De Costi Seafoods (Franchises) Pty Limited v Wachtenheim (No 4)
[2014] NSWDC 70
•13 June 2014
District Court
New South Wales
- Amendment notes
Medium Neutral Citation: De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 4) [2014] NSWDC 70 Hearing dates: 16 and 17 December 2013 Decision date: 13 June 2014 Jurisdiction: Civil Before: P Taylor SC DCJ Decision: (1) Dismiss the application for the orders sought in paragraphs 1 to 3 of Ms Thomson's notice of motion.
(2) Note that I do not find under s 349(1) of the Legal Profession Act 2004 that the facts established by the evidence at trial do not form a basis for a reasonable belief that the claim by Serge Wachtenheim and Deist Safety Equipment Australia Pty Ltd against Frank Theodore, De Costi Seafoods (Franchises) Pty Limited, De Costi Seafoods (Holdings) Pty Limited, or George Costi had reasonable prospects of success.
(3) Note that I do find under s 349(1) of the Legal Profession Act 2004 that the facts established by the evidence at trial do not form a basis for a reasonable belief that the claim by Serge Wachtenheim and Deist Safety Equipment Australia Pty Ltd against Androulla Costi had reasonable prospects of success.
(4) Stand over for directions the further conduct of the notices of motion dated 5 August 2013 and 14 October 2013 to a date to be determined convenient to the parties.
(5) Direct the parties to forward to my associate within seven days a list of convenient dates for further directions.
(6) Reserve all questions of costs of the applications.
Catchwords: ORDERS - absence of party - setting aside - inherent power - injustice - orders after bankruptcy - fresh step - creditor - provable debt - costs - consent - no determination on merits - costs orders against practitioners - reasonable prospects - fairly arguable - court hearing proceedings - facts established by the evidence - credibility issues - claim for damages - multiple causes of action - multiple parties Legislation Cited: Bankruptcy Act 1966 (Cth), s 5, s 27, s 58, s 60, s 82
Civil Procedure Act 2005, s 56, s 57, s 99, s 101
Legal Profession Act 1987, s 198J, s 198M, s 198N
Legal Profession Act 2004, s 198, s 345, s 348, s 349
Supreme Court Rules 1970, Pt 40 r 9
Trade Practices Act 1974 (Cth), s 84
Uniform Civil Procedure Rules 2005, r 36.15, r 36.16Cases Cited: ANZ Banking Group Ltd v Computer Plus [1992] 1 VR 607
Australian Competition and Consumer Commission (ACCC) v Kritharas (2000) 105 FCR 444
Australian Competition & Consumer Commission v The Bio Enviro Plan Pty Ltd [2004] FCA 415
Bailey v Marinoff (1971) 125 CLR 529
Bennett v Elysium Noosa Pty Ltd (in liq) (2012) 202 FCR 72
Bovaird v Frost [2013] FCA 974
Cameron v Cole (1944) 68 CLR 571
CGU Insurance Ltd v Watson [2007] NSWCA 301
Charitopoulos v Deputy Commissioner of Taxation [2009] SADC 120
Commonwealth Bank of Australia v Hadfield (2001) 53 NSWLR 614
Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234; [2005] HCA 67
De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54
De Costi Seafoods (Franchises) Pty Limited v Wachtenheim (District Court (NSW), Johnstone DCJ, 12 December 2011, unrep)
Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284
DJL v Central Authority (2000) 201 CLR 226
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397
Fraser Property Developments Pty Ltd v Sommerfeld (No 2) (2005) 2 Qd R 404; [2005] QCA 242
Fraser v Commissioner of Taxation (1996) 69 FLR 99
Gertig v Davies [2003] SASC 86
Hoskins v Van Den-Braak (1998) 43 NSWLR 290
Immigration and Ethnic Affairs, Re Minister for; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622
In the matter of Wan Jia (Australia) International Development Pty Ltd [2012] NSWSC 1007
Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300
Nicholson v Nicholson [1974] 2 NSWLR 59
NMFM Property Pty Ltd v Citibank Ltd (No 10) (2000) 107 FCR 270
Northey v Bega Valley Shire Council [2012] NSWCA 28
Pelechowski v Registrar, Court of Appeal (1999) 198 CLR 435
Permanent Custodians Ltd v Agb Developments Pty Ltd [2010] NSWSC 540
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
RAB Finance Pty Limited v Parlby [2012] NSWDC 247
Staples and Another v Milner and Others (1998) 83 FCR 203
Steindl Nominees Pty Ltd v Laghaifar [2003] 2 Qd R 683
Taylor v Taylor (1979) 143 CLR
Watson v Foxman (1995) 49 NSWLR 315
Zantiotis v Andrew (No 2) (1988) 80 ALR 299Texts Cited: Ritchie's Uniform Civil Procedure NSW Category: Costs Parties: De Costi Seafoods (Franchises) Pty Limited (ACN 103 324 812) (first plaintiff/first cross-defendant/applicant on notice of motion filed 5 August 2013)
De Costi Seafoods (Holdings) Pty Limited (ACN 064 186 410) (second plaintiff/fifth cross-defendant/applicant on notice of motion filed 5 August 2013)
Serge Wachtenheim (first defendant/first cross-claimant/first respondent to Ms Thomson's notice of motion)
Deist Safety Equipment Australia Pty Ltd (ACN 081 763 877) (second defendant/second cross-claimant/second respondent to Ms Thomson's notice of motion)
Frank Theodore (second cross-defendant)
George Costi (fourth cross-defendant/applicant on notice of motion filed 5 August 2013)
Androulla Costi (seventh cross-defendant/applicant on notice of motion filed 5 August 2013)
Leonardo Muriniti (respondent to De Costi's notice of motion/third respondent to Ms Thomson's notice of motion)
Robert Newell (respondent to De Costi's notice of motion/fourth respondent to Ms Thomson's notice of motion)
Louise Thomson, Trustee of the Bankrupt Estate of Barry David Shnider, the Sixth Cross Defendant (applicant on notice of motion filed 14 October 2013)Representation: Mr S J Stanton with Mr M B Holmes (plaintiffs/first, second, fourth, fifth and seventh cross-defendants/applicants on notice of motion filed 5 August 2013)
Mr D A Lloyd (Leonardo Muriniti)
Mr P Greenwood SC with Mr H Pintos-Lopez (Robert Newell)
Mr P Doyle Gray with Ms T Gordan (Louise Thomson, Trustee of the Bankrupt Estate of Barry David Shnider, the Sixth Cross Defendant)
McLachlan Thorpe (plaintiffs/first, second, fourth, fifth and seventh cross-defendants/applicants on notice of motion filed 5 August 2013)
Yeldham Price O'Brien Lusk (Leonardo Muriniti)
Gadens Lawyers (Robert Newell)
Searle & Associates (Louise Thomson, Trustee of the Bankrupt Estate of Barry David Shnider, the Sixth Cross Defendant)
File Number(s): 2006/296319 Publication restriction: None
Judgment
A. Introduction
De Costi Seafoods (Franchises) Pty Limited ("Franchises"), and a related company ("Holdings") (together "De Costi Seafoods") commenced proceedings in 2006 against Serge Wachtenheim and his company, Deist Safety Equipment Australia Pty Ltd ("Deist"), for moneys owing under certain written agreements. In February 2007 Mr Wachtenheim and Deist filed a defence and a cross-claim against De Costi Seafoods and other related persons ("together De Costi"), principally alleging misleading conduct. In 2008 Barry David Shnider was joined as a cross-defendant.
The primary proceedings were the subject of a decision of Johnstone DCJ (see De Costi Seafoods (Franchises) Pty Limited v Wachtenheim (District Court (NSW), Johnstone DCJ, 12 December 2011, unrep)) where judgment was given in favour of De Costi Seafoods. On 1 February 2012, Johnstone DCJ dismissed the claim against Mr Shnider with no orders as to costs.
The cross-claim against De Costi was heard separately, commencing in June 2012, and was dismissed (see De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54 (hereafter De Costi (No 3)). Order 5 of the orders made on that occasion was in the following terms: "5. Grant liberty to the parties to apply within 28 days to vary the costs order...or to seek any further order in respect of costs."
De Costi and Louise Thomson, trustee of the bankrupt estate of Mr Shnider, make applications, relying on the liberty granted.
B. The applications
On 5 August 2013 De Costi filed a notice of motion seeking orders that Leonardo Muriniti, the solicitor of Mr Wachtenheim and Deist, and Robert Newell, counsel for Mr Wachtenheim and Deist, indemnify De Costi under s 99(2) of the Civil Procedure Act 2005 ("CPA") and s 348(1)(b) of the Legal Profession Act 2004 ("LPA") for the costs payable by De Costi "arising from or related to these proceedings", and for interest on costs pursuant to s 101(4) of the CPA.
On 14 October 2013 Ms Thomson filed a notice of motion seeking similar orders under s 99(2) of the CPA and s 348(1)(b) of the LPA against Mr Muriniti and Mr Newell in respect of costs paid or payable by Mr Shnider or his bankrupt estate, and interest on costs paid. Ms Thomson also sought orders in the following terms:
"1 Set aside ex debito justitiae order 7 of the Court made 1 February 2012.
2 Dismiss the Cross-Claim insofar as it makes a claim against [Mr Shnider].
3 The Cross-Claimants to pay [Mr Shnider's] costs of the Cross-Claim on an indemnity basis."
Submissions in respect of orders 1 to 3 sought by Ms Thomson proceeded separately and first at the hearing of the applications, and it is appropriate that I deal first with that aspect.
C. Thomson application orders 1 to 3
(a) Background facts
By an amended cross-claim filed on 18 January 2008 Mr Wachtenheim and Deist joined Mr Shnider to the proceedings as the sixth cross-defendant and claimed damages for misleading conduct, negligence and advice given "recklessly and without regard to [its] truth or falsity".
Further amendments were made to the pleadings.
On 9 August 2011 the proceedings were listed before Gibb DCJ. Mr Wachtenheim and Deist were granted leave to file a Fourth Further Amended Cross-Claim in draft form, but were subject to an adverse costs order made in the following terms:
"5. XC1 and XC2 (jointly and severally) to pay the costs on an indemnity basis of each of the Ps and the XDs (jointly and severally), being costs incurred today and thrown away by reason of delay in compliance with previous orders."
On 23 September 2011 Gibb DCJ vacated the hearing date of the cross-claim but maintained the hearing dates for the hearing of the claim by De Costi Seafoods. Order 22 made by Gibb DCJ on 23 September 2011 was in these terms:
"22. XCs' to pay the XDs' costs incurred today and thrown away by the filing of the Fifth Further Amended Statement of Cross-Claim, which includes the hearing today (on all matters), such costs to be assessed forthwith and to be payable forthwith."
Her Honour stood over for further directions the "[cross-defendants'] application for indemnity costs on the vacation of the listing of the hearing of the cross claim".
On 26 September 2011 the fifth further amended statement of cross-claim was filed for Mr Wachtenheim and Deist. This version of the cross-claim maintained against Mr Shnider the allegations of negligence and misleading conduct, including being knowingly involved in misleading conduct.
On 7 October 2011 Mr Shnider was made bankrupt.
On 18 October 2011, Gibb DCJ stood over:
"for argument before and determination by the trial judge...
9.10 The sixth cross-defendant's [Mr Shnider's] application for costs on [sic] be paid on an indemnity basis in respect of and thrown away by the filing of the fifth further amended cross-claim in respect of vacation of the listing of the hearing of the cross claim".
Searle and Associates ("Searle") were the solicitors acting for Mr Shnider from 18 January 2008 until 7 December 2011. On 3 November 2011 the solicitors for De Costi wrote to Searle by email stating:
"I tried calling your office but there was no answer.
In any event, I have been asked by the Court to inform you that His Honour intends to deal with the issue of costs 'some time next week'.
His Honour has also asked that we inform you, to:
1. Write to all the parties, articulating precisely the order you seek.
2. Let the Court know how much notice you will require (for you to appear), so the Judge's Associate can contact you to let you know within the appropriate time before the issue of costs is heard.
3. put Mr Shnider on notice that should he wish to appear, he should make his intentions known.
I attach an extract of today's transcript in relation to the above.
If anything said by our Counsel or Mr Newell, in relation to your position / Mr Shnider's position (if he remains your client) is not accurate, you may wish to flag it to the Court at your next appearance, in order to correct the Court's records."
The attached transcript recorded Mr Newell stating that Searle "had instructions to appear on behalf of the trustee in bankruptcy for Mr Schneider [sic]". Mr Newell also stated that Searle would be asking for costs, and counsel for De Costi stated that Searle would be asking "for costs for the vacation of the hearing...on an indemnity basis". Mr Newell indicated that the orders sought in the Searle application would not be by consent.
On 4 November 2011 Mr Shnider wrote to the judge's associate indicating that he was aware of the invitation for him to apply for costs orders, and that Searle would act for him. On 7 November 2011 Searle wrote on behalf of Mr Shnider to the judge's associate foreshadowing an application for indemnity costs for vacation of the hearing date, asserting that Searle was a secured creditor and confirming that the Official Trustee did not object to the application.
On 8 November 2011 Johnstone DCJ made orders including that the "costs application by [Searle] stood over date to be fixed" and granting Searle leave to attend a mediation then proposed.
On 11 November 2011 Mr Muriniti wrote to the Official Trustee in Bankruptcy asking whether it would be appearing in the proceedings on behalf of Mr Shnider at a directions hearing on 1 February 2012 at 10am. A response from the Official Trustee that same day confirmed that the Official Trustee "does not intend to participate in the mediation and intervene in the District Court proceedings".
The Official Trustee had on 10 November 2011 also confirmed this position to the solicitors for De Costi.
On 7 December 2011 Searle filed a notice ceasing to act for Mr Shnider and wrote to the judge's associate stating, "We wish to inform the Court that we will not be pressing this application [for indemnity costs] and now withdraw it".
On 1 February 2012, in the absence of Mr Shnider and the Official Trustee, Johnstone DCJ made an order that the cross-claim against Mr Shnider is dismissed with no order as to costs "the intention being that each party is to bear their own costs of that cross-claim".
In the period from June to November 2012 the De Costi cross-claim was heard, and judgment delivered on 3 May 2013.
Searle appeared on 31 May 2013 in a directions hearing and filed a notice of appearance on 11 July 2013 for the trustee of Mr Shnider. By this time Ms Thomson, rather than the Official Trustee, was the trustee of the bankrupt estate of Mr Shnider.
On 23 July Searle wrote to the other parties and to my associate, referring to that part of the orders of Johnstone J dealing with costs and stating "We were not present on that day and gave no prior indication either to the Court or to any other party that we agreed to each party bearing their own costs". An affidavit of Deborah Jean Searle, the principal of Searle, stated at paragraph 13:
"I did not become aware of the order [of Johnstone DCJ] until Friday, 14 July 2013. Neither this firm, Shnider or The Insolvency Trustee [sic] was given notice of the listing nor of the court making this order."
Ms Thomson asserts that the order that the cross-claim against Mr Shnider be dismissed with no order as to costs should be set aside on two bases: first, that no notice (presumably, of the order in advance of it being given) was given to her or Mr Shnider; and secondly, that the order was a fresh step in proceedings taken without leave of the court under s 58(3) of the Bankruptcy Act 1966 (Cth). Ms Thomson further submits that the order should be replaced with an order that the cross-claim against Mr Shnider "be dismissed with a costs order made on the grounds set out in sections C and D below". Sections C and D deal principally with the argument for costs orders against Mr Muriniti and Mr Newell under s 99 of the CPA and s 348 of the LPA, but relevantly for present purposes assert that the cross-claim against Mr Shnider:
"did not have reasonable prospects of success and should never have been commenced and maintained. Accordingly, the Court should order that... the cross-claimants pay Mr Shnider's costs of the proceedings on an indemnity basis".
(b) The lack of notice
Much of the argument about the lack of notice was directed to the inherent power of the District Court to set aside an order given in the absence of and without notice to a party. A passage from the judgment of Rich J in Cameron v Cole (1944) 68 CLR 571 at 589 lends support to the existence of this power:
"It is a fundamental principle of natural justice, applicable to all courts whether superior or inferior, that a person against whom a claim or charge is made must be given a reasonable opportunity of appearing and presenting his case. If this principle be not observed, the person affected is entitled, ex debito justitiae, to have any determination which affects him set aside; and a court which finds that it has been led to purport to determine a matter in which there has been a failure to observe the principle has inherent jurisdiction to set its determination aside..."
This passage was adopted expressly by Gibbs J in Taylor v Taylor (1979) 143 CLR 1 at 4, with whom Stephen J agreed (at 10). Mason J at 16 similarly stated:
"A jurisdiction to set aside its orders is inherent in every court unless displaced by statute...[which extends to] the setting aside of judgments which have been obtained without service or notice to a party [and to] the setting aside of a default or ex parte judgment obtained when the absence of the party is due to no fault on his part."
See also Hoskins v Van Den-Braak (1998) 43 NSWLR 290 at 294. The passages in Pelechowski v Registrar, Court of Appeal (1999) 198 CLR 435 at [118] and Commonwealth Bank of Australia v Hadfield (2001) 53 NSWLR 614 at [68], relied upon by Mr Muriniti, do not challenge this principle.
However, as Taylor notes this common law rule is subject to any contrary statutory provision.
The Uniform Civil Procedure Rules 2005 empower the court to set aside judgments in a number of circumstances.
For present purposes the relevant provision is rule 36.16(2)(b) which enables the Court to set aside a judgment given in the absence of a party whether or not the absent party had notice.
It is not in contest that the order made by Johnstone DCJ dismissing the claim against Mr Shnider with no order as to costs was made in the absence of Mr Shnider and the Official Trustee. That is sufficient to enliven the power in rule 36.16(2)(b).
But Ms Thomson resolutely maintained reliance upon the existence of the inherent power, apparently on the basis that the inherent power creates a right in Ms Thomson to have the judgment set aside, whereas rule 36.16(2)(b) only enlivens a discretion.
In the circumstances of this case, this difference, if it exists, is of no significance. The "right" arising from an inherent power depends on Ms Thomson having no "reasonable opportunity of appearing and presenting [her] case" (see Cameron at 589) or where there is no "service or notice" (Taylor at 16) or where there has been a "failure to observe an essential requirement of natural justice" (Taylor at 7; Hoskins at 298E).
In those circumstances, the discretion under rule 36.16(2)(b) would invariably be exercised, at least so long as the application is not otherwise futile.
The real question then is whether the trustee was unaware of the possibility of the orders because of the lack of notice and so had no reasonable opportunity of presenting a case, and there was therefore a denial of natural justice.
The evidence of Deborah Searle that she did not become aware of the (1 February 2012) order until July 2013 is of no significance. The relevant fact is what the Official Trustee knew about the hearing of the matter up to the time the order was made, not what information Ms Searle received afterwards.
Searle ceased acting for Mr Shnider on 7 December 2011, some two months before the orders, and apparently at no relevant time was acting for the Official Trustee (notwithstanding Mr Newell's statement in the transcript of 3 November 2011). The awareness of Ms Searle in the period from 7 December 2011 to 1 February 2012 is not the awareness of a party and is thus irrelevant. Similarly, an absence of "notice of the listing [or] of the court making the order" being given to Ms Searle or to Searle is immaterial.
If I read Ms Searle's affidavit reference to "The Insolvency Trustee" not having notice, as a reference to the Official Trustee not having notice, then, although not objected to, I cannot accept it. Ms Searle's attempt to give evidence about the notice received by another party, for whom she was not acting, cannot prevail over direct documentary evidence of the notice of the 1 February 2012 listing given to the Official Trustee on 11 November 2011. The acknowledgement of that notice that same day by the Official Trustee, and the express decision of the Official Trustee not to participate, is an election validly made under s 60(2) of the Bankruptcy Act 1966 (Cth).
That leaves the position of Mr Shnider. But on 7 December, Searle on behalf of Mr Shnider withdrew the application for indemnity costs, and forwarded a Notice of Ceasing to Act.
Even if Mr Shnider could maintain an action for indemnity costs, which must be doubted in view of s 60(2)-(5) of the Bankruptcy Act 1966 (Cth) and the abandonment of the claim by Searle and the Official Trustee, it is Ms Thomson and not Mr Shnider applying before me to continue the claim for indemnity costs. The notice or lack of notice to Mr Shnider after he became a bankrupt is irrelevant to that application.
The November and December 2011 correspondence persuades me that Ms Searle, her firm and the Official Trustee, knew that the proceedings generally were continuing, but abandoned any action to obtain further relief including by way of costs. On 23 July 2013, Searle said it could not get instructions to proceed with the application (for costs), but obtained instructions "[a]fter that", presumably 19 months after. The evidence only makes sense if Searle were refused instructions by the Official Trustee in December 2011. The subsequent instructions given by Ms Thomson as the trustee in July 2013 are ineffective to invalidate the election earlier made by the Official Trustee.
The circumstance that the Official Trustee had notice of the hearing on 1 February 2012 and expressly declined to participate, and Searle expressly withdrew the application for indemnity costs, is sufficient to deny any entitlement to have the order set aside under the inherent power, if it continues in existence notwithstanding rules 36.15 and 36.16, which I doubt.
But rule 36.16 does not require an absence of notice, only the absence of the party. As Ms Thomson placed no reliance on rule 36.16, it is doubtful whether I should exercise a power under it. Further, no argument was advanced that I should exercise a power in circumstances where the Official Trustee had notice of the hearing.
In any event, there needs to be some injustice present for the power in rule 36.16 to be exercised.
In Nicholson v Nicholson [1974] 2 NSWLR 59, Jenkyn J considered Pt 40 r 9(3) of the Supreme Court Rules 1970, the predecessor of UCPR 36.16. Although there are differences between the terms of Pt 40 r 9(3) and r 36.16(2)(b), those differences are immaterial to the present matter.
In Nicholson, the party that had obtained the order in the absence of the other party sought to set it aside, circumstances having changed since the order was made. Jenkyn J concluded that the power in Pt 40 r 9(3) was not confined to circumstances where the absent party was seeking an order (see pp 64-65 especially 65E). However, Jenkyn J determined that (at 66A):
"The origin of this type of rule was undoubtedly based upon a desire that a court should retain a reserve of power to ensure, if possible, that injustice should not be done because of some procedural error".
His Honour also stated (at 66B):
"I can find no case, and none has been referred to me, in which the power has ever been exercised where no mistake has arisen or force exerted, leading to the making of an unjust order, but where the order obtained or consented to correctly implemented the then intentions of the party, simply because one or other of the parties to the order has experienced a change of heart. In my view it does not matter whether the change of heart flowed from a reconsideration of the facts as they existed prior to the order, or because of changed circumstances which arose after the making of the order".
Jenkyn J also said (at 67A):
"It is one matter to determine whether, in an appropriate case, a person other than the absent one can resort to Pt. 40, r. 9 (3), and another to determine whether, on the facts of the particular case, the Court should accede to an application made under that rule. I do not think that, on the facts of the present case, the Court should set aside the existing order... Without deciding the matter, I would be inclined to conclude that, although the words of Pt. 40, r. 9 (3) (a) are wide enough to cover applications by any interested person, and are not limited to an application by the absent party, the ground on which such application is based must ordinarily be limited to some injustice which arises from the circumstances in which the judgment was made or pronounced, and not simply to supervening circumstances which make the judgment less attractive to one of the interested parties, whether that party be the party obtaining the order or the one against whom it passed".
The proposition was stated more directly in Northey v Bega Valley Shire Council [2012] NSWCA 28 at [16]:
"The central question is whether it is unjust to let the perfected order stand. The matter was put thus by Jordan CJ (Davidson J and Roper J concurring) in Vacuum Oil Co Pty Ltd v Stockdale (1942) 42 SR NSW 239 at 243-4:
The question is whether, upon the material that has been placed before us, there is a real likelihood that it would be unjust to the defendant to allow the judgment to stand. If so, it should be set aside on such terms as it will minimise the possibility of injustice to the plaintiff. If not, we should not interfere."
The injustice submitted by Ms Thomson (though not in terms relying on rule 36.16) is as follows:
"8. As a consequence of the Order made by the Court:
a. the Trustee was not given an opportunity to be heard on the question of costs before the proceedings were dismissed;
b. the bankrupt estate has suffered significant prejudice in that it has been prevented from seeking an order that Mr Shnider's costs be paid be the Cross-Claimants or their legal representatives; and
c. the trustee has thereby been prevented from being able to perform her duty to take appropriate steps to recover property for the benefit of the estate."
I have already found that the Official Trustee was given an opportunity to be heard in respect of the matter and declined to do so, and that the present solicitor for Ms Thomson, the present trustee, abandoned any claim for costs when acting for Mr Shnider. The other two reasons submitted by Ms Thomson are founded on the asserted lack of opportunity. If the Official Trustee had an opportunity, as it did, it was not prevented from seeking a costs order or recovering property for the benefit of the estate.
In my view, there is no injustice present here. The trustee was content for no costs order to be made in its favour in February 2012. To adopt and adapt the words in Nicholson, the new trustee, Ms Thomson, may have had a "change of heart" because "supervening circumstances [in this case, the abject failure of Mr Wachtenheim's proceedings]...make the [existing costs order] less attractive" but that is insufficient to warrant setting aside the order.
There are, on the other hand, good reasons not to disturb the existing order. The general rule that orders once entered are beyond recall supports this approach (see Bailey v Marinoff (1971) 125 CLR 529, 530; DJL v Central Authority (2000) 201 CLR 226 at [38]). All the other parties in the present case have acted for many months on the basis of the orders that have been made. The passing of those 19 months without word from the trustee does not indicate any interest in the trustee in the outcome.
I also accept Mr Muriniti's argument that, at the time of the order of Johnstone DCJ there was no entitlement to seek an order in respect of the costs of the proceedings. Such an order needed to await the resolution of the proceedings on the merits. So far as appears before me, the dismissal on 1 February was by reason of the bankruptcy and s 58(3) of the Bankruptcy Act 1966 (Cth), and not because the allegations in the cross-claim against Mr Shnider were otherwise unmaintainable.
Mr Shnider, or his trustee, may have had an entitlement to seek the costs thrown away by reason of the vacation of the hearing date. Gibb DCJ made an order to similar effect on 23 September 2011. Those costs may be a major component of the costs sought by Ms Thomson, and there was evidence of those costs before me. To the extent that a wider or indemnity costs order is sought, this order is the same as the order that the Official Trustee and Searle decided in 2012 not to pursue.
Mr Newell submits also that Ms Thomson's solicitors should not be permitted to "approbate and reprobate" and that her actions are "opportunistic". Although these labels are applicable, it is doubtful whether they strengthen the resistance to the application. The matters relied on by Mr Newell to justify these labels have been considered above.
(c) Fresh step and the Bankruptcy Act 1966 (Cth)
Ms Thomson also relies on s 58(3) of the Bankruptcy Act 1966 (Cth), submitting:
"Furthermore, it was not competent for the Cross-Claimants to take a fresh step in the proceedings without leave of the Federal Court of Australia: Bankruptcy Act 1966, section 58(3). A fresh step includes the making of an order by the Court on the application of any party: Gertig v Davies (2003) 85 SASR 226 at [63] - [64] per Doyle CJ with whom Mullighan J agreed.
In these circumstances, the Court should exercise its inherent power to set aside the Order dismissing the Cross-Claim against Mr Shnider with no order as to costs".
The submission that the inherent power of the District Court included a power to set aside an order made in contravention of s 58(3) of the Bankruptcy Act 1966 (Cth) was not developed in argument and no authority was cited to support it.
However, rule 36.15 of the Uniform Civil Procedure Rules 2005 allows judgments given or enforced irregularly to be set aside. Is the order of Johnstone DCJ on 1 February 2012 such a judgment by reason of s 58(3)?
Section 58(3) provides:
"(3) Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding."
In this section, "the Court" means "a Court having jurisdiction in bankruptcy under this Act" (s 5 of the Bankruptcy Act 1966 (Cth)). The District Court does not have jurisdiction in bankruptcy (see s 27 of the Bankruptcy Act 1966 (Cth)). It follows that leave of "the Court" was not given.
For a lack of competence pursuant to s 58(3) of the Bankruptcy Act 1966 (Cth) to be established, there must be a creditor, taking a fresh step, in respect of a provable debt.
A creditor ordinarily is a person to whom money is owed. In bankruptcy legislation the term usually refers to a person entitled to prove in the bankruptcy: see Staples and Another v Milner and Others (1998) 83 FCR 203; Zantiotis v Andrew (No 2) (1988) 80 ALR 299 at 302. In the present case, Ms Thomson does not identify who is the putative creditor under s 58(3). Perhaps it is Mr Wachtenheim, since he was the party suing Mr Shnider.
However, Mr Wachtenheim was not a creditor of Mr Shnider. He was not entitled to prove in Mr Shnider's bankruptcy. A claim based on misleading conduct, the claim made against Mr Shnider, is insufficient to make Mr Wachtenheim a creditor. Section 82(2) of the Bankruptcy Act 1966 (Cth) provides that "Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy". A claim arises "by reason of a contract" only if the debtor (in this case, Mr Shnider) is a party to a contract (see Australian Competition and Consumer Commission (ACCC) v Kritharas (2000) 105 FCR 444 at [36]-[38], Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234; [2005] HCA 67 at [62], [71]).
In the present case, no contract with Mr Shnider was alleged. Even if a contract with De Costi Seafoods resulted from Mr Shnider's conduct that is insufficient for the purpose of s 82(2) of the Bankruptcy Act 1966 (Cth).
The expression "fresh step" includes any step that advances the proceedings towards judgment (ANZ Banking Group Ltd v Computer Plus [1992] 1 VR 607 at 608, 610) or "a step taken towards the satisfaction of [a] debt" (see Fraser v Commissioner of Taxation (1996) 69 FLR 99 at p 115). Dismissal of the claims with no order as to costs does not advance the proceedings towards judgment and cannot be "a step taken towards the satisfaction of [a] debt". It is not advancing the creditor's claim.
In addition, Mr Wachtenheim has not taken any step, let alone a fresh step. There is no application by Mr Wachtenheim for any costs order. Rather, the transcript reveals that the order was made of the Court's own motion, not only in respect of costs but also in respect of dismissal of the cross-claim. Mr Newell as Mr Wachtenheim's counsel informed the Court that the cross-claim was not being maintained. No order was sought, or opposed, by any person present. The Court evidently determined that since no party was seeking costs, it was appropriate to make an order that the cross-claim be dismissed and that there be no order as to costs, so as to finalise the matter (cf ss 56 and 57 of the CPA).
Ms Thomson relies upon the decision of Gertig v Davies [2003] SASC 86. In that case, Doyle CJ (with whom Mullighan J agreed at [69]) stated at [63]:
"But in my view the 'fresh step' of claiming an order for a set-off was not completed on the day on which the application was made orally by counsel. That step was still being taken when the Judge heard submissions on a later day."
This paragraph does not assist Ms Thomson. No relevant submissions in respect of the costs order were made before Johnstone DCJ after the date of the bankruptcy.
But Doyle CJ continued in [63]:
"I would not read the reference to taking 'any fresh step' as referring only to the oral making of the application. I would read it as extending to the hearing of the application and to the making of a decision on the application."
This last sentence does not identify whether the learned Chief Justice would regard the decision alone as a fresh step. Rather, it indicates that a hearing and decision, together constitute a fresh step.
The Chief Justice continued at [64]:
"[64] If I am wrong in that, and the making of the application [before the bankruptcy] was itself the relevant fresh step, I would nevertheless hold that the pronouncement of the order for a set-off is itself a fresh step. In other words, I would distinguish between the application and the order. I appreciate that the order is made by the Court, while the application was made by counsel for Mr Gertig. But an order pronounced on an application made by Mr Gertig remains, in my opinion, a step in the proceeding taken by Mr Gertig. In other words, I would regard an order made on application by a party as a step in the proceedings by that party."
The initial words in the quoted paragraph indicate that the passage is obiter. If so, I am not bound to follow it. Besanko J dissented, stating at [80]:
"It is important to note that the words used in s58(3)(b) are 'fresh step' and not simply any 'step' in the proceeding. It is also important to note that it is a fresh step taken by a creditor. Ordinarily a person takes a step in a proceeding by issuing an application seeking certain orders. It is possible to say that attendance at a hearing and the making of submissions is a step in the proceeding, but I do not think it can be said to be a fresh step. Nor do I think that it can be said that the act of a Judge in proceeding to consider and then determine a matter is a fresh step taken by a creditor."
Besanko J gave the following reasons at [81]:
"I think that there are a number of matters which support the view I take, although I accept that they are not compelling. First, the time at which an application is heard will often be beyond the control of a creditor, and the time at which it is determined will almost certainly always be beyond the control of a creditor. Secondly, one would assume that any leave given would be for the taking of a step clearly defined in the grant of leave. I accept that it is possible to frame a grant of leave in this case, but I think there is some awkwardness about doing so. Thirdly, and this is a negative factor I suppose, I do not think the interpretation I propose runs counter in any way to the purposes of the statutory scheme (Re McMaster; Ex parte McMaster (1991) 33 FCR 70 per Hill J at 72 - 73). It is true that s58(3)(b) is to be interpreted broadly, but at the same time I note the Legislature has not seen fit to frame the section in terms that clearly prohibit (without leave) any further action in the proceeding."
The decision in Gertig was considered briefly in Australian Competition & Consumer Commission v The Bio Enviro Plan Pty Ltd [2004] FCA 415, a case concerned with whether the "filing of submissions and making of final orders" constituted a fresh step. RD Nicholson J at [7] adopted the majority view:
"that the hearing of an application made prior to bankruptcy and the making of a decision on such an application constituted a 'fresh step' in the proceeding". (Emphasis added).
The obiter remarks in Gertig are most directly supported in Permanent Custodians Ltd v Agb Developments Pty Ltd [2010] NSWSC 540 at [63], where Davies J held:
"The making of an order is a step in the proceeding taken by the Plaintiff and notwithstanding that the application was made, and the hearing conducted, prior to the making of the sequestration order: Gertig v Davies...(2003) 85 SASR 226 at [64]-[66]."
(See also Charitopoulos v Deputy Commissioner of Taxation [2009] SADC 120).
Bovaird v Frost [2013] FCA 974 at [4] referred to both Gertig and also Fraser Property Developments Pty Ltd v Sommerfeld (No 2) (2005) 2 Qd R 404; [2005] QCA 242, without needing to decide what constituted a fresh step.
Fraser Property Developments Pty Ltd is a unanimous decision of the Queensland Court of Appeal and is inconsistent with Gertig but does not refer to it. At 407, [7] McPherson JA, with whom Williams JA (at [15]) and Philippides J (at [16]) agreed, stated:
"No authority has been found suggesting that mere argument in support of an appeal amounts to taking a 'fresh step' in the proceeding. I am disposed to the view that it is not. The order of the court allowing the appeal may conceivably be a fresh step in the proceeding; but it was taken not by the 'creditor', if that was what the Council was, but by this Court, and so is not within the prohibition imposed by s. 58(3)(b)."
Accordingly, an order by the court is not a fresh step by a creditor, even if it "may conceivably be a fresh step in the proceeding". With respect, I agree with this proposition, and I am bound by it.
Further, Mr Wachtenheim's misleading conduct claim against Mr Shnider was not a "provable debt", for the reasons given at [65] above. Fraser Property Developments Pty Ltd also considered the circumstance of an order for costs. Although this passage is not short, it is worthy of repetition particularly as it appears to apply directly to the present circumstances. McPherson JA in Fraser Property Developments Pty Ltd stated at [8]-[12]:
"[8] The question remains whether making an order for costs amounts or would amount to a 'fresh step' in that proceeding and if so, whether, it is taken 'in respect of a provable debt' within the meaning of s. 58(3)(b) of the Act. Which debts are provable in bankruptcy is governed by s. 82 of the Act. Under s. 82(1) they include all debts and liabilities present, future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy:
'... or to which he ... may become subject before his ... discharge by reason of an obligation incurred before the date of the bankruptcy ...'
[9] Sommerfeld was not at the date of his bankruptcy subject to any order to pay costs to the Council. It might be said that having instituted the proceeding to compel removal of the action into the Tribunal, he thereby incurred a liability to pay the costs of an appeal by the Council if, as proved to be the case here, it was successful. But quite apart from the possibly limiting effect of s. 82(8), it is settled by authority in England that the mere prospect of an order for costs against the bankrupt, or the contingency that it might be made, is not a liability provable in bankruptcy.
[10] The authorities go some way back in time. In Vint v. Hudspith (1885) 30 Ch.D. 24, 27, Lindley L.J. said that he doubted 'very much' whether the possibility of having to pay costs is a provable debt, although it might in some cases be a contingent liability. An opportunity for his Lordship to expand on his views arose in Re British Gold Fields of West Africa [1899] 2 Ch. 7, which concerned an order for costs in favour of a shareholder for the rectification of the share register and for repayment by the company of a sum paid for the shares. The proceedings were initiated before winding up (which was the equivalent of bankruptcy for present purposes), but were not successfully completed until after it took place. In delivering the judgment of the Court of Appeal, Lindley M.R. said ([1899] 2 Ch. 7, 11) that if an action was brought against a person, who afterwards became bankrupt, to recover a sum of money, and the action was successful, the costs were regarded as an addition to the sum recovered and so provable if the debt was provable 'but not otherwise'. If the sum recovered is not provable, said his Lordship, 'neither are the costs of recovering it'. Speaking of a case in which no verdict is given and no order was made for payment of costs until after bankruptcy, Lindley M.R. continued (at p. 12):
'In such a case there is no provable debt to which the costs are incident, and there is no liability to pay them by reason of any obligation incurred by the bankrupt before bankruptcy; nor are they a contingent liability to which he can be said to be subject at the date of his bankruptcy. This was the case of Vint v. Hudspith.'
[11] What was said by Lord Lindley there has since been followed and applied in a number of English decisions, of which the most recent is Glenister v. Rowe [2000] Ch. 76. There the creditor Mrs Rowe sued her solicitor Glenister for negligence and breach of trust. The action was struck out by Millett J. in 1991, but an appeal against that order succeeded in 1995 after Glenister had been made bankrupt in 1992. He was discharged from bankruptcy in 1995 shortly before the Court of Appeal allowed Mrs Rowe's appeal with costs later taxed at some £15,000. Applying what was said in Re British Gold Fields of West Africa, the Court of Appeal held that the order for costs against Glenister was not a debt provable in bankruptcy and so was enforceable after his discharge. The English bankruptcy legislation (s. 382 of the Act of 1986), although now differing slightly from s. 82 in Australia, has been altered in the direction of admitting debts that would previously not have been provable. Nevertheless, Mummery L.J., with whom the other Lords Justices agreed, said ([2000] Ch. 76, 84):
'(3) The fact that an order for costs (a) creates an obligation to pay money and (b) is a contingency in legal proceedings is not sufficient, however, to make a claim that the court should exercise its discretion to make such a order a 'contingent liability' of the person against whom such an order may ultimately be made. It is accepted that before an order is made there is no present liability to pay. Nor can there be a future liability: there is no certainty that the court will exercise its discretion to make such an order. If, as some of the authorities hold, a contingent liability must arise out of an existing or underlying liability, no such liability can exist simply by reason of a claim for costs made in a writ, summons, application or notice of appeal to the judge or to the Court of Appeal.'
Among those authorities, was Community Development Pty Ltd v. Engwirda Construction Co. (1969) 120 C.L.R. 455.
[12] The principle applies in the present case. A potential or contingent liability for costs is not a provable debt unless an order for payment of those costs has been made before bankruptcy intervenes. As can be seen from Glenister v. Rowe [2000] Ch. 76, 84, the underlying reason is that costs of legal proceedings are in the discretion of the court; and until an order is made there is no obligation or liability to pay them. On this footing the Council could not prove its debt or claim for its costs of the appeal in the present case or of the proceedings below. It is not a 'provable debt' within the meaning of s. 58(3)(b). Leave of the Court (which means the Bankruptcy Court, now the Federal Court) is not required under s. 58(3)(b) because, even if it is 'a fresh step', it is not in a proceeding 'in respect of a provable debt'. The case is not one in which it can be said that there is a provable debt to which an order for costs is or would be incidental in the sense laid down in Re British Gold Fields of West Africa. The 'proceeding' instituted by Sommerfeld was not to recover a sum of money, but for an order that the plaintiff Fraser Property Developments discontinue its action in the Supreme Court and re-institute it before the Tribunal. The Council as the third defendant opposed the making of that order, and it has been successful on appeal. Its right to obtain an order for the costs of the appeal or of the proceedings in the Supreme Court is not obstructed by s. 58(3)(b) of the Bankruptcy Act. This view accords with the decision of Bergin J. in Australian Securities and Investments Commission v. Loiterton (2004) 50 A.C.S.R. 693, 735, in which her Honour applied Re British Gold Fields of West Africa [1899] 2 Ch. 7, at 11-12."
Accordingly, a potential or contingent liability for costs is not a provable debt, and thus falls outside s 58(3).
Any entitlement of Mr Shnider to a costs order - the converse of the claim by Mr Wachtenheim - is not a provable "debt" in the bankruptcy. If it existed at all it would be an asset.
On 7 November 2011 Searle wrote in respect of maintaining its claim for costs (which it subsequently abandoned), "This firm is a secured creditor and therefore we do not need instructions from the trustee".
If this assertion is correct, and there is no evidence before me to dispute it, Searle's entitlement to costs also falls outside the bankrupt's estate as there is no evidence to establish the matters in Division 1 of Part VI of the Bankruptcy Act 1966 (Cth) that would entitle Searle as a secured creditor to prove in the bankruptcy. But no claim is now made by Mr Shnider (or Searle) apart from the claim made by Ms Thomson. Any such claim was withdrawn on 7 December 2011.
Thus, as tersely submitted on behalf of Mr Newell:
"The making of the order by Johnstone DCJ did not result from a creditor taking a fresh step in a proceeding in respect of a provable debt. The cross-claimants were not creditors of Mr Shnider, they did not take a fresh step; and the proceedings were not in respect of a provable debt" (emphasis in original).
For these reasons, I do not regard the order made by Johnstone DCJ on 1 February 2012 as constituting a fresh step by a creditor in the proceedings in respect of a provable debt. Section 58(3) of the Bankruptcy Act 1966 (Cth) is therefore inapplicable.
(d) Consent of Mr Wachtenheim
There is one other matter. Mr Wachtenheim was present in court and did not oppose the order sought against him and Deist. He had no legal representation acting for him in court, although an affidavit by Mr Wachtenheim was read, without objection save as to relevance. In it, Mr Wachtenheim stated that he had no legal representation, and concluded:
"I understand that this affidavit will be used by David's trustee in bankruptcy to kill-off the Cross-Claim by me against my brother-in-law David and get a Court order that I pay the costs of my brother-in-law David of the Cross-Claim on an indemnity basis."
This paragraph approaches, but does not quite reach, consent to the orders sought. In any event, Ms Thomson submitted no more than that neither Mr Wachtenheim nor his company were opposing the orders. To ascertain the attitude of Deist, Ms Thomson seems to rely on the Court inferring that Deist is a company still controlled by Mr Wachtenheim, although there is no mention of Deist in his affidavit.
Whilst consent of the parties may enlarge the circumstance in which I should make the orders sought, non-opposition by Mr Wachtenheim is not sufficient. In addition, having considered the matters set out at Ritchie's Uniform Civil Procedure NSW at p 8208 [36.14.5] and the opposition from the other parties (and the matters dealt with above), I am not persuaded that justice is served by setting aside the orders made by Johnstone DCJ whether under rule 36.1A, rule 36.16 or any residual inherent power in the Court.
(e) A further order for costs
As I have declined to set aside the order of Johnstone DCJ, there is no aspect of costs of Mr Shnider that remains to be dealt with. However, if I am wrong, so that it is appropriate to set aside the order of Johnstone DCJ either because it was given without notice to the Official Trustee or because it was made in contravention of s 58(3), there would still arise the question of whether I should make an order for costs in favour of Ms Thomson, and whether those costs should be on an indemnity basis as Ms Thomson seeks.
In the proceedings titled, In the matter of Wan Jia (Australia) International Development Pty Ltd [2012] NSWSC 1007, Black J at [13] referred to the principle that where there has been no adjudication on the merits, the rule that costs generally follow the event does not apply. Black J also referred to Immigration and Ethnic Affairs, Re Minister for; Ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 at 624-5, where McHugh J decided that where proceedings are settled and no order for costs has been agreed, it is generally appropriate that each party bear their own costs.
The decision of McHugh J in Immigration and Ethnic Affairs, Re Minister for; Ex parte Lai Qin makes reference to two potential exceptions to the rule that each party bear their own costs: where there is conduct by one party which has been so unreasonable that it should bear the costs of the action, and where the court is confident that one party was almost certain to have succeeded. In those two circumstances it may be appropriate that one or other party obtain a favourable costs order.
In the present case, the dismissal of the proceedings arose not by reason of any settlement but because of the bankruptcy of Mr Shnider. It did not reflect unreasonableness by Mr Wachtenheim and Deist or that, absent the bankruptcy, Mr Shnider would almost certainly have succeeded. As the proceedings against Mr Shnider were concluded before any hearing so the matters alleged against Mr Shnider were never ventilated. The proceedings prior to this application do not enable me to conclude that the proceedings generally against Mr Shnider were unreasonably commenced and maintained.
On 23 September 2011 a hearing date for the cross-claim was vacated, apparently because of the filing by Mr Wachtenheim of a further version of the cross-claim (Fifth Further Amended Statement of Cross-Claim). Costs orders against Mr Wachtenheim and Deist, and in favour of Mr Shnider, were made on 9 August 2011 (on an indemnity basis) and 23 September 2011. On the latter date an application for indemnity costs thrown away was stood over for further argument and was subsequently withdrawn.
Thus, Mr Shnider obtained costs orders in his favour, and his indemnity costs application was abandoned. There seems to be no scope for a further order in respect of particular procedural defaults by Mr Wachtenheim and Deist.
However, Ms Thomson seeks an order in respect of the entire proceedings against Mr Shnider, in reliance upon the decision in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397. That decision established the proposition that in an abandoned case, dismissed with costs, the judge may order that some of the costs should be assessed on an indemnity basis, because the case "was hopeless from the outset" (at 399-400). Woodward J stated at 401:
"I believe that it is appropriate to consider awarding 'solicitor and client' or 'indemnity' costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law. Such cases are, fortunately, rare. But when they occur, the court will need to consider how it should exercise its unfettered discretion."
As I have said, this is not a case where the proceedings were dismissed for any reason other than the bankruptcy of Mr Shnider. It is not a case that was abandoned because it was hopeless.
In reliance upon Fountain, Ms Thomson submits that Mr Wachtenheim should pay Mr Shnider's costs on an indemnity basis, because the claim against Mr Shnider did not have reasonable prospects of success. This terminology differs, perhaps only slightly, from the passage in Fountain, which speaks of "no chance of success". In any event, this lack of reasonable prospects is precisely the same basis as the basis of the claim against Mr Newell and Mr Muriniti for indemnity costs pursuant to s 348 of the LPA and s 99 of the CPA.
This identity between the basis of the claim against Mr Wachtenheim and the claims against Mr Newell and Mr Muriniti is confirmed by the matters relied upon by Ms Thomson to establish a lack of reasonable prospects. As submitted by Ms Thomson, those matters can be summarised as first, the belief of Mr Newell and Mr Muriniti about two profit and loss statements; secondly, the instructions of Mr Shnider to Mr Newell and Mr Muriniti to disabuse them of that belief; thirdly, the lack of evidence to contradict Mr Shnider's instructions to Mr Newell and Mr Muriniti, and fourthly, that Mr Muriniti and Mr Newell did not swear affidavits or give evidence to contradict the instructions of Mr Shnider.
Whatever be the strength of these assertions, factually or legally, they are the same assertions that found the claim against Mr Muriniti and Mr Newell. It is inappropriate that I deal with this issue now given that it arises in another context in this application, and in the present context it is hypothetical only because of my earlier findings. The extent to which this issue needs to be dealt with at all in this judgment is considered below.
I dismiss orders 1 to 3 of Ms Thomson's notice of motion.
D. The applications for indemnity from Mr Muriniti and Mr Newell
De Costi seek orders that Mr Muriniti and Mr Newell indemnify them against costs payable by them in the proceedings. Ms Thomson seeks orders to the same effect in respect of costs paid or payable by Ms Thomson or Mr Shnider.
These applications are made pursuant to both s 348 of the LPA and s 99 of the CPA.
For reasons that will become apparent, the application before me concerned only issues under s 349 of the LPA preliminary to the issues arising in s 348 of the LPA, and concerned s 99 of the CPA not at all. The residual issues arising under s 348 of the LPA and s 99 of the CPA are left to be considered and determined on another day, dependent, at least in part, on this decision.
(a) The legislation
Sections 345, 348 and 349 of the LPA are relevant to this application. They provide:
"345 Law practice not to act unless there are reasonable prospects of success
(1) A law practice must not provide legal services on a claim or defence of a claim for damages unless a legal practitioner associate responsible for the provision of the services concerned reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success.
(2) A fact is provable only if the associate reasonably believes that the material then available to him or her provides a proper basis for alleging that fact.
(3) This Division applies despite any obligation that a law practice or a legal practitioner associate of the practice may have to act in accordance with the instructions or wishes of the client.
(4) A claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim. A defence has reasonable prospects of success if there are reasonable prospects of the defence defeating the claim or leading to a reduction in the damages recovered on the claim.
(5) Provision of legal services in contravention of this section constitutes for the purposes of this Division the provision of legal services without reasonable prospects of success."
"348 Costs order against law practice acting without reasonable prospects of success
(1) If it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success, the court may of its own motion or on the application of any party to the proceedings make either or both of the following orders in respect of the practice or of a legal practitioner associate of the practice responsible for providing the services:
(a) an order directing the practice or associate to repay to the party to whom the services were provided the whole or any part of the costs that the party has been ordered to pay to any other party,
(b) an order directing the practice or associate to indemnify any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified.
(2) The Supreme Court may on the application of any party to proceedings on a claim for damages make any order that the court in which proceedings on the claim are taken could make under this section.
(3) An application for an order under this section cannot be made after a final determination has been made under this Part by a costs assessor of the costs payable as a result of an order made by the court in which the proceedings on the claim concerned were taken.
(4) A law practice or legal practitioner associate of the practice is not entitled to demand, recover or accept from a client any part of the amount for which the practice or associate is directed to indemnify a party pursuant to an order under this section."
"349 Onus of showing facts provided reasonable prospects of success
(1) If the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success.
(2) If the Supreme Court (when the Supreme Court is not the trial court) is satisfied, either as a result of a finding of the trial court or otherwise on the basis of the judgment of the trial court, that the facts established by the evidence before the trial court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success.
(3) A presumption arising under this section is rebuttable and a person seeking to rebut it bears the onus of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success.
(4) A law practice or legal practitioner associate of the practice may, for the purpose of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success, produce information or a document despite any duty of confidentiality in respect of a communication between the law practice or a legal practitioner associate of the practice and a client, but only if:
(a) the client is the client to whom the legal services were provided or consents to its disclosure, or
(b) the court is satisfied that it is necessary for the law practice or associate to do so in order to rebut a presumption arising under this section."
(b) Procedure
The leading decision on s 349 of the LPA and related provisions is Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300. Although the numbers of the relevant provisions have changed since that decision, the wording and substance of the provisions have not. The provisions in Lemoto equivalent to ss 345, 348 and 349 of the LPA ("the 2004 Act") were respectively ss 198J, 198M and 198N of the Legal Profession Act 1987 ("the 1987 Act").
In Lemoto McColl JA gave the leading judgment, agreed to by Hodgson JA at [1], [11] and Ipp JA at [12].
In Lemoto at [135]-[137], McColl JA observed:
"[135] It is important to recognise that the question whether a s [348] order should be made may arise in several ways each of which may attract different onuses of proof. It may arise because the trial court 'hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success': s [349(1)]... there is a rebuttable presumption...that the legal services provided on the claim...were provided without reasonable prospects of success. The presumption is rebutted if the legal practitioner establishes 'that at the time legal services were provided there were provable facts (as provided by section [345]) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success': s [349(3)].
[136] Section [349] is only concerned with whether the facts demonstrated there was 'a basis for a reasonable belief that the claim or the defence had
reasonable prospects of success'. However, the question whether a s [348] order should be made may arise for reasons which do not turn on the facts found by the court. The court may, for example, form a prima facie view that despite the facts found, there was no reasonably arguable view of the law which would support a reasonable belief that 'the claim or the defence had reasonable prospects of success'.
[137] Alternatively, the question whether a s [348] order should be made might arise for reasons which are extrinsic to the judgment. In this case the s [348] application was made because the second respondent contended the futility of the District Court proceedings should have been apparent to the appellant because of the outcome of the arbitration. Section [348(1)] contemplates that the court may consider making a costs order against the legal practitioner in such circumstances. An application of this nature or one initiated by the court independently of its factual findings would not trigger the s [349] rebuttable presumption. The onus would remain upon the applicant throughout to demonstrate that the solicitor or barrister had provided legal services without reasonable prospects of success. If the court was proceeding of its own motion, it would be important that it recognise that no s [349] rebuttable presumption arose." [Current provisions inserted].
In the present case, I understood the parties to have agreed that any argument under s 348 of the LPA would be dealt with on a future occasion, in conjunction with consideration of s 99 of the CPA. The issue of concern at this hearing was the application of s 349 of the LPA.
Section 349 requires consideration of whether the facts established by the evidence before the trial court hearing proceedings on a claim for damages do not form a basis for a reasonable belief in reasonable prospects. Such a conclusion can only arise if the court has heard the proceedings. Whilst this has occurred in respect of the claim by Mr Wachtenheim and Deist against De Costi, it has not occurred with respect to the claim against Mr Shnider. Accordingly, if Ms Thomson as Mr Shnider's trustee is entitled to an order against Mr Newell or Mr Muriniti under s 348, it will not be because of the provisions of s 349(1), but because of the alternative procedures referred to by McColl JA in Lemoto at [137]. The District Court was the court "in which proceedings are taken" (s 348) against Mr Shnider, but it is not the court "hearing proceedings on a claim...[utilizing] the evidence before the court" (s 349).
As ss 99 of the CPA and 348 of the LPA are not to be determined as part of this aspect of the application, the residue of Ms Thomson's application must be left to the subsequent hearing (that is, the application apart from orders 1-3). As that application will not involve s 349 the presumption does not arise (see Lemoto at [137]) and the onus remains on Ms Thomson throughout.
In the application by De Costi, the present matters for determination arise under s 349(1). If the question arising under s 349 is answered in the affirmative, that is, if the facts "do not form a basis for a reasonable belief that the claim...had reasonable prospects of success" then the s 349 presumption arises. If the presumption arises, it is rebuttable (see s 349(3) of the LPA) and Mr Muriniti and Mr Newell will have an opportunity to rebut the presumption at the future hearing, to be held on the same occasion as the application under s 99 of the CPA.
(c) Analysis
The expression "the facts established by the evidence before the court" warrants consideration. It will invariably be the case that the losing party at trial has failed to establish some fact necessary for success. In the case of a losing plaintiff, as in this case, factual findings on the evidence before the court disprove the existence of the plaintiff's cause or causes of action. Those factual findings of themselves cannot be a basis for reasonable prospects, because they are findings that deny the claim. But those factual findings also cannot be sufficient to give rise to the presumption under s 349. To find otherwise would cause a presumption to arise against the legal practitioner acting for the losing party in almost every case. The decision in Lemoto (see [133]-[134]), the history of the provisions (see Lemoto at [84]-[93]) and the competing policy issues (see Lemoto at [91], [124]-[126]) point strongly against that conclusion. As McColl JA stated in Lemoto at [186]:
"The fact that, ultimately, [the plaintiff] failed both before the primary judge and the arbitrator did not mean the [legal practitioner] had provided legal services without reasonable prospects of success."
Thus, there must be a difference between the facts elemental to the cause or causes of action, which are found by the judge at trial, and "the facts established by the evidence" at trial relevant to the question of whether the claim has reasonable prospects. This distinction may best be illustrated by an example. A witness says, "The defendant told me X". The elemental fact found by the tribunal judge to deny the plaintiff's claim might be that "the defendant did not say X". But a fact established by the evidence relevant to the presumption in s 349 is that "a witness says the defendant said X". That fact can provide a basis for a "reasonable belief in reasonable prospects" of proving the defendant said X. Of course, so can a finding that "the defendant said X", but not if it is not established at trial.
The former finding - a witness says the defendant said X - may be established at trial not by any formal findings, but because it is apparent from the judge's discussion of the competing evidence.
The reference to "a basis" in s 349 is concerned with whether "the facts established by the evidence" at trial do or do not "form a basis". This can be contrasted with "the basis" in s 345(1), namely, whether "on the basis" of "provable facts and a reasonably arguable view of the law" the legal practitioner reasonably believes that the claim has reasonable prospects of success.
In other words, whether the presumption in s 349 arises will depend upon whether a certain basis is or is not provided by the facts established by the evidence before the court at trial. Whether an order under s 348 may be made (which depends upon whether s 345 is contravened, see s 345(5) and s 348(1)) is governed by a different basis, the basis of provable facts. It is important to keep in mind the different bases applicable to whether a s 349 presumption arises, and whether a s 345 contravention is established.
The facts established by the evidence before the court at trial are "proven" and thus necessarily "provable". But the converse is not true. There may be many provable facts that are not established at trial. A fact is provable "only if" the legal practitioner "reasonably believes that the material then available to him or her provides a proper basis for alleging that fact", see 345(2). In context I read "only if" as meaning "if and only if" or "means". In other words, a reasonable belief that available material provides a proper basis for an allegation of a fact is both necessary and sufficient to establish that the fact is provable. The legal practitioner may call in aid "provable facts" in rebutting a presumption arising from facts established at trial.
It is unnecessary to consider in this part of the application the interaction between the "proper basis" in s 345(2) and the "basis" in s 345(1).
Accordingly, the question posed by s 349 in the present application is not whether there is a reasonable belief in reasonable prospects of success, but whether no "basis" for this belief is formed by the facts established by the evidence at trial.
The proper construction of a "reasonable belief" in "reasonable prospects" was considered in Lemoto. McColl JA referred to the decision of Barrett J (as Barrett JA then was) in Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284 at [20]-[28] and agreed (at [132]) that:
"the expression 'without reasonable prospects of success' appears to me to accommodate both the purpose of [the Division] and to reflect the language of s 198J [now s 345]. The test [was] whether a claim or a defence was 'so lacking in merit or substance as to be not fairly arguable'.
McColl JA noted that, in context:
"the question becomes whether the solicitor or barrister held a reasonable belief that the provable facts and a reasonably arguable view of the law meant that the prospects of recovering damages [was] 'fairly arguable'."
Her Honour noted that this was a matter on which "reasonable minds might differ", and concluded at [132]:
"The question will be whether the solicitor or barrister's belief that they had material which objectively justified proceeding with the claim...'unquestionably fell outside the range of views which could reasonably be entertained'".
Although these passages are concerned with ss 190J and 190M (now ss 345 and 348), they nevertheless impact upon s 349 also.
The decision in Lemoto gives guidance as to the meaning and application of s 349 (previously s 198N), but that appeal was not principally concerned with s 198N of the 1987 Act. It appears that Lemoto was an appeal from a decision of a judge acting of his own motion under s 198M in the 1987 Act (now s 348).
In Lemoto at [181]-[182], McColl JA stated:
"In my view it is open to this Court to determine the matter on the basis that there should be no finding in terms of s 198N(1) [now s 349], and that there was no prima facie case that the appellant had provided legal services to the third respondent without reasonable prospects of success.
Consideration of this question requires determining whether the appellant could reasonably have believed that the...claim ...had reasonable prospects of success."
There is no reference to a prima facie case in s 349 or in any provision of Division 10. However, her Honour's reference to prima facie case is presumably a shorthand way of referring to the interaction of s 349 and s 348. This passage may indicate that at least in some circumstances, if the s 349 presumption is not established, then the proceedings must fail. But that is not a matter I need to determine finally at this stage.
However, the reference to prima facie case (at [181]), and the reference (in [182]) to the "question" (rather than "questions") in paragraph [181] may elide one difference between s 348 and s 349. Only in the former is providing "legal services...without reasonable prospects of success" relevant, see ss 345(5), 348(1). The meaning of that phrase is dependent upon provable facts, not upon facts established by the evidence at trial.
In Lemoto at [182], McColl JA refers to "whether the appellant could reasonably have believed" [emphasis added]. It is unclear whether this passage states a general principle or a feature of the particular case in Lemoto.
If this is the general principle, then it appears to follow that the presumption created by s 349 arises only if the facts proved at trial exclude that (reasonable) possibility, for otherwise "the appellant could reasonably have believed". If the facts established at trial do not exclude that possibility, then those facts "established by the evidence before the court" may be said to "form a basis" for a reasonable belief in reasonable prospects.
Coupled with the adoption of the test espoused by Barrett J in Degiorgio, the presumption would then arise only if there was no basis for a reasonable belief in a fairly arguable claim. This leads to the test: do the facts established by the evidence at trial prove that the claim could not be reasonably believed to be fairly arguable.
Although the words of the text in s 349 refer to "not form a basis", rather than "could not", that may be a distinction without a difference. It could be said - and it seems to be supported in Lemoto - that unless the facts established by the trial evidence exclude a reasonable belief in reasonable prospects, those facts "form a basis" for a reasonable belief in reasonable prospects, and the elements for a s 349 presumption are not made out.
(d) Claims, causes of action and parties
The case alleged by Mr Wachtenheim and Deist was founded in misleading conduct, unconscionability and breach of contract. Is examination of each of these causes of action required? Sections 345, 348 and 349 are concerned with a "claim for damages" not a particular cause of action. "Claim for damages" is not defined in the LPA. However, I do not regard a claim to be the same as a "cause of action". A "claim" is in the nature of a demand, whereas a cause of action (although a chameleonic term: see CGU Insurance Ltd v Watson [2007] NSWCA 301 at [57]) is commonly a reference to a legal right, or the facts that support that right (see Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 at 610-611).
In the present context where a claim for damages is pleaded by reference to several causes of action, those pleaded causes of action inform whether there is any reasonable basis for the claim. But if one of the causes of action is arguable and others not, the claim for damages remains arguable on the basis of the arguable cause of action. The presence of a baseless cause of action is only determinative of the validity of a claim if it forms the sole basis of the claim.
Thus, to exclude a fairly arguable claim for damages, one must exclude all of the causes of action relied upon to support the claim.
On the other hand, if a claim for damages is made against two respondents, is it fairly arguable if it is only fairly arguable against the one? Or is it to be regarded as comprising a claim against each respondent, the validity of each claim depending on the validity of at least one cause of action against each respondent? The better view, in my opinion, is the latter, that a separate claim is made against each respondent. Therefore, even though a defective cause of action will not be fatal to a claim for damages if another cause of action can be found to support the claim, nevertheless a baseless claim against one respondent will not be saved, so far as s 345 of the LPA is concerned, merely by the existence of a valid claim against another respondent.
The analysis of McColl JA in Lemoto at [182]-[186], which considers the claim against each of two defendants, supports the need for a reasonable belief in a fairly arguable cause of action to exist against each party to a claim, in order to avoid the application of s 345.
It follows that I must consider whether in respect of each respondent to Mr Wachtenheim's claims, a basis to reasonably believe there was a fairly arguable cause of action, based on facts established by the evidence at the trial, was excluded. I note that (unlike ss 345 and 348 of the LPA) there is no express reference to a reasonably arguable view of the law in s 349 of the LPA, although that may likely be a component of reasonable prospects.
Accordingly, I need to consider the claims against the first cross-defendant (De Costi Franchises), the second cross-defendant (Frank Theodore), the fourth cross-defendant (George Costi), the fifth cross-defendant (De Costi Holdings) and the seventh cross-defendant (Androulla Costi). The position of Mr Shnider, formerly the sixth cross-defendant, will not need to be considered for reasons already given.
(i) Frank Theodore
The first cause of action alleged against Mr Theodore is that he misleadingly represented that the take-home profits of the business amounted to $1,000 per week after mortgage payments of $7,800 per month.
Mr Wachtenheim gave evidence of this representation by Mr Theodore. He found some support in the evidence of Nicole Dhillon and Mrs Wachtenheim.
The occurrence of this representation was rejected because of Mr Wachtenheim's lack of credit, based on his poor memory, his dishonesty, the challenges presented by the principle in Watson v Foxman ((1995) 49 NSWLR 315) and other considerations including the divergence between the particularised oral statements in the repeated amended pleadings.
In other words, the facts established by the evidence before the court include that there was evidence in favour of the alleged representation, but it was rejected as not being credible.
In Lemoto at [92] McColl JA referred to the established principle that "the legal practitioner is not 'the judge of the credibility of the witnesses or the validity of the argument'". See also [109] and Steindl Nominees Pty Ltd v Laghaifar [2003] 2 Qd R 683 at [27].
McColl JA also noted at [179] that Ms Lemoto failed at trial "for reasons largely connected to [the trial judge's] assessment of her credibility. Division 5C does not require the legal practitioner to pre-judge that issue". Further, at [183], "It was not for the [legal practitioner] to determine whether [the plaintiff] would be believed" and at [185], "Again this conclusion largely turned on [the plaintiff's] credibility".
In my view, the same principles apply to the present matter. The existence of the representation depended on the credit of Mr Wachtenheim. There were reasons to believe that Mr Wachtenheim's evidence might not be accepted, that he might be rejected as a witness of credit, but that is not a matter that a legal practitioner is required by s 345 or s 349 to determine.
Similar considerations apply to other representations alleged by Mr Wachtenheim, although, as indicated above, one fairly arguable cause of action against Mr Theodore is sufficient to make the claim fairly arguable.
However, a claim based on misleading conduct is not made out merely because of the existence of a representation. The representation needed to be misleading and to cause loss. Both of these elements - whether the representation was misleading and whether it caused loss - need to be arguable in order for the cause of action to be arguable.
In the earlier hearing, I did not find that the alleged representation of predicted profit was misleading but neither was it established that the representation was true (see De Costi (No 3) at [201]). Reference was made to the level of profitability being difficult to assess because of the evidence of Mr Wachtenheim taking cash from the business. Whilst this conduct of Mr Wachtenheim was known prior to the trial, and even if the extent of those drawings was then apparent, the facts established at trial did not establish that an allegation of misleading conduct could not properly be made. It is not immaterial that Mr Theodore did not seek to establish that the business was making $12,000 profit per month before interest.
Reliance by Mr Wachtenheim upon the representations of Mr Theodore was also determined adversely to Mr Wachtenheim. This again depended significantly on his credit (see De Costi (No 3) at [278]). Although there were a number reasons why Mr Wachtenheim was found not to have relied upon Mr Theodore, those reasons are bases for rejecting Mr Wachtenheim's evidence of reliance. Again, as Lemoto establishes that the credit of a witness is not a matter for a legal practitioner to assess in order to comply with s 345, it cannot be said that the case of reliance was not fairly arguable based upon the facts established by the evidence.
In the earlier judgment I recognised that "Mr Wachtenheim may well have been worse off financially when the business closed in late August 2006 than he was in November 2004 before he purchased the business" (De Costi (No 3) at [305]). That indicates that some loss may have been sustained. Generally, the court must do the best it can to assess the quantum of damages. The judgment gave reasons why Mr Wachtenheim did not establish any damages. But it is apparent that the credit of Mr Wachtenheim, Michael Birrell and Gary Dent were significant in that decision. Again, if counsel and solicitor are not obliged by s 345 to assess credibility then it follows that the facts established at trial do not exclude a reasonable belief in a fairly arguable claim for damages.
A review of the judgment, and the facts established at trial (in the sense explained above at [114] et seq) shows that there was some evidence to support each element of the cause of action. Once credibility is to be disregarded for the purposes of s 349, then this fact - the existence of evidence to support each element - is sufficient to provide a "basis" for a reasonable belief in reasonable prospects, and to deny the application of s 349(1).
(ii) De Costi Franchises and Holdings
The case against Franchises and Holdings depended in the first place upon the representations of Mr Theodore. Leaving aside issues of credit, as I am obliged to do, the facts established by the evidence at trial provide a basis for a reasonable belief in reasonable prospects. The same conclusion must be reached in respect of the claims against Franchises and Holdings, so far as they depend upon the same elements.
But the cases against Franchises and Holdings also required proof that these companies bore legal responsibility for the representations of Mr Theodore. Mr Wachtenheim alleged that this responsibility arose from Mr Theodore's company, De Fish Dee Why Pty Ltd ("De Fish Dee Why"), being a nominee of Franchises and Holdings, and also because Mr Theodore was "a senior management employee of [Holdings]", and "conducted at a senior level the management of [Holdings and Franchises]" (fifth amended statement of claim).
For these reasons, it was said that Mr Theodore made representations on behalf of Holdings and Franchises. Reliance was placed upon s 84(2) of the Trade Practices Act 1974 (Cth) which, at the relevant time, provided:
"(2) Any conduct engaged in on behalf of a body corporate by a director, agent or servant of the body corporate or by any other person at the direction or with the consent or agreement (whether express or implied) of a director, agent or servant of the body corporate shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate."
At trial I found that Mr Theodore was a servant of Franchises and Holdings, but he was also a servant of De Fish Dee Why, the owner of the business. Whether his representations were made "on behalf of" Franchises or Holdings or on behalf of De Fish Dee Why depended upon the content of those representations (De Costi (No 3) at [315]). Some of the representations were found to be on behalf of Franchises and Holdings (De Costi (No 3) at [316]). Further, notwithstanding my findings against Mr Wachtenheim on this issue in respect of the other representations, Mr Theodore's dual role and the connection between his ownership of a franchise and his employment for the franchisor and its holding company (facts established by the evidence at trial) provided a basis for a reasonable belief that it was fairly arguable that all representations made by Mr Theodore were representations on behalf of all three entities (cf NMFM Property Pty Ltd v Citibank Ltd (No 10) (2000) 107 FCR 270 at [1241], Bennett v Elysium Noosa Pty Ltd (in liq) (2012) 202 FCR 72 at [207]).
I am not satisfied that these facts do not form a basis for a reasonable belief that the claim had reasonable prospects of success.
(iii) George Costi
Three representations were alleged to have been made by George Costi. The first representation was admitted, namely that the fish shop was "a profitable business and was generally 'a good business'". I found that "There was no evidence to indicate that the De Fish Dee Why business was unprofitable", and dismissed the claim based on this representation for a number of reasons in De Costi (No 3) at [214]-[236]. The representation was alleged to have been made to David Shnider. Mr Wachtenheim and Deist disavowed any case based on reliance by Mr Shnider. Although there was ample evidence that Mr Wachtenheim relied upon Mr Shnider, if Mr Shnider did not rely on this representation, Mr Wachtenheim's reliance is insufficient as the chain of causation is broken.
In those circumstances, there was no evidence to establish causation or that the representation was misleading. In my view, the evidence at trial does not establish a basis for a reasonable belief in this cause of action being fairly arguable.
The second representation alleged against Mr Costi is that he told Mr Wachtenheim that Deist "would obtain supply of fish...at prices that were better than could be obtained from any other supplier and that he would be able to undercut the competition". The third representation, a year earlier, that he would get the "best prices" and that "no one can undercut De Costis" is on a similar subject matter.
Whilst I found that the evidence did not support the terms of these representations, there was evidence to support the allegation of a representation that Mr Wachtenheim would be able to "undercut the competition" (cf De Costi (No 3) at [179] and [184]). The existence of these representations failed principally because they depended on the credit of Mr Wachtenheim (De Costi (No 3) at [181]-[182], [185]-[186]).
The evidence of falsity of these representations depended upon the evidence of a price comparison by James Turner and David Batchelor, and was dealt with in De Costi (No 3) at [206]-[210]. The credit of Mr Turner and Mr Batchelor (and John Susman and Antonio Muollo) was very relevant in assessing whether the price comparison was valid so as to establish the representation to be misleading.
As for reliance, Mr Wachtenheim's credit was again crucial in finding against him (see eg De Costi (No 3) at [278]).
I have already dealt with the issue of damages and do not regard it as not fairly arguable, even though it failed at trial.
For these reasons, "the facts established by the evidence before the court" show that the claim based on these two alleged representations was rejected because of the credibility of Mr Wachtenheim and others. That finding denies the lack of a basis for a reasonable belief in a fairly arguable case, because it recognised the significance of credit and, at least implicitly, the existence of supporting evidence.
(iv) Androulla Costi
The case against Mrs Costi was based primarily on unconscionable conduct (see paragraphs 25B to 27 and 29(b) of the fifth amended statement of claim). The cross-claim in paragraph 29(a) also alleged knowing involvement in misleading conduct but that allegation was unsupported by any particulars and not pressed in final submissions. The claim of unconscionability generally was considered at [213]-[314] and was dismissed at [342] - [343] in De Costi (No 3). The claim against Mrs Costi was not separately considered in the judgment.
The facts pleaded to support the unconscionable conduct claim extend over a number of pages in the cross-claim, but insofar as they concern Mrs Costi they can be summarised thus: Mrs Costi pressed Mr Wachtenheim to take over the lease of his business premises; she knew or ought to have known that Mr Wachtenheim was "under the compelling influence of [Mr Shnider]"; she knew that Mr Wachtenheim's repayment obligations would be impossible for him to meet; she knew that the lease had a 12-month demolition clause which rendered the lease of no value; and as one of the directors she was involved in the execution of agreements on behalf of Franchises and Holdings.
It is apparent from this summary that, in general terms, the conduct of Mrs Costi comprises pressing Mr Wachtenheim to take over the lease of his premises and signing as a director in the execution by the companies of the agreements. No submissions were made by Mr Wachtenheim as to how these two items of factual conduct by Mrs Costi could amount to unconscionable conduct by her.
The alleged knowledge of Mrs Costi comprises knowledge of the demolition clause, Mr Wachtenheim's reliance upon Mr Shnider, and Mr Wachtenheim's inability to meet his prospective repayment obligations.
The evidence did not establish that the lease which Mrs Costi was said to have urged upon Mr Wachtenheim was a lease with a 12-month demolition clause, the primary complaint of Mr Wachtenheim in respect of Mrs Costi. The findings in the judgment are to the contrary (see De Costi (No 3) at [335]-[339]). Thus, the factual findings at trial disprove the underlying matter of which Mrs Costi is alleged to have known.
I dealt with Mr Wachtenheim's reliance on Mr Shnider in De Costi (No 3) at [255] and [259]-[272]. It must be accepted that there was a proper basis to allege such reliance. How this reliance militates in favour of unconscionability by Mrs Costi rather than against it was not apparent.
I previously found that "there was no evidence that De Fish Dee Why business was unprofitable" (De Costi (No 3) at [214]). Whether the business was sufficiently profitable to enable Mr Wachtenheim to meet his substantial repayment obligations may be arguable.
That leaves one issue remaining: Mrs Costi's knowledge of Mr Wachtenheim's alleged inability to meet his prospective obligations. This was not the subject of any direct evidence. It was denied by Mrs Costi. The submissions by Mr Wachtenheim were in the nature of "she must have known". There was no evidence that she knew of the details of Mr Wachtenheim's assets, income or borrowings. The matter of Mrs Costi's knowledge is left to inference, with no particularity about the facts said to support the inference.
The facts established by the evidence at trial include that Mr Wachtenheim, with the benefit of a financial advisor and a solicitor, entered an agreement with De Costi Seafoods. Mrs Costi was a director who signed agreements as a director. No evidence is identified in Mr Muriniti's or Mr Newell's submissions as to the findings or evidence of the knowledge Mrs Costi had, or how, in any event, her conduct in signing an agreement for another (Franchises) and urging Mr Wachtenheim to take over the lease of the premises where he was conducting a business, gave rise to a fairly arguable claim for damages against Mrs Costi for unconscionable conduct.
Importantly, the submissions on behalf of Mr Newell and Mr Muriniti on this application do not deal, at all, with the claim against Mrs Costi. Mr Muriniti submits that the claim (against De Costi) based on unconscionable conduct "was not a claim for damages" but paragraph 27 of the fifth amended statement of claim pleads that the contraventions in paragraphs 25B and 25C, the unconscionability allegation, caused the cross-claimants to suffer damage. This submission of Mr Muriniti, and the absence of any submissions against Mrs Costi, increases the difficulty in finding that the claim against Mrs Costi, on the facts established at trial, was fairly arguable.
I recognise that a presumption under s 349 does not arise merely because a case is weak, and that an unconscionable conduct claim might occasionally be supported by an amorphous collection of facts. But there must be some evidence to support these facts and collectively these facts must found an argument of unconscientious conduct. I do not see this in the case against Mrs Costi.
In my view, the facts established by the evidence at trial do not form a basis to fairly argue that Mrs Costi engaged in unconscionable conduct. Unlike the other claims, this claim did not fail because of the lack of credit of witnesses. Rather, the facts established at trial, including those at [326]-[339] in De Costi (No 3) do not provide a basis to allege that she knew of Mr Wachtenheim's position. Even if she did, in circumstances where he was represented by a solicitor and a financial advisor, the limited extent of her conduct is insufficient to make a claim of unconscionability against her fairly arguable, on the facts established by the evidence.
In these circumstances, in respect of the claim for damages against Mrs Costi, I find that the evidence at trial did not form a basis for a reasonable belief that the claim had reasonable prospects of success and that the presumption under s 349(1) of the LPA arises.
E. Orders
The orders, notations and directions of the Court are:
(1) Dismiss the application for the orders sought in paragraphs 1 to 3 of Ms Thomson's notice of motion.
(2) Note that I do not find under s 349(1) of the Legal Profession Act 2004 that the facts established by the evidence at trial do not form a basis for a reasonable belief that the claim by Serge Wachtenheim and Deist Safety Equipment Australia Pty Ltd against Frank Theodore, De Costi Seafoods (Franchises) Pty Limited, De Costi Seafoods (Holdings) Pty Limited, or George Costi had reasonable prospects of success.
(3) Note that I do find under s 349(1) of the Legal Profession Act 2004 that the facts established by the evidence at trial do not form a basis for a reasonable belief that the claim by Serge Wachtenheim and Deist Safety Equipment Australia Pty Ltd against Androulla Costi had reasonable prospects of success.
(4) Stand over for directions the further conduct of the notices of motion dated 5 August 2013 and 14 October 2013 to a date to be determined convenient to the parties.
(5) Direct the parties to forward to my associate within seven days a list of convenient dates for further directions.
(6) Reserve all questions of costs of the applications.
**********
Amendments
17 July 2014 - Incorrect section of the Civil Procedure Act 2005 cited.
Amended paragraphs: 110 and 112
Decision last updated: 17 July 2014
4