Franklin v GHF Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA TASMANIA DISTRICT REGISTRY GENERAL DIVISION TAD 14 of 2013

JUDGE: DAVIES J DATE: 23 DECEMBER 2014 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 In late July 2014, this proceeding was listed for hearing commencing on 23 March 2015 on an estimate of six days. On 3 December 2014, the first and second respondents ("Genesis" and "Bain") applied pursuant to r 16.53 of the Federal Court Rules 2011 (Cth) ("the Rules") for leave: (a) to amend their defences in the form of a proposed joint further amended defence; and (b) to file and serve a joint amended cross claim against the third applicant ("GFC") and the third to sixth respondents ("the Vendors"). 2 The application came on for hearing on 5 December 2014. On that day, leave was granted to Genesis and Bain to make some of the proposed amendments. The Court stood over for further argument proposed amendments which contain new alternative claims by Genesis and Bain against GFC by way of defence and cross claim. Mr McTaggart, who appeared for the applicants, opposed the proposed amendments, contending that they are futile, that no proper explanation has been given for the delay in advancing the new claims and, given the proximity of the trial, that the applicants would suffer serious prejudice if the amendments were allowed. 3 It is necessary to give some background in order to understand the alternative claims that Genesis and Bain seek to advance against GFC. 4 In September 2010, the first and second applicants ("the Purchasers") purchased the shares in GFC from the Vendors and became the directors of GFC, replacing the third respondent ("Guirguis"), who had been GFC's sole director. GFC, at the time of the share purchase, conducted a business under a franchise agreement with Genesis at premises leased by Genesis which it subleased to GFC. Bain was an employee of Genesis at the time. The applicants seek damages from the respondents arising from an alleged contravention of s 52 of the Trade Practices Act 1974 (Cth) ("the TPA"). Central to the claim is the allegation that the respondents, through Bain, made false and misleading representations, concerning the business carried on by GFC. It is alleged that the Purchasers, in reliance upon the representations, were induced to purchase the shares in GFC from the Vendors. The applicants also allege negligence against Bain and Genesis, breaches of the Franchising Code by Genesis, unconscionable conduct by Bain, Genesis, Guirguis and/or the fourth respondent, and have made a restitution claim. 5 Genesis filed a defence in which it alleged, amongst other things, that Bain was not authorised to make, and was acting outside the scope of his employment in making, the representations on behalf of Genesis and that any representations made by Bain were not as agent for Genesis. The defence also relevantly alleged that to the extent that Bain was acting within the scope of his employment, Genesis (through Bain) was acting as agent for the Vendors in the negotiations and that any information provided by Genesis (through Bain) was originally generated by the Vendors. It was alleged that by reason of those matters any wrongful conduct of Genesis (through Bain) concerning the sale of the business is conduct that should be attributed solely to Bain and the Vendors. 6 Bain (who was then separately represented) also filed a defence in which he alleged that he was acting in his capacity as an employee of Genesis at all material times, and that Genesis was the agent of the Vendors. He alleged alternatively that to the extent that he was not acting in his capacity as an employee of Genesis, he was acting as the agent of the Vendors at all material times. 7 Genesis and Bain each alleged in their defences that the claims of the applicants are "apportionable" within the meaning of Part 9A of the Civil Liability Act 2002 (Tas) and for the purposes of s 87CB and 87CD of the TPA. They also filed cross claims against each other and the Vendors. 8 On 25 July 2014, the applicants filed an amended statement of claim ("ASOC") with the leave of the Court. The amendments relevantly included the new allegations that: (a) all relevant representations made by Bain were made by him in his capacity as an employee of Genesis, further and alternatively that Genesis held Bain out as a person authorised by it to negotiate and make representations on its behalf to the applicants in relation to the business; and (b) when the respondents made the representations "they were reckless as to their truth". 9 Genesis filed an amended defence to the ASOC. Bain did not. Bain, at that time, was not legally represented. 10 On 6 November 2014, HWL Ebsworth Lawyers, which hitherto had acted only for Genesis, also commenced acting for Bain. Also on that date, Genesis and Bain discontinued their cross claims against each other, and shortly after the proposed joint amended defence and cross claim against GFC and the Vendors were served on the other parties to the proceeding. 11 Relevantly, in the proposed joint amended defence: (a) Genesis and Bain now admit that Bain was at all relevant times during his dealings with the applicants, acting in his capacity as an employee of Genesis and/or as an agent for Genesis; and (b) Genesis and Bain say further that in any negotiations between the Vendors and the Purchasers, Genesis (through Bain) was acting as agent for the Vendors and/or for GFC. 12 Relevantly, in the proposed joint amended cross claim it is alleged that: (a) Bain was acting in his capacity as an employee of Genesis and as an agent for Genesis in any negotiations between the Vendors and the Purchasers concerning any sale of any interest in the business; (b) if Genesis or Bain are liable to the applicants, Genesis (through Bain) was acting in such negotiations as agent for the Vendors and/or for GFC (para 11(c)); (c) any information provided by Genesis (through Bain) to the Purchasers concerning the business was provided by the vendors and/or GFC (para 11(d)); and (d) by reason of the matters in para 11(c) and (d), the Vendors and/or GFC must indemnify Genesis and Bain to the extent that they are found liable to the applicants for misleading and deceptive conduct ("the indemnity claim"). 13 The particulars supporting the allegation that Genesis was acting as agent for the Vendors and/or GFC plead that the information contained in the emails that Bain provided to the applicants in the course of the negotiations: ... was based upon information prepared by Guirguis (the then sole director of [GFC]) and provided to the Purchasers by Bain with the consent and approval of Guirguis (in her capacity as sole director of [GFC]). 14 The particulars also state that: The consent and approval of Guirguis (in her capacity as sole director of [GFC]) to the provision of that information by Bain to the Purchasers is evidenced by and to be inferred from the contents of the following communications between Bain and Guirguis: [the relevant documents are then listed] 15 It is further alleged in relation to each of the specific representations alleged by the applicants that if Genesis or Bain are liable to the applicants for contravention of s 52 of the TPA, the information was provided to Genesis (through Bain) by GFC, that Genesis and Bain relied on the accuracy and reasonableness of that information in sending the emails to the Purchasers and they have suffered loss and damages and seek an order under s 82 of the TPA ("the damages claim").

submissions 16 It was argued for Genesis and Bain that the proposed amendments are necessitated by the allegation that the applicants first pleaded in the ASOC that the respondents made the representations in reckless disregard of the truth. It was submitted that it is possible, by reason of s 87CC of the TPA, that Genesis and Bain would not be able to rely on the proportionate liability provisions in Part VIA of the TPA if the allegation is proved. Section 87CC provides: (1) Nothing in this Part operates to exclude the liability of a concurrent wrongdoer (an excluded concurrent wrongdoer) in proceedings involving an apportionable claim if: (a) the concurrent wrongdoer intended to cause the economic loss or damage to property that is the subject of the claim; or (b) the concurrent wrongdoer fraudulently caused the economic loss or damage to property that is the subject of the claim. … 17 It was argued that the potential operation of the exception to the proportionate liability provisions has "significantly changed the landscape of the proceeding". The submission was that Genesis and Bain would be seriously disadvantaged if they are not permitted to raise the proposed claims against GFC by which they seek to set up the right for them, by direct claims against GFC, to recover against GFC for any loss and damage for which they are found liable. 18 It was submitted for the applicants that the proposed claims against GFC should not be allowed because they are futile. Three reasons were advanced. First, that GFC has no mind of its own and could not have made the relevant representations other than via one or more of the respondents and consequently, any conduct by GFC can only be the responsibility of Bain, Genesis and one or more of the other respondents. Secondly, because the transaction was effected by way of a share purchase in GFC, GFC is not a concurrent wrongdoer within the meaning of s 87CB(3) of the TPA as there was no act or omission of GFC that independently or jointly with another party caused the loss or damage claimed. Further, Genesis and Bain do not say how GFC caused the loss to itself or to the Purchasers. Thirdly, even if GFC can be found to be a concurrent wrongdoer, "it cannot be sensibly suggested that its liability would not be reduced to nil under s 87CD of the TPA" because "in the relevant circumstances, it could only act via one or more of the respondents". Accordingly, it was submitted, adding GFC will be futile and a waste of time and money and the "practical result is absurd". 19 It was also submitted for the applicants that the Court should not allow the amendments because the delay in bringing the proposed claims against GFC has not been adequately explained and that the applicants will suffer substantial prejudice if the proposed claims are allowed. Specifically, it was put that there will be additional delays and costs because: (a) it will be necessary to obtain proper particulars of the agency said to have been in existence between Genesis and [GFC]. The current particulars are taken from the Applicants' Amended Statement of Claim and do not relate to the alleged agency between [GFC] and Genesis/Bain. They relate to and were pleaded to establish the agency between Bain and the Vendors; (b) the Applicants have alleged fraud against Bain. His authority to make fraudulent representations on behalf of Genesis and [GFC] will need to be considered and particulars sought; (c) [GFC] will need to consider whether to plead breach of director's duties against Guirguis and breach of agent's duty against Bain principally or in the alternative. Depending on the answers given in relation to the scope of his agency, Bain may himself have been a silent director of [GFC]. It follows that the applicants may need to draft a further Amended Statement of Claim and the Respondents may object to it. This will cause further delay and jeopardise the mediation and trial date. (d) substantial consideration will need to be given to the current discovery made by [GFC], Bain and Genesis; and (e) [GFC] will need to consider the cross claims in their entirety and plead to it. Further amendments to the cross claims may need to be made and replies made. It is likely that further discovery will be required.

decision 20 In my opinion, it cannot be said here that the proposed claims against GFC are futile. In my opinion, there is at least an arguable basis for the claims. First, it is not correct as a matter of law that GFC cannot be held liable for the relevant representations: see s 84(2) of the TPA which deems conduct engaged in on behalf of a company by a director, employee or agent of the company within the scope of the person's actual or apparent authority to be conduct engaged in also by the company for the purposes of the TPA. Moreover, the agency relationship, if established in relation to GFC, is capable of giving rise to an entitlement in Genesis and Bain to be indemnified by GFC, if Genesis and Bain are found liable for misleading and deceptive conduct and acting within their authority in making the false representations: G E Dal Pont, Law of Agency (3rd ed, 2014) [22.19]-[22.20]; Brookhouse v NSW Mutual Real Estate Fund Ltd (1978) ATPR 40-064; Diamond Hill Mining Pty Ltd v Huang Jin Mining Pty Ltd (2011) ACSR 616; [2011] VSC 288. That said, I accept that there may be some substance in the contention for the applicants that the fact that GFC was, at the relevant time, owned and controlled by the very persons against whom the allegations of misleading and deceptive conduct are made may have a bearing on the extent to which, if at all, Genesis and Bain may recover from GFC. It is possible that considerations of unjust enrichment may preclude GFC from liability to Genesis and Bain in the circumstance that the Purchasers, which now own the shares in GFC, would, if they are successful in establishing misleading and deceptive conduct by the respondents in relation to that share purchase transaction, effectively be required to contribute to, or bear, the loss and damage caused to them by the respondents: Burke v LFOT Pty Ltd (2002) 209 CLR 282. However, it cannot be said that the proposed claims are untenable, nor can it be said that there would be no utility in making such claims against GFC because the Court would not reduce any award of damages in the applicants' favour. Whether that be so is a question for determination at trial. 21 The fact that the claims are arguable does not mean that leave should be granted. Whether the amendments should be allowed is a matter for the Court's discretion under r 16.53 the Rules. In exercising the discretion, prejudice to the other parties, concerns of case management and whether an adequate explanation for the delay has been given are all matters to be taken into account: Aon Risk Services Australia Pty Ltd v Australian National University (2009) 239 CLR 175. 22 An explanation for the delay was provided by Mr Tydde, solicitor, from the firm of HWL Ebsworth Lawyers, which now represents both Genesis and Bain, in an affidavit in support of the application. He deposed that when Genesis filed its amended defence to the ASOC, Genesis did not have a factual basis to plead in detail to certain of the allegations concerning the conduct of Bain in his communications with the Purchasers and, as a result, a number of allegations were not admitted by Genesis. He also deposed that as a consequence of HWL Ebsworth commencing to act for Bain in November 2014 and Bain's direct involvement in the communications with the Purchasers, Genesis now has a factual basis to be able to plead a more detailed defence and cross claim. The explanation could have been more fully expressed and is not entirely satisfactory but I accept that the proposed amendments arose as a consequence of HWL Ebsworth commencing to act for Bain in November 2014 and accept that the factual basis upon which the amendments are based was not known to Genesis before the joint representation. Bain must have known that factual basis and it may be surmised that he could have raised the amendments when the ASOC was filed had he been represented at the time. Regrettably he was not represented at the time that the ASOC was filed and he did not file an amended defence to the ASOC. The application to amend was made reasonably promptly following HWL Ebsworth commencing to act for Bain. 23 The question is whether Genesis and Bain should be allowed to raise the new claims against GFC at this stage of the proceeding, when the matter has been listed for hearing in late March 2015 and the applicants claim they will suffer prejudice if the amendments are allowed because of the late stage at which they are sought to be made before the trial. The Court must exercise the power to grant or refuse leave in a way that promotes the "overarching purpose" of the civil practice and procedure provisions of the Federal Court of Australia Act 1976 (Cth) ("the Act"). Section 37M of the Act provides that the overarching purpose of the civil practice and procedure provisions is to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. 24 I accept that there may be some prejudice to the applicants arising from the amendments, but I have reached the conclusion that Genesis and Bain should have leave to pursue the proposed claims against GFC. The addition of the claims may add some complexity to the case and require further trial steps to be taken for the case to be ready for trial by all parties. However, the new claims do not add substantially to the factual substratum and the trial is still some three months away. Whilst the festive holiday season intervenes, careful and appropriate case management should enable the parties to get ready for trial in time, without the need to vacate the hearing date. There is no suggestion at this point in time that the hearing date would have to be vacated and the material presently before the Court does not indicate that the vacation of the hearing date would be an inevitable consequence of the amendments being made. That is not to say that there may be additional factual matters that may arise for consideration, but it does not seem to me that the additional claims will add a further element of procedural complexity to the proceedings such that it will make it impossible for the hearing to proceed when listed. I take into account also that there is a mediation listed for 30 January 2015. However, again appropriate case management should enable that mediation to be held without disruption occasioned by the amendments. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.