Johnson Tiles Pty Ltd v Esso Australia Ltd

Introduction 1 The present case raises the question of the extent to which and the manner in which the Court is to be concerned with fee arrangements entered into by solicitors acting for representative parties and group members represented by the representative party in a representative proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth) ("the Act").

Background 2 On 25 September 1998 an explosion and fire occurred at the Longford Gas Plant. As a consequence of the explosion and fire, gas ceased to be generally available to gas consumers in the State of Victoria. 3 Several representative proceedings under Pt IVA of the Act were issued against the respondents ("Esso") claiming damages on behalf of the represented persons. The represented persons, who are said to exceed one million, fell into three categories of group members - business users, domestic users and stood down workers who suffered financial loss as a result of the cessation of supply of gas. As a result of orders made by the Court on 5 February 1999 Maurice Blackburn & Co (now Maurice Blackburn Cashman) and Slater & Gordon ("the applicants' solicitors") were granted leave to appear as solicitors on the record in two of the representative proceedings which were consolidated. A further representative proceeding commenced by another firm of solicitors on behalf of another applicant was stayed. The orders, in effect, permitted the applicants' solicitors to represent all group members to the exclusion of other solicitors. 4 Pursuant to orders of the Court, dated 25 June 1999 and made pursuant to ss 33X and 33Y of the Act, an extensive advertising campaign was undertaken by the applicants' solicitors. The advertisements gave notice to group members of the commencement of the representative proceedings and of their right, pursuant to s 33J(2) of the Act, to opt out of the representative proceedings on or before 19 August 1999. Less than 200 opt out notices were filed by the closing date. 5 The notice, which was in a form approved by the Court under s 33Y of the Act after hearing submissions of the parties on 4 June 1999, contained the following statement: "If you believe you are a Group Member you should obtain your own legal advice or contact the Maurice Blackburn Cashman/Slater & Gordon Class Action Facility on 1800 812 597." 6 During the hearing on 4 June 1999 Esso claimed that the applicants' solicitors were entering into fee agreements with group members which entitled the solicitors to charge the group members a premium, referred to as an uplift fee, of 25% over and above the solicitor and client costs and disbursements incurred by them. Esso contended that if it was proposed that group members were to be liable to the applicants' solicitors for costs pursuant to fee agreements then they should be informed of that potential liability in the notice to be given pursuant to s 33X. 7 After I expressed my concern about such fee arrangements with group members to senior counsel acting for the representative parties I was assured that, under the fee arrangements the applicants' solicitors proposed to enter into with group members, the group members would not incur a liability for costs other than taxed costs as between solicitor and client and, even then, only in accordance with orders of the Court or the prior approval of the Court. After receiving that assurance I approved the form of the opt out notice proposed by the applicants' solicitors which did not contain a statement concerning any potential liability group members may incur for legal costs. 8 The evidence now before the Court discloses that, notwithstanding the assurance given to the Court by senior counsel for the representative parties, the standard form of 'No Win No Fee' Fee & Retainer Agreement entered into between the applicants' solicitors and group members provided for group members to be liable for legal costs, including the uplift fee of 25%, without any prior Court order in respect of, or Court approval of, that liability. 9 Esso has moved the Court for orders restraining the applicants' solicitors from inviting group members to enter into fee agreements and from enforcing, or recovering, any fees pursuant to fee agreements already entered into with group members other than in accordance with an order, or prior approval, of the Court. The legislative scheme 10 A person who commences a representative proceeding under Pt IVA of the Act as the representative party is a party in the proceeding representing members of the group of persons on whose behalf the proceeding has been commenced: see ss 33A and 33C. Group members who do not exercise the right to opt out of the proceeding pursuant to s 33J are bound by the judgment given in the representative proceeding: see s 33ZB. 11 Section 43(1A) provides that the Court or a Judge may not award costs against a person on whose behalf a representative proceeding has commenced, other than a party to the proceeding who is representing such a person, except as authorised by ss 33Q or 33R (which relate to specific circumstances involving individual group members). 12 Part IVA of the Act was enacted to give effect to the recommendations of the Australian Law Reform Commission in its report on Grouped Proceedings in the Federal Court (1988). In the report the Commission made several recommendations concerning remuneration to be paid to legal practitioners representing a representative party in a grouped proceeding. The Commission proposed that the Court be authorised to approve fee agreements, which could include an uplift fee, in advance of the conclusion of the proceeding. The proposal was reflected in cl 33 of the draft Bill which accompanied the report. 13 Clause 33 provided that the Court may at any stage of the representative proceeding approve an agreement concerning remuneration to be paid to legal practitioners in relation to the proceeding. The clause provided that the Court shall not approve an agreement that provides for the amount of remuneration to be ascertained by reference to the amount recovered or ordered to be paid in the representative proceeding. However, the Commission proposed that in order to encourage representative proceedings' fee agreements, which provided for a calculation of some increase in the costs that would be recoverable as taxed costs, a fee agreement should be capable of being approved by the Court provided that it was fair and reasonable to all concerned. 14 When the Bill inserting Pt IVA into the Act was introduced in the Senate the Minister, in his Second Reading speech, acknowledged that Pt IVA had been developed following the Commission's report but added that the government had not accepted all of the Commission's recommendations, including "the Commission's proposal for contingency fees": see Senate Debates 12 September 1991 at 1448. 15 Part IVA, as enacted, did not deal with fee agreements that may be entered into between solicitors and representative parties or group members. Thus, the issue of fee agreements could not be said to have been directly, or indirectly, regulated by Pt IVA. The regulation in Pt IVA in respect of costs related to the quite separate subject matter of the Court's power to make orders in respect of costs that affected group members. In that regard, as explained above, s 43(1A) of the Act prohibits the Court from awarding costs against group members other than as authorised by ss 33Q or 33R. Section 33Q(3) authorises the Court to make a costs order against a person, other than the representative party, where that person is appointed to be the sub-group representative party. Section 33R empowers the Court to make costs orders against an individual group member where that individual group member is permitted by the Court to appear in the proceeding. 16 Section 33V, which provides for the Court to approve of the settlement of a representative proceeding, permits 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". Plainly, the Court's power in respect of the distribution of monies would extend to orders providing for payment of legal costs out of the sums to which the representative parties and group members might otherwise be entitled. Further, in the event of a successful outcome special provision is made for reimbursement of the representative party's costs by s 33ZJ of the Act, which empowers a representative party or a sub-group representative party to apply to the Court for orders that provide for group members to contribute towards the costs incurred by the representative party out of the damages awarded. Paragraph 55 of the Explanatory Memorandum for the Federal Court of Australia Bill 1991 stated in respect of s 33ZJ: "The new Part does not affect the application of the ordinary costs rules applicable in the Federal Court for proceedings generally. However, where the representative party or a sub-group representative party is successful and secures a monetary award in favour of group members or sub-group members, as the case may be, it is appropriate that those group members contribute towards the amount by which the representative will be out of pocket for costs after recovering costs from the respondent. This section allows the Court to make an order for a contribution from group members in these circumstances." 17 Although the applicants' solicitors may not be required to perform individual legal services for most of the group members for some time, if at all, it is inevitable that from time to time they may be called upon to give legal advice or to perform particular legal services for some group members. For example, in order to ensure that the trial of the representative proceeding will determine most of the significant issues of principle that will require determination in order to determine the claims of group members, specific instructions may have to be sought from a number of group members as to their particular circumstances. Also, group members may from time to time require legal advice as to their claims, the manner in which their losses are to be calculated and the evidence that they might need to adduce in due course to establish those losses. Thus, although the mere fact of being a group member may not, of itself, result in a solicitor-client relationship existing between the applicants' solicitors and the group members, or result in a need for the provision of individual legal services to the group members, it is inevitable that circumstances will arise where such a relationship might come into existence or that individual legal services will be provided to group members. 18 Any solicitor-client relationship that comes into existence in respect of the present proceedings will be governed in the State of Victoria by the Legal Practice Act 1996 (Vic). Specific provisions of that Act provide for costs agreements, including an uplift fee not exceeding 25%, of the kind entered into between the applicants' solicitors and group members. The relevant provisions of the Legal Practice Act are as follows: · s 96 provides for costs agreements to be in writing; · s 97 provides that costs agreements may be conditional on a successful outcome of the proceeding; · s 98 provides that a conditional costs agreement may provide for uplift fees being a premium not exceeding 25% of the costs and disbursements otherwise payable. 19 The applicants' solicitors relied upon ss 96, 97 and 98 to enter into 'No Win No Fee' Fee & Retainer Agreements with group members as their clients. Esso contends that in doing so the solicitors have acted unlawfully as those sections of the Legal Practice Act cannot be relied upon as they are inconsistent with Pt IVA of the Act, and to that extent, invalid pursuant to s 109 of the Constitution. Section 109 of the Constitution 20 The submissions made on behalf of Esso in relation to s 109 of the Constitution were made shortly prior to the hearing. They raise a question as to whether a notice was required to be given under s 78B of the Judiciary Act 1903 (Cth) on the basis that the proceeding involves a matter arising under the Constitution or involving its interpretation. As was pointed out by Burchett J in Narain v Parnell (1986) 9 FCR 479 at 489, before a s 78B notice is required to be given it must appear to the Court that the constitutional issue is a "live issue" in the proceeding. Burchett J added that if the issue depends on an erroneous construction of the relevant legislation, a s 78B notice is not required as the cause pending in the Court does not "really and substantially" involve a matter arising under the Constitution or involving its interpretation. 21 Esso contended that the provisions of the Legal Practice Act that authorised the making of conditional fee agreements, unsupervised by the Court, would impair or detract from the operation of Pt IVA to an extent that amounted to inconsistency for the purposes of s 109 of the Constitution: see Stock Motor Ploughs Ltd v Forsyth (1932) 48 CLR 128 at 136; Victoria v The Commonwealth (1937) 58 CLR 618 at 630; Australian Mutual Provident Society v Goulden (1986) 160 CLR 330 at 337. 22 Esso submitted in the alternative that Pt IVA constitutes an exhaustive code regulating representative proceedings in the Federal Court and is intended to "cover the field" in a manner that does not permit State law to enter upon that field: see New South Wales v The Commonwealth (1983) 151 CLR 302 at 316-319. Thus, so it was contended, the relevant provisions of the Legal Practice Act in relation to conditional fee agreements in respect of representative proceedings under Pt IVA have detracted from the intention of the Commonwealth Parliament to regulate such matters exclusively by the provisions of Pt IVA: see Viskauskas v Niland (1983) 153 CLR 280 at 292-293 and Ex Parte McLean (1930) 43 CLR 472 at 483. 23 In my view Esso's submissions in relation to s 109 of the Constitution are based on an erroneous construction of the relevant statutory provisions and are misconceived. Part IVA of the Act does not purport or intend to deal with, let alone cover the field in relation to, fee arrangements that might be entered into by solicitors acting for representative parties or group members in representative proceedings. As explained above, the provisions of Pt IVA do not expressly or impliedly deal with those matters. Rather, Pt IVA (ss 33V and 33ZJ) and s 43(1A) deal, inter alia, with the powers of the Court to make particular orders concerning costs in specified circumstances in representative proceedings. 24 The legislative intention that can be discerned from Pt IVA is that fee arrangements in relation to representative proceedings were not to be regulated by the Act but rather, were left by the legislature to be dealt with by private contractual arrangements, subject to the requirements of any applicable laws or judicial power that might touch upon or regulate such arrangements. Whether such arrangements, in a particular case, should be subject to supervision or approval of the Court is a matter left to be determined by the Court. 25 Accordingly, as no real, arguable or live constitutional issue has arisen in the present proceeding: · it is not appropriate or necessary for the Court to abstain from proceeding further in the cause until a notice pursuant to s 78B of the Judiciary Act has been given; · the contention by Esso that the 'No Win No Fee' agreements are unlawful or are not capable of being authorised by the Legal Practice Act must be rejected. 26 The matter of substance argued on Esso's motion related to whether the 'No Win No Fee' agreement should be subject to the approval and supervision of the Court. The 'No Win No Fee' Agreement 27 The 'No Win No Fee' agreement is in a standard form. After the orders relating to advertising were made, group members were advised by the applicants' solicitors to register their interest in joining the representative proceeding or to opt out by 19 August. Upon a group member registering interest in the proceeding or seeking the assistance of the applicants' solicitors, the member was given a questionnaire and a copy of the 'No Win No Fee' agreement which the member was invited to complete and return with the reply paid envelope that had been provided. Group members were advised that upon receipt of that documentation they would be kept informed of developments. 28 For the purposes of the present motion it is unnecessary to outline the 'No Win No Fee' agreement in detail. The main features of the agreement are: · the group member is liable for individual costs and disbursements incurred in working on the group member's particular claim ("the individual fees") as well as for a "reasonably" apportioned share of the fees for services rendered to the group as a whole in the conduct of the representative proceeding ("the group fees"); · the group member is not liable for any fees or disbursements unless the member's claim for compensation is "successful" and the member receives "compensation"; · a "successful" outcome is defined as one in which compensation is paid as a result of the proceeding, where an offer of settlement is made and the applicants' solicitors recommend that it be accepted or where a benefit from "a statutory or other compensation scheme" is received; · the group member is obliged to remain a client of the applicants' solicitors until the member's claim is finalised but, in the event of an earlier termination of the solicitors' retainer or a failure by a group member to comply with obligations under the agreement, then the group member is liable, and can be charged, for the individual fees and a portion of the group fees incurred as at the date of termination; · if the group members' claim is "successful" the solicitors are entitled to charge a premium of 25% on the individual fees and group fees (including disbursements); · no provision was made for the agreement to be approved by the Court and the liability of group members was not limited to taxed costs as between solicitor and client. 29 The 'No Win No Fee' agreement does not accord with the assurances given to the Court by senior counsel on behalf of the applicants' solicitors when the form of the opt out notice was being settled on 4 June 1999. No satisfactory explanation has been given as to why that occurred. However, the fact that it has occurred confirms the view I expressed in the course of the submissions as to why it was desirable, in a case such as the present, that group members are not to be rendered liable for legal costs save with the Court's approval and that, if any costs liability without the Court's approval was proposed, the exposure of group members to that liability should be adequately explained to them in the advertising that informed them of their right to opt out of the representative proceeding. 30 There are several reasons for the Court to be concerned with proposed or actual fee arrangements with group members. One reason why the opt out notice required to be given under s 33X must be approved by the Court under s 33Y is to ensure that group members are given such information as is appropriate and necessary to enable them to make an informed decision whether to opt out of the proceeding. In the usual course group members are entitled to have the group proceeding conducted by the representative party on their behalf without being liable for legal costs merely because they are a group member. However, if it is proposed that group members are to become liable for the legal costs and disbursements incurred by the solicitors acting for the representative party, without the prior approval or supervision of the Court in respect of those costs, then it seems to me that, to enable an informed decision whether to opt out, the opt out notice should adequately inform the group members of that prospective liability. 31 Further, as the fee arrangements in the present case demonstrate, costs agreements with group members can result in unfair or unreasonable outcomes. For example, early termination of a retainer can result in a substantial costs liability that is quite inconsistent with the 'No Win No Fee' representation made to group members. Also, as only a limited number of group members will have signed the fee agreements at any particular time, to the extent the agreements can render only some group members liable for an apportioned share of group fees, the agreements can operate unequally, and in an unfair and arbitrary manner, as between group members. As ss 43(1A), 33A, 33C and 33ZJ demonstrate, group members are not parties to a proceeding for the purposes of costs or otherwise. Accordingly, there is a real question as to whether the fees to be charged to them under the 'No Win No Fee' agreement will be recoverable by them from the respondents if the group claim succeeds. In my view it is not an answer to the above difficulties to claim that such matters can be sorted out by the Court in due course in respect of a settlement under s 33V or after a judgment for damages under s 33ZJ. The problem with such an answer is that the liability under the fee agreements has not been made subject to Court order, approval or supervision. Finally, the specific provisions of the agreement as to the circumstances in which a group member may be liable for costs are imprecise and ambiguous. 32 The difficulties to which I have referred are not intended to be exhaustive. They indicate the need for these issues to be carefully considered at an earlier, rather than a later, stage of the proceedings. 33 The circumstances that have arisen in the present case are plainly unsatisfactory. As a result of the assurances that were given to the Court, but not honoured, group members were not informed of the prospective liability for legal costs to which they have been exposed by the 'No Win No Fee' agreement which they are being "requested" to enter into with the applicants' solicitors. The group members, who comprise a significant section of the public in the State of Victoria, have played no role in, and have not contributed to, the commencement or prosecution of the representative proceeding. In those circumstances, subject to the issue of jurisdiction, the Court has a responsibility to be satisfied that the group members are not being unfairly or unreasonably exposed to legal costs. 34 The position might be otherwise where specific group members have actually agreed to join together in commencing and prosecuting a representative proceeding to be commenced by one of them as the representative party. In circumstances where the group members are actively involved in and contributing to the conduct of the proceeding the Court is less likely to be concerned with or involved in approval or supervision of a fee agreement between the solicitors acting for the representative parties and the group members. The nature and extent of the Court's involvement and concern with a fee agreement will depend upon the particular facts and circumstances of each case. Jurisdiction of the Court in relation to fee agreements 35 It is well established that a superior court possesses jurisdiction to approve or supervise fee arrangements entered into in relation to a proceeding in the court. The Federal Court, as a superior court, possesses a general jurisdiction in respect of costs and disbursements claimed by an attorney or solicitor from a client. The primary basis for the jurisdiction was described in Woolf v Snipe (1933) 48 CLR 677 at 678-679 by Dixon J as follows: "The superior Courts of law and equity possess a jurisdiction to ascertain, by taxation, moderation, or fixation, the costs, charges, and disbursements claimed by an attorney or solicitor from his client, and that jurisdiction is derived from three sources and falls under three corresponding heads. First, a jurisdiction exists founded upon the relation to the Court of attorneys and solicitors considered as its officers. This jurisdiction, commonly called the general jurisdiction of the Court, enables it to regulate the charges made for work done by attorneys and solicitors of the Court in that capacity, and to prevent exorbitant demands. … Second, when a contested claim for costs comes before the Court it has jurisdiction to determine by taxation or analogous proceeding the amount of costs." [Cases and Footnotes deleted] 36 Dixon J (at 679) referred to the third source of jurisdiction as being statutory. The statutory jurisdiction of the Federal Court was considered in Keith Hercules & Sons v Steedman (1987) 17 FCR 290 at 300 per Lockhart J and at 302-303 per Sheppard J where their Honours concluded that the power conferred by s 23 of the Act empowered the Court to make appropriate orders, including orders for the taxation of costs, when a dispute arose between a solicitor and client in respect of costs incurred in connection with a proceeding in the Court. The Court has the additional general power in respect of representative proceedings under s 33ZF(1) to make "any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding". Justice would not be done in a representative proceeding if group members, as such, were being exposed to a potential liability for legal costs in respect of which they had not been adequately informed when exercising their right not to opt out of the representative proceeding as a group member. 37 Accordingly, the Court has ample jurisdiction and power to approve or supervise the form of costs agreements entered into between solicitors acting for a representative party and group members in relation to a representative proceeding commenced under Pt IVA of the Act. Court Approval and Supervision of the 'No Win No Fee' Agreement 38 The applicants' solicitors filed extensive submissions seeking to explain why it was both necessary and appropriate for them to have 'No Fee No Win' agreements to ensure that they are fairly and adequately rewarded for costs incurred in representative proceedings. The submissions concluded: "For the future conduct of proceedings under Part IVA it is important that the Court should not rule against fee agreements generally, and fee agreements which provide for a lawful uplift specifically. It is difficult to imagine a litigant who could take on the might of Esso single-handed. It is difficult to imagine a solicitor who would run the action 'no-win no-fee' if it faced even the possibility of being out of pocket by millions of dollars even if the action succeeded. If the provisions of Part IVA are to be workable in a practical way, it is necessary to face the fact that all class members must, one way or another, share the solicitor-client differential where the action succeeds. Any uncertainty about that matter would discourage use of Part IVA, especially in proceedings with large classes and complex issues. The fee agreements are a legitimate way of reducing that uncertainty." 39 I have no difficulty in accepting that Pt IVA could lose much of its utility if solicitors acting for representative parties are not able to be fairly and adequately reimbursed in respect of the costs they incur in a representative proceeding where they are reliant on a "successful outcome" for payment of their fees. I also accept that under Victorian law solicitors can properly be rewarded by their clients for the cost risks they undertake by entering into conditional costs agreements that can include an uplift fee, being a premium not exceeding 25% of the costs and disbursements incurred by the solicitors. Such arrangements have been accepted more generally as not being champertous or improper: see Bevan Ashford v Geoff Yeandle (Contractors) Ltd [1999] Ch 239 at 250-252. However, it does not follow that group members ought to be liable for costs incurred in a representative proceeding, other than out of the amounts awarded on judgment by the Court or as a result of the Court's approval of a settlement prior to judgment. 40 When a solicitor makes a decision to commence a representative proceeding under Pt IVA on behalf of a representative party, it is appropriate for the solicitor to enter into an appropriate fee arrangement with the representative party. In the usual course such an arrangement would be regarded as a private contractual matter between the solicitor and the representative party provided that the arrangement: · is in accordance with law and is otherwise a proper and ethical arrangement for the solicitor to enter into; · does not unfairly or unreasonably prejudice the rights or interests of group members. 41 Sections 23, 33V, 33ZJ and 33ZF of the Act and the Court's supervisory jurisdiction, as discussed in Woolf v Snipe, ensure the Court has ample jurisdiction and power to make orders that fairly and adequately reward solicitors for costs incurred in relation to a representative proceeding. However, to the extent a fee agreement with group members is regarded as appropriate or necessary the Court's supervisory jurisdiction might be attracted for the reasons already given. Whether it is attracted in a particular case will depend on the circumstances of the case. 42 In the present case the Court authorised an opt out notice that did not advise group members of any actual or potential liability they may incur for costs. The form of notice was approved by the Court on the basis of an assurance given on behalf of the applicants' solicitors that the proposed fee agreements with group members did not expose them to any liability for costs or an uplift fee without a prior order of or approval by the Court. As explained above, the assurance has not been honoured. In those circumstances it is incumbent upon the Court to be satisfied that the fee arrangements entered into with group members are not only lawful but are fair and reasonable. For the reasons I have outlined I am not satisfied that the 'No Win No Fee' agreements are fair and reasonable in the circumstances. 43 It is appropriate for the Court to exercise its supervisory jurisdiction by making orders enjoining the applicants' solicitors from acting upon or giving effect to the 'No Win No Fee' agreements made, or to be made, with group members or from receiving any payment of fees or disbursements pursuant to such agreements other than in accordance with an order or direction of the Court. The applicants' solicitors have, through counsel, offered an undertaking to the Court broadly in the terms of the proposed injunctions, in the event that the Court was of the view that orders, of the kind to which I have referred, are appropriate. I am prepared to accept those undertakings in lieu of the injunctions that I would otherwise have granted. Conclusion 44 For the above reasons I am prepared to accept undertakings to be proffered on behalf of the applicants' solicitors, Maurice Blackburn Cashman and Slater & Gordon, that until further order the said solicitors, whether by their servants, agents or howsoever otherwise: (a) will not enforce or give effect to 'No Win No Fee' Fee & Retainer Agreements entered into by the said firms of solicitors with any persons, other than a representative party, who are group members in proceedings number VG 519 of 1998 and VG 524 of 1998 and will not demand or accept payment of any costs or disbursements pursuant to such agreements other than pursuant to an order or direction of the Court; (b) will inform all group members who have entered into or signed, or who hereafter enter into or sign, such agreements of these undertakings to the Court. In my view it was proper for Esso to move the Court for the orders sought by it on the Notice of Motion. As Esso has substantially succeeded in obtaining the relief it sought it ought to receive its costs of and incidental to the motion from the applicants' solicitors. Accordingly, I propose to order that Slater & Gordon and Maurice Blackburn Cashman pay Esso's taxed costs of and incidental to the Notice of Motion. As those costs should be costs for which the firms of solicitors, rather than their clients or group members, are liable I also propose to direct that no part of those costs be charged directly or indirectly to the representative parties or to any group members.