January Force Pty Ltd v Tricon Restaurants Australia Pty Ltd

REASONS FOR JUDGMENT 1 Each of the respondents has filed a notice of motion seeking an order that the applicants provide security for its costs in such amount as the Court thinks fit. The applications are made pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth), O 28 r3 of the Federal Court Rules and s 1335 of the Corporations Law. 2 The proceeding commenced with the filing of an application and a statement of claim on 18 May 1998. In their current statement of claim (a proposed further amended statement of claim has been propounded which is the subject of objection and leave to file and serve it has not yet been granted) the applicants allege that by three separate agreements made on or about 16 March 1993, 16 July 1993 and 14 January 1994 between the first respondent ("Tricon") as head franchisor, the second respondent ("Jardine") as sub‑franchisor and each of the applicants as franchisee, Jardine granted to each of the applicants ("January Force", "Limnet" and "Dallas Downs") a Pizza Hut delivery franchise. A Pizza Hut delivery franchise consists of 90% telephone home delivery pizza orders and 10% takeaway pizza orders, the majority of which takeaway orders are lodged by telephone. 3 The applicants allege that the franchise agreements contained terms which included the provision by Tricon and Jardine of the Telecom Customnet telephone ordering system or some comparable system for the taking of telephone orders for the home delivery of takeaway pizzas, pursuant to which orders for pizzas within the specified delivery areas would be directed to the applicants' outlets within their delivery area. The applicants allege that Tricon and Jardine terminated the Telecom Customnet telephone ordering system on or about 22 August 1996 and replaced the same with a CSC telephone ordering system and refused to provide any telephone ordering system to the applicants unless they paid certain fees and signed another agreement. It is alleged that these matters constituted a breach of the franchise agreements and unconscionable conduct within the meaning of s 51AA of the Trade Practices Act 1974 (Cth) and s 10A of the Fair Trading Act 1985 (Vic). The applicants allege that they were compelled to use the CSC call system which did not work properly as a result of which they have suffered loss and damage. The applicants also allege conduct in breach of s 52 of the Trade Practices Act and s 11 of the Fair Trading Act and they claim exemplary damages for the alleged conduct in breach of the franchise agreements. The applicants' allegations are denied by the respondents. 4 The proceeding has progressed to a point where a further amended statement of claim has been filed and served, defences have been delivered and leave has been sought to file and serve a proposed second further amended statement of claim. Objections have been taken to leave being granted to file and serve that proposed further amended statement of claim. Discovery has been completed and the matter has been mediated, although unsuccessfully. Requests by both respondents for the applicants to provide security for the respondents' costs of the proceeding have not been responded to affirmatively. 5 Evidence as to the financial position of the applicants has been provided by the applicants and the respondents and can be summarised as follows: (a) As at 30 June 1997 January Force had an excess of liabilities over assets of $54,415 and for the year ended 30 June 1997 had an operating loss of $31,845. (b) For the year ended 30 June 1997 Limnet had an income of $12,988 and as at 30 June 1997 it had an excess of assets over liabilities of $12,990. (c) For the year ended 30 June 1997 Dallas Downs had a net profit of $13,134 and an excess of assets over liabilities of $35,356. (d) As at 30 June 1998 January Force had an excess of liabilities over assets of $56,921. Current assets were $4,961 and current liabilities were $102,283. Its operating profit for the year ended 30 June 1998 was $5,493. (e) For the period ended 1 December 1998 Limnet incurred a net loss of $48,932.75. As at 1 December 1998 Limnet had cash at bank of $9,819.29, petty cash of $17,754 and plant and equipment valued at $13,124.92. (f) For the year ended 30 June 1998 Dallas Downs made a net profit of $5,160 and as at 30 June 1998 had an excess of assets over liabilities of $38,658. In or about August 1998 Limnet and Dallas Downs sold their Pizza Hut delivery businesses, the subject of the proceeding. The proceeds were used to satisfy outstanding debts and expenses of the companies and to contribute to the purchase of a further business in which the directors of Limnet and Dallas Downs work. Limnet and Dallas Downs do not operate that business. 6 The applicants' solicitor says that the effect of the introduction of the call centre, of which complaint is made in the further amended statement of claim, was to increase the applicants' costs but, the represented increase in sales revenue from the use of the call centre did not occur. The result was that the business of each of the applicants was "less profitable than it had been in the past, if not marginal". It is not said explicitly that the introduction of the call centre brought about any impecuniosity of the applicants. 7 The applicants claim that their current financial position or their position prior to the sale of any franchise has been caused by the actions of the respondents, in that the introduction of the call centres has caused them to suffer loss which is the result of reliance on the representations made by the respondents during the course of the introduction and implementation of the call centre. 8 The applicants have incurred professional costs in relation to the proceeding to date of $65,000 and there is a further sum of unbilled professional costs of approximately $15,000 which will be billed shortly. The applicants have paid $21,535.93 in disbursements to date and a further $2,680 is to be billed. Thus, the total actual expenditure made and incurred in respect of the proceeding to date is $104,215.93. The solicitor for the applicants estimates that the costs of disbursements incurred on behalf of the applicants in respect of the further preparation and conduct of the trial will be of the order of $113,500. 9 The applicants' solicitor says that the effect of any order for the provision of security for the costs of the respondents will be to remove the ability of each applicant to provide sufficient resources to fund the proceeding. Limnet and Dallas Downs are no longer operating due to the sale of their franchises and they do not have any funds to pay any security. 10 It was not in issue between the parties that the applicants would not be able to pay the costs of the respondents if the applicants failed in the proceeding and an order for costs in favour of the respondents was made against them. Indeed, counsel for the applicants submitted that that had always been the position since the application was commenced on 18 May 1998 and that that fact was known to the respondents as they were aware of the financial position of the applicants through the franchise arrangements between them. Thus, the threshold question as to whether there is credible testimony that there is reason to believe that the applicants will be unable to pay the respondents' costs is answered in the affirmative. 11 Although the motions are based on s 56 of the Federal Court of Australia Act, O 28 r3 of the Federal Court Rules and s 1335 of the Corporations Law, the issue of whether security for costs should be ordered falls to be determined by reference to the principles which are applicable to s 1335 of the Corporations Law which provides: "Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given." Although the threshold may be overcome the discretion thereupon committed to the Court is at large. In Sir Lindsay Parkinson and Co v Triplan Limited [1973] QB 609 Lawton LJ said at 629, when commenting on an early English equivalent of s 1335, that the Court's discretion: "… ought not to be hampered by any special rules or regulations, nor ought it to be put into a straightjacket by considerations of burden of proof. It is a discretion which the court will exercise having regard to all the circumstances of the case." (See also Barton v Minister for Foreign Affairs (1984) 2 FCR 463.) 12 The relevant principles were recently discussed and analysed in considerable detail by Phillips JA, with whom Ormiston and Charles JJA agreed, in the Victorian Court of Appeal in Ariss v Express Interiors Pty Limited (In Liq) [1996] 2 VR 507. There are a number of discretionary considerations that have been referred to in the cases: see, eg, Gentry Brothers Pty Limited v Wilson Brown and Associates Pty Limited (1992) 8 ACSR 405. An authority often referred to is Equity Access Ltd v Westpac Banking Corporation (1989) 11 ATPR 40‑972 in which Hill J listed six matters as being appropriate for consideration in determining whether to exercise the discretion to order security for costs. Those six matters were not exhaustive and his Honour's sixth matter was "whether there are any particular discretionary matters peculiar to the circumstances of the case" (at 50,635). 13 The applicants submitted that I should not exercise the discretion committed to me to order security for costs for the following reasons: (a) the respondents had delayed in putting the applicants on notice that they require the provision of security for costs and in making such application; (b) the delay in making application for security for costs was a deliberate and calculated tactical decision; (c) any order for the provision of security for costs would bring the litigation to an end; (d) the financial position in which the applicants found themselves was a direct consequence of the conduct of the respondents which is the subject‑matter of the proceeding. 14 The respondents submitted: (a) Having regard to the events which had occurred since the commencement of the proceeding, there had not been delay in making the application for security for costs and, in any event, any such delay was not per se a disentitling factor but was to be taken into account and balanced with other relevant factors; (b) any delay in making the application for security for costs was not a tactical decision; (c) the evidence did not support the proposition that the financial position of the applicants was a direct consequence of the conduct complained of in the proceeding; (d) the persons who were the directors of, and lying behind, the applicant companies had not given any evidence of their financial position and the applicants' counsel had submitted that he was instructed that those persons had no proposals to put any funds into the applicants for the purpose of funding the proceeding or any order for security of costs.