Plaintiffs v Defendant

Supreme Court of Victoria|2014-08-22|Before: SIFRIS J

PRACTICE AND PROCEDURE - Application by directors of a company for leave to file a Second Further Amended Statement of Claim - Where the original Plaintiff, a company, is in liquidation and no longer party to the proceeding - Where the Second Further Amended Statement of Claim inadequately pleads the claims and the nature and extent of the loss with regard to the directors - Leave to file the Second Further Amended Statement of Claim refused.

1 This proceeding commenced in December 2013. At that time the first plaintiff was MacFellis Pty Ltd ('MacFellis'). MacFellis is now in liquidation and is no longer a party to the proceeding. The second and third plaintiffs, Heath Allen MacFadyen and Mark Andrew Ellis ('the Plaintiffs'), now the only plaintiffs, were directors of MacFellis. They now seek to bring a proceeding against the Bank of Queensland ('the Bank') in their own names for loss that they have personally suffered, apart from any loss suffered by MacFellis which was the manager of a Bank of Queensland branch in Geelong ('the Branch').

2 The Statement of Claim pleaded the execution of an OMB Agency Agreement (the 'initial OMBAA') in 2007, a renewal agreement for a further term of five years in 2012 ('the OMBAA'), the provision of breach notices by the Bank, a dispute notice by the Plaintiffs and an attempt by the Bank to recover possession of the Branch. Alleging breach of various duties, the Plaintiffs sought, amongst other things, injunctive relief restraining the Bank from taking possession of the Branch.

3 On 26 November 2013, Robson J granted interim interlocutory relief.

4 On 5 December 2013, I discharged the interim interlocutory injunction and ordered that the plaintiffs deliver up possession of the Branch to the Bank. Other directions were made in relation to the filing of pleadings, affidavits and a mediation. By its Senior Counsel, the bank gave an undertaking to continue operating the Branch 'in the ordinary course of business pending the hearing and determination of this proceeding or further order'.

5 The mediation was unsuccessful. MacFellis went into liquidation, following the appointment of administrators. Neither the administrators nor the liquidators have decided to pursue the proceeding and the Plaintiffs were given leave to re-plead the case. In fact, the liquidators resolved the proceeding with the Bank. On 3 March 2014 Almond J made orders dismissing the proceeding by MacFellis as against the Bank with no order as to costs. In relation to the repleaded case by the Plaintiffs, Almond J struck out the Amended Statement of Claim and gave leave to the Plaintiffs to serve a Further Amended Statement of Claim by 4.00pm on 14 April 2014.

6 On 24 June 2014, by consent, I struck out the Further Amended Statement of Claim and ordered the Plaintiffs to provide a proposed Second Further amended Statement of Claim to the Bank ('2FASC'). The proposed 2FASC has been provided by the Plaintiffs who seek leave to file and serve it. The Bank opposes the Plaintiffs' leave to file and serve the 2FASC on the basis that it is defective and fundamentally flawed.

7 The application was heard on 1 August 2014 and I gave the parties leave to file short submissions by 5.00pm on 4 August 2014.

8 The 2FASC is not underlined. It has similarities to the amended Statement of Claim.

9 A brief summary of the more relevant allegations made in the 2FASC is set out below:

Paragraph 5 of the 2FASC alleges that pursuant to an agreement in or about June 2007 ('the initial Agreement'), the Plaintiffs agreed to become owner managers of a branch of the Bank under a franchise arrangement. The particulars to paragraph 5 include certain assurances given by Mr Sacristani on behalf of the Bank, including assurances to the effect that the Plaintiffs and MacFellis would make a lot of money and would get a fit out loan which would be secured only by the fit out itself. The assurances are called 'the Sacristani Assurances' and it is alleged that they constituted representations (paragraph 6 of the 2FASC).
Paragraph 11 sets out express terms of the initial Agreement (for a period of five years) including:

the requirement to register a company, borrow $500,000 for the fit out (business loan) and have an overdraft account with a limit of $150,000 for running expenses (to be guaranteed by the directors);

the entitlement to receive specified commissions payable to MacFellis and the Plaintiffs; and

assurance that the Bank would provide sufficient assistance to the Plaintiffs 'to enable them to discharge their duties under the OMBAA', which formed part of the initial Agreement.

Paragraph 12 sets out alleged 'implied terms' of the initial Agreement or alternatively implications arising from the express terms. They include the following:

the Bank would deal with the Plaintiffs in good faith and not capriciously (paragraph 12(a));

the Bank would enable MacFellis and the Plaintiffs to offer competitive financial procedures and services and would assist the plaintiffs (paragraph 12(c));

the Plaintiffs and MacFellis would be able to write $4m per month in settled lending business (paragraph 12(d));

the Branch would be very profitable (paragraph 12(e));

the Bank would maintain a proper and effective risk management system (paragraph 12(f));

the Bank would warn the Plaintiffs and MacFellis if it proposed to substantially alter the terms in the event of any renewal of the agreement (paragraph 12(g)); and

on termination the Plaintiffs and MacFellis would be entitled to credit for the fair value of the fit out of the Bank's loans and goodwill (paragraph 12(j)).

Paragraph 14 pleads reliance on the Sacristani Assurances and 'the 2006 Assertions',[1] in investing their capital, establishing MacFellis and effectively embarking on the venture and operating the Branch.
Paragraphs 15-17 plead loss associated with the breach by the Bank of the initial Agreement by failing 'to have and maintain a proper and effective risk management system applicable to owner management branches'.
Paragraphs 18-21 plead a decision by the Bank to increase its profitability at the expense of the Branches. No particulars are given. It is alleged that the decision constituted a breach of the initial Agreement and the Sacristani Assurances and the 2006 Assurances.
In or about June 2012, the parties agreed to renew the initial Agreement ('the 2012 Agreement') (paragraph 31). Paragraphs 24-30 plead the falsity of and reliance upon what are called 'pre-Renewal representations' made before the parties agreed to the 2012 Agreement. In particular these refer to:

representations to the effect that the Bank would not take steps to alter the profitability of the Branch during the period of any renewed term. These representations are said to arise out of the conduct of the Bank in:

maintaining a consistent availability of financial product;
not reducing the rate of commission of the Plaintiffs or altering the services provided to the Plaintiffs;
not conducting any risk assessment of the Plaintiffs prior to the renewal;
informing the Plaintiffs that it intended to continue with the owner managed branch system with an improved system and support services; and
representing that the Bank was certain that the Branch would continue to be profitable and successful (paragraph 24).

The Bank did not care whether the representations were true or that there was no proper or reasonable basis for making them (paragraph 27-28).

The pre-Renewal Representations were not true because the Bank could change the terms of the initial OMBAA (paragraph 29).

The Plaintiffs relied on these pre-Renewal Representations (and the Sacristani Assurances and the 2006 Assertions) in renewing and entering into the 2012 Agreement (paragraph 30).

Paragraph 32 pleads the following express terms of the 2012 Agreement:

the Plaintiffs would maintain the fit-out loan and the running expenses debt;

the debt on the establishment loan would be secured by the fit-out itself and with the Plaintiffs' personal guarantees;

the 2012 Agreement would be for a term of five years;

MacFellis would be entitled to receive the specified commissions on the income received by the Bank from loans written by the Plaintiffs;

the Plaintiffs would be entitled to enforce the receipt by MacFellis of specified commissions on the income received by the Bank from loans and other financial products written by the Plaintiffs; and

the Bank would provide sufficient assistance to the Plaintiffs to enable them to discharge their duties under the 2012 OMBAA.

Paragraph 33 pleads the following implied terms of the 2012 Agreement:

the Bank would deal with the Plaintiffs in good faith and not capriciously;

the Bank would take all reasonable steps that might be necessary to maintain the Financial Services Licence ('FSL'), including by compliance with s 912A of the Corporations Act 2001 (Cth) and would not imperil the FSL by neglectful or careless acts or conduct;

the Bank would enable the Plaintiffs to offer competitive financial products and services and it would apply its knowledge and expertise to assist the Plaintiffs in the conduct of the Branch;

the Bank expected the Plaintiffs to write $4 million per month in settled lending business and would not prevent or impede the Plaintiffs from writing $4 million per month in settled lending business;

the Bank would ensure that the Plaintiffs and their staff were adequately trained and competent to provide financial products and services and would therefore provide adequate training to the Plaintiffs and their staff to enable them to comply with the Bank's procedural requirements, its audit standards and the standards required for maintenance of the FSL;

the Bank would have and maintain a proper and effective risk management system; and

on termination by the Bank the Plaintiffs would be entitled to a credit for the fair value of the fit-out of the premises established by the Plaintiffs at Pakington Street Newton in Geelong, the book of loans established by the Plaintiffs and any other assets including the goodwill of the Branch.

Paragraphs 36-41 plead various breaches of the 2012 Agreement as follows:

the bank's failure to provide a proper and effective training regime (paragraphs 36-38); and

the bank's failure to have a proper and effective risk management system (paragraphs 39-41).

Paragraphs 42-43 plead various steps taken by the Bank, having decided to reduce the financial returns to MacFellis and the Plaintiffs. They include altering the remuneration arrangements, withdrawing certain financial products, altering the conditions applicable to the approval of loans (and thereby becoming less competitive), slowing the process of approval of loans and withdrawing support positions and services.
Paragraphs 44 and 45 plead the alleged consequent loss in income and profitability to the Plaintiffs.
Paragraphs 46-52 plead the Bank's decision to terminate the Branch agency including the various notices and demands made by the Bank.

10 Towards the end of the 2FASC there are claims for relief under various headings as follows:

claims for relief for breaches of contract and representations (paragraphs 53-59);
claims for relief for misleading and deceptive conduct (paragraphs 60-66); and
claims for relief for unconscionable conduct (paragraphs 67-72).

11 There are three components to the breach of contract claim. The first relates to the payment or reimbursement by MacFellis and the Plaintiffs of the sum of $2,320,000 during the period June 2007 to June 2014. It is alleged that there was no basis for the Bank to demand payment or reimbursement of this total amount and that such demand constituted a breach of the initial Agreement and the 2012 Agreement (paragraphs 53-55).

12 The second claim relates to the fit-out. It is pleaded that the demand for repayment of the balance of the fit-out loan constituted a breach of the Sacristani Assurances and the 2012 Agreement (paragraphs 56-57).

13 The third claim relates to the alleged action taken by the Bank to reduce the profitability of MacFellis and the Plaintiffs. The steps taken are referred to in paragraph 43 and the effect of such action and conduct is pleaded in paragraph 44. It is alleged that this conduct was in breach of the 2012 Agreement, the Sacristani Assurances, the 2006 Assertions and the pre-Renewal representations (paragraph 58) and that as a result, MacFellis and the Plaintiffs suffered loss and damage (paragraph 59).

14 The loss and damage pleaded in paragraph 59 is set out as follows:

loss of income and dividends occasioned by the termination of the agency, including but not limited to gross annual salaries for the Plaintiffs of $400,000 each per annum for the remaining four years of the 2012 Agreement and share of dividends or distributions for the remaining four years of the 2012 Agreement;

the potential liability incurred in relation to interest payments on the fit-out loan and the running expenses loan;

the cost of liabilities accruing to the Plaintiffs by reason of the termination of the Agency, including but not limited to redundancy payments and compensation for the staff dismissed by reason of the Bank's conduct;

the cost of the voluntary administration, namely $250,000; and

the cost of the proceedings against MacFellis and the Plaintiffs being in the order of $150,000 as presently known.

15 The first claim includes the pre-Renewal representations.

16 The claim for relief for misleading or deceptive conduct relates to the Sacristani Assurances, the 2006 Assertions and the pre-Renewal representations (together 'the Representations') (paragraph 60).

17 It is alleged that the Representations were made in trade and commerce (paragraph 60), were not true (paragraph 63), were misleading and deceptive or likely to mislead or deceive (paragraph 61) and caused loss and damage to the Plaintiffs (paragraph 65).

18 The loss and damage set out in paragraph 65 is as follows:

the Plaintiffs would have earned a gross salary of some $200,000 per annum each during the period June 2012 to November 2013;

alternatively, the Plaintiffs would have earned profits of $400,000 each in conducting a finance company during the period June 2012 to March 2013; and

the Plaintiffs would not presently have the potential liabilities associated with the fit-out loan and the running expenses loan, the voluntary administration and the liquidation of MacFellis and the proceedings against MacFellis and the Plaintiffs.

19 The final claim for unconscionable conduct pleads that 'at the time the Plaintiffs entered into the 2012 Agreement they were at a special disadvantage to the defendant' arising from various factors including that:

the Bank encouraged the Plaintiffs to renew their agency despite a decision to reduce profitability of the Branch (paragraph 67).

20 Paragraph 68 pleads that by reason of the special disadvantage the Plaintiffs were bound by the 2012 Agreement and were unable to re-negotiate or terminate the 2012 Agreement without serious adverse financial consequences.

21 Paragraph 69 pleads that the terms of the OMBAA relied upon by the Bank, to engage in the conduct alleged to reduce profitability (clauses 3.6, 4.6 and 33.5) were harsh and oppressive and rendered the conduct of the Bank unconscionable within the meaning of s 21 of the Australian Consumer Law[2] (paragraphs 69-71).

The Plaintiffs have suffered loss and damage being the loss of income they would have received had the unconscionable conduct not occurred and they had continued to conduct the Branch and the Agency for the balance of the term of the 2012 Agreement and sought and obtained a further renewal.

23 The Bank submitted that the 2FASC was so defective that leave to file the pleading should be refused and the Plaintiffs should be given one final opportunity to plead their case failing which the proceeding should be dismissed.

24 In addition to the usual technical pleading criticisms, the main criticisms related to the ability on the part of the Plaintiffs, as the directors (and apart from MacFellis, the company) to make the claims, the absence of material particulars relating to serious claims and the basis of the misleading or deceptive conduct cases, particularly so far as the nature and extent of the loss is concerned.

25 The Plaintiffs disagree and contend that the pleading is adequate. They contend that the Plaintiffs were parties to the relevant agreements and have proper claims and further, that many of the alleged defects can be cured by the provision of particulars.

26 For reasons that follow, I do not consider that the claim has been adequately or sufficiently pleaded. Accordingly, leave to file the 2 FASC will be refused. I do not propose to deal with all of the arguments raised. It is neither necessary nor desirable to do so. It is enough to say that the claim is sufficiently confusing and sufficiently lacking in necessary material facts that it should not be allowed to proceed in its current form.

27 The defects referred to permeate the pleading and therefore the 2FASC ought be struck out in its entirety, rather than the Court embarking on the exercise of picking out all of the defective parts of it.[3]

28 As Lockhart J stated in Trade Practices Commission v Australian Iron & Steel Pty Ltd[4] about the pleading in that case:

It fails to plead the material facts, it contains confusing and irrelevant material, it uses ambiguous terms, pleads particulars rather than material facts and asserts conclusions or opinions. Certain of the matters are perfectly well pleaded, but the defective parts are so inextricably intertwined with offending material that an oppressive burden is cast upon the respondents to spell out the alleged cause or causes of action.[5]

29 The third aspect of the breach of contract claim[6] relates to the Bank's decision to reduce the financial returns to MacFellis and the Plaintiffs, and to seek to assume control of the Branch (paragraph 42 of 2FASC), in the manner set out in paragraph 43(a)-(j) of the 2FASC. These do not contain any particulars of the serious, extensive and substantial matters pleaded.

30 In some cases such a defect can be cured by the provision of particulars as submitted by the Plaintiffs. This is not such a case. The paragraphs are defective on their face and it is not for the Bank to make the necessary request. Material particulars are part of the case and must be provided, as indeed was acknowledged by the Plaintiffs.

31 As they presently stand paragraphs 42 and 43 must be struck out. Although the Plaintiffs argued that the particulars, which they agreed were necessary, could be provided separately, they have not done so despite the fact that paragraphs 42 and 43 are similar to the paragraphs which were before Almond J and were struck out for lack of particulars.

32 The next issue is that the Plaintiffs are attempting to run misleading or deceptive conduct cases in respect of both the 2007 and 2012 OMB agreements on the basis that, had the alleged wrongful conduct not occurred, they would not have entered into the agreements.

33 Cases of this kind require a comparison of what actually occurred with what would have occurred had these Plaintiffs not entered into the agreements.[7] This case has not been pleaded.

34 Further, there are significant contradictions in the Plaintiffs trying to plead a 'no transaction' case in respect of both agreements. For example, it is alleged in paragraphs 22 and 45 that the Branch was profitable, particularly until 2012. It is therefore not apparent as to how any loss arises or could arise under the 2007 agreement.

35 It may be that the Plaintiffs seek to run a case that the business was less profitable than it should have been. However, this case has not been pleaded. Paragraph 65 does not set out any comparison as to what is said to have occurred and what opportunities have been lost.

36 No comparison is pleaded as to what the Plaintiffs received from 2007 to 2012 with what it is alleged they could have earnt elsewhere.

37 The Plaintiffs are not entitled to make any claim in the name of or on behalf of MacFellis. This is a matter for the liquidator, who has resolved matters with the Bank. Accordingly the Plaintiffs' claim must be confined to causes of action properly available to them. This often requires careful pleading and particularisation, most importantly in relation to the nature and extent of any loss that may be suffered separate and apart from the loss of a principal contracting party or obligor. The Plaintiffs have not done this with the necessary precision. This is fatal to any survival of the statement of claim in its present form.

38 The continued use of the composite phrase 'MacFellis and the Plaintiffs' in many paragraphs is both confusing and potentially misleading. Most of the loss arising out of the breach of contract claim, as pleaded in paragraph 59, is the loss of MacFellis as the operator of the Branch and not the Plaintiffs.

39 The fact that the Plaintiffs are parties to the agreements is not entirely to the point. It is necessary to assess the various rights and obligations referred to in the agreements and determine which party is entitled to make a claim for any particular breach. Are the Plaintiffs in the position of a promisee and thereby able to enforce the promise against the promisor? These specific obligations need to be identified; that is, the term, the breach and the loss so far as it relates specifically to the Plaintiffs apart from MacFellis. They cannot all be lumped together.

40 The identified loss and damage in relation to the misleading or deceptive conduct claims, as pleaded in paragraph 65 do not support the Plaintiffs' case. Further, it is not clear how and on what basis the Plaintiffs (apart from MacFellis) have suffered this particular identified loss.

41 Similar comments can be made in relation to the loss and damages pleaded in relation to the unconscionable conduct claim. These are in any event the same as those pleaded in paragraph 65 in relation to the misleading or deceptive conduct claim.

42 Finally, although the Plaintiffs may well have a claim in their own right apart from MacFellis it is not sufficiently clear what it is and how it arises. It must be. Any contract with MacFellis and representations made to MacFellis is not relevant unless the Plaintiffs show with precision why and how they are entitled to rely on any contract or representations made to another party. Of course they may plead that they are the contracting party and relied on representations made directly to them. This is another matter. As it presently stands all of these matters are mixed up and although there may be a case it is not for the Court to unravel the strands.

[1] The 2006 Assertions were contained in a letter from the Bank, responding to the Business Plan Proposal which was part of the initial Agreement, and included assertions that (1) 'the Bank would expect the OMB at ... [the Branch] to be writing $4 million in new lending drawdowns on a monthly basis' for the first 12 months; (2) 'failing to meet the target will not in itself be a breach of the OMBAA if the Bank determines that the OMB has used its best endeavours', and (3) 'the Owner Manager's ability to meet targets will impact upon the Bank's decision to renew the term of the OMBAA'.

[3] Trade Practices Commission v Australian Iron & Steel Pty Ltd [1990] FCA 23; (1990) 22 FCR 305, 323; [1990] FCA 23; 92 ALR 395, 413 (Lockhart J); Gunns Ltd v Marr [2005] VSC 251 [58] (Bongiorno J).

[7] Marks v GIO Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494, 515 [53] (McHugh, Hayne and Callinan JJ).

At a glance

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Judgment (97 paragraphs)

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Legislation Cited (8)

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