O & D Pty Limited v Pangalas and Pangalas [2013] ACTSC 250

Supreme Court of the ACT|2013-12-13|Before: Nield AJ

1. The interim injunction granted by Master Harper on 15 August 2008 is dissolved.

2. The plaintiff is to give security in the amount of $20,000.00 for the defendants' costs of the proceedings;

3. The security must be given in cash or by bank guarantee, unlimited as to time, as approved by the Court's Registrar;

5. The proceedings are stayed for 56 days from the date hereof as far as concerns any steps to be taken by the plaintiff, other than the giving of security, or the defendant;

6. In the event that the plaintiff fails to give the required security for the defendants' costs of the proceedings within the period of 56 days from the date hereof, the plaintiff's claim is deemed to have been dismissed, in which event the plaintiff is to pay the defendants' costs of the proceedings.

The plaintiff is to pay the defendants' costs of the application for security for costs.

1. The plaintiff is O & D Pty Limited, of which Mrs Dragana Petreski and her husband, Mr Orce Petreski, are the only shareholders and directors.

2. The defendants are Mr Dion Pangalas (the first defendant) and his wife, Mrs Selene Pangalas (the second defendant).

3. By agreement for sale of business made on 5 August 2005 the defendants, as vendors, sold their goodwill and property in a pamphlet distribution business being conducted by them to the plaintiff, as purchaser, for the total price of $400,000.00 ($370,000.00 for the goodwill and $30,000.00 for the property).

1.2. Covenant in Restraint

This clause has effect as if it were separate clauses each one and being severable from the others:

1.2.1 Each such separate clause consists of the covenant set out in clauses 1.2.1.1 to 1.2.1.5 inclusive combined with each separate period referred to in clause 1.2.2 and if any of the separate clauses are invalid or unenforceable for any reason such invalidity or unenforceability will not affect the validity or enforceability of any other separate clause. The Vendors must not whether individually or as a principal agent, partner, joint venturer, manager, agent, appointor, assistant, clerk, director, majority shareholder or person with the capacity to exercise substantial control of the corporation, without the previous consent in writing of the purchaser, be concerned in or interested in or employ, manage or operate or participate in the management or operation or marketing of any services in competition or relation to the delivery of pamphlets within the following areas:

1.2.1.1. Australian Capital Territory;

1.2.1.2. Yass Valley City Council Local Government area;

1.2.1.3. Greater Queanbeyan City Council Local Government area;

1.2.1.4. Goulburn Mulwaree Council Local Government area;

1.2.1.5. Cooma Monaro Council Local Government area;

during the period specified in this clause.

1.2.2. The periods specified are:

1.2.2.1. Five (5) years from the date of this agreement;

1.2.2.2. Four (4) years from the date of this agreement;

1.2.2.3 Three (3) years from the date of this agreement;

1.2.2.4 Two (2) years from the date of this agreement.

1.2.2.5 One (1) year from the date of this agreement.

1.3 The parties agree that this Agreement is NOT intended to restrict the use of any derivative of the Business Names currently registered that are based on a derivative of Pro Pamphlets by the Vendors subject to compliance by the Vendors with clause 1.4 of this Agreement.

1.4 The parties agree that the Vendors must not register any further business names which use or incorporate the words pro pamphlets. This clause does not merge on completion.

1.5 The parties agree that this Agreement is NOT intended to exclude or in any way limit the capacity of the Vendors to engage in any business activity which is involved or related to the delivery of pamphlets in any areas outside the areas detailed at paragraph 1.2.1.1 to 1.2.1.5 inclusive.

...

4. Exclusion of pre-contractual and other representations

4.1 Entire Agreement

This agreement constitutes the entire agreement between the vendors and the purchasers relating to the sale of the Business.

4.2. Earlier agreements supplanted

This agreement supplants and supersedes any previous written or oral negotiations or preliminary arguments between the parties, which ceased to be legally effective from the date the parties entered this agreement.

4.3. No collateral agreements

The parties have not entered into and are not bound by any collateral or other agreement apart from this Agreement.

4.4 Warranties imposed in agreement or by statute

The parties are not bound by any warranty, representation, collateral agreement, or implied term, under the general law or imposed by legislation unless:

4.4 .1. such warranty, representation, agreement or term is contained in the express terms of this Agreement; or

4.4.2. it is an implied term or warranty imposed by statute which is mandatorily and could not be excluded by the parties' agreement.

5. By letter dated 20 February 2008 the defendants' solicitor (Mr Gregory Phillip Walker) informed the plaintiff of the first defendant's intention "to return to business as a pamphlet deliverer...under the business name "F-1 Flyers"...in the Canberra/Queanbeyan area" and requested "some negotiations with a view to modifying the Sale Agreement to reflect [the defendants'] ...intentions and [the plaintiff's] legitimate business interests" (see annexure C to the affidavit affirmed 30 July 2008 of Mrs Petreski).

6. By letter dated 3 March 2008 the plaintiff's (then) solicitor informed the defendants' solicitor that the plaintiff "is not prepared to accede to any abandonment of the agreed restraint and in the event of [the defendants] returning to business in the manner proposed [the plaintiff] will seek to enforce the agreed terms" (see annexure D the affidavit of Mrs Petreski).

7. On or about 1 May 2008 the first defendant commenced a pamphlet delivery business under the business name "F1-Flyers" (see paragraph 8 of the affidavit affirmed 22 August 2008 by the first defendant).

8. By Statement of Claim filed in the Registry of the Supreme Court on 23 July 2008 the plaintiff sued the defendants to recover damages for the defendants' alleged breach of the term of agreement in restraint of the defendants engaging in a pamphlet delivery business within the ACT and Queanbeyan areas within the specified periods of time.

9. By application filed in the Court's Registry on 5 August 2008 the plaintiff sought an interim injunction to restrain the defendants from delivering pamphlets within the ACT and Queanbeyan areas. This application was supported by the affidavit of Mrs Petreski.

10. On 15 August 2008 Master Harper granted the interim injunction sought by the plaintiff against the defendants.

11. By affidavit affirmed 22 August 2008 the first defendant, on behalf of himself and the second defendant, admitted commencing pamphlet deliveries on or about 1 May 2008 and he disclosed the earnings from such pamphlet deliveries; and he sought an order dissolving the interim injunction on his undertaking to provide the plaintiff with details of his deliveries on a monthly basis. So far as I am aware, the interim injunction was not dissolved and remains in force. As all of the periods of restraint have expired by the passage of time, I will dissolve the interim injunction.

12. By Amended Statement of Claim filed in the Court's Registry on 15 September 2008 the plaintiff amended its claim by adding a claim based upon an alleged breach of a representation made by the first defendant to the plaintiff as to the defendants' gross income from pamphlet deliveries during the income years ended 30 June 2001, 2002, 2003 and 2004 and the six months ended 31 December 2004 and likely gross income from deliveries during "future years", which representation was alleged to have induced the plaintiff to enter into the agreement.

13. By Statement of Defence to the plaintiff's Amended Statement of Claim filed in the Court's Registry on 22 January 2009 the defendants admitted the agreement between the plaintiff and them, claimed that the term in restraint of trade was void and unenforceable as being uncertain and unreasonable, admitted making the representation as to past gross income and denied making any representation as to future gross income.

14. Between the first directions hearing on 15 December 2008 and the filing of the defendants' application for an order that the plaintiff give security for the defendants' costs of the proceedings on 25 September 2012, a period of 3 years and 9 months, many steps have been taken in the proceedings (as shown by the chronology in the affidavit affirmed 29 October 2012 by Mr Basem Seif and as detailed in the affidavit sworn 24 September 2012 by Mr Walker) mainly at the request or demand of the plaintiff.

15. On 17 January 2010 the plaintiff was deregistered as a corporation (see annexure E to the affidavit of Mr Walker).

16. On about 11 July 2011 the defendants' solicitor was informed that the plaintiff had been deregistered and, therefore, by letter dated 11 July 2011 the defendants' solicitor wrote to the plaintiff's solicitor requesting that the plaintiff give security in the sum of $25,000.00 for the defendants' costs of the proceedings (see annexure F to the affidavit of Mr Walker).

17. By letter dated 15 July 2011 the plaintiff's solicitor informed the defendants' solicitor that the plaintiff would not give security for the defendants' costs of the proceedings and that any application to the Court for such an order would be "vigorously defended".

18. By email dated 26 August 2011 the plaintiff's solicitor informed the defendants' solicitor that the plaintiff had been reregistered (see annexure B to the affidavits of Mr Seif).

19. By application filed in the Court's Registry on 25 September 2012 the defendants sought an order that the plaintiff give security for the defendants' costs of the proceedings. This application was supported by the affidavit of Mr Walker.

20. By affidavit affirmed 29 October 2012, Mr Petreski stated that the plaintiff did not have any assets and that, if it is required to give security for the defendants' costs, the plaintiff will not be able to continue with its claim.

21. On 28 June 2013 the defendants' application for security of costs came on for hearing by me. Mr Walker, solicitor, appeared for the defendants, and Mr Arthur, of counsel, appeared for the plaintiff. After hearing submissions from Mr Walker and Mr Arthur, I reserved my judgment, allowing Mr Walker and Mr Arthur to provide written submissions as to the effect of delay upon the defendants' application.

22. Subsequently, on 18 July 2013 I received submissions from Mr Walker and, then, later (the date was not recorded), I received submissions from Mr Arthur.

23. It is beyond argument that the Court has the power to order that the plaintiff give security for the defendants' costs of the proceedings. The power is provided by rule 1900 of the Court Procedures Rules 2006 (ACT) which states:

(1) On application by a defendant, the court may order the plaintiff to give the security it considers appropriate for the defendant's costs of the proceeding.

(2) An application must be supported by an affidavit setting out the facts relied on and the grounds on which the order is sought.

24. Rule 1901 provides that the power to order a plaintiff to give security for a defendant's costs of proceedings may be exercised under rule 1900 only if the court is satisfied, so far as is relevant to the present application, that:

(a) the plaintiff is a corporation and there is reason to believe the

plaintiff will not be able to pay the defendant's costs if ordered to pay them; or

...

(h) the justice of the case requires the order to be made.

25. Rule 1902 provides that the making of an order that the plaintiff give security for a defendant's costs of proceedings is discretionary:

(1) In deciding whether to make an order for security for costs under rule 1900, the court may have regard to any of the following matters:

(a) the means of the people standing behind the proceeding;

(b) the prospects of success or merits of the proceeding;

(c) the genuineness of the proceeding;

(d) for rule 1901 (a) - the corporation's lack of financial resources;

(e) whether the plaintiff's lack of financial resources is attributable to the defendant's conduct;

(f) whether the plaintiff is effectively in the position of the defendant;

(g) whether an order for security for costs would be oppressive;

(h) whether an order for security for costs would stop or limit the progress of the proceeding;

(i) whether the proceeding involves a matter of public importance;

(j) whether there has been an admission or payment into court;

(k) whether delay by the plaintiff in starting the proceeding has unfairly prejudiced the defendant;

(l) whether an order for costs made against the plaintiff would be enforceable within the jurisdiction;

(m) the estimated costs of the proceeding.

(2) This rule does not limit the matters to which the court may have regard.

The plaintiff's financial position

26. The first matter to be considered is whether there is material upon which there is reason to believe that the plaintiff, a corporation, will not be able to pay the defendants' costs if ordered to pay them. The affidavit of Mr Petreski (see paragraph 20 above) reveals that the plaintiff does not have any assets. Accordingly, I am satisfied that there is good reason to believe that the plaintiff will be unable to pay the defendants' costs of the proceedings if ordered to do so.

The means of the people standing behind the plaintiff

27. I was informed by the plaintiff's counsel, Mr Arthur, that Mr and Mrs Petreski are not in a position financially to provide security for the defendants' costs of the proceedings on behalf the plaintiff.

The prospects of success or merits of the proceedings

28. As to the claim based upon a breach of the term of the agreement as to restraint of trade, the periods referred to in paragraphs 5 and 6 of the Amended Statement of Claim, taken from Clause 1.2.2 of the agreement, are uncertain and, I think, seen by the drafter of the agreement as a "catch-all" term, so that, if one period is unreasonable, then perhaps the next shorter period might be reasonable . I see the defendants' argument, that the periods of restraint of 3, 4 and 5 years for the ACT and the Queanbeyan areas were excessive and unreasonable, to have merit (see Capital Aircraft Services Pty Ltd v Brolin [2007] ACTCA 8).

29. As to the claim based upon a misrepresentation (as to past income and likely future income) which induced the plaintiff to enter into the agreement, the affidavit sworn 1 March 2013 by Mr Colin Thomas Imrie reveals that the representation as to past income was true. I see the plaintiff's claim that the first defendant made a representation as to likely future income, something denied by the first defendant, as being caught by Clause 4 of the agreement (as to which, see paragraph 4 above) and, in the absence of such a representation being referred to in the original Statement of Claim, as being an after-thought by the plaintiff. It is noteworthy that the plaintiff, notwithstanding that the business was in financial difficulty (see paragraph 17-19 of the affidavit affirmed 17 April 2012 by Mr Petreski), did not seek to recover anything from the defendants until after the first defendant informed the plaintiff of his intention to return to the business of delivering pamphlets in the ACT and Queanbeyan areas.

30. Although the evidence (by affidavit) is not complete, and although the witnesses have not been cross-examined, I see weaknesses in the plaintiff's claim on the law and in the facts.

31. I do not doubt that the proceedings were commenced by Mr and Mrs Petreski as shareholders in and directors of the plaintiff because they believed that the failure of the pamphlet distribution business that the plaintiff purchased from the defendants was due, in some way or other, to the actions of the first defendant, rather than to their actions in the conduct of the business. It is not unknown that a business which is profitable when conducted by someone is unprofitable and fails when conducted by someone else.

32. I have referred already to the fact that the plaintiff does not have any assets.

Whether the plaintiff's lack of financial resources is attributable to the defendants' conduct

33. Other than the fact that the first defendant commenced to deliver pamphlets in the ACT and Queanbeyan areas on about 1 May 2008, there is nothing to show that the conduct of the defendants caused or contributed to the failure of the plaintiff's business or to its lack of financial resources. I suspect that the failure of the pamphlet delivery business being conducted by the plaintiff from 5 August 2005 was due to the conduct of Mr and Mrs Petrevski rather than to the first defendant's recommencing to deliver pamphlets in the ACT and Queanbeyan areas on about 1 May 2008, two years and nine months after when the plaintiff purchased the business from the defendants.

Whether the plaintiff is effectively in the position of a defendant

Whether an order for security for costs would be oppressive

35. In view of the plaintiff's financial position, an order for security for costs might be oppressive.

Whether an order for security for costs would stop or limit the progress of the proceedings

36. In view of the statement of Mr Petreski (see paragraph 20 above), an order for security for costs may result in the plaintiff not continuing with the claim.

Whether the proceeding involves a matter of public importance

37. The claim does not involve a matter of public importance.

Whether there has been an admission or payment into Court

38. The defendants have not made any admission or paid any money into Court.

Whether delay by the plaintiff in starting the proceedings had unfairly prejudiced the defendant

39. There is nothing to show any delay on the part of the plaintiff in commencing the proceedings.

Whether an order for costs made against the plaintiff would be enforceable within the jurisdiction

40. There is nothing to suggest that, if the plaintiff had some assets, an order for costs could not be enforced against it within the jurisdiction.

41. The defendants' solicitor estimates that, if the plaintiff's claim proceeded to hearing and if the hearing lasted 2 or 3 days, the defendants' future costs would be in the order of $25,000.00 to $30,000.00 (see paragraph 27 of the affidavit of Mr Walker).

The delay in the filing of the application for security for costs by the defendant

42. I have difficulty in determining the point when the defendants should have filed their application for security for costs. Is it when they were served with the plaintiff's Statement of Claim; or when they were served with the plaintiff's Amended Statement of Claim; or when they filed their Statement of Defence; or when the plaintiff sought discovery or further discovery; or when their solicitor first became aware that the plaintiff had been deregistered; or when the plaintiff's solicitor informed the defendants' solicitor that the plaintiff would not give security for the defendants' costs of the proceedings; or when the plaintiff was reregistered? I consider that the appropriate point in time was, at the earliest, when the defendants' solicitor informed the plaintiff's solicitor that the plaintiff had been deregistered (see paragraph 16 above) or at the latest, when the plaintiff's solicitor informed the defendants' solicitor that the plaintiff had been reregistered (see paragraph 18 above). Accordingly the period of delay was between 11 July 2011 at the earliest or 26 August 2011 at the latest and 25 September 2012 (see paragraph 19 above). But time did not stand still during this period and steps were taken by both the plaintiff and the defendants (as revealed by the chronology in the affidavit of Mr Seif) and I assume that both the plaintiff and the defendants incurred costs in relation to the steps that they took during this period. However, I do not see the passage of time between either 11 July 2011 or 26 August 2011 and 25 September 2012 as prejudicing the plaintiff any more than it prejudiced the defendants.

43. I am left to balance the right of the plaintiff to have the court adjudicate on its claim against the defendants and the right of the defendants to be protected in costs in the event that the plaintiff, a corporation without assets, fails on its claim and is ordered to pay the defendants' costs of the proceedings.

44. I consider, having regard to the weaknesses of the plaintiff's claim and to the fact that the plaintiff does not have any assets, that it would be unjust to the defendants to allow the plaintiff's claim to proceed to a hearing without the defendants being protected as to costs in the event that the plaintiff's claim fails, notwithstanding that an order that the plaintiff give security for the defendants' costs of the proceedings may sound the death-knell for the plaintiff's claim.

1. The interim injunction granted by Master Harper on 15 August 2008 is dissolved;

2. The plaintiff is to give security in the amount of $20,000.00 for the defendants' costs of the proceedings;

3. The security must be given in cash or by bank guarantee, unlimited as to time, as approved by the Court's Registrar;

4. The security must be given within 56 days from the date of these orders;

5. The proceedings are stayed for 56 days from the date hereof as far as concerns any steps to be taken by the plaintiff, other than the giving of security, or the defendant;

The plaintiff is to pay the defendants' costs of the application for security for costs.

I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Nield.

Procedure Rules 2006

Procedures Rules 2006

Procedure Rules 2006

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