Pampered Paws Connection Pty Ltd (on its own behalf and in a representative capacity) v Pets Paradise Franchising

AND: PETS PARADISE FRANCHISING (QLD) PTY LTD ACN 054 406 272

PETS PARADISE FRANCHISING (SA) PTY LTD (ACN 069 620 391)

PETS PARADISE FRANCHISING (NSW) PTY LTD (ACN 006 919 222)

PETS PARADISE (FRANCHISING) PTY LTD (ACN 006 626 445)

WHERE MADE: ADELAIDE (VIA VIDEOLINK WITH BRISBANE)

Upon the undertaking of the applicants Lynda Campbell and Elizabeth Campbell given in their personal capacity and as directors of the applicant Pampered Paws Connection Pty Ltd that they will not sell, transfer or otherwise dispose of any interest in real property in their names or either of their names or in the name of Pampered Paws Connection Pty Ltd without giving 21 days' notice thereof to the respondents by notice in writing to be given to Donaldson Walsh Lawyers at Kings Chambers, 320 King William Street, Adelaide, other than by charging, or extending the charge on, any such property for the purpose of procuring funds to enable them to continue to conduct this proceeding or for the purpose of securing funds to enable the business of Pampered Paws Connection Pty Ltd to be conducted: 1. The order made on 21 December 2009 directing Pampered Paws Connection Pty Ltd to provide security for costs in the amount and in the manner expressed in that order be varied by substituting for the sum of $200,000.00 the sum of $100,000.00 and by discharging the requirement that Lynda Campbell and Karl Donnelly provide a bank guarantee in the sum of $100,000.00 and by renumbering paragraphs 1.2 and 1.3 as paragraphs 1.1 and 1.2 respectively. 2. In the event that the respondents are given any notice referred to in the undertaking hereby given, they have liberty to apply for any further order or orders they may seek in relation to security for costs. 3. The respondents be released from their undertaking recorded in the recital to the order made on 21 December 2009.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website.

BETWEEN: PAMPERED PAWS CONNECTION PTY LTD (ACN 116 460 621) (ON ITS OWN BEHALF AND IN A REPRESENTATIVE CAPACITY)

AND: PETS PARADISE FRANCHISING (QLD) PTY LTD ACN 054 406 272

PETS PARADISE FRANCHISING (SA) PTY LTD (ACN 069 620 391)

PETS PARADISE FRANCHISING (NSW) PTY LTD (ACN 006 919 222)

PETS PARADISE (FRANCHISING) PTY LTD (ACN 006 626 445)

REASONS FOR JUDGMENT 1 The corporate applicant Pampered Paws Connection Pty Ltd (Pampered Paws) at a time when it was the sole applicant agreed to provide security for the costs of the respondents in this proceeding. That order was made on 21 December 2009. It was relevantly in the following terms: On the Respondents' application for security for costs made by Notice of Motion filed on 26 May 2009, and on the undertaking of the Respondents by their counsel not to apply for further security for costs in this action provided that the Applicant does not file any schedules of particulars in relation to any group members for whom schedules of particulars have not been filed and save and except for any application made by the Respondents not before 30 days prior to trial that seeks security for costs in relation to costs to be incurred after the end of the first day of the trial. THE COURT ORDERS BY CONSENT THAT: 1. The Applicant within 60 days provide or cause to be provided security for costs in the sum of $200,000.00 up to the end of the first day of trial, in the following form: 1.1 A bank guarantee to be provided by Lynda Campbell and Karl Donnelly for $100,000.00 in a form acceptable to the Registrar of this Court, or alternatively in any other form of security that is ordered by the Court. 1.2 A bank guarantee to be provided by Paul Whiley and Patricia Vardy for $75,000.00 in a form acceptable to the Registrar of this Court, or alternatively in any other form of security that is ordered by the Court. 1.3 A third registered mortgage in the sum of $25,000.00 in favour of the Respondents over the property of Rochelle Semmler situated at 20 Colonel Light Drive Lyndoch South Australia, comprised in Certificate of Title Register Book Volume 5069 Folio 628. 2 To understand why the order was in those terms, it is necessary to note briefly the nature of the action itself. Pampered Paws brings the claim as a group action under Part IVA of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) on behalf of itself and "current and former Pets Paradise franchisees", including 11 nominated franchisees. 3 The group members are franchisees of one or other of the first three respondents. 4 The corporate respondents together are alleged to be part of the "Pets Paradise Group" which, inter alia, franchises businesses around Australia for the conduct of a Pets Paradise business as a pet shop including the supply of pet products. The eighth respondent, Gary Diamond, is the managing director of the "Pets Paradise Group". 5 Since the order of 21 December 2009 was made, Lynda Campbell and Elizabeth Campbell have been joined as applicants. They are the directors of Pampered Paws. Karl Donnelly is the husband of Lynda Campbell. Paul Whiley and Patricia Vardy are directors of Whiley Investments (Qld) Pty Ltd, one of the group members specified in the amended statement of claim. Rochelle Semmler is a director of Marshelle Pty Ltd, another of the group members specified in the amended statement of claim. 6 The security for costs application was brought by notice of motion of 26 May 2009. The motion also sought an order under s 33N of the FCA Act that the action no longer proceed as a representative action. The security for costs application, by arrangement between the parties, was stood over from time to time and then listed for hearing on 14 December 2009. On that occasion the parties were able to reach agreement as to appropriate terms, reflected in the orders of 21 December 2009. The application under s 33N was not then addressed. The respondents revived that application in early 2010 and it was argued on 25 February 2010. I gave a ruling on that application on that date, and subsequently published reasons for that ruling: Pampered Paws Connection Pty Ltd v Pets Paradise Franchising (Qld) Pty Ltd (No 6) [2010] FCA 295. 7 In the meantime, in an endeavour to have the matter proceed to hearing notwithstanding interlocutory skirmishing, on 27 February 2009 I had directed the applicant to file and serve by 7 April 2009 its proposed book of documents (which subsequently became a resource used at the hearing) and the witness statements of the witnesses (other than expert witnesses) it proposed to rely on at the hearing. That time was subsequently extended to 3 July 2009 and then to 23 July 2009. By 24 July 2009, those orders were in essence complied with. At the hearing, the second and third applicants gave evidence and their primary witness statements had been filed and served by that date. 8 On 14 December 2009, I gave the applicant leave to file and serve any further witness statements (other than expert witness statements) by 12 January 2010. On 28 January 2010, I extended that time to 25 February 2010. Further statements and supplementary statements of the second and third applicants were duly filed and served, together with a statement of another person (who was not ultimately called to give evidence). 9 On that latter date, I listed the matter for hearing, commencing on 11 May 2010. I required the applicant's expert witness statements by 12 March 2010, and to give detailed particulars of its loss and damage by 12 March 2010. The applicant was about one week late in complying with that order. I directed the respondents to file and serve their principal witness statements by 26 March 2010 (subsequently varied to 8 and then 16 April 2010) and other witness statements by 9 April 2010 (subsequently varied to 16 and then 23 April 2010), their book of documents by 9 April 2010, and their expert witness statements by 23 April 2010 (subsequently varied to 30 April 2010). The time for respondents' material on damages was also extended to 30 April 2010. 10 In fact, the respondents' evidence was not all filed and served in accordance with those directions. Significant witness statements were served progressively from 21 April 2010, including a block of witness statements on 3 to 5 May 2010, further witness statements on 7 and 11 May 2010, supplementary statements (including from the eighth respondent, Mr Diamond) between 6 and 14 May 2010, and, in addition, supplementary documents on liability were served on 5 May 2010, together with their documents on damages on that date, and further document on 13 May 2010. 11 The purpose of that recital of events is not to allocate blame for any apparent delays. I accept that the parties and their solicitors have worked assiduously towards preparation of the case for hearing in recent times. But it is apparent that the applicants (there being now three applicants) have less than an ideal opportunity to prepare for the hearing. They have received at a very late stage, indeed partly during the hearing itself, material which they have had to consider and provide instructions on; counsel and solicitors have had to absorb, consider and advise on that material and to complete instructions so as to be able to lead evidence from the applicants' witnesses where it touches upon them and to cross-examine the respondents' witnesses on them. It has also meant that the hearing (which has now been completed apart from final submissions) did not proceed quite as anticipated. Instead of starting on 11 May 2010, it commenced on 13 May 2010 so the applicants and their counsel and solicitors could consider the recently served material and address it, as appropriate, in their evidence. There were ongoing issues about the adequacy of the disclosed documents, and requests for further documents. 12 More importantly, the history shows that the extent of the preparatory tasks, and the scope of the evidence by reason of the factual matters in issue was more extensive than the parties anticipated. I accept that counsel and the solicitors for the parties may have had somewhat different estimates as to the likely length of the hearing. I accept that, to some extent, the hearing time was taken up by the applicants, through counsel, objecting to parts of the respondents' proposed witness statements (which the respondents contend was unnecessary) and seeking further disclosure of documents. I accept that there is some material which indicates that, despite the deferral of the commencement of the hearing for two days, at least one of the personal applicants appeared not to have considered one respondents' witness statement served on 30 April 2010 by the time of her evidence. 13 It is not possible to determine at present the extent to which the time set aside for the trial might have been better spent. The Court cannot place itself in the position of counsel and solicitors for the applicants, endeavouring to progress the matter in the interests of the applicants. The same comment applies to the submissions by the applicants that the failure of the respondents to file and serve their witness statements and documents within the times directed, sometimes nominated by the respondents themselves, should be regarded as "blameworthy" for the purposes of the present application. 14 It was in that context that the applicants, on 24 May 2010, orally applied to be discharged from, or to have varied, the order for security for costs. The respondents did not object to the form of the application. They strongly opposed the application itself.

The power of the Court to entertain the application 15 Although the respondents did not contend that the Court could not entertain the oral application, it is appropriate to note that I am satisfied that the Court does have such power, even where the orders of 21 December 2009 were made by consent. 16 Section 56 of the FCA Act gives the Court a broad and unfettered discretion to make or vary an order for security for costs: Bell Wholesale Co Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1, (Bell Wholesale) provided of course that the discretion is exercised judicially. Section 56(3) specifically empowers the Court to reduce the amount of security given or to vary the time at which, or the manner or form in which, the security is to be given. The factors commonly regarded as potentially relevant to the exercise of the discretion, subject to their significance if any in a particular case, apply also to a representative action under Part IVA of the FCA Act: Ryan v Great Lakes Council (1998) 154 ALR 584; Ryan v Great Lakes Council (1998) 155 ALR 447. Those factors are discussed in cases such as Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Limited (1998) 193 CLR 502; Bell Wholesale; and Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972. An example of a case where an application was entertained to reduce the amount of security for costs already provided is Gordano Building Contractors Ltd v Burgess [1988] 1 WLR 890. 17 The fact that the order of 21 December 2009 was by consent does not, in the circumstances, preclude the Court from exercising that power. See, for example, Woodward and Foster JJ in R D Werner & Co Inc v Bailey Aluminium Products Pty Ltd (1988) 80 ALR 134 at 138. It is a matter which, in my view, should be taken into account. It tends to weigh quite heavily in the scales against making a decision varying or discharging the order. Its context, however, is that it was an agreed outcome to an interlocutory application in the face of the exchange of evidence and the hearing itself. Parties are always urged to resolve or narrow the issues between them, and particularly on interlocutory matters. On interlocutory matters, where the agreed outcome appears to be an attempt to reflect by agreement how the Court's discretion might otherwise have been exercised, the agreement should not be at the price of the Court - in the face of significantly changed circumstances - being disentitled from reconsidering the issue. 18 In this matter, I therefore approach the exercise of the discretion on the basis that the respondents presently have the benefit of the security for costs order made on 21 December 2009. That is the status quo. There must be sound reasons to change that position. Secondly, I approach it on the basis that the applicants must show significantly changed circumstances to warrant a change in that position.

Consideration 19 As the consent of the then applicant to the order of 21 December 2009 in effect acknowledges, the criteria for making an order, under s 56 of the FCA Act and O 28 r 3 of the Federal Court Rules 1979 (Cth), then existed. There is no submission now to the contrary. The question for the Court is whether the discretion under s 56 should now be exercised - having regard to the matters I have mentioned and the other discretionary considerations raised by the parties - so as to vary that order. 20 As I have indicated, I am satisfied that there is now a significant change in the circumstances of the applicants. It is that, in my view, there is a real prospect that the applicants will be unable to continue to conduct the proceeding if the order for security for costs is not varied. Plainly, the proceeding is to take longer than the original estimate of the applicants, and has required considerably more work beyond that anticipated by the then applicant and the legal advisers in December 2009. That work has also significantly eaten into the time for the hearing. The circumstances in which that has come about are set out above. As I indicated, it is not a matter of blaming either the applicants or the respondents for that circumstance. There are reasons for it. If the Court had adjudicated on the security for costs application in December 2009, it would have considered the likely preparation and hearing time and the resources available to the applicant to decide whether any order for security for costs might have stultified the proceeding, as well as other matters. It was not called upon to do so. Its assessment of that issue is likely to have been different because the extent of the work required of the applicants and the time and cost involved is now apparently significantly greater than they then estimated. The available resources to meet those costs do not appear to have changed materially. 21 Presently, the parties have agreed upon the deferment of evidence upon a discreet question as to damages, and the submissions in relation to it. That has shortened the hearing to some degree. There remains, subject to that question, preparation for the closing submissions and the submissions themselves. Although the information about the applicants' available resources is limited, and is not ideal, I am satisfied that their resources are now so stretched that, without a variation of the security for costs order, they are likely to be unable to continue to be represented in the proceeding. Given its complexity and the stage of the proceeding, I am not confident that if they became self-represented, they could usefully contribute to the final stage of the proceeding. I noted that the evidence as to their present resources is not in ideal form. It is by affidavit of a solicitor acting for them. However, I am mindful of the financial position of the applicants (the then applicant and its directors - now the second and third applicants) in December 2009. There is nothing to suggest their financial position has changed, except adversely by the funding of this proceeding to date. The affidavit of a solicitor for the respondents tends to confirm that assessment. 22 On the other hand, the Court can vary the security for costs order without greatly impairing the resources available to the respondents to recover their costs if the action is unsuccessful. It may do so by varying the amount of the security from $200,000.00 to $100,000.00 and by discharging the requirement of the third applicant and her husband Karl Donnelly to provide a bank guarantee in the sum of $100,000.00. The evidence filed in December 2009 indicates that that bank guarantee was apparently able to be offered by reason of real property held jointly by him and mortgaged to the Commonwealth Bank of Australia (in an earlier affidavit called the Timbertop Property) and another property held by Karl Donnelly also mortgaged to that bank (called the Bonogin Property). Each of those properties then, and now, is mortgaged to support loans by the bank to support the borrowing of the first applicant from the bank. There was said to be a significant residual equity in them. The first applicant, through its directors, proffered a further mortgage over the Timbertop Property by way of security. I infer that the security for costs was provided in that context. 23 The variation of the security for costs order which I propose to make will not, in my assessment, significantly reduce the assets of the applicants available to meet any costs order. Both the Timbertop Property and the Bonogin Property presently are mortgaged to secure borrowing of the first applicant from the bank. In the relatively short period until the proceeding is resolved, that position is unlikely to change. The addition of the second and third applicants exposes them directly to an order for costs; even though each is only recently a party, as I indicated in the course of submissions, any costs incurred by the respondents since they have been parties are likely to be recoverable against all applicants (if the claims are unsuccessful) and I would be disposed in any event to ensure that costs awarded against the third applicant would extend sufficiently to cover the amount of the bank guarantee. Any costs order may well extend beyond that. I also require the second and third applicants to undertake not to dispose of any interest in real estate until judgment as a condition of varying the security for costs order. To the extent that the third applicant has an interest in the Bonogin Property, that undertaking would extend to that property. What will be lost to the respondents in the short term is the immediate access to the bank guarantee. In the circumstances, I think that is really a timing issue. That guarantee does not create any priority over other unsecured creditors of any of the respondents. Ultimately, their assets will be unchanged and recourse to them will be available to support any order for costs. If their claims are unsuccessful and costs are ordered against them, the Court could fix a preliminary quantum for costs at least to the extent of the bank guarantee so that steps to recover it would not be delayed by taxation. The immediate impact upon any costs recovery, if the claim is unsuccessful, is that the $100,000.00 guarantee will not be available once costs are taxed. If the claim is unsuccessful, the process for recovering costs will be more prolonged and complex. But, as I assume the bank guarantee was provided by some arrangement between their bank and the third applicant (and Karl Donnelly), I infer there is ultimately equity in those two properties to support it. There is no reason why that position will have altered in any material way. The properties are mortgaged, so the bank itself will be monitoring the borrowings. I also have not overlooked the evidence that, relatively recently, Karl Donnelly became the sole registered proprietor of what is apparently the home of himself and the third applicant. I infer that they arranged for him to do so to remove the family home from exposure to liability in the event that the first respondent became insolvent, so that its creditors could not pursue that property. I do not regard that arrangement as sinister; it is a not uncommon step taken in such circumstances. As I do not think that any exposure to costs of any of the respondents would - except in the sense I have referred to - be less likely to be met if the claim is unsuccessful, whilst I have had regard to it, it does not lead me to the view, either alone or in the light of all the matters I was asked to consider, that I should not vary the security for costs order. Apart from the immediate payment of the guarantee, the respondents would have no greater and no lesser access to that asset (or Karl Donnelly's assets generally) than they presently have. 24 It is appropriate to note other matters which I have considered when deciding how to exercise the discretion to vary the order for security for costs. They are discussed in many cases: see generally, Stephen Colbran, Security for Costs (1993) Ch 14 at 233-272. They include the financial position of the applicants, and in the way discussed about that of those standing behind them. They include the fact that the claim, I am satisfied, has been brought in good faith. I have considered the respective prospects of success of the parties; as I indicated in submissions, I have not given that matter weight in favour or against exercising the discretion as its outcome will depend to some degree on my views of the reliability of several of the witnesses including the second and third applicant and I have not yet formed a firm view on those questions. Nor do I have a firm view about the likely outcome of the proceedings in any respect. Although a common consideration is whether the applicants' financial position is attributable to the respondents' conduct, as I do not have a firm view about the prospects of either the applicants or the respondents in the proceeding that matter has not weighed in the scales. The first applicant clearly has significant indebtedness to its bank, and one of the live issues in the case touches upon whether that is a consequence of the choices made by the first applicant about how it should conduct its business. In the circumstances, since about mid 2009, I consider that the applicants and the respondents have conscientiously conducted the proceeding in a timely way. I have taken into account the burden on the respondents of conducting the proceeding. It is very substantial - in terms of time, the commitment of their resources, and of course in terms of cost. 25 In all the circumstances, I have come to the view that I should vary the order for security for costs to the extent of varying the amount to $100,000.00 and releasing the third applicant and Karl Donnelly from the provision of the bank guarantee. The respondents will retain the benefit of the balance of the security for costs. As I see it, that will enable the applicants prospectively to continue to operate their business and to continue prospectively to conduct the proceeding to its completion, other than in respect of the issue which has been deferred. Those costs, having regard to the steps now required, will be of relatively small proportion compared to the costs incurred by the respondents to date. Nevertheless, in respect of those extensive costs, as I have noted above, the respondents will, by the order I propose, lose immediate access to the bank guarantee. 26 The agreed order of 21 December 2009 included a term that the respondents would not subsequently seek an order for security for costs. As that agreement was part of the "package" then agreed, the variation of the order should include them being released from that term. Moreover, the release from that term will enable the respondents to have a further application for security for costs if there is a material change in circumstances, either different from the course of the proceedings as I have understood them to be, or if the respondents learn that the financial position of the applicants is materially different from that which I understand it to be. 27 The second and third respondents have given appropriate written undertakings in terms which reflect the requirement referred to above. 28 In the circumstances, I order that: Upon the undertaking of the applicants Lynda Campbell and Elizabeth Campbell given in their personal capacity and as directors of the applicant Pampered Paws Connection Pty Ltd that they will not sell, transfer or otherwise dispose of any interest in real property in their names or either of their names or in the name of Pampered Paws Connection Pty Ltd without giving 21 days' notice thereof to the respondents by notice in writing to be given to Donaldson Walsh Lawyers at Kings Chambers, 320 King William Street, Adelaide, other than by charging, or extending the charge on, any such property for the purpose of procuring funds to enable them to continue to conduct this proceeding or for the purpose of securing funds to enable the business of Pampered Paws Connection Pty Ltd to be conducted: 1. The order made on 21 December 2009 directing Pampered Paws Connection Pty Ltd to provide security for costs in the amount and in the manner expressed in that order be varied by substituting for the sum of $200,000.00 the sum of $100,000.00 and by discharging the requirement that Lynda Campbell and Karl Donnelly provide a bank guarantee in the sum of $100,000.00 and by renumbering paragraphs 1.2 and 1.3 as paragraphs 1.1 and 1.2 respectively. 2. In the event that the respondents are given any notice referred to in the undertaking hereby given, they have liberty to apply for any further order or orders they may seek in relation to security for costs. 3. The respondents be released from their undertaking recorded in the recital to the order made on 21 December 2009. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.