Lopez v Star World Enterprises Pty Ltd [1999] FCA 104 | Case summary

Judgment (19 paragraphs)

[1]

THE COURT ORDERS THAT: 1. The settlement agreements dated 28 January 1999 and the settlement scheme (the settlement agreement) tendered by consent and to be retained on the court file are approved by the court. 2. On the applicant's claim against the respondents and on behalf of the applicant and the other group members who purchased, consumed or were cross-infected by products manufactured and/or sold by the firstnamed respondent between January and March 1997 (group members) and have thereby suffered damage, and on the cross-claimant's claim against the cross-respondent there will be judgment as follows: (a) In the sum of $750,000 (the settlement fund) with $700,000 costs; (b) The settlement fund be dealt with in accordance with the terms of the settlement agreements, subject to the enforceability and validity of their provisions; (c) The settlement fund be distributed in accordance with the terms of the Settlement Scheme. 3. The date for opting out pursuant to s 33J of the Federal Court of Australia Act 1976 (the Act) is extended to 15 March 1999. 4. That Slater & Gordon file with the court by 15 March 1999 notices of opt out on behalf of group members who give notice in writing to them by 11 March 1999 of their intention to opt out, and who do not subsequently rescind that notice prior to 13 March 1999. 5. This judgment binds all group members other than those who have: 5.1 on or before 15 March 1999 (whether or not before the date of this order) opted out in accordance with s 33J of the Act; and 5.2 not subsequently to so opting out "opted in" in accordance with the terms of the Settlement Scheme. 6. The applicant's solicitors shall cause to be published in the Herald-Sun and Chieu Duong newspapers a notice in the form of Schedule A to this order, on at least one occasion on or before 10 February 1999. 7. The cross-claim is dismissed. 8. The cross-respondent to pay the cross-claimants costs in accordance with the settlement agreement. 9. The cross-respondent to pay the second and thirdnamed respondents' expenses in accordance with the settlement agreement. 10. There be liberty to apply on reasonable notice, including liberty to any group member to apply for orders challenging the validity or enforceability of the terms of the settlement agreement.

REASONS FOR JUDGMENT 1 Star World Enterprises Pty Ltd (in liquidation) (Star World Enterprises), the first respondent, was a manufacturer and retailer of food products trading under the name "Springvale World Hot Bread Bakery" from premises at Springvale, a suburb of Melbourne. In 1997 until its liquidation on 5 May 1997, Van Thong Chiem, the second respondent, and Ngoc Lan Chiem, the third respondent, were the directors of Star World Enterprises. 2 On 2 April 1997, Rodolfo Lopez instituted this proceeding to recover damages, compensation and other relief from the respondents. Mr Lopez alleges that in March 1997 he and many other persons purchased from Star World Enterprises food products that were contaminated with salmonella bacteria and were thus unfit for consumption. He also alleges that he and those other persons who had consumed the contaminated food products suffered physical injury (nausea, diarrhoea and fever) and financial loss (medical expenses, loss of wages and the like). 3 Part IVA of the Federal Court of Australia Act 1976 (Cth) permits a person to bring what is known as a representative proceeding: that is, a proceeding not only on behalf of that person but also on behalf of others (referred to as "group members") being not less than seven in number, where the claim of all of them arises out of the same, or similar or related, circumstances and where their claims give rise to substantial common issues of law or fact: see s 33C. There are limits to the nature of the claims that may be brought in a representative proceeding (see e.g. s 33G) but none of those limitations arise for consideration here. 4 Mr Lopez brings this proceeding not only on his own behalf but as representing all other persons who had consumed contaminated food products that had been supplied by Star World Enterprises and had suffered physical injury or financial loss as a consequence. There appears to be in excess of 800 persons who fall into this group. 5 Mr Lopez relies on a number of causes of action to found liability in the respondents, some are federal and some are not. It is not necessary for me to describe the causes of action in any detail. They include, as one might expect, breach of implied conditions as to quality and fitness for purpose of the food products supplied under contracts of sale (see s 19 of the Goods Act 1958 (Vic)), liability under Part VA of the Trade Practices Act 1974 (Cth) for the supply of "defective" goods (see especially s 75AD), contraventions of s 52 of the Trade Practices Act and s 12 of the Fair Trading Act 1985 (Vic)) for misleading conduct, the alleged offending conduct being false representations that the food products were fit for consumption or of merchantable quality and did not contain contaminants and a claim based on the common law tort of negligence. 6 With regard to Mr and Mrs Chiem, the allegations are that they were under a duty to Mr Lopez and to the group members to ensure that the food products supplied by Star World Enterprises were free from contaminants and complied with all food, health and safety legislation, that they were in breach of those duties and that they are therefore liable to make good any loss or damage suffered by Mr Lopez and the group members. 7 On 5 May 1997, by resolution of its creditors, Star World Enterprises was wound up in insolvency and Mr Barry Taylor was appointed its liquidator. Apart from a policy of insurance that I will mention in a moment, the company has assets worth approximately $94,000 and liabilities (excluding the claims made by Mr Lopez and the group members) of approximately $486,000. Taking into account the actual and expected costs of the liquidation it is estimated that the unsecured creditors of the company (other than Mr Lopez and the group members) will receive not more than $0.25 cents in the dollar; the amount may be less if the Australia and New Zealand Banking Group Ltd proves in the liquidation in respect of a contingent debt which it claims is due to it. 8 Australian Unity General Insurance Limited (Australian Unity) issued a policy of insurance in favour of Star World Enterprises on 1 December 1993. The policy has been renewed annually and was current for the 12 months commencing on 1 December 1996. By that policy Australian Unity agreed to indemnify Star World Enterprises for $1 million for any one claim for all sums which Star World Enterprises became legally liable to pay as compensation for bodily injury (which term included death, disease and illness) to any person, together with the costs and expenses of the claim. 9 Star World Enterprises has made a claim under the policy in respect of its potential liability to Mr Lopez and the group members. However, Australian Unity denied liability under the policy. Two principal reasons were given for this course. First, Australian Unity relies upon an exclusion clause in the policy which provides that it is not liable for bodily injury caused by products supplied by Star World Enterprises, other than for food or beverages sold or supplied by it as a service to employees or visitors for consumption on its premises. Secondly, Australian Unity alleges that Star World Enterprises was in breach of a condition of the policy that required it to take all reasonable care to prevent bodily injury, to comply with every law, by-law, Australian standard or regulation that related to its activities and to prevent bodily injury due to the manufacture, sale or supply of defective products. 10 Following this denial of liability, Star World Enterprises commenced a cross‑claim in this proceeding against Australian Unity wherein it seeks a declaration that Australian Unity is liable to indemnify it under the policy in respect of the claims made by Mr Lopez and the group members and wherein it seeks an order for the payment of any amount found to be due to Mr Lopez and the group members together with the costs incurred by it in defending the proceeding. 11 There is now a proposal that the claims brought by Mr Lopez and the group members against Star World Enterprises and the claim brought by that company against Australian Unity be compromised. The proposal is that on the applicant's claim against the respondents there be judgment for $750,000 with $700,000 costs and that there be a like judgment on Star World's claim against Australian Unity. The sum of $750,000 (exclusive of costs) is to constitute a fund that is to be distributed amongst the members of the group who do not opt out of the proceeding (as to which see s 33J of the Federal Court of Australia Act) and who can establish that they suffered an injury as a result of consuming contaminated food products manufactured by Star World Enterprises and supplied by it between 20 March 1997 and 23 March 1997. The fund is to be administered by Mr Ian Hone, a solicitor employed by Slater & Gordon, the solicitors for the applicant. Mr Hone has considerable experience in personal injuries litigation. 12 The settlement scheme, comprising signed terms of settlement and a document entitled "The Settlement Scheme", makes detailed provision for the manner in which Mr Hone is to assess the claims made by group members. Each member of the group is to submit a written claim verified by medical reports or medical certificates. The quantum of damages to which each group member is to be entitled will then be assessed and the fund distributed pari passu, accordingly. Any decision made by Mr Hone under the settlement scheme is not subject to review by the court. In addition, Slater & Gordon will receive the costs of $700,000 as and for their costs of conducting the proceeding and administering the fund. No additional costs will be claimed by that firm. 13 The proposed settlement cannot be implemented without an order of the court. Section 33V(1) of the Federal Court of Australia Act provides: "A representing proceeding may not be settled or discontinued without the approval of the court." Mr Lopez seeks approval under that subsection. The liquidator also seeks approval to compromise the claim made against Australian Unity: see s 477(2A) and s 506(1A) of the Corporations Law. It is

convenient to consider both applications at the same time because of the substantial overlap of the issues involved. 14 I should mention, by way of preliminary observation, that on 26 October 1998 I gave directions that the details of the proposed settlement be provided to all persons who had notified Slater & Gordon that they were actual, prospective or potential group members or persons who had given notice of opting out of the proceeding, and that an advertisement in a form that I approved be published giving notice of this application. In addition, the liquidator has written to all creditors who have filed a proof of debt in the liquidation advising them of the proposed settlement and of the fact that approval for it was to be sought. In the end, no person appears to oppose the orders that are sought either by Mr Lopez or the liquidator. 15 With regard to the application under s 33V, my principal task is to assess whether the compromise is a fair and reasonable compromise of the claims made on behalf of the group members. I am not so much concerned with the position of Mr Lopez who, after all, has solicitors and counsel to advise him as to how his interests will best be served in the litigation. The group members are not protected in this way. It is true that any group member may opt out of the proceeding to avoid his or her rights being affected in any way (whether adversely or beneficially) by the outcome of this litigation. But, I have no doubt that many members of this group (and no doubt members of other large groups who are represented in proceedings in the court) will remain as represented parties (that is not opt out of the proceeding) without a real appreciation of what that entails. In particular, it is likely that many group members will not understand that any judgment given in a representative proceeding will be binding upon them: see s 33ZB. Even if the group members are provided with a summary of the law relating to matters such as issue estoppel and res judicata, it is unlikely to be instructive to most of them. 16 Accordingly, the task of the court in considering an application under s 33V is indeed an onerous one especially where the application is not opposed. It is a task in which the court inevitably must rely heavily on the solicitor retained by, and counsel who appears for, the applicant to put before it all matters relevant to the court's consideration of the matter. In this regard there would be few cases where the court can properly exercise its power under s 33V without evidence from the solicitor supported by counsel that the proposed compromise is in the interests of the group members. I appreciate that, on occasion, this will place the solicitor and counsel in a difficult position. The interests of their client will not always be coincident with the interests of the members of the group. But, in my view, that is no more than a necessary consequence of their client instituting a representative action. 17 In this case there are no such difficulties. I have the evidence of Mr Lopez's solicitor and senior counsel that is to the plain effect that it is prudent to accept the sum of $750,000 plus costs in full settlement of all claims. They do say that $750,000 is substantially less than the amounts that, in aggregate, would be awarded to the applicant and to the group members if the action was successful at trial. They refer to the fact that there are of the order of 800 persons who are believed to have good claims against Star World Enterprises, and they estimate that the claimants might be entitled to awards of damages that could total around $3,000,000. But they point out, as the evidence shows, that Star World Enterprises is hopelessly insolvent and that the only asset of substance that is available to meet the claims is the right of indemnity under the policy of insurance. As to this "right", Slater & Gordon have taken advice from Mr Peter Rashleigh, a senior partner at Phillips Fox, solicitors, who specialises in insurance law. Mr Rashleigh has advised that the maximum amount payable under the policy is $1 million. However, he has also expressed the opinion that the exclusion clause referred to earlier in these reasons is likely to apply to the facts of the case and, if he is correct in that regard, as he seems to be, Australian Unity would be under no liability to provide any indemnity under the policy. 18 With regard to Mr and Mrs Chiem, the evidence shows that their liabilities exceed their assets (they have assets to the value of approximately $1,124,000 and liabilities that exceed $4 million) and it is clear that they could not satisfy a judgment for $3 million or, indeed, any judgment for a substantial sum. 19 Accordingly, so far as all the claims are concerned, if the proceeding is not compromised in the manner proposed, and the case goes to judgment, there is a very real risk that neither Mr Lopez nor the group members will receive anything like the amount they will be entitled to receive if the compromise is approved. That is to say, if the action goes on and the applicant and the group members are successful but the claim against Australian Unity is dismissed, all that Mr Lopez and the group members will have available to them is the ability to prove in the winding up of a hopelessly insolvent company and in the bankruptcy of Mr and Mrs Chiem and the right to receive a proportionate share of the assets that are available for distribution. That is hardly an enticing position. 20 Earlier I mentioned that the settlement scheme provides that Mr Hone will determine the quantum of damages to which each group member is to be paid and that his decision is not subject to review. To my mind this creates certain difficulties. It is by no means clear that a provision to oust the jurisdiction of the court on such a matter is enforceable or enforceable in all the circumstances. I have not had the benefit of argument on the point as there is no opposition to the application and it is unwise to determine this issue without the assistance of a contradictor. Moreover, there may be other provisions in the settlement scheme that are unenforceable for other reasons. If made, the order will need to provide for liberty to any group member to challenge the validity or enforceability of any of the provisions of the settlement scheme if he or she is so advised. 21 Be that as it may, I am content, in this case, to approve a scheme where each group member's entitlement to share in the $750,000 is not subject to review. This is because the amount that each group member can expect to receive will not be large and the cost of even a successful challenge to the administrator's decision will be disproportionate to any benefit that might be gained. 22 It is likely that included amongst the group members will be persons under disability. I am satisfied that this does not prevent the court approving a settlement under s 33V(1). Section 33F(1) provides that it is not necessary for a person under disability to have a next friend or committee merely in order to be a group member. In my view, s 33V(1) proceeds on the assumption that the representative proceeding which is to be settled or discontinued with the approval of the court is a proceeding where group members may be under disability. The settlement scheme makes specific provision for the protection of rights of persons under disability. It contemplates that each person under disability will be represented by some person who by law is entitled to act on his or her behalf or by a solicitor. It will be the obligation of the representative or solicitor to lodge a claim on behalf of the person under

Lopez v Star World Enterprises Pty Ltd

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