Bellamy’s cry for “cost capping” in competing McKay and Basil class actions dismissed by the Full Court of the Federal Court

On 23 August 2019, the Full Court of the Federal Court in Bellamy’s Australia Limited v Basil [2019] FCAFC 147 (Bellamy’s) unanimously dismissed the applicant’s application for leave to appeal “costs capping” orders, initially rejected by the primary judge at first instance.

Bellamy’s Australia Limited (BAL) is the respondent to two class actions: McKay Super Solutions Pty Limited (as Trustee for the McKay Super Solutions Fund) v Bellamy’s Australia Limited (VID163/2017) (McKay Action) and (Basil v Bellamy’s Australia Limited FCA VID213/2017) (Basil Action). The actions allege that BAL breached its continuous disclosure obligations, engaged in misleading or deceptive conduct, and made misleading statements, in contravention of the Corporations Act 2001 (Cth) and the ASX Listing Rules regarding the growth prospects of the company and its infant formula trade.

BAL’s proposed appeal had the intention of capping costs recoverable by McKay and Basail, such that upon any taxation exercise, only a single set of costs across both proceedings would be recoverably against BAL, capped at a maximum of $4,456,550 (or $2,228,275 per action) (Quantum Caps). The Full Court has said duplicative costs are better addressed by case management decisions by docket Judges, aimed to cut excessive expense, not by prospectively limiting future costs which might be incurred at early stages in the proceeding.

Primary Judge’s Decision

The Full Court summarised the primary judge’s refusal of BAL’s application as follows:

1. the Court’s own case management directions were working reasonably well to substantially reduce any duplicate costs, and BAL had not approached the primary judge to tighten or strengthen the directions, or establish any substantial noncompliance with them;
2. any future unjustified duplication could be retrospectively adjusted by the primary judge by limiting BAL’s adverse costs exposure at a later stage;
3. his Honour was not, at the time of hearing BAL’s application, adequately positioned to assess the Quantum Caps, and BAL had not advanced any compelling reason to deal with those matters prospectively;
4. any Quantum Capping should only operate where there was mutuality, such that BAL would be subject to a correlative constraint on its costs (and only for costs incurred after his Honour’s earlier decision to reject a stay and allow both proceedings to progress); and
5. any Quantum Capping could prejudice group members if the applicants succeeded at trial – it is likely any difference between solicitor/client costs and the Quantum Caps would be born out of any damages award, but it was unclear as to who would bear this burden (ie the applicants generally, group members as a whole, applicants’ solicitors, or the litigation funders). It would be better to deal with all cost questions retrospectively and otherwise leave in place a protocol designed to reduce or minimise duplication or inefficiency.

However, at the time of the leave application, BAL had dropped the “costs capping” relief sought, alternatively seeking that any cost orders made in favour of McKay and Basil, be agreed or assessed (ie taxed) on the premise they are treated as being represented only by one legal team, and one set of counsel (effectively one set of costs across the two actions).

Findings

The relevant principles to determine whether leave to appeal should be granted were not in dispute. The Full Court echoed the well-established principle that it must exercise a “tight reign…upon attempts by litigants with long purses or litigious dispositions to transfer exercises of discretion in interlocutory applications from docket judges to the Full Court in matters involving practice and procedure”[1]. The power to grant leave derives from the statutory charge in s 37M(2) of the Federal Court of Australia Act 1976 (Cth) (FCA), which must be ‘carried out in way that best promotes the overarching purpose – the just resolution of dispute according to law and as quickly, inexpensively and efficient as possible’.

BAL needed to satisfy a two pronged test set out in Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 (Décor) at 398-399 – that is:

1. in all the circumstances, the decision to be appealed is attended with sufficient doubt to warrant its reconsideration on appeal; and
2. supposing the decision to be wrong, substantial injustice would result if leave were refused.

The tests are cumulative, such that if either of the tests is not met, leave to appeal ought not be granted[2].

Substantial Injustice

Their Honours addressed the “substantial injustice” limb first, noting BAL’s five grounds of appeal concerned “one key issue”: that is whether or not ‘BAL should be exposed to duplicate costs, arising from multiple actions, whose claims are identical or substantially similar, but the parties are separately represented and there is no conflict between the applicants’ interests, and no trade rivalry justifying separate representation’[3].

The Court deemed BAL’s interests to such exposure (if any) is and would be protected, given the three circumstances in which costs would likely become payable by BAL[4]:

1. firstly, pursuant to orders made in favour of McKay and Basil at initial trial, or some interlocutory stage;
2. secondly, and rarely, pursuant to an order made in favour of a group member, or former group member, following the initial trial and after de-classing (ie, following determination of a group member’s claim); and
3. thirdly, as part of a settlement of the whole or part of the actions, such settlement being subject to court approval under s 33V of the FCA.

Unless the court orders otherwise, any assessment of costs under the first and second scenarios will be subject to taxation under Part 40 of the Federal Court Rules 2011, which allow for rejection of unreasonable or unnecessary costs incurred. The third scenario is protected by the Court’s supervisory role in approving settlements of class actions: it will only allow costs to be deducted from a settlement sum which it is satisfied are fair and reasonable (from the perspective of group members, who will likely bear such costs from the ultimate settlement sum).[5] Their Honours noted the primary judge was well aware of these protections, and expressly reserved BAL’s position to apply for a ‘bespoke or retrospective order limiting their adverse costs exposure at a later stage’.

It was found the primary judge accurately concluded there was no compelling reason advanced by BAL to ‘deal with the costs matters prospectively now’ as BAL’s application did not “finally determine” the issue of duplicate costs that might be recovered. In agreement, the Full Court observed the better and more practical solution, is to address the cost question retrospectively, rather than make a decision on “insufficient material, with insufficient justification of a crude costs cap”.

Their Honours were also unconvinced that BAL’s suggested “prejudice” (the lack of a prospective “costs capping” order would operate as a restraint on the parties in settlement discussions) was of any substance[6].

Even if the primary judge’s position were wrong, the Full Court concluded BAL would not suffer substantial injustice if leave were refused, because an adverse costs order might never arise, and if it did, there are several procedural options available to protect BAL’s position. Thus BAL failed to meet the second Décor limb.

Sufficient Doubt

Notwithstanding the second Décor limb had already failed, the Court returned to the first Décor limb, they’re considering whether the proposed appeal would be sufficiently arguable, as it will “seldom be in the interests of justice” to grant leave where the appeal has little prospects of success[7].

Looking to the structure of Part IVA of the FCA, the Court acknowledged the legislation recognises and permits competing class actions to proceed, and does not mandate a respondent faces only one set of legal costs in respect of same. However, the desirability to avoid duplicate costs in the interests of the respondent and group members is obvious. Their Honours referred to the recent Full Court decisions in GetSwift and Klemweb which ‘make it clear that docket judges (primary judges hearing the class actions) have considerable latitude to fashion case management solutions to deal with multiplicity of class actions, and potential duplicate costs, are a “relevant discretionary factor” to determine an appropriate solution’.

The Full Court observed the Primary Judge had recognised that there would likely be some duplicate costs, being consequential to his decision to allow more than one action to proceed – but it is that primary judge’s role to mitigate such unfairness by implementing case management strategies to deal with this. This is precisely what transpired in this instance[8]. Further, to “the extent that such prophylactic steps were insufficient, any prejudice (to either BAL or group members) could be addressed later”[9].

BAL’s suggestion that there was some conduct or error of the applicants (McKay and Basil) in the class actions that would justify a refusal to award them costs as successful parties (the principle emanating from the recent High Court decision in Northern Territory v Sangare[10]) was unfounded. Their Honours did not consider the Primary Judge did anything but ‘exercise his discretion by reference only to considerations relevant to its exercise and upon the facts before his Honour[11]‘. The Full Court further expressed there would be manifest “asymmetry and unfairness” to McKay and Basil, by allowing a “costs capping” order in favour of BAL, without an equivalent fetter on BAL’s costs[12].

Ultimately, the Full Court thought little of BAL’s second, third and fourth proposed grounds of appeal, the fifth and final ground being rejected, having accepted it was open to the Primary Judge, in exercising his discretion, to reject the “cost capping” orders sought, and deal with the duplication issue as the Primary Judge did (ie retrospectively).

Given neither Décor limbs were satisfied, Murphy, Gleeson and Lee JJ dismissed BAL’s application, with further submissions to be filed by the parties in respect of costs.

Key Lessons from Bellamy’s

The decision is a win for applicants, plaintiff law firms, and litigation funders in the Australian class action landscape, entrenching the notion that when faced with multiple competing class actions, the Courts:

1. should not at an early stage of the proceedings, prospectively set a “cost cap” unilaterally in favour of a respondent; but
2. have wide discretionary power over managing duplicate cost issues, which should be monitored throughout the proceedings, and any duplication issues should be handled retrospectively.

[1] Bellamy’s Australia Limited v Basil [2019] FCAFC 147, Murphy, Gleeson and Lee JJ, at [5].

[2] Ibid, at [7].

[3] Ibid, at [10].

[4] Ibid, at [11].

[5] Ibid, at [13].

[6] Above No 1, at [15].

[7] Referring to MZABP v Minister for Immigration and Border Protection [2015] FCA 1391; (2015) 242 FCR 585 at 597-598 [62]-[63] (Mortimer J), Ibid at [17].

[8] Above No 1, at [21].

[9] Ibid, at [25].

[10] [2019] HCA 25 per Kiefel CJ, Bell, Gageler, Keane and Nettle JJ.

[11] Above No 1, at [26].

[12] Ibid, at [27].

Authored by:

Glenn McGowan QC, Partner & Chief Counsel

Rebecca Di Rago, Associate