Johnston v Endeavour Energy

HIS HONOUR:

On 15 July 2016, pursuant to s 173 of the Act, I gave provisional approval to a settlement of these proceedings as between Johnston and the members of the class which he represents and the defendant (Endeavour). I also gave provisional approval of a payment to insurers from the settlement sum.

The proceeding has been stood over to 26 September 2016 for the hearing of objections and if appropriate, for final approval of the settlement. This judgment sets out my reasons for giving provisional approval.

Mr Johnston’s case is that at around 1.20pm on 17 October 2013 an acacia tree on the western side of Linksview Road Springwood (the tree) failed and fell onto live bare aerial conductors owned and operated by Endeavour. Pressed together by the tree, the conductors arced and molten aluminium particles ejected from the conductors and started the fire.

The origin and cause of the fire are in dispute.

Mr Johnston alleges that the structural defect in the tree (decay) was detectable and if Endeavour had adopted reasonable practices, it would have been detected and the tree removed so that it could not fall onto the conductors and cause the fire. Osborne Aviation Services Pty Limited (Osborne), a contractor engaged by Endeavour to conduct inspections of vegetation as part of its pre-summer bush fire inspection program, was named as a concurrent wrongdoer and became the subject of a cross-claim by Endeavour. Osborne was subsequently sued by Mr Johnston. Endeavour and Osborne each denied liability.

The trial commenced on 17 February 2016 before Garling J.

On 29 February 2016 I approved a settlement between Mr Johnston and Osborne pursuant to s 173 of the Act. On 18 March 2016 (approximately the estimated mid-point of the trial) Mr Johnston and Endeavour agreed to settle the proceeding on terms.

The terms of a Deed of Settlement of the proceeding against Endeavour have been agreed and executed by the plaintiff and Endeavour (Settlement Agreement). The deed provides for the release of Endeavour from all claims made by Mr Johnston and the class he represents in the proceeding on the basis that Endeavour pay without any admission of liability the sum of $18 million, inclusive of costs and interest.

The settlement with Endeavour is not effective without approval by the Court. The application before the Court was pursuant to:

Mr Johnston referred to and relied upon:

The first issue is whether the proposed SDS (original SDS) is fair and reasonable in the interests of the group members as a whole. There is, however, a second issue.

On 20 May 2016 Insurance Australia Ltd (NRMA) and WFI Insurance Ltd (Coles Insurance and WFI) (together, the Insurance Australia Group or IAG) filed a Notice of Motion seeking leave to be heard in respect of Mr Johnston’s Notice of Motion filed 24 March 2016. On the same day Allianz Australia Insurance Ltd filed a Notice of Motion in similar terms.

At the hearing before me on 6 May 2016, counsel for IAG and Allianz objected to the terms of the original SDS. They submitted that the insurers should participate in the settlement on the basis of a pro-rata distribution between insured and uninsured losses.

AAI Ltd and CommInsure also indicated that they intended to object to the terms of the original SDS on the same basis as IAG and Allianz Insurance, either at the 15 July 2016 hearing or in the event that the original SDS was provisionally approved.

Mr Johnston and IAG, Allianz, AAI Ltd and CommInsure (the insurance intervenors) have reached in principal agreements in relation to the extent to which each insurer will receive reimbursement in relation to insurance payments paid to group members. The agreements with the insurers are subject to the Court approving the proposed settlement. A summary of the terms and effect of these agreements is set out below.

The second issue is the question of whether it is fair and reasonable in the interests of group members to approve a settlement which involves the partial reimbursement to insurers, as set out in the revised SDS, which reflects the agreements with the insurance intervenors. Put another way, whether it is in the interests of group members as a whole and inter se that the Court approve the agreements with the insurance intervenors.

Mr Johnston relies on the opinions prepared by his counsel setting out their views as to whether the revised SDS is fair and reasonable in the interests of group members. These opinions have been filed on a confidential basis in accordance with orders made by me on 24 March 2016 and in accordance with the established practice in group proceedings under Pt 10 of the Act and cognate provisions in other courts.

One particular feature of this proceeding and its proposed settlement against Endeavour is that notice is required.

The group members in the proceeding are all those persons who suffered personal injury, property loss or damage as a result of the fire. The “open” nature of the class means that Mr Johnston’s solicitors are not currently able to identify every person who fits the definition of “group member”. There are 779 group members registered with the solicitors (RGMs). 362 RGMs are clients of Mr Johnston’s solicitors, Maddens Lawyers. There are 417 non-client RGMs. It is likely that there are few other group members apart from the group members registered with the solicitors and that further notices and advertisements are unlikely to be effective in targeting non-registered group members (first confidential Pendergast affidavit at [42] and [51]).

Accordingly, and having regard to paragraphs [39] to [52] of the first confidential Pendergast affidavit, it is proposed that the Notice of Proposed Settlement be distributed to each RGM by post and if details are available, also by email, by Maddens Lawyers. The notice will be made available on the Court and Maddens Lawyers websites. I have made orders to that effect.

The principles that govern an application for approval of a settlement of a group proceeding are well established:

The effect of those considerations is that the proposed settlement must be fair and reasonable and in the interests of all group members who will be bound by the settlement. In this context group members, who are not clients of Maddens, are not directly represented. It is their interests in particular which the Court, in an application of the present kind, is concerned to ensure are addressed fairly, vis-a-vis the plaintiff and other group members and having regard to the overall merits of the claims made on their behalf in the action.

Notwithstanding the reservations expressed by Jessup J in Darwalla regarding lists of criteria, the factors identified by Goldberg J in Williams as typically bearing on an assessment of a proposed settlement provide a useful framework. Those factors are:

Each of the factors referred to in the preceding paragraph were the subject of analysis in the confidential opinions of counsel. Where appropriate, without disclosing the content of the opinions, I will make reference to them.

The specific agreements are set out and exhibited to the fourth confidential Pendergast affidavit at paras [18] – [34]. A summary of the agreements with the insurance intervenors is set out below.

The insurance intervenor agreements compromise the insurers’ entitlement to a distribution in respect of group members partially insured by insurers within the IAG Group, Allianz including Club Marine, insurers within the AAI Group and/or CommInsure. The compensation pool otherwise available to these group members would be adjusted by deducting the total agreed insurer reimbursement amounts set out in Table 1 below.

This adjustment will not affect any other group members because the revised SDS provides that the extent of adjustment to individual group members with mixed claims will be calculated by multiplying the total agreed insurer reimbursement (set out in Table 1) by the proportion which the individual insurer payment to a group member bears to the total insurance payout made to group members by the relevant insurer.

The insurer reimbursements recorded in the agreements and reproduced in Table 1 are in full settlement of any entitlement that the insurers may have against group members with mixed claims, who are insured by any one or more of the insurance intervenors.

The insurer intervenor agreements also compromise the insurers’ entitlement to a distribution in respect of group members on whose behalf only a subrogated claim has been made. The extent of the agreements is set out in Table 2 below.

The supplementary confidential opinion prepared by counsel in light of the terms of the revised SDS makes it clear that the proposed settlement is fair and reasonable in the interests of group members. The very significant compromise made by the insurers is evident from the percentage reimbursement amounts set out in the fourth column of the tables.

The same principles previously set out in relation to the approval of the settlement as between Mr Johnston and Endeavour, apply also to the insurance intervenors’ settlement. In summary, therefore, the revised SDS must be:

The revised SDS provides for the payment of $18 million by Endeavour to Mr Johnston and the group members and sets out a scheme of distribution of the settlement monies to group members. It also seeks to provide for equity as between:

By way of overview, all group members will receive exactly the same proportion of their assessed claims. The assessment process treats equally all group member claims which have not been assessed to date by independent assessors. To the extent that the scheme relies upon self-assessment of property loss claims, the scheme makes a uniform adjustment based upon extensive work performed by the solicitors in estimating the quantum of the claim across the group in a transparent and equitable fashion to address the apparent over estimation of property loss claims by group members which emerged during the course of the proceeding.

The scheme is similar to that approved by me in the More proceeding (this was a second representative proceeding against Endeavour arising from the same fire by 39 individuals and entities). Both schemes draw upon the significant experience of the legal representatives in each case in class action settlement schemes generally and also in assessments of claims of this kind, as well as the circumstances of the claim group specifically.

I accept that the scheme has been deliberately designed so that the costs and time associated with its administration is commensurate with the sums to be distributed to group members. An important aspect of the scheme is that the relatively modest compensation which the group members will receive not be reduced by expensive and time consuming individual assessments of group member claims. I have referred to the main operative parts of the scheme and commented on them as appropriate. I have not referred to every part of the scheme.

The scheme administrator is to be the principal in charge of the Class Actions Department of Maddens, or another person nominated by that principal. The administrator and administrator’s staff are under a duty to the Court to administer the scheme fairly according to its terms and are obliged under the scheme to act properly on behalf of the group members as a whole. The administrator has the same immunities from suit as a Judge of the Supreme Court of New South Wales. This is appropriate, given that they are administering a Court approved scheme.

By written notice the administrator may require an RGM to provide and verify by further declaration or otherwise such additional information as the administrator may require. The administrator is otherwise entitled to treat as accurate information provided by RGMs or held by the administrator for the purposes of calculating each RGM’s distribution from the settlement distribution fund.

The administrator is entitled to rely upon information provided or obtained to date in calculating RGM entitlements but may at its absolute discretion take into account additional information pertaining to a head of loss which the RGM has not previously notified to Maddens and/or is likely to have a material impact on a RGM’s assessment notice.

I accept that these discretions will assist to ensure an orderly, timely and fair administration of the scheme.

The settlement distribution fund is to be allocated between RGMs in accordance with the loss assessment formula set out therein. This is subject to the further adjustment required by the settlement with the insurance intervenors which is set out in the revised SDS.

After receipt of the settlement sum from the defendant, and payment of it into the settlement distribution fund, the administrator will pay:

Ms Harris, an independent costs consultant, has assessed the legal costs. Mr Johnston relies upon her assessment being the report exhibited to the first confidential Harris affidavit.

The proper approach to the task of evaluating the overall reasonableness of a proposed costs deduction from a class action settlement has been considered on several occasions. The applicable principles have recently been set out by Osborne JA in Matthews. In Courtney v Medtel Pty Limited (No 5) [2004] 212 ALR 311; FCA 1406 at [61] (Medtel) (Sackville J) described his expectation as to the content of the material to be provided to the Court:

The bases for the solicitors’ charges for fees and disbursements are set out in the “Conditional Costs Agreement” entered between the solicitors and Mr Johnston, which is set out in the first confidential Harris affidavit. Maddens have provided updated costs estimates to Mr Johnston from time to time during the proceeding.

The “Opt Out Notices” distributed to group members, approved pursuant to the order made by Garling J on 1 August 2014, specifically notified group members of the likelihood of a requirement to apply some portion of any eventual recovered sum towards reimbursing Mr Johnston for any costs not recovered from the defendant.

Ms Harris broadly approved as reasonable the rates at which professional fees were charged and disbursements incurred (in respect of barristers, expert witnesses and other contractors, such as loss adjustors). Where she considered that any costs should not be allowed deductions were made by her. The end result of that extensive work was that Ms Harris calculated an amount that could properly be charged for legal costs (fees and disbursements). That amount is set out in the summary of opinion at paragraph 17 of the first confidential affidavit of Ms Harris.

The costs agreements under which Maddens and some of Mr Johnston’s counsel team have acted throughout their engagement have been “conditional” costs agreements. Maddens act entirely on a “no win no fee” basis. Some counsel acted on a part conditional basis pursuant to which a portion of fees was paid on being invoiced, but the balance would be due only upon a “successful outcome” as defined in the various costs agreements. In accordance with the practice permitted by the Legal Profession Act (Vic) now applicable under s 182 Legal Professional Uniform Law Application Act 2014 (Vic) an “uplift” of 25% of the conditional component of the fees will be payable in the event the settlement is approved. Ms Harris has noted and endorsed those provisions as reasonable.

Although the proportion of legal costs as to the total settlement sum is high, I have concluded as a result of the analysis carried out in both the confidential Harris affidavits, that the substantial amount of work done by Mr Johnston’s representatives was unavoidable in the context of complex and hard fought litigation, and that the group members would not have recovered any amount at all from Endeavour had the proceeding not been instituted.

The scheme provides for $25,000 to be paid to Mr Johnston. This payment is intended to compensate him for the time, inconvenience and burden associated with taking on and discharging the obligations of lead plaintiff in attending to matters on behalf of group members.

The appropriateness of compensating class representatives was established in Darwalla. Jessup J recognised that he was dealing with a then novel request for payment outside the normal categories allowed in litigation. His Honour held that it was:

Jessup J emphasised two matters:

The proposed payment here is not said to be an exact valuation of the time or expense incurred by the lead plaintiff, rather Mr Johnston’s lawyers have nominated a fixed sum. I am told that Mr Johnston was not asked to keep time records of his attendances but that his lawyers estimated the number of hours that he spent in attendances. I accept that any assessment of the reasonableness of the proposed payment must recognise that the burden on Mr Johnston in this proceeding was probably greater than that of the lead plaintiffs in Darwalla or Modtech. This was not a commercial action for recovery of cartel rents or lost share-market investment. The proceeding involved a catastrophic bush fire. Mr Johnston accepted the burden of conferences with solicitors and then counsel and having to provide particulars of his claim. He testified about his personal losses in a public forum.

I take into account that the proposed payment is modest and that all RGMs have been notified in the notice sent to them. I consider that the payment is fair and reasonable having regard to the interests of the group members generally and I have no difficulty in approving it.

Distributions to group members from the revised SDS will be made pro rata in the proportion which the final assessed value of each group members claim bears to the aggregate of all final assessed claims. I accept that this will ensure a fair distribution of the settlement funds.

A methodology for property loss assessments is set out within the scheme. In summary, the scheme adopts assessments conducted by independent loss assessors. Self-assessments will be uniformly revised down according to Schedule A of the revised SDS. This is based on reports by Professor Gordon to the effect that most such claims have been over estimated. That conclusion was arrived at by his independent assessment of a number of such claims. The reduction will be uniform across all self-assessed property loss claims.

I accept that such an approach is reasonable because of the relatively modest distribution amount available under the scheme. Detailed assessment of property losses are not in the interests of group members due to the significant cost involved and the delays in processing many hundreds of claims. For that reason, I also accept as fair and reasonable that there is no review of an assessment notice which issues under the Scheme.

There are approximately 54 personal injury (PI) claims. The scheme provides that after settlement approval, the administrator will arrange for the personal injury claims to be assessed (pro bono) by Mr Johnston’s senior counsel, Mr Tobin SC. Mr Tobin SC in considering and valuing each PI claim may in his sole discretion refer a group member for medico legal assessment and/or confer with the group member. The justification for this simplified mode of assessment of personal injury claims was the need for a cost efficient yet robust assessment procedure, given the relatively modest likely distribution to be made to most group members with personal injury claims under the scheme.

I accept that such a scheme is fair and reasonable and note that provision is also made with respect to group members’ potential obligations to reimburse any government agencies that may have paid them statutory benefits or to reimburse insurers. That latter circumstance is dealt with when setting out the effect of the distribution to the insurance intervenors.

Given the modest amount available for distribution, I accept as fair and reasonable that a determination by the administrator of assessed loss is binding with no right of review or appeal. This, of course, is subject to administrative errors or a slip. Rights of review or appeal would be costly and disadvantage other group members, given the modest distribution amount available. It would also significantly delay the administration of the scheme and the distribution of payments.

Where the scheme administrator believes that a group member is or may be a person to whom Division 4 of the Act applies, the administrator must identify the appropriate personal representative and notify the group member, the proposed personal representative and the Court accordingly. Decision making relating to participation in the scheme then reverts to the group member’s personal representative. All steps to be taken in respect of that group member under the scheme will be taken by the personal representative.

Once the various steps required by the scheme have been completed, the administrator will then make an application to the Court for orders reflecting the terms of s 75 of the Act for approval of the compromised claim by the group member. I accept that this process is fair and reasonable and has due regard to the rights of a disabled RGM.

The administration costs of the scheme, including all professional costs and disbursements incurred by the administrator, are to be paid from the settlement distribution fund. The scheme provides that the administration costs are to be paid from interest earned on the settlement sum before reducing the principal sum payable to group members.

Fees payable in respect of work performed by Maddens in connection with the administration of this scheme will be charged at rates which have been approved by the independent costs consultant as reasonable commercial rates.

Administration costs are to be disbursed from the distribution fund as the costs are invoiced to the scheme administrator. The administrator may refer any issues arising in relation to the scheme to the Court for determination or advice.

I accept that the scheme administrator is entitled to a reasonable remuneration for managing the scheme and that the procedure identified is fair and reasonable and provides an acceptable amount of transparency.

The revised SDS does not alter the assessment of claims or the pro-rata distribution of the compensation pool between group members:

The revised scheme also does not alter the pro-rata amount distributed on a claim by claim basis where group members have mixed claims. However, the distribution to the group member is subject to an adjustment to the extent agreement has been reached with the group member’s insurer or insurers as to reimbursement in respect of insurance payouts to the group member.

Only group members partially insured by insurers within IAG, Allianz including Club Marine, insurers within the AAI Group, and/or CommInsure, will be affected. It is clear that no question of fairness between affected group members with mixed claims and other group members arises.

If group members are partially insured by insurers within the IAG group, Allianz including Club Marine, insurers within the AAI Group, and/or CommInsure the distribution to affected group members will be subject to an adjustment. This adjustment will be calculated by multiplying the total agreed insurer reimbursement (set out in Table 1 above) by the proportion which the individual insurer payment to a group member bears to the total insurance payout made to group members by the relevant insurer.

In each case the insurer reimbursement, as a proportion of the total payment to group members as a result of the fire, is less than the amount of approximately 4.5% of total assessed losses expected by the administrator to be recovered by individual members. I accept that it is a superior outcome for group members than that achieved for the group in Matthews. It will result in relation to mixed claims in group members recovering a higher proportion of their uninsured loss where a group member has the benefit of a compromise achieved with the insurer. I accept that it represents a significantly better outcome than if priority were afforded to insurers, as group members would not receive any distribution at all.

The extent of the insurer compromise in each instance reflects the legal uncertainty as to priority between insurer and insured. The slightly higher insurer reimbursement amount achieved by IAG reflects the existence of an agreement recorded in a letter from William Robert’s Lawyers to Maddens Lawyers dated 3 September 2015 and the partial performance of that agreement by IAG.

The insurance intervenor agreements also compromise the insurers’ entitlement to a distribution in respect of group members on whose behalf only a subrogated claim has been made. The extent of the agreement is set out in Table 2 above which provides certainty to other group members who are uninsured or who have mixed claims.

For the reasons set out when considering the prospects of success in the proceeding of the group members generally and of the application by the insurance intervenors, it is clear that absent this settlement the prospects of success by the group members generally was poor and in the case of the insurance intervenors much of the settlement distribution sum would have been expended on costly litigation.

The most compelling reason for my grant of provisional approval of the revised SDS is that I consider the prospects of success of the RGMs against Endeavour to be poor. While it is not appropriate for me to disclose the detailed analysis of liability set out in the first confidential opinion of counsel, I wish to identify in general terms the principal difficulties for the class members.

Although it is not free of doubt, it is likely that Endeavour would have been found to have owed a duty to exercise reasonable care to Mr Johnston and the other class members. Even so, the precise formulation of the duty and its content could have been difficult.

Breach of duty gave rise to considerable difficulty for Mr Johnston. It was common ground that Endeavour engaged contractors to carry out an inspection of vegetation near power lines throughout its large area of responsibility which included the power lines on Linksview Road. At no time did Endeavour or any of its contractors detect the fact that the tree was rotten and therefore at substantially increased risk of failing and falling onto the power lines.

This was not surprising given the difficulties which the experts referred to in identifying the particular problem with the tree. The evidence appears to be that the internal rot could not be seen by looking at the tree but would have required more extensive testing, e.g. striking the trunk with a sounding mallet or probing beneath the bark with some implement. The obvious comment is that such investigations would only have been warranted if there were visible indicia pointing to the possibility that the tree had internal decay. There was considerable disagreement amongst the experts as to the existence, prominence and significance of the signs (if any) which were present.

If, as seems likely, s 43A of the Civil Liability Act 2002 (CLA) applied to the claim a further difficulty existed in proving breach of duty. To succeed Mr Johnston would have had to establish that Endeavour’s failures were “in the circumstances so unreasonable that no authority having the special statutory power in question could properly consider the act or omission to be a reasonable exercise of, or failure to exercise, its power”. To the extent that evidence would have been given as to the practices of other electricity distribution companies in Australia, that evidence would have been to the effect that Endeavour’s practices were not substantially different from other distributors.

In addition to breach of duty, causation presented a significant obstacle to Mr Johnston’s success in the proceeding. The claim was that if Endeavour had engaged vegetation inspectors with appropriate training and had properly directed them to identify hazardous trees, they would have detected that the tree was rotten and it would have been removed before the fire. For the reasons already given in relation to breach of duty, such trained personnel had they been employed would not have been able to identify that the tree was rotten without more invasive testing. That assumes that there would have been some visual trigger to require such additional testing. Not only was that latter consideration controversial, the expert evidence concerning it was in conflict.

The conclusion I have reached is that had the trial proceeded to judgment, it is unlikely that Mr Johnston would have succeeded in establishing liability. There are some other lesser considerations which also favour a conclusion that the modified SDS is a fair and reasonable result and is in the interests of group members as a whole. The settlement finalises the proceedings against Endeavour and avoids the risk that even if Mr Johnston obtained judgment at first instance, there would be an appeal which might delay finality for some years. The settlement also limits the legal costs which would otherwise increase substantially in order to finalise the trial and any appeals.

The application by the insurance intervenors also gives rise to liability issues. This is addressed in the second confidential opinion of Mr Johnston’s counsel, in the fifth confidential Pendergast affidavit. The opinion of counsel is that the revised SDS, insofar as it reflects the risk to group members in the application by the insurers, is fair and reasonable and in the interests of all group members.

The major problem with the application by the insurer intervenors is that there is considerable legal uncertainty as to whether or not (and if so to what extent) the insurers’ rights of subrogation under general law entitle them to be reimbursed from the settlement sum, or to otherwise recover from the insured group members distributions made to them under the original SDS. The nature of that uncertainty was summarised by Dixon J in Matthews.

There is also a dispute and considerable uncertainty as to the application of:

As already indicated, the significant extent of the insurer compromise, as set out in the Schedules, reflects the legal uncertainty as to priority between insurer and insured in the proceedings. What is clear is that, had there not been an agreement between the insurers and Mr Johnston as to reimbursement, further litigation would have ensued which would have significantly reduced what is already a modest settlement sum. I have concluded that the agreement reached between the plaintiff and the insurance intervenors is in the interests of all group members and for the reasons already indicated, represents a fair and reasonable resolution of the dispute.

For the reasons set out above, I have concluded that there is little likelihood of the group members obtaining judgment for an amount in excess of the settlement offer. This also applies to the agreement reached with the insurance intervenors.

My opinion in relation to the settlement proposal and the agreement between Mr Johnston and the insurance intervenors accords with that of his counsel, i.e. not only are the proposals to the advantage of group members but they are fair and reasonable and in the interests of all group members who will be bound by the settlement.

Had the matter not settled, the estimated length of the proceedings against Endeavour was a trial of up to 10 weeks. The proposed settlement with Endeavour was reached during a short break in the trial after the conclusion of the lay evidence and before the commencement of the expert evidence. Given the involvement of numerous experts, including three who would have travelled from the United States and others from interstate, the costs of the second half of the trial would have been considerable.

I accept that the settlement with Endeavour avoids incurring the costs of the remainder of the trial, removes the prospect of appeal proceedings and avoids other consequential matters such as an adverse costs order. I have concluded that the settlement of the proceedings is very much in the interests of the group members.

Similarly, in relation to the insurance intervenors, the agreements reached avoid incurring the costs of determining the applications and likely appeal proceedings.

The orders sought by Mr Johnston and which I have made include a process for group members to oppose the final settlement of the proceeding against Endeavour and also the agreements reached with the insurance intervenors. As of the date of this judgment, it is not known if any of the group members will object to the proposed settlement.

For the above reasons, I accept that the inter partes aspects of the settlement with Endeavour reflect an appropriate compromise within complex litigation having regard to the risks for group members in the proceeding. Moreover, the settlement does not differentiate between group members and as such no question arises as to whether it is fair and reasonable inter se. Similar considerations apply to the agreements reached between Mr Johnston and the insurance intervenors.

It is for the above reasons that I gave provisional approval to the proposed settlement and to the proposed documentation to be sent to group members.