Adultshop.com Ltd v Shannon
[2005] WASC 71
ADULTSHOP.COM LTD & ANOR -v- SHANNON & ORS [2005] WASC 71
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2005] WASC 71 | |
| Case No: | CIV:2304/2004 | 9 MARCH 2005 | |
| Coram: | MASTER SANDERSON | 5/05/05 | |
| 9 | Judgment Part: | 1 of 1 | |
| Result: | Amended statement of claim struck out | ||
| B | |||
| PDF Version |
| Parties: | ADULTSHOP.COM LTD (ACN 009 147 924) TODAY'S SUCCESS PTY LTD (ACN 083 832 311) DEAN MICHAEL SHANNON STEVEN EDWARD JONES E-MILLIONS PTY LTD (ACN 097 345 483) |
Catchwords: | Practice and procedure Application to strike out amended statement of claim Turns on own facts |
Legislation: | Trade Practices Act 1974 (Cth), s 51A, s 52 |
Case References: | Ting & Anor v Blanche & Anor (1993) 118 ALR 543 Nil |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- First Plaintiff
TODAY'S SUCCESS PTY LTD (ACN 083 832 311)
Second Plaintiff
AND
DEAN MICHAEL SHANNON
First Defendant
STEVEN EDWARD JONES
Second Defendant
E-MILLIONS PTY LTD (ACN 097 345 483)
Third Defendant
Catchwords:
Practice and procedure - Application to strike out amended statement of claim - Turns on own facts
(Page 2)
Legislation:
Trade Practices Act 1974 (Cth), s 51A, s 52
Result:
Amended statement of claim struck out
Category: B
Representation:
Counsel:
First Plaintiff : Mr P N Bevilacqua
Second Plaintiff : Mr P N Bevilacqua
First Defendant : Mr M H Zilko SC
Second Defendant : Mr M H Zilko SC
Third Defendant : Mr M H Zilko SC
Solicitors:
First Plaintiff : Fearis Salter Power Shervington
Second Plaintiff : Fearis Salter Power Shervington
First Defendant : Christensen Vaughan
Second Defendant : Christensen Vaughan
Third Defendant : Christensen Vaughan
Case(s) referred to in judgment(s):
Ting & Anor v Blanche & Anor (1993) 118 ALR 543
Case(s) also cited:
Nil
(Page 3)
1 MASTER SANDERSON: This is the defendants' application to strike out the plaintiffs' amended statement of claim. To understand the nature of the application it is necessary to deal briefly with the plaintiffs' pleaded causes of action.
2 The first and second plaintiffs are companies duly incorporated and from 29 June 2001 and at all material times thereafter, the second plaintiff was a wholly owned subsidiary of the first plaintiff. From 11 August 1998 to 2 February 2002 the first and second defendants were directors of the second plaintiff. Between them they equally held the whole of the issued capital of the second plaintiff. The third defendant is duly incorporated and was formally known as Lopso Pty Ltd. Throughout the pleading the third defendant is referred to as "Lopso" and that is the description which I will use in these reasons.
3 All of these matters are pleaded in the first three paragraphs of the amended statement of claim and are uncontroversial.
4 The plaintiffs plead that at all material times the second plaintiff conducted a business of "internet adult entertainment". Customers of the business would, upon payment of a fee, gain access to images contained within internet websites owned by the second plaintiff. This enterprise is described in the pleading as "the Business". By par 5 it is pleaded that at all material times up to and including 20 September 2001 payments made to the second plaintiff as part of the Business were made by customers primarily by means of a credit card payment to a third party billing service company. This third party billing service company is defined in the pleading as "the Third Party Processor". It is pleaded that the Third Party Processor applied certain controls in respect of payments to avoid fraudulent payments. The payments were then passed on by the Third Party Processor to the second plaintiff.
5 It is then pleaded that by a written agreement made on or about 30 April 2001 between the first plaintiff on the one hand and the first and second defendants on the other, the first and second defendants sold all their shares in the second plaintiff to the first plaintiff. The consideration for this transaction was that the first defendant received just over 33 million fully paid ordinary shares in the first plaintiff and the second defendant, or his nominee, received just under 28 million fully paid ordinary shares in the first plaintiff and $1 million in four equal instalments. Both the first and the second defendants agreed that neither would sell at least half of their shares in the first plaintiff for a period of six months after settlement of the transaction. It was also part of the
(Page 4)
- agreement that the first defendant and the second defendant, or their nominee companies, would enter into consultancy agreements pursuant to which they were responsible for managing the Business. I will return to and deal with these consultancy agreements later in these reasons.
6 Paragraphs 7 through to 11 plead what is said to be a "First Trade Practices Claim in respect of Representations". Paragraph 7 of the amended statement of claim pleads six representations which, it is said, were made by each of the first and second defendants to the first plaintiff between 1 April 2001 and 29 June 2001. All of these representations relate to the processing of credit card payments. Because of the importance of par 7 I will quote it in full:
"7. Between a date on or about 1 April 2001 and 29 June 2001 Shannon and Jones each represented to officers and employees of Adultshop that in the event that Adultshop purchased the whole of the shares in Today's Success and thereby the Business:
(a) under the direction of Shannon and Jones, Today's Success could manage and control the process of making payments to Today's Success by customers as part of the Business by the processing of credit card payments through accounts established and maintained by Today's Success with nominated financial institutions (Merchant Account Processing);
(b) Merchant Account Processing would in the short, medium and long term substantially increase sales of the Business;
(c) Merchant Account Processing would in the short, medium and long term substantially increase profit derived from the Business;
(d) Merchant Account Processing would in the short, medium and long term substantially improve the cash flow of the Business;
(e) Merchant Account Processing would in the short, medium and long term grow the Business; and
(Page 5)
- (f) In all respects for the Business Merchant Account Processing was to be preferred to Third Party Processing
(the Representations).
Particulars of Representations
The best particulars the plaintiffs can give until discovery and/or interrogatories is that the Representations were made orally and in writing to Malcolm Day, Paul Lloyd, Marcus Gracey, Reginald Gillard, Samantha Tough, Kim Heitman, Hans Moser and Harry Ward. In so far as they were in writing they were made in an email from Jones to Marcus Gracey on 23 May 2001 and an email from Jones to Malcolm Day on 31 May 2001."
7 It is to be noted that each of these representations would seem to involve each of the first and second defendants telling officers of the plaintiffs something. But the pleading does not make it clear what time frame was involved. For instance, does "short term" mean a matter of weeks, a matter of months or a matter of years? The pleas are so vague as to be embarrassing and they cannot stand. A proper plea will provide some temporal reference to enable the defendants to understand the case they have to meet.
8 By par 8 it is pleaded that the first and second defendants did not advise officers of the plaintiffs "that there were any risks to or for the Business associated with Merchant Account Processing". It is hard to know what to make of that plea. It is not clear whether it is a plea that there was a further representation by silence. It would appear not because complaint is made about "the Representations". If it is only the pleaded Representations that ground the trade practices claim, then par 8 is unnecessary. If there is a separate plea of a representation by silence, which is said to be actionable, then that needs to be made clear. In its present form par 8 cannot stand.
9 By par 9 it is pleaded that the Representations were with respect to future matters and that the plaintiff relies on s 51A of the Trade Practices Act 1974 (Cth) and s 9 of the Fair Trading Act 1987 (WA). Section 51A facilitates proof in misrepresentation cases involving representations as to future matters. In Ting & Anor v Blanche & Anor (1993) 118 ALR 543, Hill J described the section as follows (at 552):
(Page 6)
- "The section is but an interpretation section; it does not of itself create a cause of action, nor define a norm of conduct. The relevant cause of action is to be found in s 82(1) of the Act by reference to the norm of conduct laid down in s 52 of the Act. What s 51A does, in a practical sense, in cases where it applies, is to cast the burden of proof upon the respondent corporation who has made a representation about a future matter to show that in making that representation it had reasonable grounds for so doing."
10 There is, of course, no reason why the plaintiffs cannot rely on s 51A in the circumstances of this case. As I have indicated above, in my view the way in which the Representations are presently pleaded is defective. But is does seem clear that the Representations all relate to future matters. Notice needs to be given by the plaintiffs to the defendants of the plaintiffs' intention to rely on s 51A. But only in the context of a claim based on misleading and deceptive conduct.
11 There are four elements which go to make up a claim under s 52 of the Trade Practices Act. First, there must be a representation. Second, the representation must be made in trade and commerce. Third, there must be reliance by the plaintiff on the representation leading to a certain course of conduct. Fourthly, the representation must be false. It is to this fourth aspect of the cause of action that s 51A is directed. Logically then, it must come after the elements of the cause of action have been pleaded. That has not been done in this case.
12 Nor is there any plea of reliance. It is not clear from the pleading whether or not the Representations were made prior to the first plaintiff entering into the sale and purchase agreement with the first and second defendants. It may be that the Representations are directed to the consultancy agreements which were entered into as part of the sale agreement. If that is so, it is difficult to see how the consultancy agreements were entered into consequent upon the Representations when there was a contractual obligation requiring the first and second defendants to enter into the consultancy agreements as part of the sale agreement. By par 13 of the amended statement of claim it is pleaded that the Representations "induced" the first plaintiff to complete and settle the sale agreement. But it is not clear whether the first plaintiff actually relied upon the Representations when entering into the sale agreement.
13 The pleading is confused and embarrassing. Paragraphs 8 through to 13 will be struck out.
(Page 7)
14 Paragraphs 14 to 16 of the amended statement of claim are said to deal with "The Contract claim against Shannon". This claim relates to the consultancy agreement entered into by the first defendant with the first plaintiff pursuant to the sale agreement. Paragraph 14 pleads two express terms of the contract and an implied term that the first defendant would "exercise all reasonable care and skill in the performance of all duties and obligations pursuant to the Shannon Consultancy Agreement". There seems little doubt that such a term would be implied in the consultancy agreement and counsel for the defendants did not suggest otherwise.
15 By par 15 it is pleaded that the first defendant was in breach of the consultancy agreement because he "did not advise officers and employees of Today's Success and Adultshop that there were any risks associated with Merchant Account Processing". There then follows a plea that the first defendant did advise the plaintiffs of certain matters in relation to Merchant Account Processing - the six pleaded matters reflecting the representations pleaded in par 7.
16 The first thing to note about par 15 is that it is a rolled-up plea. On the one hand it alleges a failure to advise as to the risks associated with Merchant Account Processing. Presumably that is said to be a breach of the consultancy agreement. On the other hand, it pleads advice that was given which, presumably, is said to be wrong, thus giving rise to a breach of the consultancy agreement. These two separate breaches of contract -the failure to advise on one hand and wrong advice on the other - should be separately pleaded. Such breaches must necessarily have arisen out of different contractual terms. It is not enough simply to plead that there was an implied term to exercise all reasonable care and skill. The alleged breaches in par 15 require a more substantial grounding. Furthermore, it is difficult to see the relevance of the two pleaded express terms. If it is either or both of those terms which the first defendant is alleged to have breached, then the manner of the breach ought be identified.
17 Paragraph 16 appears to be directed at knowledge the first defendant had about the Merchant Account Processing system and its associated risks. If that knowledge is to be the background against which there is said to have been a breach of an implied term, the background must be pleaded before the breach. At present pars 14 to 16 do not properly plead a cause of action and they ought be struck out.
18 Paragraph 17 is headed "The Shannon Equitable Duties". What is pleaded is that the first defendant owed an equitable duty to the plaintiffs "to exercise all reasonable care and skill in the performance of all duties
(Page 8)
- and obligations pursuant to the Shannon Consultancy Agreement". With respect that plea makes no sense at all and the paragraph should be struck out.
19 Paragraph 18 is headed "The Shannon Fiduciary Duty". It is pleaded that the first defendant owed the plaintiffs a fiduciary duty to ensure that "his personal interests did not conflict with those of either Today's Success or Adultshop". It may well be that such a fiduciary duty was owed by the first defendant to the plaintiffs. But reference only to the consultancy agreement is not satisfactory. The plaintiffs must plead particular circumstances that give rise to fiduciary duties in the context of this contractual arrangement. A consultancy agreement is not one of those contractual arrangements which, by their nature, give rise to fiduciary duties. The particular circumstances of the relationship between the first defendant and the plaintiffs needs to be pleaded out to ground any claim that a fiduciary relationship exists. Even if such a relationship does exist, it is difficult to see here that the relationship has been breached so as to give rise to a claim by the plaintiffs against the first defendant. However, it is too early to rule out that as a possibility. For the present, it is enough if I say that par 18 in its present form cannot stand and will be struck out.
20 Paragraphs 19 through to 22 plead what is described as "The Contract Claim Against Lopso". The pleading is identical to the contract claim pleaded against the first defendant and for the same reasons, pars 19 to 22 will be struck out. Paragraph 23 pleads "The Lopso Equitable Duties" and par 24 pleas "The Jones Fiduciary Duty". These two paragraphs are the same plea against the second and third defendants as are found in pars 17 and 18 directed at the first defendant. For the same reasons, both of these two paragraphs will be struck out.
21 Paragraphs 25 through to 36 appear under the heading "First Trade Practices Claim in respect of Advice". The "Advice" referred to is the advice provided by the first and second defendants in relation to the account processing. With respect, the plea is confused and confusing. It does not give any indication of reliance leading to loss. In fact, by pars 32 to 34 it is pleaded that the Business improved. Furthermore, it is not clear how this particular trade practices plea ties in with the plea in pars 7 through to 13. Presumably the Representations pleaded in pars 25 through to 36 were made at a later time. The way both sets of Representations are pleaded it may be that there was only one set of Representations repeated from time to time. This is a matter which
(Page 9)
- requires further attention. At present pars 22 to 36 do not represent a proper plea and ought be struck out.
22 There is an additional difficulty with pars 35 and 36. These paragraphs plead that the first and second defendants sold shares allotted to them pursuant to the sale agreement. There is no indication as to why they should not have sold those shares. It is not clear whether the plaintiffs say the first and second defendants were in breach of the escrow agreements. If they were not, then there seems to be no reason why they could not sell the shares. This is a matter which needs further attention in any repleading.
23 Paragraphs 37 through to 43 deal with "Second Trade Practices Act" claim in respect of Representations. I need not go through these paragraphs in detail. It is sufficient if I say that they do not amount to proper pleas and that they should be struck out. In addition, pars 40 and 42 refer to the first and second defendants knowing that their advice was false. The relevance of such pleas is not clear. A plea of misleading and deceptive conduct under s 52 of the Trade Practices Act does not depend upon the maker of the representation knowing that it was false. Knowledge is irrelevant. Again, in any repleading, pars 40 and 42 require further consideration.
24 Paragraphs 44 through to 47 detail the alleged breaches by the first and second defendants of their fiduciary and equitable duties. Given what I have said in relation to these duties earlier in these reasons, none of these paragraphs can stand. Paragraphs 48 through to 61 detail the losses allegedly suffered by the plaintiffs as a consequence of the breaches by the defendants of the Trade Practices Act, various contractual obligations and equitable and fiduciary duties. Given that I have determined that virtually all of this pleading ought be struck out it is not appropriate that I say too much about the way that the alleged loss is claimed. But this is a matter to which the draftsmen will need to give careful attention. It is one thing to claim loss of a money sum based upon reliance on misleading advice. It is another thing to claim a loss based upon the issue of shares by the plaintiffs to the defendants. There are difficulties associated with such a claim and the draftsmen would be as well to bear these in mind when recasting the pleading.
25 In my view the whole of the amended statement of claim ought be struck out. There will be leave to replead. I will hear the parties as to the precise form of orders and as to costs.
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