Class action proceedings within the franchising context: Davaria Pty Ltd v 7-Eleven Stores Pty Ltd case study

By Alicia Hill, Principal and Angela Wang, Law Clerk

A class action is a legal proceeding an applicant brings on behalf of themselves and a group of people (‘group members’) with consistent claims, against the respondents.

The case of Davaria Pty Ltd (Davaria) v 7-Eleven Stores Pty Ltd (7-Eleven) and ANZ concerned a class action, commenced by a 7-Eleven franchisee Davaria and its director, on behalf of current and former franchisees for misleading and deceptive conduct, unconscionable conduct and breach of contract.  ANZ was also alleged to have provided unsustainable loans to franchisees.  

Whilst the parties have reached an in-principle agreement to settle the class action, at the time of writing this still needs to be approved by the Court. This case provides insight regarding the procedural steps of a class action, issues which can arise that differ to non-class action proceedings, as well as some of the challenges of litigating as a class actions.

The claims

 Davaria first entered into a Franchise Agreement with 7-Eleven on 19 September 2013, over the lease of the Campbelltown Store Site.  Prospective Franchisee’s were required to pay an agreed amount for Goodwill, application/training fee, franchise fee and a cash investment.

Over the course of operating the franchise under the franchise agreement terms, Davaria complained of misrepresentation, poor communication, unconscionability, and lack of transparency in operation of the Franchisor.

In specific, Davaria alleged three grounds against 7-Eleven:

• Misleading and Deceptive conduct pursuant to sections 236; 243 of the Australian Consumer Law (Cth)(ACL’), and section 18 of the ACL, regarding:
  • false representations of business opportunities;
  • failure to exercise due skill and care to compile accurate forecasts and historical profitability information;
  • inaccuracy of labour costs, despite being reasonably aware of underpayment or under-declaration of wages;
  • the need for franchisees to work very minimal amounts after making loan repayments;
  • limited negotiations of stock prices and collection of rebates from vendors;
  • limited choice of suppliers and merchandise offered in the stores;
  • substantial influence and control over the Goodwill price of listed stores and those available for sale.
• Unconscionable conduct pursuant to subsections 236; 243 of the ACL and section 21 of the ACL: making false representations to entice franchisees into entering agreements, despite having knowledge that achieving profitability would be contingent, or at the very least, strongly linked to the underpayment of staff members and/or working unreasonable and unconscionable hours themselves.
• Breach of contract: the franchise agreement entered into had been breached, as group members were only able to purchase stock from C-Store, run by Metcash under 15(b) of the Franchise Agreement.  7-Eleven had previously negotiated with Metcash, allocating prices that were substantially above prices which Franchisees were able to obtain through alternative suppliers, at similar quantities – indicating that these were not the lowest costs reasonably obtainable by 7-Eleven had they used their best efforts.

Davaria also brought allegations against ANZ, for providing unsustainable loans to the Franchisees. They sought damages on the grounds of:

• Breach of contract: ANZ allegedly loaned money to group members despite having knowledge of the extensive labour hours required in operation of the franchised stores, award rates payable per hour and the inaccuracy of both historical and forecasted expenses.
• Unconscionable conduct pursuant to subsections 12GF and/or 12GM of the ASIC Act (Cth)(ASIC Act) and section 12CB of the ASIC Act: ANZ acted unconscionability in lending money to group members in circumstances where they had knowledge that profitability was contingent on the underpayment of staff and overtime working hours of Franchisee’s themselves.

The class action process in the Federal Court

A general application to commence a case in the Federal Court entails filing an application with relevant supporting affidavit, or the filing of a Statement of Claim, or a concise statement.

Whilst the process is similar in a class action case, there are some specific rules and practice directions which specify the process of running a class action in the Federal Court.

Part IVA of the Federal Court of Australia Act 1976 (Cth) as well as Division 9.3 of the Federal Court Rules 2011 (Cth), and the Class Actions Practice Note (GPN-CA) dated 20 December 2019 being the primary rules.

Some of the key points include that:

• The originating application needs to describe or identify the class members by name or characteristic and specify the common questions of law or fact which are said to arise in the action
• The proceedings will be allocated to either a class actions judge to a docket judge or a designated case management judge and/or registrar
• If a litigation funder is involved there are obligations to notify class members of any applicable legal costs or funding charges and to provide a copy of the funding agreement to the court and to the other side
• Applicants of a class may opt out by completing a ‘Notice of opting out by group member’ as required by the Registrar of the Federal Court of Australia
• The consequence of opting out as a class member, would be that if the class action provides a rewarding or beneficial settlement or judgment, they would not be entitled to any share of such. Conversely, if the result of the class action is unfavourable, an individual who has opted out would not be bound to, or liable for any orders made by the Court.
• The first case management hearing is ordinarily fixed for a date within 4 weeks from filing. This is generally informal and emphasizes an exchange between all participants including filing of a joint position paper
• any costs or litigation agreement should include provisions for managing conflicts of interest between solicitors/clients and clients/clients
• the court must be notified about any competing class actions commenced in the Court or other courts as soon as practicable so orders can be made about how proceedings can progress
• Parties can expect more than the usual number of subsequent case management hearings due to complexity or logistical issues
• There is expectation that parties will consider with and discuss with other parties, ‘case management imperatives’ prior to each relevant hearing
• The court expects parties to utilize processes of alternative dispute resolution and will consider making orders for suitable steps for settlements
• A class action cannot be settled or discontinue without the court’s approval and there is a process to be followed to obtain that approval
• Group members are not personally liable to any incurred legal and upfront costs, including the security for costs which is over $7 million. The Applicant – in this case, Davaria, or any litigation funder nominated, is liable
• there are restrictions on communications with group members and avenues specified as to how this occurs
• trials may be split so that common issues are dealt with in one hearing and non-common issues concerning liability first with balance issues at a second hearing
• confidentiality orders are not the ordinary course, a court has to be convinced that it is appropriate to make confidentiality orders and not prevent prejudice to the proper administration of justice and will not inhibit the public interest in open justice.

Proceedings

The proceedings against Davaria and ANZ started on 28 May 2018, leading to 9 judgements being made prior to the reaching an out-of-court settlement.

A summary of timeline is as follows:

• 28 May 2018: application concerning whether communication sent by solicitors of Davaria to class members in the class actions who have retained the firm was subject to an interlocutory application. The court was satisfied that it was confidential communication for the predominant purpose of providing legal advice, due to the heading of the email, addresses sent to and emphasis on its privileged nature. Therefore, the order made was for 7-Eleven to pay the costs of application.
• 29 June 2018: court orders that Davaria must issue a Correction Notice to advise group members of misleading statements and allow them opportunity to withdraw their position. Davaria to bear the costs of such and must also pay 7 Eleven’s costs of and incidental to this application.
• 19 August 2019: court orders that amended interlocutory application seeking to restrict disclosure of confidential evidence dated 16 July 2019 be dismissed and costs reserved. This was because there was insufficient evidence to ascertain this would prejudice 7-Eleven in its ability to test the relevant evidence.
• 11 December 2019: application for relief seeking to restrain 7-Eleven from communicating with group members concerning compromises or releases that relate to the proceedings. Court ordered amendments to the Interlocutory Application and listed matter to be heard for further case management on 28 February 2020.
• 25 March 2020: Davaria’s application for leave to appeal from interlocutory orders of docket judge made on 11 December 2019 dismissed as the Judge was entitled to reach his views. Davaria to pay 7 Eleven’s costs of and incidental to that application.
• 7 July 2020: Orders for Davaria to provide security for 7-Eleven’s costs for period up to commencement of initial trial in sum of $301,500 by depositing cash with Court in deposits, after only completing six of eight payments in order made on 12 April 2019.
• 7 August 2020: Discontinuance of claims against ANZ pursuant to Deed of Settlement between Davaria and ANZ.
• 2 October 2020: order of the court providing for quantum of remuneration of third-party litigation funder to be fixed as a proportion of moneys recovered in proceedings, for all group members in this proceeding to bear same proportionate share of liability.
• 3 November 2020: application for declaratory relief 7 Eleven’s interlocutory application dated 7 August 2020 be dismissed as Davaria played no active role – 7-Eleven separately agreed to pay the costs of the contradictor.
• 5 March 2021: Further amendment application. Court refused leave in respect of adding the Unconscionable System Case and extending the group member definition. Alternatively, ordered to allow leave for the Supplementary Amendments and removal of the ANZ Bank.
• 3 May 2021: Application made under s192A of the Evidence Act providing that admissibility or use of evidence, operation of provision of Act or the giving of leave under s192 may be given a ruling or finding before the evidence is adduced in proceedings. Court rejected this application and made an order that costs of and in connection with the application under s192A of the Evidence Act be paid by 7-Eleven to applicants.

Takeaways

 This case provides a case study of how a class action can differ from non-class action litigation and has built in procedural requirements to ensure group members are adequately informed, the process is overseen and managed and outcomes reached are approved by the Court.

Whilst the benefits of class actions include lower individual costs and often funded action, proceedings can also take longer, have multiple interlocutory hearings raising the overall cost of proceedings, and not necessarily result in a return to a group member of everything that a personal action may have afforded.

The courts have set up process and provided practice notes / directions to attempt to prevent issues which may otherwise arise for those not involved in litigation with this number of participants and possibly non-common issues.

Should you wish to discuss this further please contact Alicia Hill of our Dispute Resolution and Litigation Team at (03) 8540 2092 or Alicia.hill@mst.com.au