brought against 7-Eleven by franchisees of 7-Eleven stores. The applicants in that proceeding are Davaria Pty Ltd and Kaizenworld Pty Ltd. 6 Proceeding VID 182/2018 was brought in respect of claims brought by the natural person principals of (corporate) franchisees against 7-Eleven. The applicants in that proceeding are Mr and Mrs Davaria, who are the principals of Davaria Pty Ltd, and Mr and Mrs Singh, the principals of Kaizenworld Pty Ltd. 7 In proceeding VID 180/2018, the applicants made four claims against 7-Eleven that relate to their entry into a standard form 7-Eleven franchise agreement: (1) claims for breach of contract by reason of 7-Eleven's merchandise supply and inventory practices that are alleged to contravene one or more express or implied terms of the franchise agreement; (2) claims of misleading or deceptive conduct; (3) claims for loss arising from 7-Eleven's alleged breach of s 51ACB of the Competition and Consumer Act 2010 (Cth) and s 51AD of the Trade Practices Act 1974 (Cth) and s 51AD of the Competition and Consumer Act, by reason of 7-Eleven's alleged non-compliance with its disclosure obligations under relevant industry codes; and (4) claims for loss arising from 7-Eleven's alleged unconscionable conduct. 8 Proceeding VID 182/2018 substantially relied on the facts pleaded in the other 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 loans with Australia and New Zealand Banking Limited (ANZ). 9 7-Eleven denied any liability in respect of all of the claims made in both proceedings. 10 The applicants filed and served most of their lay evidence in chief in September and October 2020. As at 14 October 2021, they had filed 60 substantive affidavits, 23 in respect of interlocutory applications, some of which were intended to be relied on at trial, and 37 separate trial affidavits of evidence in chief, as well as six affidavits of experts annexing reports. 11 7-Eleven served most of its lay evidence in chief by 22 June 2021. As at 14 October 2021, it had filed 36 lay affidavits and two affidavits of experts annexing reports. 12 By orders made on 8 May 2020, the proceedings were set down for a six week hearing commencing on 9 August 2021. The expected length of the hearing was later extended to ten weeks. 13 The proceedings were mediated by the Honourable Susan Crennan AC QC, a former justice of the High Court of Australia. On 4 August 2021, the parties executed a settlement deed. The parties to it were each of the applicants, 7-Eleven, Galactic Seven Eleven Litigation Holdings LLC (the litigation funder of the proceedings) (Galactic), and Levitt Robinson (the solicitors for the applicants). 14 The applicants now seek the approval of that settlement pursuant to ss 33V and 33ZF of the Federal Court Act and related orders. 15 By separate interlocutory applications, Galactic, which is also the third and second respondent in proceeding VID 180/2018 and VID 182/2018, respectively, seeks among other things: (1) 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 (CFO); (2) reimbursement for legal costs incurred and paid of approximately $20 million; and (3) return of its security for costs (in the sum of $6,945,625) which was paid into court. 16 Sub-sections 33V(1) and (2) of the Federal Court Act confer two distinct powers: first, to approve the settlement; and, secondly, if the approval is given, to approve the distribution of payments made under the settlement. See eg Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (2020) 281 FCR 501 at 506-507 [23]. 17 The central question under s 33V(1) is whether the settlement is a fair and reasonable compromise of the claims of the group members. 18 That requires the court to consider whether the proposed settlement is fair and reasonable both as between the applicants and group members and the respondents, as well as between the group members inter se. 19 The cases make it clear, and the parties and the contradictor (Mr JA Redwood SC) agreed, that the exercise of the power under s 33V(1) of the Federal Court Act need not occur contemporaneously with the exercise of power under s 33V(2). See Caason Investments Pty Limited v Cao (No 3) [2020] FCA 91 at [6]-[7], [12]; and Botsman v Bolitho (No 1) (2018) 57 VR 68 at 144-145 [389] and [391]. 20 In this case, such a bifurcation of issues is also contemplated by the terms of the settlement deed. In particular, the settlement deed requires the administrator to hold the settlement sum in a trust account (including interest accruing on it) in accordance with the terms of the deed for the group members and Galactic, until the settlement is distributed pursuant to the settlement scheme. 21 The parties and the contradictor agreed that, in this case, I should be satisfied that the settlement sum (a gross sum of $98 million, and a net sum of at least approximately $52 million) is fair and reasonable to group members, and that I should approve the settlement under s 33V(1), before proceeding to the second stage (the hearing in relation to which will resume on 22 April 2022). 22 Mr Redwood was appointed by the court as contradictor to represent group members' interests and to assist the court to perform its judicial function in relation to the applications, by orders made on 15 September 2021. The terms and scope of Mr Redwood's appointment as contradictor require him to advance all reasonably arguable competing positions on behalf of group members (or a subset of group members) on material points of law and fact going to the relevant issues and to ensure the court receives evidence and submissions on those matters he considers important to its deliberations in the exercise of its protective jurisdiction. The role of the contradictor also involves, or can involve, sharpening the focus on the question of the fairness and reasonableness of the settlement sum and the distribution of it, and encouraging parties to provide adequate justification for the key features of the sum and its distribution, where otherwise it may be lacking or insufficient. 23 The court has an important responsibility to safeguard the interests of group members as a whole under s 33V(1). That is so, including because, as the applicants submitted, there is a danger that when a settlement is reached the interests of the parties to the proceedings may receive paramount consideration, and the impact on group members may not be adequately addressed. 24 It follows that in exercising the power under s 33V(1) to approve a settlement the court must scrutinise with considerable care the way in which any orders are formulated. 25 In approaching the assessment of whether the settlement is fair and reasonable in Botsman v Bolitho (No 1) (2018) 57 VR 68 at 111-112 [203]-[207], the Victorian Court of Appeal (Tate, Whelan and Niall JJA) made the following relevant observations (footnotes omitted): It is an essential starting point to identify the settlement and its terms. It is commonplace that a deed of settlement may address more than the settlement of the claims against the defendant and will also deal with the distribution of settlement money, including to a litigation funder. The structure of sub-ss 33V(1) and (2) suggests that such payments may be distributions of money that has been paid under a settlement to which the Court has given approval under s 33V(1). Those distributions are the subject of separate Court approval under s 33V(2). The question of fairness interposes itself at various levels. Most obviously, there will need to be consideration of the fairness of a proposed settlement sum. The Court is being asked to approve a compromise of litigation. Inevitably, that will require an assessment of whether the plaintiff is likely to succeed in the action, the measure of damages that a successful judgment would yield, the prospects of recovery, and the expenditure in costs, time and effort that would be required to bring the proceedings to a conclusion. That assessment does not involve a simple calculus but calls for matters of judgment based on imperfect knowledge and is influenced by the appetite for risk. It will be informed by the complexity and duration of the litigation and the stage at which the settlement occurs. It is important to acknowledge that it is the state of imperfect knowledge and the existence of risks that will have likely induced the settlement. It follows that those matters should be accorded a degree of prominence in any assessment of the reasonableness of the settlement. Those considerations mean that there will rarely, or ever, be a single correct settlement. Strategic decisions must be factored into account but it is not the role of the Court to second guess those decisions. 26 As Beach J said in Newstart 123 Pty Ltd v Billabong International Ltd [2016] FCA 1194; (2016) 343 ALR 662 at 664 [11], reasonableness is a range and the relevant question is whether the proposed settlement falls within it. 27 In my view, the making of the orders above approving the amount of the settlement sum, and the terms of the settlement scheme attached to the orders, is appropriate in the circumstances of this case, for the following reasons. 28 First, approval of the settlement is supported by the applicants, 7-Eleven and Galactic. The contradictor, in his careful and detailed submissions, also did not oppose approval of the proposed settlement under s 33V(1), because he considers that the net settlement sum (approximately $52 million), even assuming the deduction of the full amount of the funding commission and reimbursement for legal costs sought by Galactic, is fair and reasonable. 29 Secondly, doing so would facilitate the payment of the settlement sum by 7-Eleven into an interest-bearing account and enable the scheme administrator to be appointed and do whatever preparatory work needs to be done to enable the prompt distribution of the settlement proceeds. 30 Thirdly, it would relieve 7-Eleven from any further participation in the proceedings. 31 Fourthly, although objections were received from a small number of group members, none raised any reasoned opposition to the settlement sum. 32 As the Court of Appeal in Bolitho observed, there will rarely be "a single correct settlement". In my view, however, the net settlement sum in this case is fair and reasonable, having regard to all the relevant circumstances, including whether the applicants were likely to have succeeded in the proceedings, the measure of damages that a successful judgment would have yielded, the prospects of recovery, and the expenditure in costs, time and effort that would be required to bring the proceedings to a conclusion. 33 There is no doubt that the proceedings here involved significant factual and legal complexities. The legal fees incurred up to the date of the settlement were in the vicinity of $20 million. And the trial was to take ten weeks. 34 Further, I have had regard to a confidential opinion prepared by counsel for the applicants in which they candidly assess the prospects of success of the various different claims made in both proceedings. 35 The orders also provide for the making of certain limited orders in respect of the confidentiality of documents, or parts of them, pursuant to ss 37AF and 37AG of the Federal Court Act. 36 In my view, the making of those orders was appropriate, including because much of the redacted material concerns the internal thought processes of the applicants' legal advisers in relation to the settlement, and responses by the contradictor. The confidentiality orders also included privileged documents referred to in reports of the costs referee. 37 In my view, is also appropriate to make the order that Galactic sought that the security for 7-Eleven's costs, previously paid into court on behalf of the applicants, now be paid to Levitt Robinson's trust account so that it can be returned to Galactic. Because I take the view that the settlement should be approved pursuant to s 33V(1), it is also appropriate now to return the security to Galactic. 38 I should add one final matter. Although it was originally proposed that Mr Levitt from Levitt Robinson, the solicitors for the applicants, would be the scheme administrator, it was agreed that Mr Steven Nicols should be appointed instead. I have read Mr Nicols' affidavit sworn 30 March 2022 and I am satisfied that given his experience, including in administering settlement proceeds in actions such as this, and his familiarity with the proceedings, he is an appropriate person to serve in that role on the terms proposed. 39 It follows that because the settlement approval has been bifurcated in the manner and for the reasons given above, the agreed questions that will be the subject of further submissions at the resumed hearing on 22 April 2022, and which will be the subject of orders and reasons in a separate judgment after that hearing, are: (1) Are the legal costs of approximately $19.4 million incurred in the proceedings, and sought to be recovered from the settlement sum, reasonable? (2) Should each of the costs reports of the costs referee be adopted, varied or rejected, in whole or in part, or the subject of other orders by the court pursuant to s 54A of the Federal Court Act? (3) Was there adequate disclosure and monitoring of legal costs throughout the proceedings, and what are the consequences (if any) if there was not? (4) 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? (5) 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)? (6) Does the court have the power to make a CFO under s 33V(2) or in its equitable jurisdiction? (7) 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? (8) 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? (9) What is the appropriate methodology to determine a fair and reasonable funding commission? (10) If the court declines to make a CFO in these circumstances, should a fund equalisation order (FEO) otherwise be made? (11) What is, or should be, the aggregate amount of any FEO? (12) Does the court need to be satisfied as to Galactic's asserted contractual rights under the funding agreements in order to make an FEO? If so, is there an adequate foundation for such a finding in this case, including to what extent (if at all) is Galactic entitled to a "gross up" funding commission if an FEO is made? (13) Are the costs of the solicitors for the applicants in respect of these applications reasonable? (14) Does the cost referee's reference extend to reviewing the reasonableness of the contradictor's costs? Should it? 40 There are also some other questions that remain to be resolved, and which were the subject of submissions at the hearing that occurred last week, viz: (1) Is the proposed settlement distribution fair and reasonable inter se amongst group members or different categories of group members in both proceedings? (2) Is the allocation of the net settlement proceeds of 60% to proceeding VID 180/2018 and 40% to proceeding VID 182/2018 within a rational range? (3) Is the allocation for the VID 180/2018 claims of 80% for "VID 180 Loss Claims" and 20% for "Rebates Claims" within a rational range? (4) Are the relative weightings for the "VID 180 Loss Claims" and the proceeding VID 182/2018 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) entered their franchise agreement after 1 October 2015? 41 As I say, these remaining issues do not impact the approval of the amount of the settlement sum and the terms of the settlement scheme, which provides for further determination of these matters by the court. Accordingly, I made the orders set out above. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.

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