Brehm v Stretch Studio Aus Pty Limited

Introduction 1 The respondents in the principal proceeding, Stretch Studio Aus Pty Limited (Stretch) and three of its officers, seek an order that the applicant, Kathrin Maria Brehm, give security for costs, pursuant to r 19.01 of the Federal Court Rules 2011 (Cth) (FCR). 2 Rule 19.01(1) provides: (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. 3 Ms Brehm, who is a German national, is not currently residing in Australia. Indeed, it appears that she was not residing in Australia at the time she commenced the principal proceeding on 30 December 2019. The evidence indicates that she left Australia in late 2019 and is currently residing somewhere in Germany. Her exact location is not known. This is the substantial basis advanced by the respondents for requiring her to give security. Prior to her departure, Ms Brehm was legally in Australia as the holder of a student visa. 4 Ms Brehm claims damages against the respondents for alleged breach and unlawful termination of contract and for various alleged contraventions of the Competition and Consumer Act 2010 (Cth) (arising from the alleged contravention of cl 9(1) of the Competition and Consumer (Industry Codes - Franchising) Regulation 2014 (Cth) (the Franchising Code)) and the Australian Consumer Law (Sch 2 to the Competition and Consumer Act 2010 (Cth) (arising from alleged misleading or deceptive conduct and unconscionable conduct). She claims other "remedial orders" but the specific nature of the relief is not stated in the originating application. 5 Ms Brehm and Stretch entered into a franchise agreement in about December 2017. Ms Brehm says that from 1 January 2018 until 11 June 2019 she operated a "stretching" business pursuant to the franchise agreement from premises in Neutral Bay, New South Wales. The premises were jointly leased by Ms Brehm and Stretch. Ms Brehm says that she alone paid the rent. 6 On 11 June 2019, Stretch gave a notice to Ms Brehm terminating the franchise agreement. It also took possession of the leased premises. Ms Brehm says that Stretch's termination of the franchise agreement was unlawful because it failed to comply with the conditions of the agreement and the requirements of the Franchising Code. 7 Ms Brehm says that, at various times from October 2017, Stretch represented that it would act as a sponsor for her "visa requirements" once it had achieved a particular level of turnover, which would enable it to be her sponsor. Ms Brehm says that these representations constitute misleading or deceptive conduct because Stretch had not taken steps to ensure that it would be able to sponsor her legally. 8 Ms Brehm says that the respondents engaged in unconscionable conduct because she was induced to enter into the franchise agreement by Stretch's representations concerning sponsorship (apparently she required sponsorship for a visa to remain in Australia and to be able to operate the business pursuant to the franchise agreement); she was denied financial information pertinent to her decision to enter into the franchise agreement; she was unreasonably denied training and advertising services; she was disabled by an injury occasioned by Stretch's prescribed stretching technique and regimen (thereby limiting her ability to work); she was at a relative disadvantage in bargaining power when negotiating the franchise agreement; and she was the victim of "unfair tactics" in respect of Stretch's allegedly unlawful termination of the franchise agreement. 9 Ms Brehm claims damages of $135,127.75 plus interest. She says that this is the amount that she invested in the franchise business and that the immediate consequence of Stretch terminating the agreement and entering into possession of the Neutral Bay premises is that she is unable to recover that investment. She also alleges that she has suffered loss or damage through having lost the opportunity to earn income from alternative employment as a yoga instructor. 10 The respondents deny these allegations. They deny that the Franchising Code has not been complied with in relation to the provision of documents to Ms Brehm and in relation to Stretch's termination of the franchise agreement. They deny that the franchise agreement was unlawfully terminated according to its terms. They deny that Stretch made representations concerning the sponsorship of Ms Brehm for a visa. They deny that they have engaged in, or been involved in, unconscionable conduct.

Should security be ordered? 11 Ms Brehm opposes the application for security for costs. She submits that an order for security should not be made as a matter of discretion. She submits that she is presently in Germany by compulsion, not by choice. She says that she is unable to return to Australia because of the "international travel ban" currently in effect in Australia. 12 Ms Brehm is currently enrolled in a Diploma of Counselling course with an organisation called the Australian Learning Group. A Confirmation of Study document in evidence shows that the start date for this course was 25 January 2019 and that the finish date was to be 9 July 2020 (a total duration of 78 weeks). Ms Brehm has deferred her fifth term of study (Term 1, 2020) to Term 1, 2021, which is due to commence on 25 January 2021. She submits that she has made a substantial investment in that course (said to be approximately $34,000) and that she does not intend to throw away those costs by not returning to Australia and completing the course to obtain her qualification. Thus, she argues, her return to Australia is "a likely occurrence". 13 She also submits that the amount sought by the respondents for security is excessive. She submits that if she is required to provide security for the respondents' costs it should be limited to the cost of enforcing in Germany any adverse costs orders that might be made against her. Alternatively, she submits that she should only be required to provide security in the amount of $25,000 - $30,000. She also submits that any order for security should apply only while she remains outside Australia. 14 I am satisfied that Ms Brehm should provide security for the respondents' costs. She is not residing in Australia, and has not resided here since late 2019. The evidence does not make clear why Ms Brehm left Australia. An Overseas Student Certificate of Enrolment issued by the Department of Education, Skills and Employment on 13 May 2020 indicates that she deferred her study at the Australian Learning Group due to "compassionate & compelling reasons". Those reasons are not explained in the certificate; nor are they explained in the evidence before me. However, given that the deferral was for a course commencing in Term 1, 2020, I infer that Ms Brehm left Australia in late 2019 for these reasons, which cannot be related to the current Covid-19 pandemic. 15 I do not know whether the reasons for Ms Brehm leaving Australia persist. But even if the only reason for Ms Brehm not returning to Australia is the present travel restriction placed on international students who are currently overseas, the simple fact is that she cannot be said to be "ordinarily resident" in Australia. 16 It is not known when arrangements for the return of international students to Australia will be implemented. The only guidance on that matter provided by the Australian government is that international students will be permitted to return to Australia once it is safe to do so, and in a way which protects the Australian community. It is not known when those conditions will be met or what they will be. 17 All of this assumes, of course, that Ms Brehm will be able to re-enter Australia as the holder of a student visa. She has not advanced any other basis on which she can or would return to Australia. 18 I mention these matters because it is far from certain that Ms Brehm will be permitted to enter Australia to re-commence her studies in Term 1, 2021, should that be her desire.

The amount of security to be provided 19 As to the amount of that security, I am not persuaded that it should be limited to the cost of enforcing a costs judgment against Ms Brehm in Germany. Ms Brehm has not adduced evidence of her financial circumstances or whether she even has assets in Germany that would be available to meet an adverse costs order. Further, she has not disclosed her address in Germany. She has provided very limited information about her personal circumstances. Given this state of affairs, I am not satisfied that the respondents will be adequately protected by the prospect that they might be able to seek enforcement in Germany of a costs judgment in their favour. On the present state of the evidence that prospect seems more theoretical than real. 20 The respondents have estimated their costs of the proceeding to be $120,710.00. These costs are itemised in a schedule provided to Ms Brehm's solicitors (the Schedule). At that time the respondents proposed that security be provided for $52,960.00. They say, however, that this was a heavily discounted sum which they proposed in an attempt to secure an agreement on the amount of the security without the need for a contested hearing on the question. They say that this sum is a considerable compromise which should be viewed as such having regard to the circumstances in which it was proposed. Those circumstances no longer pertain. 21 Ms Brehm challenges the respondents' estimate. She says that costs of this order are "grossly inflated" and "nothing short of an outrage". Her solicitor, Mr Neumann, has raised the following matters in his affidavit made on 11 September 2020: (a) there is an arithmetical error in the respondents' calculations, requiring a deduction of $7,570 from the estimate provided; (b) an amount of $7,500 has been incorrectly included for costs incurred before the commencement of the proceeding relating to a compulsory mediation between the parties that was required to be held under the terms of the franchise agreement; (c) costs have been included for expert evidence, which Mr Neumann contends are unnecessary; (d) a three-day hearing has been estimated, when a two-day hearing would suffice; and (e) counsel's fees are charged at a rate above that which Mr Neumann considers appropriate for the present case. Mr Neumann contends that these fees should be adjusted in any event to recognise that only a two-day hearing is required and that there will be no need to settle expert evidence. 22 I do not accept that the respondents' estimated legal costs are grossly inflated, as Ms Brehm contends. Nevertheless, I think that there should be some adjustment. 23 First, the respondents accept that the arithmetical error that Mr Neumann has identified should be corrected. 24 Secondly, I am not persuaded at the present time that accounting evidence will be required. Much will depend on how Ms Brehm seeks to prove the loss she claims. Therefore, no allowance should be made for obtaining and settling such evidence or reviewing such evidence or securing the court attendance of an expert to give evidence. This means that Items 25, 30, 31, 33 and 46 in the Schedule should not be taken into account for the purpose of determining the appropriate amount for security. However, I will grant liberty to the respondents to apply for further security should the need for such evidence arise in the future. 25 Thirdly, I am not persuaded that an allowance should be made for the respondents' costs of and incidental to the compulsory mediation that was held before the commencement of the proceeding. 26 In terms, r 19.01 is not constrained as to the circumstances in which, or the steps for which, security will be ordered. Relatedly, the Dictionary in Sch 1 to the FCR defines the expression "costs as between party and party" as meaning those costs "fairly and reasonably incurred by the party in the conduct of the litigation". 27 In State of Victoria v Sportsbet Pty Ltd (No 2) [2012] FCAFC 174 (Sportsbet), the Full Court said: 15 …We would not construe the words "in the conduct of the litigation" as precluding the recovery of costs incurred before a party was formally joined. Rather, the definition of costs as between party and party is directed to the substance of the matter: that is, an order for party and party costs will encompass such costs as were fairly and reasonably incurred in the conduct of the litigation by a person who is a party to the litigation at the time the costs order is made. Depending on the circumstances of the case, this not only covers costs incurred in the litigation (when a party) but also costs incurred in preparation for the litigation (prior to becoming a party). … 28 These observations open up the possibility that security for costs could include those costs which have been incurred in a compulsory mediation where the mediation is a pre-requisite to the commencement of the proceeding itself. However, whether the amount of the security should cover such costs remains within the discretion of the Court. 29 I am not persuaded that an allowance should be made. Clause 19.9 of the franchise agreement provides that the parties will be "equally liable" for the costs of the mediation unless they agree otherwise, and must pay their own costs of attending the mediation. I do not think that it would be appropriate for the Court to ignore this agreement when exercising its discretion as to the amount of security to be awarded: see, for example, similar observations made in Lobster Group Limited v Heidelberg Graphic Equipment Ltd [2008] EWHC 413 (TCC) at [18] - [19]. 30 Mr Neumann's objection relates to Items 2, 3 and 4 in the Schedule. I would allow Item 2 because, in general terms, it relates to reviewing documents to understand the nature of the dispute between the parties. These would appear to be the kind of costs the Full Court had in mind in Sportsbet as related to the litigation itself. I would not allow Items 3 and 4. Item 3 appears to be concerned with strategic advice provided to the respondents on transactional matters relating to taking possession of the Neutral Bay premises. Item 4 is concerned solely with the respondents' participation in the pre-commencement compulsory mediation, the costs of which are subject to the agreement to which I have referred. 31 As to the other objections raised by Mr Neumann, I am persuaded that, given the claims made and issues raised by the applicant, security should be provided on the basis of a three day hearing, not a two day hearing. 32 With respect to counsel's fees, I do not accept that the rate used to estimate the fees is excessive. The rate is substantially in accordance with the rates stipulated in the National Guide to Counsel Fees, albeit at the upper limit. However, Item 50 should not be allowed for the purpose of determining the appropriate amount of security. It provides for work already captured by Item 47. 33 There are further adjustments that should be made for the purpose of determining the appropriate amount of security. The times estimated in Items 11, 40 and 51 are, arguably, excessive and should be halved. Similarly, the amount claimed in Item 15 is, arguably, excessive and should be reduced by $1,000.00. 34 Taking these various adjustments into account, the respondents' estimated costs (for the purpose of determining an appropriate amount of security) should be reduced to $68,650.00. When the respondents raised the question of security for costs with Ms Brehm's solicitors they suggested that the appropriate amount of security (without the further discount to secure Ms Brehm's agreement) should be 65% of their estimated costs for the entire proceeding. I see no reason why the adjusted estimate of their costs should not be subject to the same discount factor. Therefore, taking into account the adjustments which should be made, and applying the same discount, Ms Brehm should provide security in the amount of no less than $44,622.50. It would be appropriate to round this amount to $45,000.00 35 In the course of submissions, counsel for Ms Brehm noted that if she were to succeed only on her breach of contract case (and corresponding breach of the Franchising Code), her damages would be significantly less than the (approximately) $135,000.00 currently claimed. In fact, her damages may only be in the order of $30,000.00, representing the unrecovered investment it is said that she has forfeited by reason of the allegedly unlawful termination and unlawful possession of the Neutral Bay premises. Counsel submitted that the Court should bear this in mind when evaluating an amount for security which, he submitted, should be "reasonably proportionate to the determination of this proceeding". 36 As I explained at the time, although not entitled to be indemnified for their costs, the respondents are nonetheless entitled to be protected. They should be provided with security for their anticipated reasonable costs without having to heavily discount those costs simply to accommodate what might turn out to be wholly uneconomic litigation from an applicant's perspective. When this proceeding first came before me for case management, I remarked on the amount of damages claimed and made an order that the parties be referred to court-assisted mediation in the hope that this would provide an opportunity for the parties to resolve the dispute quickly. Unfortunately, mediation was not successful. As matters now stand, the respondents are unwilling parties to this proceeding and are entitled to take reasonable steps to defend the allegations made against them. The fact that Ms Brehm's claim for damages might be no greater than approximately $30,000.00 underscores the importance of providing the respondents with adequate security for their costs which, as presently advised, could be well in excess of the monetary value of the case.

The form of security 37 The parties have not addressed me on the form of security. In the circumstances, security should be given in the usual way, namely by cash deposit or bank guarantee. Further, I am persuaded that the proceeding should be stayed until such security is provided. I will, nevertheless, provide that the giving of security is subject to further order in the event that there is a change of circumstances which would warrant the Court re-visiting the question of whether security should be given.

Costs of the application 38 The respondents have been successful in obtaining an order for security for costs over Ms Brehm's opposition. The amount of the security to be provided is less than the amount that the respondents originally offered, but significantly more than Ms Brehm has proposed (should an order for security be made). In the circumstances, it is appropriate that Ms Brehm pay the respondents' costs of the application for security for costs filed on 15 August 2020. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Yates.

SCHEDULE OF PARTIES NSD 2177 of 2019 Respondents Fourth Respondent: MYLES DAVID DONALDSON