FNH United Pty Ltd v United Petroleum Franchise Pty Ltd

1 The first defendant (United Petroleum) and second defendant (Mr Silver) (the defendants and also the appellants) each separately appeal pursuant to r 77.06 of the Supreme Court (General Civil Procedure) Rules 2015 (the Rules) against an interlocutory decision of an Associate Judge to dismiss their applications for security for costs. The Associate Judge delivered written reasons (the Reasons).[1]

2 An appeal pursuant to r 77.06 of the Rules is not by way of rehearing de novo but by way of rehearing which, in the absence of further evidence or a change in the law, ordinarily requires an appellant to show error on the part of the Associate Judge before appellate power may be exercised.[2] On such an appeal the Court has all of the powers of the Court constituted by the Associate Judge and shall have the power, inter alia, to give any judgment and make any order which ought to have been given or made and to make any further or other order as the case may require.

3 The decision of the Associate Judge involved the exercise of a discretion. Accordingly, the applicable principles are those outlined in House v The King:[3]

It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so.[4]

4 The Court's discretion to order security for costs is wide and unfettered, but must be exercised judicially, having regard to the considerations that are relevant and appropriate. Upon these appeals, an error in the reasoning of the Associate Judge will only re-open the discretion if it caused or materially contributed to the result.[5] Moreover, particular caution must be exercised in reviewing the decision of the Associate Judge because it concerned a matter of practice and procedure.[6] In such matters, generally an appellant must also show that substantial injustice will be done if the impugned decision remains uncorrected.[7] It is also important for the proper administration of justice that appellate courts keep a 'tight rein' upon interference with interlocutory orders, given the potential consequences of such intervention in terms of delay and increased cost.[8]

5 For the reasons that follow, I will allow the appeals and invite the parties to make further submissions on the appropriate course for further hearing and determination of the defendants' applications for security for costs.

6 This proceeding is a group proceeding under Part 4A of the Supreme Court Act 1986 (Vic), brought on behalf of all persons who, at any time from 19 October 2016 and 20 October 2022 (the Relevant Period):

(a) were or commenced to be a franchisee in the 'United Network' pursuant to a standard form franchise agreement with United Petroleum (each such person being a Franchisee); or

(b) at any time during the Relevant Period were a guarantor of a Franchisee's obligations under a franchise agreement with United Petroleum (each such person being a Guarantor).

7 The first plaintiff (FNH United) was incorporated to participate in a franchise agreement under which it operated a United Network petrol station in Cranbourne South, Victoria. That franchise was terminated on 25 February 2021. The second plaintiff, Mr Fahim Istanikzai, is the sole director and shareholder of FNH United, and guaranteed that company's obligations to United Petroleum.

8 The third and fourth plaintiffs, Messrs Jigarkumar Bharatbhai Patel and Jaydeep Devijibhai Bhatti, operated a United Network petrol station at Wallan, Victoria, pursuant to a franchise agreement with United Petroleum. Messrs Patel and Bhatti were the franchisees under that agreement in their capacities as trustees of the JJ Unit Trust. Messrs Patel and Bhatti also personally guaranteed the obligations of the franchisee under that agreement. That franchise was terminated on 26 January 2021.

9 United Petroleum is a company within the 'United Petroleum' group of companies and the entity which acts as the franchisor in relation to the United Network sites. The second defendant, Mr Avi Silver, is one of two directors of United Petroleum.

10 In broad terms, the plaintiffs claim, among other things, that United Petroleum engaged in misleading or deceptive conduct and/or unconscionable conduct with respect to the installation of the 'Pie Face' franchise into sites operated by group members, as well as the allocation of Pie Face stock to those sites. It is alleged that group members suffered loss as a consequence of that wrongdoing, and that they would not have transacted with United Petroleum at all had they been fully informed with respect to the impugned franchising arrangements. The allegations against Mr Silver are of knowing involvement in United Petroleum's contraventions of the Competition and Consumer Act 2010 (Cth) sch 2 (Australian Consumer Law). Neither defendant has filed a defence. In a separate application pursued contemporaneously with these appeals, the plaintiffs sought leave to file an amended pleading which expands the group members to include persons who were commission agents of United Petroleum Pty Ltd (another company within the 'United Petroleum' group of companies) during the Relevant Period, and to join that entity as a defendant. That application was reserved before Justice Nichols, the managing judge in this proceeding, at the time these appeals were heard. It has since been determined. Her Honour made orders that, among other things, the plaintiffs have leave to file and serve an amended statement of claim effecting the joinder of Yug Sharma Pty Ltd as the fifth plaintiff (intended to be a representative of a new sub-group of group members, namely Commission Agents), and United Petroleum Pty Ltd as the third defendant.[9]

11 The plaintiffs are represented in this proceeding by Levitt Robinson.

12 Levitt Robinson were initially retained pursuant to two costs agreements with FNH United and Mr Istanikzai on the one hand, and Mr Patel and Mr Bhatti on the other, each dated 13 September 2021, which provided, inter alia:

The proceedings are likely to cost more than you can afford and therefore we will need to introduce a Litigation Funder.

However, the Litigation Funder Galactic, who has indicated a willingness to fund the proceedings will not be able to do so until its application to ASIC for the issue of an Australian Financial Services Licence for Litigation Funding purposes is granted.

That is likely to take a few months.

In the meantime you will have to fund the matter yourselves and only to recoup outlays once the Funder is substituted.

In the meantime we are prepared partially to substitute your legal costs and disbursements though not entirely. We would expect each of you to pay 50% of each bill issued as and when it is rendered plus disbursements until a Litigation Funder is substituted.

1. ESTIMATE OF PROFESSIONAL FEES, DISBURSEMENTS AND INTERNAL EXPENSES

On our present instructions, we estimate the cost of the work to be:

Professional fees up to introduction of Litigation Funder

[REDACTED] (you to pay 50% as you go and the balance on the

M. LITIGATION FUNDING

We reserve the right to introduce a Commercial Litigation Funder to replace you as the person responsible for future funding under this agreement, subject to your agreement.

(a) advised the defendants that the plaintiffs would not be filing a Funding Information Summary Statement as there is currently no litigation funder involved in the proceeding; and

(b) filed a Group Proceeding Summary Statement, which stated:

(i) there was no litigation funder involved in the case;

(ii) Levitt Robinson were acting on a 'no win, no fee' basis and all fees associated with the proceeding would be borne by Levitt Robinson unless and until there is a successful outcome; and

(iii) the plaintiffs' legal fees may be 'calculated as a percentage of the amount of any collective award or settlement if the Court makes a Group Costs Order'.

16 On 14 December 2022, Levitt Robinson informed Mr Silver's solicitors that no litigation funder was funding the proceeding and no uplift fee would be sought.

17 The plaintiffs subsequently entered into revised conditional costs agreements with Levitt Robinson on 16 December 2022 (FNH United and Mr Istanikzai) and 22 December 2022 (Mr Patel and Mr Bhatti), in which the text quoted at paragraph [12] above and, inter alia, the underlined words in the table reproduced at paragraph [13] above had been deleted.

18 These revised conditional costs agreements included new provisions concerning the payment of the professional fees of Levitt Robinson and disbursements:

B. SUCCESSFUL OUTCOME OF THE MATTER

We will only be entitled to receive payment of our professional fees (including any uplift fee) and internal expenses from you in the event that you obtain a successful outcome in this matter.

...

We will ask you to pay us, in advance, an amount to enable payment of our disbursements to complete the various stages of your matter.

19 These costs agreements also included a section titled 'Litigation Funding' in almost identical terms to the original costs agreements dated 13 September 2021. The revised costs agreements provided:

O. LITIGATION FUNDING

We reserve the right to introduce a Commercial Litigation Funder to replace you as the person responsible for future funding under this Conditional Costs Agreement, subject to your agreement.

20 On 22 December 2022, Levitt Robinson issued a bulletin in which it stated that in the event of a successful outcome in this proceeding, the firm will not seek any uplift of professional fees.

21 On 18 April 2023, Levitt Robinson informed United Petroleum's solicitors that there is no litigation funder that is funding the proceeding and that the firm was conducting the proceeding on a 'no win no fee basis without any uplift being sought'.

22 On 16 May 2023, the plaintiffs filed an Amended Group Proceeding Summary Statement. There were no amendments to the statements that '[t]here is currently no litigation funder involved in the case' and that 'Levitt Robinson is acting on a "no win, no fee" basis'. The document also retained the statement that the plaintiffs' legal fees may be 'calculated as a percentage of the amount of any collective award or settlement if the Court makes a Group Costs Order'. Ms Susan Doherty, Special Counsel at Levitt Robinson, gave evidence that, prior to the filing of the Amended Group Proceeding Summary Statement, a decision had been made not to seek a group costs order but that this was inadvertently overlooked when drafting the document.

23 On 19 June 2023, Levitt Robinson informed the plaintiffs that, notwithstanding the terms contained in the costs agreements, in the event of a successful outcome, the firm will not seek any uplift of professional fees.

24 On 20 June 2023, the plaintiffs filed a further Amended Group Proceeding Summary Statement in which the reference to a group costs order was deleted.

25 Ms Doherty gave evidence that, as at 21 June 2023, there was no litigation funder involved with this matter and that all disbursements were being paid by Levitt Robinson.

26 On 26 July 2023, a notice was issued to all Franchisees and Commission Agents, containing the following statement:

The case is being run on a 'no-win, no-pay' basis, which means that Levitt Robinson will only get paid from a settlement or judgment monies. If a litigation funder is introduced - and the there [sic] is a settlement or judgment in the plaintiffs' favour - the litigation funder will be reimbursed out of that money and will be paid about 30% of the moneys.

(emphasis added)

27 Mr Stewart Levitt, solicitor for the plaintiffs and the senior partner, gave evidence (by an affidavit made on 14 August 2023) that:

(a) there was no litigation funder in the proceeding;

(b) until 2022, Levitt Robinson for several years had a close relationship with a New York-based litigation funding group of companies which he refers to as the 'Galactic Group', which has, in the past, incorporated special purpose vehicles for the purpose of funding representative and other proceedings conducted by Levitt Robinson;

(c) Galactic 7-Eleven Holdings LLC (Galactic) funded the proceeding in the Federal Court of Australia known as Davaria Pty Ltd & Anor v 7-Eleven Store Pty Ltd & Anor (the 7-Eleven class action proceedings);[10]

(d) the 7-Eleven class action proceedings settled in August 2021 and the settlement was approved by Justice O'Callaghan on 31 March 2022;

(e) at the time of preparing the costs agreement dated 13 September 2021 in the present proceeding, he had some informal discussions with Galactic about funding this proceeding. These discussions occurred in the context of a successful settlement in the 7-Eleven class action proceedings and also in the context of what Mr Levitt identified as 'the High Court's consideration of common fund orders' and the 'the previous Federal Government's proposal to introduce legislation regulating the receipt of proceeds of settlement by litigation funders';

(f) based on discussions Mr Levitt had with Galactic's representatives, he observed that Galactic's appetite to fund class action proceedings was significantly diminished as a result of the manner in which 7-Eleven class action proceedings settlement approval application developed;

(g) subsequently, on 14 February 2023, Justice O'Callaghan delivered judgment on the settlement approval application in the 7-Eleven class action proceedings. Mr Levitt gave evidence that his Honour ruled that the Court did not have power to make a common fund order in favour of Galactic, and limited Galactic's commission entitlement to a fixed funding equalisation order in an amount that was approximately 50% of what Galactic had sought by way of a common fund order. Mr Levitt deposed that this order was the subject of an appeal by Galactic;

(h) because of these difficulties, he had not had any other discussions with litigation funders concerning this proceeding because he assessed that the legal status quo regarding common fund orders was not propitious for funding such actions;

(i) he had been informed by Ms Doherty and believed that, earlier in 2023, Ms Doherty met with a representative of CASL Litigation Funding (CASL), another litigation funder, and had some informal discussions, however she was informed that any consideration would need to be preceded by an assessment of the quantum of the claims of all group members in the proceeding and that, to date, this has not been progressed;

(j) he will be reviewing the progress of this proceeding with a view to approaching other litigation funders once he is of the view that there is a reasonable prospect of funding being offered on appropriate terms; and

(k) there were no discussions on foot with any prospective litigation funders with respect to this proceeding.

28 Mr Brett Imlay, Special Counsel at Levitt Robinson, gave evidence (by an affidavit made on 15 August 2023):

(a) he was informed by Mr Levitt that he has only ever had oral conversations with representatives of Galactic Group regarding this proceeding, and has had no discussions with any other prospective funder;

(b) he was informed by Ms Doherty that she spoke to a former colleague and friend employed at CASL some months prior but did not take a file note of that conversation; and

(c) he was not aware of any other person at Levitt Robinson who may have had any communications with litigation funders concerning the claims made in this proceeding.

29 Mr Levitt later gave evidence that, on swearing his affidavit of 14 August 2023, he failed to recall high-level discussions in mid-2022 with two other funders regarding franchisee proceedings generally but not about this proceeding in particular, namely:

(a) Mr Gavin Beardsell, Senior Investment Manager and Legal Counsel at Omni Bridgeway, who said words to the effect that Omni Bridgeway does not like franchisee cases because of the risk that the group members can be white-anted and that the franchisees are generally still in a working relationship with the party they're suing. Mr Levitt gave evidence that he already knew this from when he was seeking funding for the 7-Eleven class action proceedings; and

(b) Mr David Purcell, of Litigation Funding Solutions, a litigation funding brokerage firm, who said words to the effect that franchising was not the area of CASL, Litigation Capital Management, or Therium Litigation Funding, and that there was not much interest in funding franchising cases among the litigation funders with whom Litigation Funding Solutions deal.

30 Mr Purcell gave evidence in the applications before the Associate Judge. It is convenient to set that evidence out in full given the importance of it in the Reasons on the question of whether the evidence on the availability commercial litigation funding was sufficient. Mr Purcell gave the following evidence:

I, David John Purcell, of 38 Lakeview Boulevard, Mermaid Waters QUEENSLAND 4218, lawyer, swear that:

1. I am the Director and Legal Counsel of Litigation Funding Solutions (Australia) Pty Ltd (Litigation Funding Solutions). Exhibited to this affidavit and marked Exhibit DJP-1 is a copy of a company search for that company sourced from the records of the Australian Securities & Investments Commission. The company was incorporated on 12 October 2015, and I commenced as a director of the company on that date.

2. I was admitted as a solicitor of the Supreme Court of New South Wales on 14 April 2000, and have practiced continually since that time.

3. Prior to Litigation Funding Solutions, I worked for Thomson Simmons Lawyers, Phillips Fox, Purcell Lancione Lawyers, Purcell Insolvency Lawyers, O'Neill Partners Commercial Lawyers, and Nelson McKinnon Lawyers.

4. Litigation Funding Solutions was established in 2012 as an originator, or broker, of litigation funding.

5. Since 2012, I have been organising litigation funding for various kinds of proceedings, including class actions, as well as providing assistance with the overall strategy and management of funded claims. Litigation Funding Solutions currently has referral relationships with 15 litigation funders.

6. In mid-2022, I had a conversation by phone with Stewart Levitt of Levitt Robinson Solicitors, in which Mr Levitt said to me words to the effect of:

Would funders that you work with like CASL, LCM, or Therium be interested in funding franchisee class actions? I have some in the pipeline.

1. By 'CASL, LCM, or Therium', I understood Mr Levitt to be referring to CASL Litigation Funding, Litigation Capital Management, and Therium Litigation Funding respectively.

2. In response, I said words to the effect of:

There is not much interest in the funders with whom we deal for franchisee class actions. The funders are mostly interested in security class actions which have been more successful in outcome and are easier to group together.

1. I did not make a file note of the call with Mr Levitt.
2. I have approximately a decade's worth of experience in working with litigation funders, including for class actions. In my experience, there is not much desire amongst litigation funders to fund franchisee class actions, because the claimant class is often difficult to assemble and convince to participate in the action. Depending on the class definition, some of the franchisees may still be in a working relationship with the franchisor.
3. It is my understanding from my experience in dealing with the litigation funders with whom I work that they are also concerned about the stability of the class, and prospects that group members may decline to join the action or drop out once the action is underway.

31 There was also evidence before the Associate Judge of the plaintiffs' financial circumstances. This was summarised by the Associate Judge at paragraphs [23]-[38] of the Reasons. In summary, the evidence established:

(a) FNH United has ceased trading and has no assets or liabilities save for a business account with a nominal amount in debit;

(b) prior to entering into the franchise arrangements with United Petroleum, the second to fourth plaintiffs each had positive net asset positions; and

(c) the plaintiffs:

(i) incurred expenses and assumed liabilities in connection with their acquisition of and ongoing management of their franchises; and

(ii) disclosed current net asset positions with materially reduced assets and increased liabilities.

32 The defendants did not contest this evidence (except insofar as the plaintiffs alleged that their impecuniosity was caused by the defendants) and no issue was raised on the appeals with the proposition that the representative plaintiffs do not possess adequate financial resources to satisfy the proposed orders for security.

33 Ms Doherty gave evidence that it was not possible to ascertain the financial positions of the group members and that the primary reason for this is that it has not been possible to identify all group members.

34 There was evidence before the Associate Judge that, during the Relevant Period:

(a) there were 43 different sites operated by Franchisees (though not in all cases for the entire Relevant Period);

(b) the total gross shop sales for those sites while they were Franchisee sites was $198,188,603 and Franchisees additionally received a commission in relation to fuel sales; and

(c) while almost all of the Franchisees during the Relevant Period were corporations, the standard form franchise agreements entered into by United Petroleum do not require franchisees to be corporations.

C. THE REASONS AND DECISION OF THE ASSOCIATE JUDGE

35 The Associate Judge accepted that the plaintiffs have the onus of establishing stultification, but on his assessment of the evidence and relevant authorities, his Honour said at paragraph [55] of his Reasons that '...although this proceeding is of a commercial nature, due to its characteristics, the plaintiffs can be exempted from the need to provide evidence of funding'. His Honour then said at paragraph [56] of his Reasons:

In the interests of justice here, in conducting a balancing exercise I am of the view that there should be no security for costs on the basis of stultification. I am balancing the interests of the plaintiffs with that of the defendants. I acknowledge that should the defendants succeed, they may not get their costs.[11]

36 The Associate Judge also made findings, inter alia, that:

(a) commercial litigation funding will not be available.[12] The Associate Judge addressed this issue as an alternative to his Honour's primary finding at paragraph [55] of the Reasons that the plaintiffs can be exempted from the need to provide evidence of funding;

(b) the '...representation [of the plaintiffs] on a "no win no fee" basis is an important factor which in a case such as the present case, weighs in favour of an order that there be no security for costs';[13]

(c) there is '...no need for the other group members to give evidence of their financial position ... [and] it would be unreasonable and unfair for them to provide security in this proceeding';[14]

(d) there '...is a heavy onus on the plaintiffs to prove that impecuniosity was caused by the defendants. At best, there is a prima facie case that that has occurred but without the benefit of a trial, it is a matter that I cannot determine at this stage of proceedings';[15]

(e) United Petroleum has not delayed in bringing the application for security;[16] and

(f) due to the complexity of this proceeding '...it is not practical to reach any view about the merits of the plaintiffs' claim, other than to note that this claim is bona fide and that should not be ignored'.[17]

37 His Honour also noted that he was informed by the counsel for the plaintiffs that there were only 12 group members and the claims for the group members were valued at approximately $1million each. His Honour then stated that the total amount of security claimed for the defendants is $3.5million and said: 'I have not relied on this in coming to my decision but I believe it would be unlikely for a funder to provide litigation funding in such a case.'[18]

38 The Associate Judge then stated at paragraph [131] of his Reasons that the defendants' applications for security for costs will be dismissed on the basis that any order for security for costs would stultify the plaintiffs' proceeding.

39 On 30 October 2023, the Associate Judge ordered that the defendants' applications be dismissed. On 29 November 2023, the Associate Judge ordered Mr Silver to pay the plaintiffs' costs of and incidental to the summons filed on 12 December 2022 on a standard basis, to be taxed in default of agreement. On 15 December 2023, the Associate Judge ordered United Petroleum to pay the plaintiffs' costs of and incidental to the summons filed on 22 May 2023 on a standard basis, to be taxed in default of agreement.

40 There is substantial overlap across the defendants' grounds of appeal. These may be conveniently summarised as follows:

Finding that the plaintiffs are exempt from providing evidence of funding

Finding that the proceeding will be stultified if security is ordered

Identification of the number of group members and the quantum of their claims

Findings that there is no need for other group members to give evidence of their financial position and that it would be unreasonable and unfair for them to provide security

1. ASSOCIATE JUDGE'S FINDING THAT THE PLAINIFFS ARE EXEMPT FROM PROVIDING EVIDENCE OF FUNDING

41 This is the subject of ground [1] of United Petroleum's amended notice of appeal and grounds [1] and [2] of Mr Silver's amended notice of appeal:

United Petroleum

1. The Associate Justice erred in finding (at J[55]) that although the proceeding is of a commercial nature, the plaintiffs can be exempted from the need to provide evidence of funding.

Mr Silver

1. In connection with the plaintiffs' submission that an order for security for costs should not be made because it would stultify the proceeding, the Associate Justice erred in holding that the plaintiffs 'can be exempted from the need to provide evidence of funding' (J [55]).
2. The Associate Justice ought to have found, and erred in failing to find, that to satisfy their onus of establishing that an order for security for costs would stultify the proceeding, the plaintiffs were required to adduce evidence that they could not obtain, or reasonably obtain, litigation funding of the proceeding, in circumstances where:

(a) the proceeding is a commercial class action (J [53]);

(b) the plaintiffs' solicitors' costs agreements and communications with group members in the proceeding contemplated the prospect of litigation funding of the proceeding; and

(c) the evidence showed that the plaintiffs' solicitors have had informal discussions with funders about the prospect of litigation funding of the proceedings (J [73]).

42 The Associate Judge correctly observed that the plaintiffs bore the onus of establishing that an order for security will stultify the proceeding.[19]

43 The Associate Judge then very carefully undertook a detailed examination of the evidence concerning the plaintiffs' capacity to pay any security.[20] His Honour concluded that it is clear that the plaintiffs are unable to pay security.[21] No criticism is made of that finding.

44 The Associate Judge referred to the observations of Markovic J in St Mary's Hog's Pty Ltd v HBCA Pty Ltd (St Mary's Hog's).[22] There, her Honour said:

In contrast this is an unfunded commercial class action brought on behalf of counterparties to the Franchise Agreements and their guarantors who ran or continue to run Hog's Breath cafés. Those parties are not in the same position as an individual applicant in an unfunded mass tort class action where most if not all members of the class are likely to be individuals. In those circumstances, I accept the submission made by Messrs Dryland, Spurgin and Jesse that, while the orders for security are sought against the applicants only, in order to satisfy the Court that making such orders would stultify the proceeding the applicants should have taken steps to demonstrate that they could not meet any order for security with support from other group members.[23]

45 These observations concern support from group members, and not a third party funder, in the context of an application for security for costs.

46 The Associate Judge also referred to Madgwick v Kelly (Madgwick),[24] in which Allsop CJ and Middleton J said:

The view of the primary judge that the availability of third party funding was of 'little relevance', was criticised as ignoring the need to consider a factor important to the balancing of the group's position, the risk of stultification and the prejudice to the respondents from the impecuniosity of the applicants and the immunity of the group members.

We consider there to be force in the submission. The applicants adduced no evidence as to whether litigation funding had been sought; and, if not, why not; and, if so, with what result. The costs agreements contemplated the possibility of litigation funding at a later stage, after a (presumably unsuccessful) mediation. Presumably, the introduction of such an external commercial funder would reduce the available funds for group members on success. That would be a relevant commercial consideration. There may be others. The evidence was silent on the matter. We should not be taken as advocating a rule that a step such as the retention of litigation funding should always be taken to avoid an order for security. This, however, when all is said and done, is a piece of commercial litigation. Investors with sufficient income or assets to protect entered commercial arrangements, many for hoped for taxation advantages. They now seek to engage in commercial litigation to repair perceived wrongs attending the entry into the arrangements. It is not unreasonable to want to understand, in the balancing of the interests of the parties, what has been done, if anything, about commercial funding of the litigation. Without that knowledge, at least in a case such as this, one cannot conclude that the proceedings would be stifled by any order for security.[25]

47 Finally, the Associate Judge referred to the observations of Lee J in Abbott v Zoetis Australia Pty Ltd (No 2) (Abbott):[26]

First, like in Madgwick, the nature of the claim advanced in this class action is highly relevant. This proceeding is precisely the sort of case contemplated by the Australia Law Reform Commission when it produced its landmark report, Grouped Proceedings in the Federal Court, Report 46. This report, published prior to the development of the modem market of litigation funding, contemplated that the proposed legislative scheme would provide an effective mechanism for persons with small or relatively modest claims to obtain access to justice. The class action procedure was seen as a mechanism to allow small or modest claims to be 'bundled together'. An obvious example of the type of case which could employ such a procedure was mass torts or product liability cases where there were likely to be a small number of complex common issues, the determination of which, was critical for a large number of small or modest claims. The current proceeding, if properly advanced, is an exemplar of such a case.[27]

48 The Associate Judge, after setting out the parties' submissions, stated:[28]

[53] The plaintiffs also submit that each case should be considered on their merits as to whether an order for security for costs is required. The plaintiffs agree that this proceeding is a commercial class action but they submit that does not necessarily lead to a conclusion that there is no stultification because the evidence regarding stultification is deficient.

[54] I agree with the plaintiffs. Each case should be considered on its merits. Here the circumstances of this proceeding are clearly different to St Mary's Hog's and Madgwick v Kelly. However, I note that in Madgwick v Kelly, Allsop CJ and Middleton J said that "We should not be taken as advocating a rule that a step such as the retention of litigation funding should always be taken to avoid an order for security".

[55] In my view, although this proceeding is of a commercial nature, due to its characteristics, the plaintiffs can be exempted from the need to provide evidence of funding.

[56] In the interests of justice here, in conducting a balancing exercise I am of the view that there should be no security for costs on the basis of stultification. I am balancing the interests of the plaintiffs with that of the defendants. I acknowledge that should the defendants succeed, they may not get their costs.

49 The Associate Judge's statement that each case must be considered on its merits is correct. It was also common ground that this proceeding is a commercial class action.[29]

50 I refer to the Associate Judge's statement that '[t]he plaintiffs agree that this proceeding is a commercial class action but they submit that does not necessarily lead to a conclusion that there is no stultification because the evidence regarding stultification is deficient'.[30] The plaintiffs did not make any such submission to the Associate Judge. Such a proposition is erroneous as a matter of law as a plaintiff will not discharge their onus in establishing stultification if the evidence regarding stultification is deficient. The plaintiffs did submit that if they did not establish stultification this did not mean that security must be ordered. This is, of course, correct as there may be other discretionary considerations that might weigh against security (e.g. delay).

51 The Associate Judge did not separately identify the 'characteristics' underlying his Honour's conclusion that the plaintiffs are exempt from the need to provide evidence of funding. In my view, upon a whole reading of the Reasons, the reference to 'characteristics' is a reference to the characteristics that his Honour identified at paragraphs [22]-[38] and [48]-[50] of the Reasons. Paragraphs [22]-[38] generally concern the plaintiffs and their financial circumstances before, during, and after their franchising arrangements with United Petroleum the subject of this proceeding. Paragraphs [48]-[50] of the Reasons may be conveniently set out:

[48] ... the first plaintiff does not trade, hold assets and made no profit, and thus has no value whatsoever. The second plaintiff gives evidence that no dividends were paid to him from the first plaintiff. Here, the plaintiffs have suffered a financial detriment which they allege was a result of their franchise.

[49] The plaintiffs submit that this proceeding is also unlike Madgwick v Kelly. They say that the characteristics of the group members are clearly different in which investors in related class actions were involved in a failed management investment scheme. In St Mary's Hog's, investors with sufficient income or assets to protect entered into commercial arrangements with an expectation to get tax advantages.

[50] The plaintiffs submit that here they would not have entered into the transactions in this proceeding at all had they known the true position in relation to the franchises with respect to the misleading or deceptive conduct, or the unconscionable conduct and matters of a similar nature. They say that distinguishes this proceeding from something like Madgwick v Kelly where the facts are completely different. [31]

52 The parties' submissions were focused on his Honour's findings insofar as they concerned commercial litigation funding (i.e. not funding by group members). This is because matters concerning other potential sources of funding (i.e. from group members) were addressed by separate grounds of appeal.

(a) the Associate Judge's finding at paragraph [55] of the Reasons was contrary to the relevant authorities and wrong as a matter of law;

(b) the relevance of evidence concerning the retention of litigation funding to the issue of stultification will depend upon the nature of the case in which security for costs is sought;

(c) in a commercial class action a plaintiff must adduce evidence of the availability of commercial litigation funding;

(d) the Associate Judge did not identify the characteristics upon which his Honour exempted the plaintiffs from the need to provide evidence of the availability of funding; and

(e) the Associate Judge did not identify how the circumstances of the present case are 'clearly different' to St Mary's Hog's and Madgwick and, on a proper assessment, no distinction was warranted. It submitted that what was significant in those cases was that the litigation was of a commercial nature. It submitted there are no matters in the present case which provide any basis to distinguish the requirements identified in St Mary's Hog's and Madgwick in relation to the need for a plaintiff to provide evidence of attempts to obtain funding. It submitted that, even if there are relevant factual distinctions between the present case and St Mary's Hog's and Madgwick, they provide no basis for suggesting the plaintiffs were not required to make attempts to obtain litigation funding. Finally, United Petroleum submitted that the prospect of obtaining commercial litigation funding for this proceeding was contemplated prior to the commencement of the proceeding and has clearly remained a possibility.

54 Mr Silver submitted there was no dispute that the proceeding was a commercial class action and that there was a prospect of litigation funding. Mr Silver submitted that, in those circumstances, the Associate Judge ought to have held, and erred in failing to hold, that the plaintiffs were required to adduce evidence that they could not obtain or reasonably obtain litigation funding of the proceeding.

55 The plaintiffs submitted that his Honour's reasons at paragraph [55] of the Reasons are 'ambiguous' and 'can be read in more than one way'. The plaintiffs submitted that in Oswal, Ferguson J (as her Honour then was) observed that a judge's reasoning may be apparent from the exchange with counsel during submissions and a review of the transcript, and that all that is required is reasoning that explains in short compass how and why one party succeeded and the other lost.[32] This submission was not further explained or developed.

56 The plaintiffs submitted that paragraph [55] of the Reasons means that the plaintiffs are exempt from the need to provide evidence of 'attempts at funding'. The plaintiffs relied upon the 'characteristics of this proceeding'. The plaintiffs submitted that the Associate Judge did not err as his Honour took account of the characteristics and gave weight to them in the balancing exercise and reached his conclusion. The plaintiffs submitted that there is no binding authority that requires a plaintiff seeking to resist a security application to adduce evidence of attempts to obtain litigation funding, simply because the proceeding is of a commercial nature. They submitted that, while it is open for parties seeking to prove stultification to lead such evidence (as occurred before the Associate Judge), there is no requirement that funding be sought in each and every 'commercial' case. The plaintiffs submitted instead, and as his Honour correctly held, each case is to be considered on its merits in performing a balancing exercise of various factors for and against an award of security. Whether a proceeding can be classed as 'commercial' is not, by itself, determinative. It is a factor to be weighed amongst many others. In accordance with authorities such as Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand,[33] what weight is to be given to it will be a matter for the decision maker.

57 The plaintiffs also submitted that, upon a proper consideration of the distinguishing factors present in Madgwick and St Mary's Hog's, his Honour correctly found the circumstances of this proceeding to be 'clearly different'. The plaintiffs submitted it was open for his Honour to reach such a finding. The plaintiffs relied upon parts of their submissions to the Associate Judge as to why the present case is different to Madgwick and St Mary's Hog's. They made no adequate attempt to identify the differences, or why they are relevant differences, with any precision. The submissions relied upon by the plaintiffs before the Associate Judge may be summarised as follows:

(a) the transactions in this case are different to those in Madgwick that concerned managed investment schemes for agribusiness, investments in forests, plantations and the like;

(b) the franchisees in this case have, through no fault of their own, lost the value of their investments and business, whereas the group members in Madgwick comprised investors with sufficient income or assets to protect who entered commercial arrangements and many for hoped for taxation advantages;

(c) the case is different to St Mary's Hog's, which involved lead applicants who continued to trade, had interests in many other franchise stores, and had recently paid out a substantial dividend. The case is also different to St Mary's Hog's in that that case concerned alleged breaches of good faith and unconscionable conduct in connection with competing food businesses. There was a forced re-branding of the plaintiffs' business and there was alleged malfeasance with respect to advertising royalties, including allegations of such funds being spent illegitimately and wrongfully charging of those royalties under franchise agreements to another company;

(d) in St Mary's Hog's, the guarantor plaintiffs guaranteed certain obligations not only under the 'St Mary's Hog's' franchise agreement but also 11 other 'Hogs Breath Café' franchises; and

(e) in the present case, no dividend has been declared by FNH United, whereas in St Mary's Hog's the applicant franchisee continued to trade, made modest profits for three years running, and despite an after tax loss declared a significant dividend in the same year.

58 The plaintiffs submitted, in the alternative, that upon a whole reading of the Reasons, the Associate Judge's finding at paragraph [55] is based upon the evidence of Mr Purcell. The plaintiffs did not otherwise develop this submission with any particularity.

59 The plaintiffs referred to his Honour's statement at paragraph [55] of the Reasons that the plaintiffs can be exempted from the need to provide evidence of funding. The plaintiffs submitted that here, the Associate Judge was indicating that an absence of such evidence is not a 'fatal point' and that the plaintiffs 'can still resist security'.

60 The plaintiffs submitted before the Associate Judge that an order for security would have the effect of stultifying their claim. In support of this submission the plaintiffs submitted before the Associate Judge, inter alia, that the plaintiffs do not have the benefit of a litigation funder.

61 The plaintiffs had the onus of establishing that an order for security would stultify their capacity to conduct the litigation.[34]

62 The reasons of the Associate Judge at paragraph [55] of the Reasons are not ambiguous as submitted by the plaintiffs. The Associate Judge found that the plaintiffs are exempted from 'the need to provide evidence of funding'.[35] This is a reference to his Honour not requiring the plaintiffs to put on evidence on the availability of, inter alia, commercial litigation funding in relation to the issue of stultification. This includes attempts at obtaining funding. This is supported by his Honour's subsequent review of the availability of commercial litigation funding in which his Honour stated at paragraph [88] of the Reasons: 'I have stated previously that in the circumstances of this proceeding the plaintiffs are not required to provide evidence of funding.'[36]

63 I have already referred to the Associate Judge's reference to the observations of Allsop CJ and Middleton J in Madgwick. Allsop CJ and Middleton J said that there was force in the submission that the primary judge had ignored the need to consider the availability of third party funding, being a factor important to the balancing of the group's position, the risk of stultification and the prejudice to the respondents from the impecuniosity of the applicants and the immunity of the group members. Their Honours said that they should not be taken as advocating a rule that a step such as the retention of litigation funding should always be taken to avoid an order for security but that, when '...all is said and done', the proceeding was a piece of commercial litigation.[37] Their Honours then went onto to describe some of the characteristics of the group members. It is clear, however, that the significant factor was that it was commercial litigation.

64 In Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd & Ors v Westcourt General Insurance Brokers Pty Ltd (Adelaide (SA Pools & Spa)),[38] Doyle J (as his Honour then was) said:

There are several authorities which have recognised that in the context of essentially commercial claims such as the present, the possibility of litigation funding should be considered before a conclusion of stultification can be reached.

There is also only limited evidence of the applicants' attempts to obtain funding. One potential funder has been approached on their behalf. It declined to fund the action. Based on Mr Argy's conversation with Ms Silvers, a representative of that funder, he concluded without further exploration or, in my opinion, sufficient explanation that the applicants could not obtain third party funding. For example there is no evidence of HBCA's financial status or to support the proposition that it won't have any assets 'by the end of the case' nor any explanation as to why Ms Silvers' approach should carry conclusive weight on the subject of funding.[39]

66 On appeal from her Honour's decision in the Full Court of the Federal Court in Goodwin v HBCA Pty Ltd (Goodwin),[40] Middleton and Lee JJ said:

The primary judge noted (at J [122]) that there was only limited evidence of attempts to obtain funding. Her Honour did not consider that the evidence adduced amounted to "sufficient explanation that the applicants could not obtain third party funding".

With respect to the primary judge, it is unclear why this was the case. The solicitor had given evidence that an experienced funder had represented that "there is no way any litigation funder would consider funding this action" because the franchisor had ceased trading and there were potential difficulties in pursuing recovery. Given the nature of and likely quantum of monetary relief able to be obtained by the class action, the correctness of this unchallenged evidence might have been thought compelling. Although for our part, we do not consider there was any insufficiency of explanation, it nevertheless appears this factor did not weigh significantly in the finding that her Honour was not satisfied stultification had been proven or, more generally, in the overall exercise of her Honour's discretion as to ordering security (as is evident from any possibility of funding not being mentioned in the summary reproduced at [10] above).[41]

67 More recently, in General Trade Industries Pty Ltd (in liquidation) v AGL Energy Limited (No 2) (General Trade Industries),[42] Derrington J said:

As a general proposition, where it is alleged in commercial litigation that an order for security for costs against an impecunious applicant will stifle the proceeding, it will be incumbent on that applicant, as a step ancillary to its proving that it is unreasonable to expect those who stand behind it and will benefit from the litigation to provide security, to adduce cogent evidence explaining what attempts it has made, or others have made on its behalf, to obtain litigation funding from a commercial provider.

The reason for this is not difficult to appreciate. Where an impecunious applicant has successfully sought litigation funding, the litigation funder will almost invariably have the means to provide security, be an entity that is 'standing behind' the applicant in the relevant sense, and also stand to benefit from any recovery by the applicant in the proceeding. In short, it will very rarely, if ever, be unreasonable to expect the funder to provide security.[43]

68 In Bufalo Corporation Pty Ltd (rec & mgr apptd) (in liq) v Prime Life Corporation Limited,[44] Judd J explained the relevance of the existence of litigation funding in a security for costs application to the issue of stultification:

The existence of the litigation funder is, however, an important discretionary consideration which, in my view, favours an order for security. Its presence diminishes the risk that an order for security will stultify the action. The weight given to other discretionary considerations, such as the cause of the plaintiff's impecuniosity may, to some extent, be neutralised by its participation. It stands to profit from a successful outcome.[45]

69 This proceeding is a commercial class action. This was not in dispute between the parties and was accepted by the Associate Judge. The Franchisee group members each entered into a commercial arrangement, being a franchise agreement, with United Petroleum to operate a service station in the United Network. The Guarantor group members each guaranteed the obligations of a Franchisee group member under such a franchise agreement. The plaintiffs make extensive allegations against United Petroleum and Mr Silver in which they seek to impugn the conduct of United Petroleum and Mr Silver in relation to the franchise agreements and guarantees. The plaintiffs seek restitution and compensation for loss and damage suffered.

70 The conditional costs agreements between Levitt Robinson and the plaintiffs reserve the right to Levitt Robinson, subject to the plaintiffs' approval, to introduce a commercial litigation funder to replace the plaintiffs as the persons responsible for funding this proceeding. In this context, Levitt Robinson, on behalf of the plaintiffs, have taken steps concerning commercial litigation funding. I refer to the evidence I have set out in this judgment concerning those steps at paragraphs [12] to [30] above. This evidence is relevant to the likelihood of whether commercial litigation funding will be obtained and, as a result, whether the proceeding would be stultified if security was ordered. The plaintiffs relied upon this evidence in support of a submission to the Associate Judge that it is unlikely that commercial litigation will be available and that, as a result, it is likely the proceeding would be stultified if security were ordered.

71 The Associate Judge did not take into account the evidence concerning commercial litigation funding and the likelihood of the availability of commercial litigation funding in finding that the proceeding will be stultified. This was important to the determination of the risk of stultification. His Honour only considered that evidence at [73]-[89] of the Reasons when addressing, in the alternative, the likelihood of the availability of commercial litigation funding. This is confirmed by his Honour's statement at paragraph [88] of the Reasons: 'I have stated previously that in the circumstances of this proceeding the plaintiffs are not required to provide evidence of funding.' [46]

72 In my view, the Associate Judge erred in finding at paragraph [55] that 'the plaintiffs can be exempted from the need to provide evidence of funding'. The formulation by the Associate Judge of an exemption assumes that there is a rule to which the exemption applies. There is no rule. As I have already said, the Associate Judge's earlier statement in the Reasons at [54] that each case must be considered on its merits is correct. By finding that the plaintiffs 'can be exempted from the need to provide evidence of funding' the Associate Judge did not take into account relevant evidence. The Associate Judge ought to have found, and erred in failing to find, that to satisfy their onus of establishing that an order for security for costs would stultify the proceeding, the plaintiffs were required to adduce evidence that they could not reasonably obtain litigation funding of the proceeding. This is a commercial class action in which the possibility of litigation funding is expressly provided for in the conditional costs agreements with Levitt Robinson, and that firm, on behalf of the plaintiffs, has taken some steps in relation to it. It is relevant, in the circumstances of this case, in balancing the interests of the parties on the applications for security for costs, to take into consideration the steps that have been taken about the funding of the litigation and the likelihood of whether commercial litigation funding will be obtained.

73 The Associate Judge said that, due to the characteristics of the proceeding, the plaintiffs can be exempted from the need to provide evidence of funding. I have identified the characteristics earlier in this Judgment. The characteristics may be generally summarised as follows:

(a) matters concerning the particular plaintiffs such as their entry into the commercial arrangements the subject of the proceeding, the impact of those arrangements, their position under the arrangements and their current financial position;

(b) FNH United does not trade, holds no assets, made no profit, and thus has no value whatsoever;

(c) no dividends were paid to Mr Istanikzai from FNH United;

(d) the plaintiffs have suffered a financial detriment which they allege was a result of entering into the franchising arrangements with United Petroleum;

(e) the plaintiffs claim they would not have entered into the transactions in the proceeding at all had they known the true position in relation to their franchises.

74 The Associate Judge did not identify any reason why the characteristics meant that the plaintiffs could be exempt from the need to provide evidence of funding. On this appeal, the plaintiff also failed to identify any such reason. The characteristics identified by his Honour did not provide any basis for exempting the plaintiffs from establishing the availability of commercial litigation funding given the circumstances I have identified earlier in these reasons at paragraphs [69] and [70] above.

75 The plaintiffs relied upon the differences between the facts in St Mary's Hog's and Madgwick on the one hand, and those in the present proceeding on the other, as a proper basis for the Associate Judge's finding that the plaintiffs were exempt from the need to provide evidence of funding. I do not accept this submission. His Honour did not find that these differences exempted the plaintiffs from the need to provide evidence of funding. His Honour at paragraph [54] of his Reasons stated that each case must be considered on its own merits. That is correct.[47]

76 In any event, the differences identified by his Honour, and those identified by the plaintiffs, did not provide any basis for exempting the plaintiffs from establishing the likelihood of the availability of commercial litigation funding. The plaintiffs did not identify how those factual differences justified such an exemption. It is not surprising that there are factual differences between the present case and St Mary's Hog's and Madgwick, just as there are also factual differences between St Mary's Hog's and Madgwick. I accept the submissions of United Petroleum that even if there are relevant differences between the facts in present case and those in St Mary's Hog's and Madgwick, they do not provide any basis for exempting the plaintiffs from the requirement to adduce evidence establishing the likelihood of availability of commercial litigation funding in relation to the issue of stultification.

77 As a result, the Associate Judge erred in finding that although this proceeding is of a commercial nature, due to its characteristics, the plaintiffs can be exempted from the need to provide evidence of funding.

78 It does not follow, however, that the appeal should be allowed and the Associate Judge's decision set aside. This is because the Associate Judge nonetheless found, in the alternative, that the evidence as to why commercial litigation funding will not be available was sufficient. As a result, it necessary to consider the grounds of appeal in relation to that issue.

1. ASSOCIATE JUDGE'S FINDING THAT EVIDENCE IS SUFFICIENT THAT COMMERCIAL LITIGATION FUNDING WILL NOT BE AVAILABLE

79 This is the subject of grounds [2(a)-(d)] and [3(a)-(d)] of United Petroleum's amended notice of appeal, and grounds [3(a)-(c)] of Mr Silver's amended notice of appeal:

United Petroleum

1. The Associate Judge erred in finding (at J[56] and J[131]) that there should be no security for costs on the basis that an order for security for costs will stultify the proceeding in circumstances where:

2. the proceeding is a commercial class action;

3. the costs agreements and communications with group members in the proceeding contemplated the prospect of litigation funding of the proceeding;

4. the available evidence showed that the plaintiffs' solicitors have had only informal discussions with funders about the prospect of litigation funding;

5. the evidence adduced by the plaintiffs failed to establish that funding would not be available in the circumstances set out in grounds 3(a) to (e) below; and/or

...

1. The Associate Judge erred in finding (at J[88]) that the evidence adduced by the plaintiffs was sufficient as to why funding would not be available, in circumstances where:

2. there was no evidence that any application had been made to a commercial litigation funder to fund the proceeding;

3. there was no evidence that any commercial litigation funder had been given details of the proceeding, including the statement of claim, the constitution of the group members and their estimated loss and damage claimed in the proceeding;

4. the plaintiffs had failed to establish that they had made reasonable to attempts to [sic] exhaust all reasonable avenues of procuring commercial litigation funding;

5. the plaintiffs had failed to explain the reasons why funding had been refused; and/or

...

Mr Silver

1. The Associate Justice erred in finding that the plaintiffs' evidence 'is sufficient as to why funding will not be available' (J [88]) when that finding was not open, in circumstances where:

(a) there was no evidence that any application had been made to a litigation funder to fund the proceeding (J [87]);

(b) there was no evidence that any litigation funder had been given details of the proceeding, including the constitution of group members and their estimated loss and damage claimed in the proceeding (J [87]);

(c) the evidence showed that the plaintiffs' solicitors had, in effect, failed to pursue the possibility of litigation funding in the proceeding (J [73]); and

80 At paragraphs [73]-[76] of the Reasons the Associate Judge set out the plaintiffs' evidence concerning commercial litigation funding.

81 The Associate Judge then referred to the observations of Derrington J in General Trade Industries. This included the statements made by Derrington J that I have already addressed earlier in this judgment,[48] and also the following observations:

Again, what is 'reasonable' will, of course, depend on all of the circumstances. It may be relevant to consider how many funders the applicant has approached, and over what period of time, both before the proceeding and during its pendency. The number might be smaller, and the time period of less relevance, where the initial funders approached by the applicant did not entertain to any meaningful extent the possibility of funding the proceeding. There is no reason to require an applicant who has already been turned down in no uncertain terms to continue a quest for funding that is likely to prove futile. On the other hand, if the initial funders turn down the applicant for merely technical or procedural reasons or, for instance, due to capacity constraints, it might be reasonable to expect that, as the litigation progresses, additional funders will be approached. For this reason, it is important for the applicant's evidence as to its attempts to secure funding to explain, so far as is possible, the reasons why funding was refused.

Here, AGL made no submissions as to the sufficiency of General Trade's attempts to obtain funding from PLF and LCM and the point was not addressed in any detail at the hearing. In these circumstances, it can be concluded that there is enough unchallenged evidence to conclude that General Trade has made a reasonable attempt to secure commercial litigation funding. This point accordingly does not weigh against any conclusion that the litigation would be stifled by an order for security for costs. [49]

82 No criticism was made of the Associate Judge's reliance on these observations.

83 At [81]-[87] the Associate Judge set out the parties submissions and then concluded:

[88] I have stated previously that in the circumstances of this proceeding the plaintiffs are not required to provide evidence of funding. However I note that Mr Levitt has explained what he has done regarding funding. He could have done more. Mr Purcell has given evidence which I accept and is sufficient as to why funding will not be available.

84 The Associate Judge found that the evidence of Mr Purcell was sufficient as to why litigation funding will not be available.

85 United Petroleum submitted that the Associate Judge erred in finding that the evidence adduced by the plaintiffs was sufficient as to why funding would not be available.

86 Mr Silver submitted, to the same effect, that the Associate Judge erred in concluding that the plaintiffs' evidence was 'sufficient as to why funding will not be available'. He submitted that it was not a finding that was not reasonably open on the evidence.

87 Mr Silver submitted that the plaintiffs' evidence on the application below did not establish that litigation funding could not be obtained or reasonably obtained. He submitted that the plaintiffs' evidence showed no application to any litigation funder to fund the proceeding, nor that any funder had been given details of the proceeding, such as the constitution of the group members and their estimated loss and damage, which would be needed for any funder to make any reasoned assessment of whether to fund the proceeding. Mr Silver submitted that there was no direct evidence from any funder. He submitted that initial approaches were made to only three funders, without identifying the present claims and seeking only their interest in funding franchisee class actions generally.

88 The plaintiffs submitted that if it is accepted that his Honour did not err in holding that the plaintiffs could be exempt from providing evidence of litigation funding, this ground does not arise. They submitted that if his Honour did so err, then it was open for his Honour to conclude that the evidence of attempts at obtaining litigation funding was sufficient.

89 The plaintiffs submitted that the evidence of Mr Levitt is similar to that before Markovic J in St Mary's Hog's, although the plaintiffs also submitted that in the present case they also adduced further evidence from Mr Purcell. The plaintiffs submitted that his Honour accepted the evidence Mr Levitt, while noting that Mr Levitt could have done more. They also submitted that his Honour also accepted the evidence of Mr Purcell, finding that it was sufficient as to why funding would not be available.

90 It is important to consider the evidence concerning the availability of commercial litigation funding. The evidence is characterised by its vagueness, generality and lack of particularity. The discussions with funders and a broker were 'informal' and 'high level'. In addition:

(a) representatives of Levitt Robinson had only spoken to a funder specifically about this proceeding in about September 2021 (i.e. Mr Levitt) and some months prior to August 2023 (i.e. Ms Doherty);

(b) there was no discussion between anyone at Levitt Robinson and a funder or funding broker that was not 'high level' or 'informal'; and

(c) there was no evidence of what information was provided by Levitt Robinson during these discussions.

91 In about September 2021, Mr Levitt had 'informal discussions' with Galactic Group about funding this proceeding. These discussions took place a year prior to the commencement of this proceeding and almost two years prior to the hearing before the Associate Judge. Mr Levitt did not identify the person or persons at Galactic Group with whom he spoke. He did not give any other evidence of what was discussed except that it was 'about funding these proceedings'. He also did not adequately explain the basis for his observation that Galactic Group's appetite to fund class action proceedings was significantly diminished as a result of the manner in which the 7-Eleven class action proceedings settlement approval developed. In addition, Mr Levitt observed that Galactic Group's diminished appetite concerned 'class action proceedings' and was not limited to, for example, franchisee class actions.

92 In mid-2022, Mr Levitt spoke with a Mr Gavin Beardsell, Senior Investment Manager and Legal Counsel at Omni Bridgeway. This discussion took place a few months prior to the commencement of this proceeding (i.e. 21 October 2022) and almost a year prior to the hearing of the applications before the Associate Judge. The discussion was at a high level regarding franchisee class actions generally and did not concern this specific proceeding. Mr Levitt did not provide any information to Mr Beardsell concerning this proceeding. Mr Levitt asked whether Omni Bridgeway have an appetite to fund class actions on behalf of franchisees and Mr Beardsell responded with words to the following effect: 'No. We don't much like franchisee cases because of the risk that the group members can be white-anted. The franchises are generally still in a working relationship with the party they're suing.'

93 Mr Beardsell's evidence was confined to why Omni Bridgeway has no appetite to fund franchisee class actions. Mr Levitt did not provide any information to Mr Beardsell in relation to the subject matter of this proceeding. This proceeding had not been commenced at the time. Mr Levitt did not explain why he did not inform Mr Beardsell of the particulars of the proceeding that was being contemplated by the plaintiffs, including anything about the potential class of group members. Levitt Robinson had been engaged by the plaintiffs since September 2021. At the time of the discussion between Mr Levitt and Mr Beardsell, the plaintiffs (namely the first, third and fourth plaintiffs) were no longer franchisees in the United Network and were not in a working relationship with United Petroleum and had not been for over a year.

94 Also in mid-2022, Mr Levitt spoke with Mr Purcell. Again, this discussion took place a few months prior to the commencement of the proceeding (i.e. 21 October 2022) and almost a year prior to the hearing of the applications before the Associate Judge. Again, the discussion was at a high level regarding franchisee class actions generally and not this proceeding. Mr Levitt did not provide any information to Mr Purcell concerning this proceeding. On his own evidence, Mr Levitt asked whether CASL, Litigation Capital Management or Therium Litigation Funding would be interested in funding franchisee class actions. Mr Levitt deposes that Mr Purcell responded that '[f]ranchising is not their area' and also that '[t]here is not much interest in funding franchising cases among the litigation funders with whom we deal'. Mr Purcell gave similar but not identical evidence.

95 Mr Purcell was a lawyer prior to working for Litigation Funding Solutions. Mr Purcell's evidence was that Mr Levitt made a query to effect of whether funders Mr Purcell works with 'like CASL, LCM, or Therium [would] be interested in funding franchisee class actions', to which Mr Purcell replied: 'There is not much interest in the funders with whom we deal for franchisee class actions. The funders are mostly interested in security class actions which have been more successful in outcome and are easier to group together'. Mr Purcell also gave the following evidence:

It is my understanding from my experience in dealing with the litigation funders with whom I work that they are also concerned about the stability of the class, and prospects that group members may decline to join the action or drop out once the action is underway.

96 It is clear that Mr Purcell's evidence was limited to the funders with whom he deals. It is not clear whether his comment that '[f]ranchising is not their area' was confined to CASL, LCM and Therium. There is further uncertainty arising from Mr Purcell's statement that 'there is not much interest in funding franchising cases among the litigation funders with whom [Litigation Funding Solutions] deal'. It is implicit in these comments that there was at least some interest in funding franchising class actions among the funders with whom Mr Purcell works. The evidence, however, is imprecise and no attempt was made to clarify the extent, if any, of the level of interest of any funders. For instance, and as I refer to further below, Ms Doherty subsequently spoke with a representative of CASL and that representative expressed, at least, some willingness to consider further information in relation to the proceeding.

97 Mr Purcell was not given any information about the claimant class in this proceeding, including what steps had been taken to identify and assemble group members, nor any information about the definition of the group members. Mr Purcell did not discuss the matters raised by Mr Levitt with any funders. Again, Mr Levitt did not explain why he did not inform Mr Purcell of the particulars of the proceeding that was being contemplated by the plaintiffs, including anything about the potential class of group members.

98 The Associate Judge found that the evidence of Mr Purcell is sufficient as to why funding will not be available. For the reasons I have just given, in my view, the evidence was not sufficient.

99 Mr Levitt referred to the decision of Justice O'Callaghan delivered on 14 February 2023 in Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) (Davaria (No 13)),[50] and stated:

His Honour ruled that the Court did not have power to make a [common fund order] in favour of Galactic, and limited Galactic's commission entitlement to a fixed funding equalisation order in an amount that was approximately 50% of what Galactic had sought by way of a [common fund order].

100 United Petroleum submitted that it is relevant to note that in Elliot-Carde v McDonald's Australia Limited,[51] the Full Court of the Federal Court confirmed that the Federal Court had the power to make a common fund order at the point of settlement approval. That decision, however, was delivered after the hearing of the applications before the Associate Judge.

101 Mr Levitt gave evidence that, because of the 'difficulties' that he identified in his affidavit made 14 August 2023, he has not had any other discussions with litigation funders concerning this proceeding as he assessed that the legal status quo regarding common fund orders was not propitious for funding such actions. These difficulties are limited to matters concerning the 7-Eleven class action proceedings, including matters concerning Galactic Group and the decision of Justice O'Callaghan on the application for a common fund order in that proceeding.

102 Mr Levitt did not explain why he did not have other discussions with funders or funding brokers prior to the delivery of that decision. Mr Levitt did not explain what he meant when he said that the legal status quo regarding common fund orders was not 'propitious for funding such actions'. After the decision of Justice O'Callaghan, Mr Levitt made no attempt to discuss this proceeding with any funder or funding broker to determine their actual preparedness to fund this proceeding. In addition, Mr Imlay gave evidence that 'some months' prior to 15 August 2023, Ms Doherty met with a representative of CASL who was her former colleague and friend, and had some informal discussions. Ms Doherty gave no evidence of this conversation. This was the subject of evidence of others, namely Mr Imlay and Mr Levitt. This was likely after the decision of Justice O'Callaghan in Davaria (No 13), delivered on 14 February 2023, given that the conversation was only 'some months' before 15 August 2023. There was no evidence why Ms Doherty approached CASL directly given that Mr Levitt had spoken with Mr Purcell in October 2022 about whether CASL would be interested in funding franchisee class actions. There is no evidence of what Ms Doherty told the representative from CASL about the proceeding. The representative informed her that any consideration would be preceded by an assessment of the quantum of the claims of all group members in the proceedings. Mr Levitt gave evidence that '[t]o date this has not been progressed'. Mr Levitt did not explain why this has not been progressed. Ms Doherty did give evidence that Levitt Robinson have been unable to ascertain the precise number of group members, however no attempt was made in this context to explain, and it remains unclear, why a detailed assessment of the quantum of the claims of known group members has not been progressed.

103 Mr Levitt gave evidence that he will be reviewing the progress of this proceeding with a view to approaching other litigation funders once he is of the view that there is a reasonable prospect of funding being offered on appropriate terms. Mr Levitt did explain why, as at 14 August 2023, he was of the opinion that there was not a reasonable prospect of funding being offered on appropriate terms. The Associate Judge found that Mr Levitt could have done more in relation to commercial litigation funding.

104 As I have already said, the plaintiffs had to establish that it was unlikely that commercial litigation funding would be available in order to discharge their onus of establishing stultification. The evidence was not cogent for this purpose. I refer to the matters I have addressed in relation to this evidence.

105 Finally, the plaintiffs submitted that the evidence relied upon by them is similar to the evidence before Markovic J in St Mary's Hog's. In that case, her Honour found that the evidence was not sufficient. But on appeal, Middleton and Lee JJ in Goodwin said:

The primary judge noted (at J [122]) that there was only limited evidence of attempts to obtain funding. Her Honour did not consider that the evidence adduced amounted to 'sufficient explanation that the applicants could not obtain third party funding'.

With respect to the primary judge, it is unclear why this was the case. The solicitor had given evidence that an experienced funder had represented that 'there is no way any litigation funder would consider funding this action' because the franchisor had ceased trading and there were potential difficulties in pursuing recovery. Given the nature of and likely quantum of monetary relief able to be obtained by the class action, the correctness of this unchallenged evidence might have been thought compelling.[52]

106 I do not accept that the evidence before Markovic J in St Mary's Hog's is similar to the evidence in the present case. It may be readily distinguished. This is because the evidence in St Mary's Hog's established that no funder would consider funding the action because the defendant (i.e. HBCA) had ceased trading and either had no assets or would not have had any assets by the end of the case. There is no such evidence in the present case. As I have said, however, each case must be considered on its own circumstances.

107 In conclusion, the Associate Judge erred in finding that the plaintiffs' evidence 'is sufficient as to why funding will not be available' when that finding was not open.[53] I address the materiality of this error after I address the grounds of appeal concerning the Associate Judge's finding that the proceeding will be stultified if security for costs is ordered.

1. ASSOCIATE JUDGE'S FINDING THAT THE PROCEEDING WILL BE STULTIFIED IF SECURITY FOR COSTS IS ORDERED

108 This is the subject of ground [8] of United Petroleum's notice of appeal and grounds [4] and [6] of Mr Silver's notice of appeal:

United Petroleum

1. The Associate Justice ought to have found, and erred in failing to find, that the plaintiffs had not satisfied their onus of establishing that an order for security for costs would stultify the proceeding.

Mr Silver

1. The Associate Justice ought to have found, and erred in failing to find, that the plaintiffs had not satisfied their onus of establishing that an order for security for costs would stultify the proceeding, because the plaintiffs had not demonstrated that they could not obtain, or reasonably obtain, litigation funding of the proceeding.

...

1. The Associate Justice erred in concluding that the plaintiffs had established that an order for security for costs would stultify the proceeding (J [131]).

109 The Associate Judge stated at paragraphs [55]-[56] of his Reasons:

In my view, although this proceeding is of a commercial nature, due to its characteristics, the plaintiffs can be exempted from the need to provide evidence of funding.

In the interests of justice here, in conducting a balancing exercise I am of the view that there should be no security for costs on the basis of stultification. I am balancing the interests of the plaintiffs with that of the defendants. I acknowledge that should the defendants succeed, they may not get their costs.

110 The Associate Judge also stated at paragraph [131]:

The defendants' applications for security for costs will be dismissed because an order for security for costs will stultify the plaintiffs' proceeding.

111 I refer to my reasons at paragraphs [60]-[78] and [90]-[107] of this ruling. In the absence of evidence that established that it was likely that commercial litigation funding will not be available, it was not open to the Associate Judge to conclude that the proceedings will be stifled by an order for security.

(a) ought to have found, and erred in failing to find, that the plaintiffs had not satisfied their onus of establishing that an order for security for costs would stultify the proceeding; and

(b) erred in finding that there should be no order for security for costs on the basis that such an order will stultify the proceeding.

1. MATERIALITY OF THE ERRORS, THE OTHER GROUNDS OF APPEAL AND ORDERS

113 The errors of the Associate Judge that I have identified in this ruling materially contributed to his Honour's decision to dismiss the defendants' applications for security for costs. This is because the Associate Judge stated at paragraph [56] of the Reasons that '...there should be no security for costs on the basis of stultification', and also at paragraph [131] of the Reasons that '[t]he defendants' applications for security for costs will be dismissed because an order for security for costs will stultify the plaintiffs' proceeding'.

114 It follows that the appeals on grounds of appeal [1], [2(a)-(d)], [3(a)-(d)] and [8] of United Petroleum's amended notice of appeal and grounds of appeal [1]-[3(a)-(c)], [4] and [6] of Mr Silver's amended notice of appeal will be allowed and the Associate Judge's decision will be set aside. As a result, it is not necessary to further consider the defendants' other grounds of appeal.

115 There was consensus among the parties at the hearing of these appeals that, if I allow the appeals, the appropriate course is for the defendants' applications for security for costs to be remitted. I wish to hear further, however, from the parties on this issue in light of these reasons and also given the following circumstances:

(a) the plaintiffs have been granted leave to join a new plaintiff and a new defendant;

(b) the plaintiffs are in the process of amending their claims; and

(c) the plaintiffs seek to rely upon new evidence on the issue of the availability of commercial litigation funding.

116 I will also hear from the parties on the precise form of orders.

[1] FNH United Pty Ltd v United Petroleum Franchise Pty Ltd (Supreme Court of Victoria, Efthim AsJ, 30 October 2023) (Reasons).

[2] Oswal v Carson [2013] VSC 355 [11] (Ferguson J) (as she then was) (Oswal).

[3] (1936) 55 CLR 499 (House v The King).

[4] Ibid 504-5 (Dixon, Evatt and McTiernan JJ). See also VM Romano Construction Group Pty Ltd v BCG (Aust) Pty Ltd [2023] VSCA 312 [17] (Niall and Whelan JJ) (VM Romano).

[5] Millsave Holdings Pty Ltd v Connective Group Pty Ltd [2023] VSCA 326 [988] (McLeish and Macaulay JJA), citing Australian Competition and Consumer Commission v Reckitt Benckiser (Australia) Pty Ltd (2016) 340 ALR 25, 40 [53] (Jagot, Yates and Bromwich JJ).

[6] Oswal (n 2) [11] (Ferguson J) (as she then was).

[7] VM Romano (n 4) [18] (Niall and Whelan JJ), citing Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc [1981] HCA 39; (1981) 148 CLR 170, 177 [9] (Gibbs CJ, Aickin, Wilson and Brennan JJ).

[8] Bodycorp Repairers Pty Ltd v GDG Legal Pty Ltd [2018] VSCA 32 [19] (Ferguson CJ, Whelan and McLeish JJA).

[9] See FNH United Pty Ltd v United Petroleum Franchise Pty Ltd [2024] VSC 366 (Nichols J).

[10] VID 180 of 2018 and related proceeding VID 182 of 2018.

[19] Ibid [20]. See Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377, 383 [22] (Maxwell P and Buchanan JA).

[22] [2022] FCA 52 (St Mary's Hog's).

[24] [2013] FCAFC 61; (2013) 212 FCR 1 (Madgwick).

[25] Ibid 19 [76]-[78] (emphasis added) (citations omitted).

[26] [2019] FCA 462; (2019) 369 ALR 512 (Abbott).

[27] Ibid 523 [33] (emphasis in original) (citations omitted).

[32] Oswal (n 2) [48] (Ferguson J) (as her Honour then was).

[33] [2008] HCA 42; (2008) 237 CLR 66.

[34] Troiano v Voci (2019) 61 VR 511, 518 [24] (Riordan J).

[38] [2016] SASC 60 [57] (Adelaide (SA Pools & Spa)).

[40] [2022] FCAFC 166 (Goodwin).

[41] Ibid [30]-[31] (Middleton and Lee JJ) (emphasis added).

[42] [2023] FCA 556 (General Trade Industries).

[43] Ibid [167]-[168] (emphasis added).

[44] [2009] VSC 171.

[47] See Madgwick (n 24) [77] (Allsop CJ and Middleton J).

[49] General Trade Industries (n 42) [175]-[176] (emphasis added).

[50] [2023] FCA 84 (Davaria (No 13)).

[51] [2023] FCAFC 162 (Beach, Lee and Colvin JJ).