FEDERAL COURT OF AUSTRALIA CONTRACT - disputed settlement agreement - scope of agreement - whether settlement disposed of primary claim and derivative cross-claims - where no document recording terms of agreement FRANKLINS LIMITED (ACN 000 929 902) v THE REJECT SHOP (AUST) PTY LTD (ACN 066 122 676) NG 138 of 1997 SPENDER J BRISBANE 10 JUNE 1998 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY NG 138 of 1997 BETWEEN: franklins limited (acn 000 929 902) AND: Applicant AND: THE REJECT SHOP (aUST) PTY LTD (ACN 066 122 676) AND: Respondent By Original Action the reject shop (aust) PTY LTD (ACN 066 122 676) first Cross-Claimant NEVERA PTY LTD (ACN 006 532 734) First Cross-Respondent AUSTRALIA PACIFIC TRADING PTY LTD (ACN 070 889 913) second cross-respondent By First Cross-Claim AUSTRALIA PACIFIC TRADING PTY LTD (ACN 070 889 913) Second cross-claimant newnham trucking pty ltd (acn 006 149 444) Third Cross-Respondent AND: GRAEME CHARLES NEWNHAM Fourth Cross-Respondent By Second cross-claim newnham trucking pty ltd (acn 006 149 444) third cross-claimant AUSTRALIA PACIFIC TRADING PTY LTD (ACN 070 889 918) fifth cross-respondent By third Cross-Claim JUDGE: SPENDER J DATE OF ORDER: 10 june 1998 WHERE MADE: BRISBANE THE COURT DECLARES THAT: The preliminary question;"Did the terms of the agreement reached on 6 August 1997 settle all claims and cross-claims between the parties", be answered in the affirmative. THE COURT ORDERS THAT: Australia Pacific Trading Pty Ltd pay the third and fourth cross-respondents' costs of the preliminary question, to be taxed if not agreed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 138 of 1997 BETWEEN: franklins limited (acn 000 929 902) AND: Applicant AND: THE REJECT SHOP (aUST) PTY LTD (ACN 066 122 676) AND: Respondent By Original Action the reject shop (aust) PTY LTD (ACN 066 122 676) first Cross-Claimant NEVERA PTY LTD (ACN 006 532 734) First Cross-Respondent AUSTRALIA PACIFIC TRADING PTY LTD (ACN 070 889 913) second cross-respondent By First Cross-Claim AUSTRALIA PACIFIC TRADING PTY LTD (ACN 070 889 913) Second cross-claimant newnham trucking pty ltd (acn 006 149 444) Third Cross-Respondent AND: GRAEME CHARLES NEWNHAM Fourth Cross-Respondent By Second cross-claim newnham trucking pty ltd (acn 006 149 444) third cross-claimant AUSTRALIA PACIFIC TRADING PTY LTD (ACN 070 889 918) fifth cross-respondent By third Cross-Claim JUDGE: SPENDER J DATE: 10 june 1998 PLACE: BRISBANE REASONS FOR JUDGMENT This is the trial of a preliminary point raised in the second cross-claim and in the third cross-claim. The preliminary point relates to a settlement conference attended by all the parties in the extensive litigation, which conference occurred on 6 August 1997 without any legal representatives of any party being present. The second cross-claimant, Australia Pacific Trading Pty Ltd ('APT') says that the settlement achieved at that conference related only to the claim by Franklins Limited ('Franklins') against The Reject Shop (Aust) Pty Ltd. The third cross-claimant, Newnham Trucking Pty Ltd ('Newnham Trucking'), says that all claims and cross-claims were settled. Unfortunately there is no document recording the terms of the agreement reached at that settlement conference. On 24 September 1997, Lehane J ordered that by consent as between the third cross-claimant and the fifth cross-respondent the proceedings be transferred to the Queensland Division of the Federal Court and made orders concerning the preparation for the hearing of the preliminary point. The principal application and the three cross-claims concern condemned canned pet food. Franklins is the owner of a registered trademark "No Frills". The Reject Shop (Aust) Pty Ltd ('The Reject Shop') had sold and offered for sale tinned 600 gram cat and dog food in cans with a label bearing the name "No Frills". Complaints were received from purchasers of the canned pet food, alleging the pet food was contaminated and in a number of instances had caused sickness in pets which had consumed it. Franklins claimed that The Reject Shop had infringed its trademark, passed off its goods as the goods of Franklins, and engaged in conduct that was misleading and deceptive in contravention of the Trade Practices Act 1974. The Reject Shop cross-claimed against Nevera Pty Ltd ('Nevera') and APT. The Reject Shop claimed it had purchased the pet food from Nevera pursuant to an agreement made on or about 20 January 1997 and alleged that each of Nevera and APT had represented that each of them had authority to purchase and on-sell the "No Frills" product to any retail outfit and, in particular, to The Reject Shop, and further had represented that the goods were of merchantable quality. The cross-claim by The Reject Shop alleged that the pet food was not fit for the purpose of resale or profit, was not of merchantable quality and was delivered without authority. The Reject Shop sought an indemnity as well as damages, interest, and costs. In the second cross-claim, APT alleges that the fourth cross-respondent (Mr Newnham) represented to Joel Keune, a director of APT, that Newnham Trucking was the owner of the pet food pursuant to its rights under the Queensland Warehouseman's Liens Act; that Newnham Trucking had offered the pet food to Franklins but Franklins were not interested in purchasing the stock and that, accordingly, Newnham Trucking could on- sell the dog and cat food to whomever it wished ; further, that while there was a concern initially that the dog and cat food were not of merchantable quality, Mr Newnham had spoken to a Health Department official, who said that the product could be sold; and finally, that Newnham Trucking would pay APT a commission if APT could sell the cat and dog food. APT says that it agreed to sell the pet food for Newnham Trucking as agent. It asserts that the pet food was not of merchantable quality and that the representation by Newnham as to the quality of the dog and cat food was false. APT claimed an indemnity from Newnham Trucking and Mr Newnham against any liability which may be found to be due from APT to The Reject Shop and an indemnity against any costs which it might be ordered to pay to The Reject Shop, as well as the amount it had paid for freighting the pet food to Melbourne. In its defence to the cross-claim of APT, Mr Newnham claimed that he told Mr Keune that the pet food had been condemned by John Stickhams of Queensland Livestock and Meat Authority by order under the Meat Industry Act 1990. Further, Newnham Trucking and Newnham asserted that the fact that the pet food had been condemned "must have been apparent to Keune on behalf of APT by virtue of the notices affixed to the pet food at the time the same was inspected by Keune at the premises of Newnham Trucking". Newnham Trucking and Newnham assert that there was an oral agreement between APT and Newnham Trucking for the sale of the contaminated dog food on an "as is, where is" basis for $60,000.00. By the third cross-claim Newnham Trucking claims the sum of $60,000.00 pursuant to that agreement. It was against a background of these claims and cross-claims that the solicitors for Nevera wrote a letter on 1 August 1997 to the solicitors for Newnham Trucking. That letter stated: "The meeting will not take (sic) unless all parties are represented.... We also wish to point out that if this matter is not resolved we have instructions to lodge a cross-claim against your client...". The meeting occurred on 6 August 1997. On 7 August 1997 the solicitor for Newnham Trucking sent a letter by facsimile to the solicitor for APT outlining the terms of the settlement that Newnham Trucking says was reached on the previous day. That letter stated, inter alia, that "each of the parties is to pay their own legal costs to date... and that all cross-claims (are to) be discontinued". On the same day the company solicitor for Franklins sent a letter by facsimile to each of The Reject Shop, Nevera, APT and Newnham Trucking giving details of the legal costs incurred by Franklins and enclosing a short minutes of order. The short minutes of order accompanying that letter stated: 1. Each of the Respondent, First Cross-Respondent, Second Cross-Respondent, Third Cross-Respondent and Fourth Cross-Respondent ("Respondents") undertakes to the Court that it, whether by itself, its officers, servants, agents or otherwise will not from the date of this order distribute, market, promote, advertise, purchase, import, offer for sale or supply, sell or supply pet food, bearing the Applicant's registered trade mark "NO FRILLS" or any other mark which is substantially identical with or deceptively similar to the Applicant's registered trade mark, or bearing any label similar to that of the Applicant, an example of which is annexed to these Short Minutes of Order and marked "A"; 2. The Respondents have paid to the Applicant damages in the sum of....; 3. The Respondents have paid the Applicant's costs of and incidental to these proceedings agreed in the sum of .....; THE COURT ORDERS THAT: 4. The First Cross-Claimant be given leave to discontinue its cross-claim; 5. The Second Cross-Claimant be given leave to discontinue its cross-claim; 6. Each party to the First and Second Cross-Claims bear its own costs of the cross claims; 7. All previous orders made in these proceedings be vacated". Newnham Trucking confirmed its agreement with those terms by facsimile on 11 August 1997. The solicitors for Franklins again circulated draft short minutes of order in the terms stated above to each of the parties' solicitors on 14 August 1997, and these short minutes of order were on-forwarded to Newnham Trucking by facsimile on 15 August 1997. On that day, Mr Newnham wrote to Mr Shuster of the Reject Shop, which letter said in part: "We refer to your facsimile transmission of 12th August 1997 and confirm we have received documents as well... Our share of the settlement monies in the sum of $11,303.51 is acceptable and we envisage being in a position to honour the settlement agreement by payment of those monies on the 22nd August 1997". By letter of 19 August 1997 the solicitors for APT wrote to the solicitors for Newnham Trucking as follows: "We refer to your letter of 7 August 1997 and advise that our client does not accept that the representatives of all the parties involved settled the action on the terms set out in your letter....... Our client agrees that the application and the first Cross-Claim are to be settled on those terms, but the claims between our respective clients remain on foot"....[the letter then proposes terms on which APT would be prepared to discontinue its cross-claim against Newnham Trucking and Mr Newnham and continues :] "If your clients are not prepared to settle the second and third Cross-Claim on the basis set out herein, our client is prepared to consent to the discontinuance of the application and first Cross-Claim and pay its share of the agreed settlement sum. The second and third Cross-Claim could then proceed (preferably in Brisbane) though we will need to further amend the Cross-Claim. We are instructed that if your clients withdrew from the settlement in respect of the application and first Cross-Claim, the remaining three parties would complete the payment. In such event, we are also instructed that Nevera Pty Ltd would commence an action against your client, Newnham Trucking Pty Ltd for damages for breach of contract. No doubt the Reject Shop Pty Ltd could also consider its position vis a vis Newnham Trucking Pty Ltd". The issue for resolution is whether in fact, the agreement reached at the meeting of 6 August 1997 settled all of the claims and cross-claims then subsisting between the parties, or whether the settlement disposed only of the primary claim by Franklins against the Reject Shop (or perhaps the primary claim and the first cross-claim), leaving the remaining cross-claimants to pursue their claims inter se. It has previously been noted that the terms of the agreement were not reduced to writing at the August 6 meeting. The task for the Court in such circumstances is to ascertain, in an objective sense, the terms of the bargain actually reached by the parties. The affidavit and oral evidence led by the parties of their respective subjective intentions in entering into the settlement is thus relevant only to the extent that it establishes the factual matrix in which the settlement at the August 6 meeting was reached, but no further. On the affidavit and oral evidence I am of the opinion that the agreement reached at the August 6 meeting disposed of all of the claims and cross-claims between all of the parties to the action. I have reached this conclusion for the following reasons: First is the inherent impracticality, in what was complex multi-party litigation, of the settlement agreement simply having the effect of capping the Franklins claim whilst leaving the other derivative claims at large. The structure of the deal is in my view the strongest evidence against such a suggestion. Franklins had sued only The Reject Shop; yet each of The Reject Shop, Nevera, APT and Newnham Trucking agreed to pay 25 per cent of Franklins' claim against The Reject Shop and 25 per cent of Franklins' legal costs. It was the strenuous assertion of the witnesses for APT, which included the responsible officers of Nevera, that the sole purpose of the settlement conference on 6 August was to bring a cessation to the Franklins' action and the Franklins action only. However this assertion is inconsistent with the letter of 1 August 1997 written by the solicitors for Nevera to the solicitors for Newnham Trucking and Mr Newnham which invited all of the parties to attend the settlement conference and which threatened the issuance of a cross-claim by Nevera against Newnham Trucking unless the matter was resolved. This invitation is compelling evidence that the object of the conference was to resolve all aspects of the controversy (including the cross-claims). It is only on this basis that a failure to resolve "the matter" would lead to a cross-claim by Nevera against Newham Trucking. Both Mr Keune for APT and Mr Guerin for Nevera admitted in their oral evidence that they were aware that Franklins had made no claim directly against Newnham Trucking. Counsel for APT says that the representatives of Newnham Trucking were required to attend the settlement conference, despite the fact that it was not a party to the Franklins claim, because it was felt that Newnham Trucking bore some responsibility for the primary action and should contribute to any settlement of it. This explanation is unconvincing. Looking at the matter objectively, each of the respondents bear some responsibility for the supply of contaminated pet food to the public. There is no evidence that at any time during the meeting of 6 August 1997 the parties stated that any settlement reached disposed of the Franklins claim only. There is evidence, however, that Mr Shuster, representing the Reject Shop, said words to the effect that irrespective of fault or blame each party would pay 25 per cent of the settlement amount so that the action would go away. This evidence, in combination with the demand that all parties attend the conference, including non-parties to the primary Franklins claim, leads to the conclusion that, despite the narrow objective of APT in attending the conference, all of the claims in the matter, including the derivative claims were settled at the August 6 meeting. A second reason is the failure by Nevera to initiate the cross-claim threatened in its solicitor's letter to the solicitors for Newnham Trucking on 1 August 1997. That letter states that: "if the matter is not resolved we , [that is, the solicitors for Nevera], have instructions to lodge a cross claim against your client as follows....". The threatened cross-claim never issued. The logical conclusion to be drawn from the failure to issue such cross-claim is that the pre-condition for issuance was fulfilled, that is, the matter was resolved. It is no answer to such a conclusion to state that the "matter" resolved was the Franklins claim only, because if that claim were indeed the only matter resolved Nevera would be fully within its rights to continue to press any claim it might have against Newnham Trucking by proceeding directly against Newnham Trucking or APT. Nevera has not issued proceedings against either of those companies. Mr Guerin for Nevera says that this is because he was informed that APT was taking action. If that were indeed so and Nevera considered that it had rights of action against APT and Newnham Trucking, which rights remained alive despite the settlement agreement, it does not accord with practical reality that Nevera would sleep on such rights and make no attempt to have itself joined to the action it believed APT was pursuing. The failure to issue the threatened cross-claim buttresses the conclusion that all claims were disposed of at the August 6 meeting. The third factor supporting that conclusion is the conduct of APT itself. The short minutes of order prepared by the solicitors for Franklins indicate that Franklins at least believed that the settlement reached at the meeting of 6 August had disposed of its own primary claim in addition to the first and second cross-claims; paragraphs 4 and 5 of the draft short minutes of order reflect that understanding. APT was aware of the draft short minutes of order as early as 7 August 1997 when a copy was sent by facsimile to them by Franklins' in-house solicitor. In addition, on the same day the solicitors for Newnham Trucking sent a letter by facsimile to the solicitors for APT indicating, inter alia, that the terms of the settlement reached on the previous day included the discontinuance of all cross-claims. I think that the terms of the facsimile sent by Franklins to each of The Reject Shop, Nevera, APT and Newnham Trucking on the day after the settlement meeting on 6 August 1997 is strongly confirmatory of the agreement that was in fact reached at that meeting. Mr Keune in his affidavit of 21 November 1997 states that he was advised on 8 August of the fax from Newnham Trucking's solicitors and says that he instructed his solicitor to advise the solicitors for Newnham Trucking that there was no settlement of the claim between APT and Newnham Trucking. The solicitor for APT, Mr Purcell, says that he advised his client that the facsimile from the solicitors for Newnham Trucking was merely an expression of their interpretation of the settlement and that they should await the draft documents from Franklins' solicitors. Mr Purcell says that those draft documents did not materialise until 14 August 1997. However, the chronology of correspondence between the parties outlined previously indicates that APT received a first draft of Franklins' short minutes of order on 7 August 1997, followed by a second draft sent directly to APT's solicitors on 14 August 1997. Mr Purcell said in his oral evidence that at that point he advised Mr Keune that they, that is, APT should make their situation clear and advise Franklins that the short minutes of order did not reflect their understanding of the agreement. However APT, either by itself or through its legal representatives, did not in actual fact raise its disagreement with the terms of the settlement with Newnham Trucking until 19 August 1997. The failure by APT to expressly disavow the terms of the settlement for a period of some two weeks between 7 August 1997 and 19 August 1997 has not been adequately explained. It is odd that APT would in its own evidence, very reluctantly agree to contribute to a settlement sum in a matter in which it believed itself blameless and all the while adamantly claim a contining right of action against the party whom it truly believed to be at fault and yet fail to draw to the attention of that other party its intention to assert such right of action either at the settlement conference or later when that right was directly questioned. The conclusion I draw in such circumstances is that the settlement of 6 August 1997 extinguished both the head claim and APT's derivative right to proceed against Newnham Trucking. Finally is the contradictory nature of what was intended to be APT's affirmation of its alleged right of action against Newnham Trucking in its solicitor's letter of 19 August 1997. That letter begins with the statement : "We refer to your letter of 7 August 1997 and advise that our client does not accept that the representatives of all of the parties involved settled the action in the terms set out in your letter. Our client agrees that the application and the first Cross-Claim are to be settled on those terms, but the claims between our respective clients remain on foot". All of the witnesses at the hearing of the matter were resolute in their evidence that there was no mention, either positively or negatively, of the cross-claims between the respondents. At the eleventh hour at the hearing of the matter, counsel for APT led oral evidence of a separate conference, allegedly held outside of the primary settlement conference, between Mr Shuster for the Reject Shop and Mr Guerin for Nevera. Mr Shuster said that during that separate discussion he specifically settled the cross-claim brought by his company against Nevera but that he made no specific arrangements and had no discussion whatsoever with Mr Keune in relation to the Reject Shop's claim against APT. Mr Keune in his oral evidence was quite adamant that there had been no specific discussion in relation to any of the cross-claims and that he at no time prior to the actual hearing of the preliminary point officially knew that the Reject Shop would not proceed against APT. This evidence is contradicted by his solicitor's letter of 19 August in which it is baldly stated that the "application and first cross-claim [that is, between the Reject Shop as first cross-claimant and Nevera and APT as first and second cross-respondents] are to be settled on those terms". Despite Mr Keune's assertion, the letter of 19 August is evidence of APT's understanding that some, if not all, of the cross-claims were implicitly settled at the meeting of 6 August 1997. The delay before the letter of 19 August 1997 challenging the contention that all claims and cross-claims had been settled, is relevant. The letter included the following: "Our client is prepared to discontinue its Cross-Claim against your clients on the basis that it is reimbursed for its direct costs resulting from its dealings with your clients, which are: 1. Contribution to Franklins settlement $13,803.51; 2 Air fares and hire car expenses (for settlement negotiations) $1,904.00; 3. Legal costs - Nicol Robinson Kidd $11,970.00; 4. Packaging expenses (Clause 13 of Cross-claim) $8,750.00 $36,427.51 Additionally, our client would require an indemnity from both your clients in relation to the freight charges of Express West Transport Pty Ltd in the sum of $12,999.32." There is the contradiction between the contention that the first cross-claim was settled while the cross-claim against Newnham Trucking continued, despite Mr Keune's assertion there was no discussion at the settlement meeting on which any such differential settlement of the cross-claims could be based. Further, the proposal of APT has the effect that the Franklins claim against The Reject Shop would be paid by The Reject Shop 25 per cent, Nevera 25 per cent, and Newnham Trucking 50 per cent, and with the further obligation of Newnham Trucking to APT of $35,000.00. I do not accept that such a scenario was the intended consequence of the agreement by the persons at the settlement conference. APT bases its position on the assertion that it is utterly blameless in the whole matter and therefore should be totally indemnified. Yet, even if one accepts that Mr Keune did not see the notices which Mr Newnham says were affixed to the pallets of pet food, it seems to me obvious both from the condition of the cans and of the price the subject of the dealings between APT and Nevera that there was a large measure of risk associated with the quality of the pet food. That there objectively is some responsibility by APT concerning the proceedings by Franklins against The Reject Shop is clear. Such a view is more consistent with the claim by Newnham Trucking as to the effect of the agreement reached on 6 August 1997. In light of the matters I have outlined above I would answer the preliminary question; "did the terms of the agreement reached on 6 August 1997 settle all claims and cross-claims between the parties", in the affirmative. In view of that finding I see no reason to depart from the ordinary rule that costs follow the event and accordingly order that APT pay the third and fourth cross-respondents' costs of the preliminary question, to be taxed if not agreed. I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender. Associate: Dated: 10 June 1998 Counsel for Newnham Trucking Pty Ltd and Graeme Charles Newnham Mr P Hackett Solicitor for Newnham Trucking Pty Ltd and Graeme Charles Newnham: Bain Gasteen Counsel for Australia Pacific Trading Pty Ltd Mr A Innes Solicitor for Australia Pacific Trading Pty Ltd Nicol Robinson & Kidd Date of Hearing: 13 March 1998 Date of Judgment: 10 June 1998