Sheather v Staples Waste Removals Pty Limited

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

JUDGE: NICHOLAS J DATE OF ORDER: 11 september 2012 WHERE MADE: SYDNEY

1. The appellant is to provide security for costs of his appeal in the amount of $12,500 within 21 days of today.
2. Subject to the appellant complying with order 1 hereof, the judgment against which he has appealed is stayed until the determination of his appeal or further order.
3. Security for costs required by these orders is to be provided by way of payment into Court or by the provision of security in some other form acceptable to the Registrar.
4. The parties' interlocutory applications are otherwise dismissed but without prejudice to the right of the first respondent to seek an order staying or dismissing the appeal in the event that security for costs is not provided in accordance with these orders.
5. The costs of the parties' interlocutory applications will be costs in the appeal.
6. The appeal is to be listed for directions and, if necessary, the hearing of any application for orders of the kind referred to in order 4 above before Nicholas J at 9.30am on 12 October 2012. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 716 of 2012

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 747 of 2012

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

JUDGE: NICHOLAS J DATE: 11 September 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 Before me are a number of interlocutory applications filed in two appeals which are to be heard together by me in early November 2012. 2 The first respondent and cross-appellant to both the appeals, Staples Waste Removals Pty Limited (SWR) sued the appellant in matter NSD 747 of 2012 (Mr Bjornsson) and the appellant in matter NSD 716 of 2012 (Mr Sheather) in the Federal Magistrates Court. SWR was successful against both Mr Bjornsson and Mr Sheather. 3 By its interlocutory application, SWR seeks orders requiring each of Mr Bjornsson and Mr Sheather to provide security for SWR's costs of their appeals in the amount of $50,000 (approximately). 4 By his interlocutory application, Mr Bjornsson seeks a stay of the judgment of the Court below. Mr Sheather seeks a similar order. Mr Sheather also seeks an order requiring SWR to provide security for costs in respect of its cross-appeal. SWR and Mr Sheather agree that SWR should be required to provide security for Mr Sheather's costs of the cross-appeal in the sum of $10,000. 5 The appeals and the cross-appeals are against orders made by Federal Magistrate Smith on 8 May 2012. The subject matter of the proceeding heard by his Honour concerned the sale of the domain name "staples.com.au" (domain name). 6 It is common ground that Mr Bjornsson registered the domain name in October 2002 in the name of SWR. It is also common ground that from October 2002 until May 2010 Mr Bjornsson paid all of the expenses associated with the domain name. The domain name was never used by SWR or Mr Bjornsson. 7 Mr Bjornsson arranged for registration of the domain name in 2002 in the hope that it might one day be sold for a profit. That expectation was fulfilled in May 2010 when Mr Bjornsson negotiated a sale of the domain name to Corporate Express Australia Pty Ltd (CEA) for $75,000 (plus GST). 8 During the course of Mr Bjornsson's negotiations with CEA he consulted Mr Sheather. Mr Sheather is a solicitor who acted for Mr Bjornsson between April and May 2010 and who provided legal advice and assistance to Mr Bjornsson in relation to his dealings with SWR, CEA and Mr Staples. 9 Mr Staples is the founder and a director of SWR. It is common ground that Mr Bjornsson had discussions with Mr Staples in October 2002 in relation to the domain name. Mr Bjornsson sought Mr Staples' consent to register the domain name in SWR's name because it was not then possible under the policy of the Australian Domain Name Administrator for Mr Bjornsson to register it in his own name or the name of any other entity with which he was associated. 10 The main area of dispute between Mr Bjornsson and SWR in the Court below concerned the terms upon which it was agreed that the registration of the domain name might take place. There was conflicting evidence given by Mr Bjornsson and Mr Staples as to what was said between them in 2002 in relation to the domain name. Mr Bjornsson relied upon his account of the relevant conversation in support of the proposition that he was legally entitled to do what he pleased with the domain name. SWR relied upon Mr Staples' version of the conversation in support of the proposition that Mr Bjornsson registered the domain name as agent for SWR. 11 Nothing more was said between Mr Bjornsson and Mr Staples in relation to the domain name until March 2010 after Mr Bjornsson was first contacted by a person expressing interest in acquiring it for US$1,000. In early March 2010 Mr Bjornsson was receiving offers involving much larger amounts. Mr Bjornsson first contacted Mr Staples to discuss the offers at about this time when the amount being offered had risen to $10,000. 12 Between early March and mid April 2010 Mr Bjornsson kept Mr Staples informed of various offers made during the negotiation between Mr Bjornsson and representatives of CEA. In mid April 2010 he contacted Mr Sheather for advice. Ultimately, Mr Bjornsson went ahead and sold the domain name without first obtaining any approval from SWR or Mr Staples. Mr Bjornsson claimed that he did this on the advice of Mr Sheather. 13 Mr Bjornsson arranged for the proceeds of sale to be paid by CEA into Mr Sheather's trust account. Most of the proceeds were then paid into a joint account in the name of Mr Bjornsson and his wife. According to Mr Bjornsson, the proceeds were used to make mortgage payments and to pay various living and medical expenses. 14 SWR sued Mr Bjornsson for breach of fiduciary duty, deceit and for contravention of s 52 of the Trade Practices Act 1974 (Cth) (the Act). SWR also sued Mr Sheather who it alleged had knowingly and intentionally participated in Mr Bjornsson's breach of fiduciary duty and his contravention of s 52. SWR also joined CEA as a party but SWR's claims against it were settled before trial for $33,000 without admission of liability. 15 On 30 March 2012 the primary judge delivered reasons for judgment. On 8 May 2012, his Honour delivered some additional reasons and made declarations to the following effect: a. Mr Bjornsson was in breach of fiduciary duties he owed to SWR in his capacity as its agent, and engaged in misleading and deceptive conduct in contravention of s 52 of the Act, when causing the domain name to be transferred from SWR's name into his own name and selling it to CEA without SWR's knowledge or authority. b. Mr Sheather participated in Mr Bjornsson's breach of his fiduciary duties with knowledge of Mr Bjornsson's dishonest and fraudulent design, and was knowingly concerned in or a party to the contravention of s 52 of the Act by Mr Bjornsson within the meaning of s 75B(1)(c) of the Act. 16 His Honour also made orders requiring Mr Bjornsson and Mr Sheather to pay to SWR the sum of $55,000 plus interest of $9,434.14. His Honour ordered Mr Bjornsson to indemnify Mr Sheather for any amounts paid by Mr Sheather to SWR pursuant to those orders. Mr Bjornsson and Mr Sheather were also ordered to pay SWR $74,878.69 in respect of the costs of the proceeding.

General principles 17 The Court has power to make an order requiring Mr Bjornsson and Mr Sheather to provide security for the costs of their appeals under s 56 of the Federal Court of Australia Act 1976 (Cth) and under r 36.09 of the Federal Court Rules 2011. The discretions conferred on the Court under both s 56 and r 36.09 are broad. The question whether security should be awarded and, if so, in what amount, has been described as one of risk management between the parties having regard to their legitimate interests: East Grace Corporation v Xing (No 1) [2005] FCA 219 at [6] per French J. 18 As a general rule, there is a very strong disinclination on the part of the Court to make an order requiring an individual to provide security for costs. However, the general rule does not apply in the case of appeals. In Cowell v Taylor (1886) 31 Ch D 34 Bowen LJ said (at 38): The general rule is that poverty is no bar to a litigant, that, from time immemorial, has been the rule at common law, and also, I believe, in equity. There is an exception in the case of appeals, but there the appellant has had the benefit of a decision by one of Her Majesty's courts, and so an insolvent party is not excluded from the Courts, but only prevented, if he cannot find security, from dragging his opponent from one Court to another. 19 In determining whether an order for costs should be made in respect of an appeal, various factors need to be considered. In Equity Access v Westpac Banking Corporation (1989) ATPR 40-972 at 50,635 Hill J referred to the following factors as relevant to the question whether security should be ordered: the chances of success of the applicant; whether the applicant's claim is bona fide or a sham; the quantum of risk that the applicant cannot satisfy a cost order; whether use of the power would shut out a small company from making a genuine claim against a large company (i.e. is the power being used oppressively); whether the impecuniosity arises out of the conduct in respect to which relief is sought; whether there are aspects of public interest which weigh in the balance against the making of an order; whether there are any particular discretionary matters peculiar to the circumstances of the case. 20 The application before Hill J was made at first instance rather than in an appeal, but each of the factors referred to by his Honour are still relevant in the case of an application for security for the costs of an appeal. However, in the case of an application for security for the costs of an appeal, an additional factor must be considered. As Bowen CJ said in J & M O'Brien Enterprises Pty Ltd v The Shell Co of Australia Ltd (No 2) (1983) 70 FLR 261 at 264: One matter which is generally considered in relation to applications for security for costs in relation to proceedings at first instance is what prospects of success the plaintiff has in the proceedings. If the plaintiff has a strong and apparently meritorious case the court is reluctant to make an order which may have the effect of shutting the plaintiff out. In the case of an appeal the position is slightly different. For one thing the plaintiff has had his day in court. 21 In Cooper v Universal Music Australia Pty Ltd [2006] FCA 642 Tamberlin J referred to the injustice that might be caused to a litigant compelled to contest a matter for a second time in circumstances where it may not obtain its costs if it is successful. His Honour said (at para [12]): Although Courts will be reluctant to make an order for security costs against a natural person on account of his or her impecuniosity, there is no general principle that prevents the making of such an order. See also Moore v Macks [2007] FCA 509 at [20] (Mansfield J), Skyring v Sweeney [1999] FCA 61 at [6] (Spender J). 22 With these principles in mind I turn to consider whether either Mr Bjornsson or Mr Sheather should be required to provide security for costs of their appeals. I begin with Mr Bjornsson.

Mr Bjornsson 23 Mr Bjornsson is a computer technician and a professional photographer. His affidavit evidence indicates that he has few assets, and none of any substantial value. It is clear from Mr Bjornsson's own evidence that there is a substantial risk that he will not be able to satisfy an order for the costs of his appeal should it be unsuccessful. 24 The house in which Mr Bjornsson resides is said to be owned by his wife of 29 years. His affidavit indicates that it is a six bedroom home at Rouse Hill. They have lived there for 14 years. The property is mortgaged to a bank, and both Mr Bjornsson and his wife are liable for borrowings totalling $342,000 secured against the house. In his affidavit Mr Bjornsson said that the value of his house exceeded these borrowings. Apart from that, there is no evidence before me concerning the value of the house. However, in written submissions filed on behalf of Mr Bjornsson it was conceded that the value of the home is likely to greatly exceed the liability to the bank. 25 Evidence given by Mr Bjornsson in cross-examination indicates that he has made mortgage payments in the past. Other evidence given by him indicates that he has been able to borrow substantial amounts of money from relatives. In particular, Mr Bjornsson was able to borrow $70,000 from his sister to help fund his defence of the proceeding brought by SWR. 26 Mr Bjornsson stated in his affidavit that he did not know of any source from whom he could borrow funds to meet any order for security for costs. Yet, it was apparent from other evidence given by him in cross-examination that he had not made any inquiries of his wife or his sister to determine whether they might provide him with funds with which to provide security for costs. 27 I accept Mr Bjornsson does not presently have the funds necessary to comply with an order for security for costs. However, I do not accept that Mr Bjornsson is not in a position to raise such funds should he be required to do so in order to prosecute his appeal. For this reason I do not accept that an order requiring Mr Bjornsson to provide security for costs in a reasonable amount will stultify his appeal. 28 There are a number of other considerations to address. Most significant amongst these are what were said to be the strongest of Mr Bjornsson's grounds of appeal and SWR's delay in applying for security for costs. 29 As to the strength of Mr Bjornsson's appeal, it was argued that the primary judge erred in two main areas. First, it was argued that his Honour overlooked the advice said to have been given by Mr Sheather to Mr Bjornsson which, according to Mr Bjornsson, was to the effect that he was entitled to transfer the domain name without Mr Staples' knowledge or approval and that he was also entitled to retain the whole of the proceeds of sale. 30 The significance of any advice received by Mr Bjornsson from Mr Sheather may depend upon the instructions that Mr Bjornsson provided to Mr Sheather particularly in relation to his dealings with Mr Staples around the time the domain name was first registered. In this regard, the primary judge did not accept Mr Bjornsson's account of his conversations with Mr Staples. As to the conversation between Mr Bjornsson and Mr Staples that took place in or about October 2002 the primary judge found (at para [118]): I accept that the reliability of Mr Staples' recollections about a relatively brief meeting nearly nine years earlier, of which he recalls receiving no reminder until 2010, needs to be treated with caution. I consider it likely that during 2010 his recollections of his 2002 arrangement with Mr Bjornsson were unclear, and that his current evidence may have been coloured by later events. However, I accept confidently Mr Staples' evidence that, at least, he said nothing to Mr Bjornsson using words to the effect, or with an intention, that Mr Bjornsson would have an unqualified authority to obtain and treat the registered business name 'staples.com.au' as his own property, and to the exclusion of Mr Staples' company, Staples Waste Removals, without the need for further discussions, agreement, and authority from Mr Staples. I make this finding not only based upon acceptance of Mr Staples [sic] denials of this, and my findings as to the less satisfactory nature of Mr Bjornsson's evidence, but also because I consider it highly improbable that Mr Staples would have made a gift of a licence to use and benefit from his company's name and business association to anyone as unrelated to him personally or in business as was Mr Bjornsson in 2002. 31 These findings are central to the primary judge's ultimate conclusion that Mr Bjornsson acted as agent for SWR when registering the domain name. Mr Bjornsson's challenge to that conclusion will need to be considered having regard to the principles discussed in Fox v Percy (2003) 214 CLR 118 at [26] - [31] per Gleeson CJ, Gummow and Kirby JJ. 32 The other errors which Mr Bjornsson attributes to the primary judge relate mainly to matters of quantum. In particular, it was argued that the primary judge made insufficient allowance for the $33,000 payment received by SWR from CEA and Mr Bjornsson's equitable entitlement to share in the proceeds of sale given what was said to be the nature and terms of the understanding arrived at between Mr Bjornsson and Mr Staples in or about October 2002. 33 As to the first matter, the primary judge declined to make any allowance for the amount paid by CEA to SWR when calculating the amount of equitable compensation that should be awarded. Mr Bjornsson's grounds of appeal contend that the primary judge should have reduced the award by $33,000. The primary judge explained at paras [170] - [175] why he was not prepared to reduce the award on this basis. Although Mr Bjornsson's grounds of appeal and written submissions argue that the primary judge's decision on this point resulted in "double recovery", they do not really engage with his Honour's reasoning process as explained in the paragraphs of the judgment to which I have referred. 34 As to the second matter, the primary judge made an allowance of 25% in favour of Mr Bjornsson. It was argued that proper allowance was 50% given the nature of the arrangements made between Mr Bjornsson and Mr Staples in 2002. I accept that there may be force in this argument but I would not go so far as to characterise this ground of appeal as strong. 35 In the circumstances, while I am willing to proceed on the basis that Mr Bjornsson's appeal is brought in good faith and is reasonably arguable, I am not satisfied that any of the grounds of appeal have been shown to be particularly strong. 36 As to delay, the pertinent facts may be summarised as follows. Mr Bjornsson's appeal was filed on 29 May 2012. SWR's solicitor wrote to Mr Bjornsson's solicitor on 12 June 2012 raising the matter of security. He promptly responded that his client would not agree to provide security. The question of security was not raised again until 17 July 2012 which was the day before the scheduled call-over. On that date SWR's solicitors wrote to Mr Bjornsson's solicitors in terms that simply ignored the fact that Mr Bjornsson's solicitor had made Mr Bjornsson's position in relation to security clear the previous month. The interlocutory application seeking security for costs was not filed until 23 August 2012. 37 Between June 2012 and August 2012 SWR incurred legal costs of approximately $12,000 which are included in the security for costs sought by SWR. 38 In my view the delay in bringing the application for security is significant. Although I do not think that it should result in SWR's application being rejected, I propose to take it into account when determining the amount of security that should be ordered. 39 None of the other factors relevant to the question of security for costs seem to be particularly relevant here. I note that it was suggested by Mr Bjornsson that there is a public interest dimension to his appeal in that the primary judge made findings of fraud against him. While I accept that this may be a matter of significance to Mr Bjornsson, I do not think it follows his appeal has any public interest dimension to it. 40 In the result, I have come to the conclusion that there should be an order requiring Mr Bjornsson to provide security for costs.

Mr Sheather 41 Mr Sheather's financial position is precarious. I am satisfied that there is a substantial risk that he will not be able to satisfy an order for costs if his appeal is unsuccessful. 42 Mr Sheather has assets of about $1.0 million. Against this he has liabilities of about $1.0 million. His principal assets consist of a home valued at approximately $720,000, receivables of $75,000 and work in progress (including disbursements yet to be reimbursed) of approximately $320,000. Borrowings secured against his house total about $460,000. All the other liabilities are unsecured including his liability to the Australian Taxation Office (ATO) of about $410,000. Mr Sheather's liability to the ATO was previously estimated to be less than half that amount but the amount claimed by the ATO increased significantly after an audit was completed around the middle of this year. He says that a large part of the amount claimed by the ATO involves penalties and interest charges. 43 Mr Sheather's costs of the appeal are being funded by his professional indemnity insurer. However, his insurer has advised him that it will not provide indemnity in relation to the orders for the payment of equitable compensation, interest and costs made below given the nature of the findings made against him by the primary judge. 44 Mr Sheather said in his affidavit that: The findings of the magistrate impact significantly on my practice as a solicitor. The judgment of the magistrate has been widely disseminated throughout the community particularly via the internet. I am very concerned about the impact of the magistrate's judgment on my professional reputation. I am dependent on my ability to practise as a solicitor to earn an income and to meet my financial obligations to my staff and my creditors including the ATO. My ability to prosecute this appeal is important to my ongoing ability to practise as a solicitor. This evidence was not challenged and I accept it. Having found that Mr Bjornsson engaged in a dishonest scheme, the primary judge found that Mr Sheather was at least wilfully blind to it. In particular, his Honour said that he was satisfied that Mr Sheather's actions involved "at least 'wilfully shutting one's eyes to the obvious' or 'knowledge of circumstances which would indicate the facts to an honest and reasonable man' in his circumstances." There is no doubt that this is a serious finding against a professional advisor, especially if he or she is a solicitor. 45 As with Mr Bjornsson's appeal, I propose to proceed on the basis that Mr Sheather's appeal is brought bona fide and has reasonable prospects of success. 46 Mr Sheather stated in his affidavit that he would not feel comfortable trying to raise finance for the purpose of providing security for costs because of his precarious financial position. While I understand his concern, I am also mindful of the risk faced by SWR if Mr Sheather's appeal is unsuccessful. While the risk cannot be eliminated, it may be reduced by requiring Mr Sheather to provide some security for costs. 47 While Mr Sheather's asset position is precarious, it is apparent that he has substantial receivables and work in progress which I infer could be used by him to raise money to comply with an order requiring him to provide security for costs. I am not satisfied that an order for security in a reasonable amount will stultify his appeal. 48 I propose to order that Mr Sheather also provide security for costs.

Quantum of Security 49 The amount of security sought by SWR is in my view excessive in two main respects. 50 First, I do not consider it appropriate to require each appellant to provide security for all of SWR's costs (even if only on a party/party basis) in respect of the hearing of the appeals and related preparation. That would mean that the total amount of security provided would be greatly in excess of the total costs that will be incurred by SWR. I accept that it is possible Mr Sheather will succeed in his appeal even if Mr Bjornsson's appeal fails. Nevertheless, to my mind that does not provide a sufficient justification for requiring each of the appellants to provide security on the footing that an appellant who is unsuccessful will be required to pay all of SWR's costs in circumstances where the other appellant is successful. 51 Secondly, a review of the evidence relied upon by SWR suggests to me that the amount of time allocated to preparation goes beyond what is reasonably required. The first respondent's solicitor's calculations include exceedingly generous allowances for preparation by both solicitor and counsel. The amount specified for preparation by counsel (which includes preparing written submissions) is 75 hours. In my view, that is excessive for a matter that began as a dispute over a comparatively small sum of money. The legal costs already incurred by SWR exceed the amount of equitable compensation awarded by a substantial margin. 52 I consider that requiring each of the appellants to provide security for costs of $12,500 is the best way of managing the risk to SWR that the appellants, or either of them, will be unable to satisfy any cost orders that may be made in favour of SWR in the event that their appeals, or at least one of them, fail. I am mindful that this may leave SWR somewhat exposed in the event that Mr Sheather's appeal, but not Mr Bjornsson's appeal, is successful. But I am also mindful of the appellants' limited means. I also take into account that each of the appellants may not be able to recover their costs from SWR (save for the $10,000 to be lodged as security for the cross-appeal in Mr Sheather's appeal) if either of them are successful. 53 In the result, Mr Bjornsson and Mr Sheather will each be required to provide security for costs in the amount of $12,500.

Stay of Execution 54 Mr Sheather and Mr Bjornsson have both applied for a stay of the primary judge's judgment pending the determination of the appeal. The rule under which their applications are made is r 36.08. 55 The appellants' applications for orders staying execution of the primary judge's judgment are to be determined in accordance with the principles applied by the Full Court in Powerflex Services Pty Ltd v Data Access Corporation (1996) 35 IPR 193 as first explained by the Court of Appeal in Alexander v Cambridge Credit Corporation Limited (1985) 2 NSWLR 685. 56 It seems to be common ground that SWR does not trade. In the absence of evidence suggesting otherwise, I infer that it has no assets apart from the judgments obtained below. No doubt this explains why SWR has agreed to provide security for costs of the cross-appeal in Mr Sheather's matter. It also explains why SWR concedes that, pending determination of the appeal and absent any stay, any amounts that may be paid by the appellants under the judgments entered against them below should be paid into Court or SWR's solicitor's trust account rather than to SWR. There are some invoices in evidence from SWR's solicitor but, apart from them, the evidence does not tell me anything about the nature or extent of SWR's liabilities. 57 Of course, the first respondent is prima facie entitled to the benefit of the judgment obtained below. But that presumption may be displaced where there are significant doubts as to the ability of the first respondent to repay the judgment sum should it need to be repaid following a successful appeal. 58 It was not suggested that either appellant might deal with his assets in a manner that might prejudice SWR if a stay is granted and, in light of their financial position as revealed by the evidence, I would not infer that there is much scope for either of them to do so in any event. 59 The prejudice that SWR might suffer in the event that a stay is granted is that it may be deprived of some interest on any amount paid into Court or into its solicitor's trust account. In the overall scheme of things, this is not a significant consideration especially when the appeal is already listed for hearing in November. 60 In all the circumstances, I am satisfied that this is an appropriate case for a stay. However, the order staying enforcement of the judgments entered below will be conditional upon the appellants complying with the orders for security made against them.

Mr Sheather's proposed amended notice of appeal 61 Mr Sheather has sought leave to amend his notice of appeal to raise an additional ground of appeal contending that the primary judge erred in law by holding that Mr Sheather and Mr Bjornsson were jointly and severally liable to SWR. 62 SWR resists the proposed amendment on two grounds. First, it argued that the point sought to be raised was not raised by Mr Sheather at trial. Secondly, it submitted that the point sought to be raised has no prospects of success. 63 Whether or not Mr Sheather should be permitted to raise what SWR says is a new point is something that I propose to address at the hearing of Mr Sheather's appeal by which time I should have a fuller understanding of the issue and the way in which the proceeding was conducted below. In the meantime, the parties' written submissions must address the proposed ground of appeal on the assumption that Mr Sheather will be granted the leave he seeks. 64 The proceedings will be stood over to a later date to consider what should be done in the event that any of the orders for security made today are not complied with. 65 I will make orders accordingly. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholas.