MODERN HOLDINGS PTY LTD -v- RECO WHITFORD PTY LTD [2021] WASC 345 (8 October 2021)

3 It was the defendant's position that the evidence show that the plaintiff was effectively impecunious and would not be able to meet any adverse costs order. The affidavit of Ms Jeanes details the efforts of the defendant's solicitors to ascertain the financial position of the plaintiff. Enquiries of the plaintiffs' solicitors produced no information. The property searches indicated the plaintiff owned no real estate. On all the available evidence, the defendants said it was clear the plaintiff had no funds to meet any costs order.

4 Counsel for the plaintiff did not concede the jurisdiction point. He submitted the evidence indicated the plaintiff had been able to fund the litigation to date - at least in so far as paying its solicitors were concerned. In making this submission, counsel relied on an affidavit of Ala'Audden Ahmad Mohammad Al-Khatib sworn 15 September 2021. Mr Al‑Khatib is a director of the plaintiff. While the affidavit does confirm that Mr Al‑Khatib and a fellow director are providing funds to allow the plaintiff's action to continue, he does not say the plaintiff itself, independent of its directors, could fund the proceedings, let alone meet an adverse costs order. In fact, Mr Al‑Khatib suggests the plaintiff has no assets in its own right and is dependent upon the continued support of the directors. There is certainly nothing in the evidence which suggests the plaintiff could, in its own right, meet an adverse costs order.

5 During the course of his submissions, counsel for the plaintiff suggested the plaintiff may benefit from other proceedings, which are on foot in this court and in the District Court. No details of these actions were provided. There is nothing in the evidence to suggest how far the actions have progressed and what the likely outcome may be. In all the circumstances, the totality of the evidence makes it clear the jurisdictional question is satisfied. The credible testimony has satisfied me; there is reason to believe the corporation will be unable to pay the costs of the defendant, if the defendant is successful.

6 The question then is whether or not, in the exercise of discretion, I ought order security to be provided.

7 The cases show there are a number of matters to be taken into account in reaching this decision. A party's inability to satisfy a costs order, should the matter fail, is generally a significant factor in an order for security of costs. If the applicant has caused the parties impecuniosity that may be a relevant countervailing factor. However, impecuniosity itself is not generally the sole ground for making an order for security. Even where a party is impecunious, if in all the circumstances the interest of justice weigh against the making of an order, then the order will not be made. In this case, it was the plaintiff's primary position it had a sound case against the defendant and the strength of the case justified an order being refused. The defendant, not surprisingly, took issue with that claim. The plaintiff also submitted the application was oppressive and would stultify the proceedings. In his written submissions, counsel for the plaintiff also pointed to a delay in the making of the application and offered this as a basis for an order being refused.

8 It is convenient to deal with this last point first. At the hearing, it was not actively pressed. If it had been pressed, I would not have declined to make an order on this basis. The pleadings have closed and a mediation has taken place. As counsel for the defendants noted, this was an early mediation and represented a bona fide attempt by the parties to settle the action. In a case such as this, it was reasonable for the defendant to delay making the application until after the defence had been lodged. There has been no request for particulars and discovery has not been given. It could not be said the action has progressed so far as to make this application unfair.

9 In his affidavit, Mr Al‑Khatib says that the making of an order for security will 'impede and stultify' the progress of the actions (see par 21). Apart from being inadmissible, neither that paragraph nor any of the other parts of the affidavit offer any evidence as to why an order for security for costs will stultify the proceedings. Presumably, it is because it will impose financial hardship on the directors and if they cannot meet the order for security the action will not progress. It is difficult to maintain that argument while at the same time arguing the plaintiff is not impecunious and the jurisdiction of the court is not enlivened. Be that as it may, I am not satisfied it would be a proper exercise of discretion to refuse an order for security based on the prospect that it would stultify the action. For the plaintiff to succeed in that argument, they would have needed to provide detailed financial information, not only with respect to the plaintiff, but with respect to the directors of the plaintiff, the shareholders of the plaintiff and any other person who might benefit from or be able to assist with the litigation. No attempt was made to provide that evidence and I see no basis for an exercise of discretion adverse to the defendant.

10 That leads to the question of the merits of the action. Ordinarily, it is inappropriate in an interlocutory proceeding to delve to deeply into the merits of the action. That is a matter for trial. However, in this case, the submissions of the plaintiff were built around the alleged strength of the claim and some consideration must be given to this issue.

11 Paragraphs 2 through to 6 of the statement of claim plead the material facts relevant to this issue. These paragraphs read as follows:

2 The Defendants are and were at all material times.

(a) the owners of retail shop premises situated at and known as Shop 323 (Premises) in the food court (Food Court) area of the Westfield Whitfords City Shopping Centre (Shopping Centre);

(b) engaged in trade or commerce within the meaning of sections 4,18 and 20 of the Competition and Consumer Act 2010 - Schedule, Australian Consumer Law (ACL); and

(c) represented by its senior leasing executive Mr Craig Bates.

3 (a) In or about June 2017 the Plaintiff signed an initial lease agreement (Initial Lease) in respect of the Premises for a term of seven (7) years (commencing on 15 September 2017 or from the date of commencement of trade by the Plaintiff) as a takeaway Mexican style food service operator in the Food Court trading as Mochachos (Business).

(b) A formal lease (Lease) in respect of the Premises was later signed by the Plaintiff in November 2017.

4 The Plaintiff signed both the Initial Lease and the Lease acting on the faith and truth of in reliance upon and induced by:

(a) drawings of floor plans of the Food Court attached to the Initial Lease shown to the Plaintiff's Directors that depicted as part of the common area in the Food Court:

(i) an elevator or lift (elevator) situated within the Food Court that provided Food Court customers with direct access to and from the lower ground level car park area, to both the Food Court and to the cinemas situated on the next (or upper) floor level; and

(ii) escalator (escalator) within the Food Court also providing Food Court customers with direct access to the cinemas on the next level upstairs,

(b) terms proposed in the Initial Lease and Lease allowing for extended or evening trading hours to capitalise on the customer traffic to and from the cinemas;

(c) customer traffic flow information for the Food Court, including representations in clause 3 of the Disclosure Statement confirming the available number of car parking spaces; and

(d) The Defendants' acknowledgements in Part 12 (clause 34) of the Disclosure Statement that:

(i) no information likely to have an impact on the Plaintiffs Business had been knowingly withheld by the Defendants; and

(ii) remedies were available to the Plaintiff if any of the information in the Disclosure Statements was misleading, false or materially incomplete.

5 At or about the time the Initial Lease was signed alternatively by the time the Lease was signed, unbeknownst to the Plaintiff's Directors, the Defendants had already carried out or were planning on carrying out alteration works to the Food Court common areas that involved:

(a) the removal of the elevator and lift that had provided direct customer access to and from the basement ground level parking lot area to both the Food Court and to the cinema;

(b) the relocation of car wash facilities in the basement ground level parking area that had previously served as parking area for Food Court customers; and

(c) the removal of the escalators situated within the Food Court which had provided direct customer access to the cinemas via the Food Court,

(Alteration Works).

6 The effect of the Alteration Works would be to result in a significant reduction in foot traffic and customers frequenting the Food Court and a lower than expected level in sales for the Plaintiff's Business.

12 These paragraphs are dealt with by the defendant in par 3 through to par 12 of the defence. These paragraphs read as follows:

3 The Defendants deny paragraph 3(a) of the Statement of Claim and deny that there was at any time any "Initial Lease" and state that:

(a) a letter of offer to lease was issued to the Alexander Anthony Karafilakis, being a director of Mochachos Pty Ltd (ACN 130 513 889), the franchisor to and agent of the Plaintiff, and the person with whom the Defendants conducted negotiations in respect of the Lease (Franchisor) on 29 May 2017;

(b) a disclosure statement in respect of a lease of the Premises to the Plaintiff for the purpose of carrying on the Business (Disclosure Statement) was issued to the Franchisor on 13 June 2017 and executed by the Plaintiff on 23 June 2017;

(c) the Disclosure Statement provided that the commencement date of the lease referred to in the Disclosure Statement was to be the earlier of 17 October 2017 or the first day of trading by the Plaintiff.

4 The Defendants admit paragraph 3(b) of the Statement of Claim and state that the Lease was executed by the Plaintiff on 7 August 2017 and that the Lease is dated 14 November 2017 (being the date of execution by the Defendants).

5 The Defendants deny paragraph 4(a) of the Statement of Claim and say that:

(a) plans attached to the Disclosure Statement did not show the elevator or the escalator (and elevator and escalator shall have the same meaning in this Defence as in paragraph 4(a) of the Statement of Claim);

(b) the elevator and the escalator were decommissioned in August 2016;

(c) plans of the Premises were issued to the Franchisor in December 2016 and January 2017, and reflected that part of the newly reconfigured Premises occupied that part of the Centre in which the elevator and escalator were previously located;

(d) hoarding was erected in or about May 2016 which covered the entire area of the Premises which included the removed elevator's space and remained in place until the Plaintiff commenced trading from the Premises;

(e) the Franchisor raised no objection to the removal of the elevator during discussions regarding the Disclosure Statement or Lease and no subsequent objection was raised at any time by the Plaintiff;

(f) the Defendants did not rely on plans depicting an elevator and an escalator when by the time the Plaintiff executed the Lease the elevator and escalator were decommissioned and removed and the plans attached to the Disclosure Statement and the Lease did not show that the Food Court would be served by the elevator or escalator;

(g) plans of the new restaurant and entertainment precinct (RE Precinct) were issued by the Defendants to the Franchisor in or about August 2016 and showed the entire RE Precinct including the entrance and foyer area of the new cinemas and access from the car park below and did not show the elevator or the escalator; and

(h) the Defendants provided the Franchisor with a final brand plan of the RE Precinct in or about June 2017 reflecting every tenancy and associated restaurant operator or entertainment usage.

6 The Defendants do not admit paragraph 4(b) of the Statement of Claim except to state that clause 21 of the Disclosure Statement has been amended by hand to provide that "the Lessee may trade as per the trading hours of the cinema at no additional cost to the Lessee" and that pursuant to clause 13.11(b) of the Lease the Plaintiff would only be charged additional Operating Expenses for trading outside the trading hours for the cinema.

7 The Defendants deny paragraph 4(c) of the Statement of Claim and deny making any representation as to customer traffic flow and state that clause 3 of the Disclosure Statement provided accurate information regarding the available car parking spaces at the Centre at that time.

8 The Defendants do not admit paragraph 4(d)(i) except to state that clause 34 of the Disclosure Statement provides "By signing this disclosure statement, the landlord confirms and acknowledges that the lessor has not knowingly withheld information which is likely to have an impact on the tenant's proposed business" and that the Disclosure Statement was signed by the Defendants agent for and on behalf of the Defendants.

9 The Defendants do not admit paragraph 4(d)(ii) except to state that clause 34 of the Disclosure Statement provides "The tenant may have remedies including termination of lease if the information in this statement is misleading, false or materially incomplete".

10 The Defendants deny paragraph 5(a) of the Statement of Claim and repeat the statements made in paragraph 5 of this Defence and state that at all material times the Plaintiff was aware or should have been aware through enquiries made with their agent the Franchisor that the elevator had been removed.

11 The Defendants deny paragraph 5(b) of the Statement of Claim.

12 The Defendants deny paragraph 5(c) of the Statement of Claim and repeat the statements made in paragraph 5 of this Defence and state that at all material times the Plaintiff was aware or should have been aware through enquiries made with their agent the Franchisor that the escalator had been removed.

13 It is clear the paragraphs of the statement of claim and defence raise issues of fact which cannot be resolved on an interlocutory application. It was the plaintiff's position the 'disclosure statement' was misleading. This led to the plaintiff entering into the lease and therefore, the defendant had engaged in misleading and deceptive conduct under the Australian Consumer Law. With respect, the position is not that simple. The defence clearly articulates the answer to the plaintiff's claim. In fact, counsel for the defendant went so far as to describe the claim as 'weak'. I would not accept that characterisation. As matters stand at the moment, with no material other than the pleadings to work with, all I can conclude is that the plaintiff's position is arguable. It cannot be regarded as so strong in and of itself to justify refusing an order for security for costs. I would accept when weighing the issues, in the balance, it is a factor in favour of a refusal of security.

14 In any application for security, it is open to the directors of the company to undertake to pay any costs awarded in favour of the defendant and against the corporate plaintiff. In his affidavit, Mr Al‑Khatib indicates he and his fellow director would be prepared to 'underwrite' the defendant's costs of the action. No form of guarantee is provided. During the course of his submissions, counsel for the defendant suggested the matter ought be adjourned while the parties explored this option further. Counsel for the defendant did not find that option attractive - he wanted to have the matter dealt with on the evidence. I determined the matter ought not be adjourned.

15 The circumstances where an order will be made allowing persons standing behind a plaintiff and who are likely to benefit from proceedings to provide security was considered by Allanson J in Sunlea Enterprises Pty Ltd (as trustee for the Drummond Cove Unit Trust) v Pollock [2014] WASC 91. His Honour said:

[84] Where, however, those who stand behind the company and would gain from the litigation are financially able to provide adequate security, it is at least a weighty consideration in favour of an order for security: Yandil Holdings Pty Ltd v Insurance Co of North America, 545; Sent v Jet Corporation (1984) 2 FCR 201; [1984] FCA 178, 215. A court is not justified in declining to make an order on the basis that the proceedings will be stultified unless the impecunious plaintiff establishes that those who stand behind it are also unable to provide the requisite security for costs: Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; [1984] FCA 34, 3; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 [66]; Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120, 123.

[85] The effect of the authorities is that a company seeking to resist an order for security on the ground that it will frustrate the litigation must exercise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts: Bell Wholesale Co Pty Ltd v Gates Export Corporation (4). It is incumbent upon a plaintiff who wishes to resist an application for security to put before the court a full and frank statement of the assets and liabilities of the plaintiff, and also of its shareholders and creditors (if relevant), and, if there are trust assets, of the beneficiaries of the trust: Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1, 3;Tirops Safety Technology Pty Ltd v Lazer Safe Pty Ltd [2005] WASC 164 [47]. Without that evidence, no conclusion can properly be reached that the effect of an order for security will be to frustrate the plaintiff's claim. In this sense there is an evidential onus on a plaintiff resisting an order for security: see BPM Pty Ltd v HPM Pty Ltd (862); Bell Wholesale Co Pty Ltd v Gates Export Corporation.

16 The affidavit material provided by the plaintiff did not come close to satisfying the requirements set out by his Honour. There is simply a bald statement that security can be provided. That is inadequate.

17 In my view, the defendant has made out it's application for security for costs. However, I would not order the full amount of the security be provided at present. Security in an amount of $50,000 ought be provided pending entry of the matter for trial. The defendant will have the right to apply for a top-up of the security. The action will be stayed pending the plaintiff providing the security. In the absence of agreement between the parties, security ought be provided by way of a payment into court or a bank guarantee. However, the order granting liberty to apply should be understood to extend to the form in which security is to be provided.

(1) The plaintiff has within 28 days to provide security for costs in the amount of $50,000.

(2) The action is stayed pending the provision of security.

(3) Security should be provided by way of payment into court or a bank guarantee or such other form as agreed between the parties.

(4) There is liberty to apply generally, and in particular, in relation to any top-up security and as to the form of security.

19 In matters such as this, I generally order that costs of the application be costs in the cause. Any party seeking an alternative costs order should file written submissions within 7 days of the publication of these reasons.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.