Morris v Hanley

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1 HIS HONOUR: This is a motion for security for costs. 2 The proceedings were commenced in late 1997 basically for breach of fiduciary duty. The current edition of the statement of claim is the fourth further amended statement of claim, which was filed on 13 July 2000. 3 It seems to me (and doubtless in this over simplification I will discount the significance of some of the facts and omit others) the claim is as follows:

(a) the first ten defendants were employed by a company in financial trouble;

(b) the New South Wales Government agreed to assist with funds on the basis that the 11th defendant company would be operated as a workers' co-operative;

(c) Articles of Association were adopted in 1988 which included an article that only members of the company would be employees and at least proceeded on the understanding that all employees would be members;

(d) the Government supplied some moneys for the company and had a representative on the board and was issued with a large number of B class shares;

(e) the intention was that the Government shares would be allocated to the employees without discrimination;

(f) the plaintiff alleges that although she was an employee from 1988 she was never informed about the scheme;

(g) the plaintiff says that during the period she was not informed about the scheme, the first ten defendants, who are employees who had each invested some $10,000 to keep the company alive, made profit from it;

(h) the scheme failed, the Government was repaid its money and the shares in due course redeemed. The plaintiff became a shareholder in the company by some other means in 1994;

(i) the plaintiff alleges that the affairs of the company were conducted by the first ten defendants as foundation members or directors of the company for their own benefit and she seeks an account of profits; and

(j) there are also in the fourth further amended statement of claim some other "odd" claims for compensation for relief from distress, anxiety and inconvenience. 4 The matter came before Hamilton J as vacation judge in January 1998 when interlocutory relief was sought. In a reasoned judgment given on 8 January 1998, his Honour reviewed the key authorities on fiduciary duty such as Phipps v Boardman [1967] 2 AC 46, 127; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 and Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533, 553 and concluded at pp 9-10 of the judgment: "The plaintiff does have a fairly arguable case, that a fiduciary relationship did arise despite the novelty of that proposition in such a situation."

His Honour, however, refused interlocutory relief on the balance of convenience. 5 I just do not know what opportunity his Honour had to consider the matter or what assistance he was given on the authorities. From the transcript it does not appear that he was given that much assistance by counsel due to lack of time because, at p 16 of the transcript it is recorded: "At 3.57 his Honour stated that the injunction would be expiring in three minutes". 6 In any event, his Honour's decision was merely that there was an arguable case for the purpose of considering whether an interlocutory injunction should be granted. His Honour was not assessing the strength of that case. 7 The matter was set down for a two week hearing earlier this year but the hearing was aborted. One of the reasons for aborting the hearing was that the plaintiff wished to amend her statement of claim yet again, but it would seem there may have been other reasons as well. 8 The defendants say that this is a proper case for security for costs either under the Supreme Court Rules, particularly Pt 53 rule 2(a), or under the Court's inherent power. I am indebted to both counsel for their thorough preparation and presentation of the respective cases and although this is, as Mr Stack for the defendants/applicants conceded, a hard road for an applicant to ride, I have been able to give a reasoned oral judgment shortly after the conclusion of the argument. 9 The reason for invoking Pt 53 rule 2(a) is that the defendants live in Casino, New South Wales. That is where the drama took place. However the plaintiff has now moved over the border to Queensland and resides in Southport. This is no reason for granting security for costs. In Australian Building Construction Employees v Commonwealth Trading Bank [1976] 2 NSWLR 371, it was held that to confuse the rule as applying to people resident outside the State in another Australian State would be unconstitutional under section 117 of the Australian Constitution and, accordingly, the rule only applies outside Australia or query to a person who lives in a Territory. In the instant case it could not apply to the plaintiff who lives in Queensland. 10 Accordingly, the real thrust of the motion is under the Court's inherent power. 11 I believe it is important to say a few words about the nature of that inherent power. The authorities suggest to my mind that it comes about from the same roots as the inherent power to summarily dismiss actions as frivolous and vexatious. Lord Blackburn said in Metropolitan Bank Ltd v Pooley (1885) 10 App Cas 210, 220 to 221: "… from early times the Court had inherently in its power the right to see that its process was not abused by a proceedings without reasonable grounds so as to be vexatious and harassing - the Court had the right to protect itself against such an abuse … and by summary order to stay the action which was brought under such circumstances as to be an abuse of the process of the Court … ". 12 There are early indications that this rule was applied in cases which today we would call applications for security for costs but in the 19th century were entitled "de-pauperisation". An example is Wagner v Mears (1829) 3 Sim 127; 57 ER 947, 948. In that case it appeared to Vice-Chancellor Shadwell that a pauper had taken proceedings in concert with her solicitor for the purpose of harassing the defendants and putting them to expense, and he ordered that the order giving the plaintiff leave to sue informally as a pauper should be discharged. 13 One gets the same view from the English Court of Appeal in Logan v Bank of Scotland (No 2) [1906] 1 KB 141 where again the test was whether there was a vexatious action in all the circumstances that were alleged in the pleadings and put before the Court. The Court said that whilst care should be taken before exercising the power, Lord Bowen in McHenry v Lewis (1883) 22 Ch D 397, 408 was correct when he said: "… the general principle (is) that the Court can and will interfere whenever there is vexation and oppression to prevent the administration of justice being perverted for an unjust end". 14 It seems to me that when the Court is considering the inherent jurisdiction it must bear those principles in mind. 15 In argument, stress was laid on what is sometimes referred to as a general rule emanating from what Bowen LJ said in Powell v Taylor (1885) 31 Ch D 34, 38 that "the general rule is that poverty is no bar to a litigant". (I will refer to this as "the sub-rule"). Although it is accepted that that utterance has become considered to be a general rule because the case involved a plaintiff suing as trustee in bankruptcy, certain decisions, in particular the decision of Sheppard J when a judge of the Federal Court in Orr v Lusute Pty Ltd (1987) 72 ALR 617, suggested it is still a fundamental rule. 16 Mr Stack invited the Court to replace the former general or fundamental rule with a rule which provides that a defendant is entitled to obtain an order for security where a plaintiff is impecunious unless the plaintiff can demonstrate that he or she has suffered actual loss and damage and has a reasonably strong cause of action. 17 I do not believe I should do this for a fundamental reason and a practical reason. 18 The fundamental reason is that the so-called "poverty rule" is really just one of the factors that a Court looks at to consider the basic question of whether it would be vexatious to allow the proceedings to continue without security. It is seldom correct to limit the Court's jurisdiction and discretion under such a general proposition by honing down too finely a sub-rule or guideline. 19 The practical reason is that the suggested restatement is probably too restricted because it is directed too much to the circumstances of this particular case. The situations that cause the Court particular concern are cases where there is a litigant in person who is alleged by the defendant to have an obsession against the defendant and who brings very expensive proceedings against the defendant with little intervention by lawyers. One such case was Rajski v Computer Manufacture and Design Pty Ltd [1982] 2 NSWLR 443 and on appeal [1983] 2 NSWLR 122. The replacement rule suggested by Mr Stack would not to my mind adequately deal with that sort of situation, which is the more worrying situation than is the present one to the Court. 20 I should record that Mr Stack did submit that litigation in the year 2000 is a far more complex matter than it was in 1885, and that there may well be reasons why what was true in 1885 is not true in 2000. However, the judgment of Sheppard J to which I referred was from 1987, which is not that long ago. In any event, it is far better to concentrate on the general proposition rather than the sub-rule. 21 It is quite clear that when one is considering the general matter of vexatious conduct warranting security for costs under the inherent power, one of the matters that the Court takes into account is the question of the non-availability of funds on the part of the plaintiff. There are, of course, other matters that bear on this, such as whether the want of assets experienced by the plaintiff was caused by the default of the defendant, but that is not a matter which is at all relevant in the instant case. However the relevance of such a factor is clear from the leading cases where the usual guidelines have been laid down, namely, Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52 and M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97. See also Chang v Comcare Australia [1999] FCA 1677 at para 25 where Moore J said: "While impecuniosity is not, by itself, sufficient to warrant an order for security, it is generally a relevant consideration". 22 It is also quite clear that in the proper case an order for security for costs may be made against the person even if this person is legally aided (see Rajski's case supra at page 452 and Fletcher v Commissioner For Taxation (1992) 37 FCR 288, 291). 23 The leading cases show that the factors a Court must take into account when considering the general question as to whether the inherent power should be exercised to order security for costs include:

(a) whether the plaintiff's claim is bona fide and not a sham;

(b) whether the plaintiff has a reasonably good prospect of obtaining the orders he or she seeks;

(c) whether an order for security would bring the proceedings to an end;

(d) whether the plaintiff has a want of assets and how this was brought about;

(e) whether there is anyone standing behind the plaintiff who might benefit from the action but who is unwilling to contribute to the risk involved in the action; and

(f) the question of delay. 24 This list is a non-exhaustive list of guidelines and one must not lose sight of the basic question as to whether the action is harassing and vexatious. For a more exhaustive list see Colbran on Security for Costs (Longman Professional Melbourne, 1992) Ch 14. 25 So far as the first matter is concerned, whether the action is bona fide, there is some material which suggests that the present action is one which is on foot for the purpose of harassing the defendants. There is evidence that the plaintiff's husband, Mr John Morris, had said that he would pursue this case forever because he had solicitors and barristers working for him on a concession basis and he had nothing to lose and everything to gain. Mr Morris is supposed to have said that the litigation doesn't bother him at all because it would not cost him anything. The second defendant says that he replied to this: "We would all be broke and living in tents" but Mr Morris said that that was the result of preventing the plaintiff from being a shareholder, and that he would not be happy until he had won and the defendants were broke. An offer of settlement of a five figure sum to "go away" was made, which was dismissed as derisory. There is other material along the same lines. None of this is contradicted. 26 It will be remembered that cases such as Wagner's case get very close to that situation, that is, where there may be a claim which is valid in law but a reason for bringing the claim is to harass the defendant. 27 Next, is the plaintiff really just a nominee for her husband? The answer to that question must be "No", for the reason that was given by Sheppard J in Orr's case. In that case, his Honour said that as the plaintiff had the claim at law because he was the actual party to the contract, he was not a nominal party even though the facts appeared to show that he was being used as a matter of convenience by somebody else who had the real axe to grind. In the instant case, if there is any fiduciary duty owed it is owed to the plaintiff and not to her husband, so she cannot be considered to be a nominal plaintiff. On the other hand, the fact that her husband is obviously very interested in this action is something that one bears in mind. 28 It is clear that the plaintiff is insolvent and it also appears clear that unless an underwriter comes in on behalf of the plaintiff, the probabilities are that the action will cease if any substantial order for security for costs is made. It is clear that the plaintiff's counsel and solicitors are acting on a speculative basis. 29 The fact that the action will probably be stultified if any substantial order for security for costs is made is to my mind an extremely important factor against making an order for security for costs. 30 One then has to consider the strength of the case. Obviously I cannot try the case because it is one which is likely to take two to three weeks on counsels' estimation. I have already referred to Hamilton J's interlocutory decision in 1998, which at least shows that the case is arguable. However, there is no doubt at all, whichever way one looks at it, that there are very great difficulties in the way of the plaintiff's success. 31 First, there is the problem that it is a case of first impression. This is not fatal but, as even Mr J Clarke, who appeared for the plaintiff conceded, it is a matter of difficulty to convince a Court that a fiduciary duty exists in the current set of circumstances. 32 Secondly, it is basic to a claim for breach of fiduciary duty that the defendants should have undertaken to the plaintiff to act in the plaintiff's interests. What appears to be the situation is that the defendants agreed with the Government that they would make available to the plaintiff and others the opportunity to become involved in the company. There was no direct undertaking to the plaintiff. It may be that the defendants did not comply with their undertaking to the Government but that does not assist the plaintiff in showing there was an undertaking to act on her behalf. 33 Thirdly the plaintiff contends that the ten controlling shareholders and directors had a duty in equity to inform the plaintiff of her rights. Sometimes trustees may have that duty (see the cases referred to in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 411 and following and in my judgment at first instance in that case, Rydge v Hartigan Nominees Pty Ltd 10 October 1990, unreported). It is treading new ground to allege that people who are personally interested in a company and who have each risked $10,000 of their own money in order to save the company that was employing them have a duty to inform another employee that she has the right to join and that that right may lead to profit but it may very well not. 34 Fourthly, Mr Stack submitted on more than one occasion that this is really a case of a plaintiff seeking to enforce a gift. He says the facts are that the plaintiff was an employee of the eleventh defendant, she was paid the award wage for her work. As a result of the investment by the defendants, their own risk of capital and the organising of the defendants as directors, a profit was made and the plaintiff, who invested absolutely nothing and took no risk, is now saying that she should have a share of that profit. That is not the sort of case that equity, in Mr Stack's submission, should countenance. 35 There is certainly a maxim that equity does not assist a volunteer. However, it is always unsafe to decide cases by maxims or slogans. When one looks behind the maxim one can see that the real truth is that equity rarely helps a volunteer. There are at least seven situations where equity assists volunteers, viz:

A fully completed trust or a resulting trust can be enforced by a volunteer: Ackroyd v Smithson (1780) 1 Bro CC 503; 28 ER 1262; Corin v Patton (1990) 169 CLR 540, 557.

A donatio mortis causa may be enforced by a volunteer: Duffield v Elwes (1827) 1 Bli (NS) 497, 530; 4 ER 959, 971.

A volunteer who, in the expectation engendered by the purported donor, spends money on property is assisted in equity: see Dillwyn v Llewelyn (1862) 4 De G F & J 517; 45 ER 1285.

The principle does not apply where the contest is not between the donor and the volunteer, but between two volunteers or the volunteer and a third party: Holt v Bishop of Winchester (1694) 3 Lev 47; 83 ER 570.

The rule in Strong v Bird (1874) LR 18 Eq 315 is another exception to the general proposition.

Equity will relieve against accident where a volunteer has a power which he wishes to exercise and does as much as he can to exercise but is thwarted by circumstances from exercising it in due form: see Montague v Bath (1693) 3 Chancery Cases 55, 68; 22 ER 963, 971, where the Court said that if a person has a power which can only be exercised in front of four Privy Councillors and the principals sent him to Jamaica where there are no Privy Councillors, equity will allow the person to exercise the power informally even though he is a volunteer.

More importantly for the present case, equity may assist a volunteer when to decline to do so would be against the conscience of the defendant, who would be taking advantage of his own wrong; see Gilbert's Lex Pretoria at page 306 which is relied on by Fonblanque in his Treatise of Equity , Volume 1, page 349 where he says: "So where the remainder man gets the deed into his possession and will not allow the tenant for life to have a sight of it, it is as though he does not pursue the terms of the power, yet equity will relieve because the remainder man will not take advantage of his own wrong by withholding power". 36 This does seem to provide some juristic basis for the proposition that the non-provision of information by a person which leads to that person making a profit may be actionable as a breach of fiduciary duty to an appropriate person. However, apart from Fonblanque and his reliance on Gilbert's Lex Pretoria, there is no other authority I know of for that proposition. 37 Pulling those threads together, it must be the situation that the plaintiff's action could succeed but there are tremendous difficulties in the way of it succeeding. 38 Accordingly, it is not an action "which may probably succeed" as that expression is used in security for costs applications. 39 Other circumstances to take into account are the large costs to the defendants that are involved. The defendants are not a multi-national corporation. They are, it would seem, working people in the Casino area, though the plaintiff strongly suggests they made a million dollars profit or $100,000 profit each out of the venture. Even so, the evidence before the Court is that costs have already been incurred of over $128,000, and, if the case goes two to three weeks as it has been estimated to go, a further $150,000 in costs will be incurred. If the defendants succeed, they will recover none of this unless there is security for costs. 40 In all these circumstances, should I permit this action, in the exercise of my discretion to continue without security for costs? The chances of success are not overwhelming. The action, which is partly brought to harass the defendants, is an extremely expensive one and may well bankrupt the defendants even if they win. 41 It is a difficult decision to make but it is a decision that has to be made. 42 In my view, the various factors in favour of granting security for costs far outweigh the factors against making the order. The factors against making the order mainly are poverty and the taking away from the plaintiff the right to have an action tried which might succeed. They are weighty factors. However, to my mind they are not as weighty as the other factors which I have reviewed in favour of the defendants. 43 It probably does not matter what order for security for costs is made. However, I would in the first instance order security in the sum of $115,000, which appears to be the costs of the first week of the hearing on the estimate that was given, with liberty to the defendants to apply no later than seven days before the hearing is fixed to increase that amount when the actual length of the case can more accurately be stated. The plaintiff should have 21 days to provide such security, which may be by cash, cheque or bank bond, and the proceedings are to be stayed until the security is given. The plaintiff should pay the defendants' costs of this motion. 44 Accordingly, the orders are:

1. The plaintiff provide the sum of $115,000 as security for costs of the defendants.

2. Liberty to the defendants to move the Court to increase such security no later than seven days before the date fixed for the final hearing of the proceedings.

3. Order that the proceedings be stayed until such security is given.

4. Order the plaintiff to pay the defendants' costs of this motion. 45 I must again express my thanks to both counsel for the helpful way in which the argument has been so thoroughly presented. If the plaintiff wishes to have a stay of these orders for 21 days then I will listen to such application but, from what I have been told so far, that would probably be a waste of time.

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