Impex Pty Ltd v Crowner Products Ltd

[1994] QCA 149

IN THE COURT OF APPEAL	[1994] QCA 149
SUPREME COURT OF
QUEENSLAND
Brisbane	Appeal No. 212 of 1993
Before The Chief Justice

Mr Justice Pincus

Mr Justice McPherson

[Impex v Crowner]

BETWEEN:

IMPEX PTY LTD

(Plaintiff) Respondent

AND

CROWNER PRODUCTS LTD

(First Defendant) Appellant

AND

JEYES OVERSEAS LIMITED

(Second Defendant)

AND

JEYES GROUP PLC

(Third Defendant)

REASONS FOR JUDGMENT - THE CHIEF JUSTICE

Judgment delivered 13.05.94

This appeal is against the refusal of a chamber judge to order that the respondent company, the plaintiff in a suit, provide security for the defendant's costs. The application for security was brought under s.1335 of the Corporations Law.

The primary claim of the plaintiff in the action was based on an alleged breach of a contract for the defendant, as supplier, to supply product to the plaintiff as a distributor of its products. The plaintiff alleged that there was in place a distribution arrangement for a term of five years but an anticipatory breach occurred when the defendant gave notice in July 1991 that it would continue to supply for only two more years, that being a period substantially less than the term which, on the plaintiff's contention, was still to run.

There appears to be no doubt that the respondent company, the plaintiff, was impecunious at relevant times and that if the appellant should succeed in obtaining an order for costs on a resolution of the litigation in its favour, it would have great difficulty in recovering those costs if security were not ordered.

The respondent's financial position was not exactly established but the material was sufficient to demonstrate the gravity of its situation. In the 1990 financial year, the year when the contract sued upon was said to have been entered into, the respondent had a large trading loss and in the next year an even greater one. A substantial deficiency in assets as compared with liabilities continued as part of its financial picture over this period. The success of the respondent in the pending litigation appears to be far from assured. The very existence of the contract on which the respondent sued was disputed by the appellant claiming that no final agreement in the terms alleged had been concluded. Although the likelihood of success in the action was not a matter for final resolution on the application for security (c.f. the observations of Rogers J. in Memutu Pty Ltd v. Lissenden (1983) 8 A.C.L.R. 364 at 365) the existence of substantial obstacles to be overcome by the plaintiff in proving its claim and in establishing its damage was one of the matters for consideration.

The judge below had a discretionary judgment to exercise and he was obliged to take into account all of the relevant circumstances: see Bell Wholesale Pty Ltd v. Gates Export (1984) 52 A.L.R. 176 at 180 and P.S. Chellaram & Co v. China Ocean Shipping Co. (1991) 65 A.L.J.R. 642 at 643.

In the present case it sufficiently clearly appeared that the judge's reasons for the refusal of an order for security were that the respondent was impecunious and could not provide it and that the harm done by the appellant's breach of contract was so connected with the respondent's financial difficulties that it would be unjust to frustrate the continuance of the action by ordering security.

While the connection between the subject matter of an action and the impecunious condition of a plaintiff may be one matter calling for consideration when security is sought, the connection in the present case appears to be highly doubtful. The respondent's contention was founded on a claim that, apart from the appellant's breach, that is if the contract had been allowed to run for its full agreed term, it could have hoped to trade out of its financial difficulties. However, when attention is given to the extent of the respondent's impecuniousness before the contract on which it relies was entered into, the extent to which its financial troubles deepened and the very limited trading in product which the respondent, as distributor, engaged in, its contention appears to receive no support from the evidence.

Even more critical for the respondent's position on the appeal is the fact that although the judge was moved by the impecuniousness of the respondent and the consequence which the judge assumed would follow, that is, that the suit would be stifled if security were ordered, he did not, in reaching this conclusion, give attention to the question whether those who stood behind the respondent company and would gain from its success in the action, might have been able to provide security and might reasonably be expected to furnish it.

It is clearly established that when a plaintiff company seeks to avoid an order to provide security on the ground that it is impecunious and its suit would be stifled in consequence of an order, the onus lies on it to show that this would indeed be the consequence and this requires attention to the question whether others who might reasonably be expected to furnish security , e.g. shareholders and creditors, are unable to provide it: see e.g. Bell Wholesale v Gates Export (supra) at 179 and P.S. Chellaram & Co. v. China Ocean Shipping Co (supra) at 643. As Meagher J. observed in Hession v. Century 21 South Pacific (1992) 28 N.S.W.L.R. 120 at 123 the impecuniousness of a plaintiff company is not, standing alone, evidence of immunity from an order for security but is evidence supporting an entitlement in the defendant to an order. It is important that poverty should not be allowed to be a bar to litigation, but this means that the courts, in cases of this kind, must be careful to see whether the company's impecuniousness in combination with an order for security, really will have the effect of stifling the litigation. It may simply be a case where others who might reasonably be expected to come forward, decline to do so.

The judge's failure to turn attention to the relevant consideration which has just been identified means, with respect, that his discretion must be regarded as having miscarried. The absence of evidence from the respondent on this issue taken in conjunction with the other circumstances including the respondent's impecuniousness and the factors affecting the strength of the respondent's claim in the suit, are persuasive that the appeal should be allowed. I agree with the form of orders proposed in the reasons of Pincus J.A.

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 212 of 1993

Brisbane

[Impex Pty Ltd v. Crowner Products Ltd]

BETWEEN

IMPEX PTY LTD

(Plaintiff) Respondent

AND

CROWNER PRODUCTS LTD

(Defendant) Appellant

AND

JEYES OVERSEAS LIMITED

(Second Defendant)

AND

JEYES GROUP PLC

(Third Defendant)

_________________________________________________________________

Macrossan C.J.
Pincus J.A.

McPherson J.A.

_________________________________________________________________

Judgment delivered 13/05/1994.

Separate reasons for judgment of the Chief Justice, Pincus J.A. and McPherson J.A.; all
concurring as to the orders made.

____________________________________________________________

ORDERS ARE AS FOLLOWS:

1.          Appeal allowed.

2.          Orders of the primary judge made on 27 September 1993 set aside.

3.          Order that the respondent give security for the costs of the appellant in defending the action, No. 564 of 1992, to the satisfaction of the Registrar, in the sum of $34,500.

4.          Order that unless such security be given on or before Friday 3 June 1994 the plaintiff's action be stayed until the security ordered is given.

5.          Order that the respondent pay the appellant's taxed costs of the application for security and of this appeal.

____________________________________________________________

CATCHWORDS:	PRACTICE - Security for costs - respondent in bad financial position - application for security refused below - whether respondent's impecuniosity caused by appellant - whether arguable basis as to existence of contract.
Counsel:	Mr P Keane Q.C. for the appellant. Mr C Toogood for the respondent.
Solicitors:	Feez Ruthning for the appellant.

Toogoods for the respondent.

Hearing date: 15 February 1994.
IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 212 of 1993

Brisbane

Before Macrossan C.J.

Pincus J.A.

McPherson J.A.

[Impex Pty Ltd v. Crowner Products Ltd]

BETWEEN

IMPEX PTY LTD

(Plaintiff) Respondent

AND

CROWNER PRODUCTS LTD

(Defendant) Appellant

AND

JEYES OVERSEAS LIMITED

(Second Defendant)

AND

JEYES GROUP PLC

(Third Defendant)

REASONS FOR JUDGMENT - PINCUS J.A.

Judgment delivered 13/05/1994

This is an appeal against a dismissal of an application under s. 1335 of the Corporations Law for security for costs in a Supreme Court action, initially brought against three defendants. After the order appealed from was made, the plaintiff company discontinued its suit against the second and third defendants, so that the appeal is pursued by the first defendant only.

In his reasons for judgment the primary judge described the respondent's claim in the action as "certainly arguable" and that:

"If the claim is correct, the harm done to the plaintiff by the breach is so connected with its present difficulties that it would be unjust to prohibit its continuity of the action by an order for security. This view acknowledges the principles concerning impecuniosity stated in the authorities which have been cited."

It appears, then, that the ground on which the judge refused to order security was that the respondent had brought a claim which appeared to have merit and that the respondent's impecuniosity had been, or might well have been, caused by wrongful acts the subject of the respondent's action.

It is contended on behalf of the appellant that the respondent's claim in the action does not appear likely to succeed; apart from that, the appellant says that it was not established that any wrong-doing on the part of the appellant brought about the respondent's poor financial position. The respondent is admittedly in a very bad state financially and therefore there is, to use the words of s. 1335 of the Corporations Law -

"...reason to believe that the corporation will be unable to pay the costs of the
defendant if successful in his, her or its defence...".

Therefore the court may require security to be given. As Mr Toogood, the respondent's solicitor, pointed out in argument, it was in the judge's discretion to make, or to refuse to make, an order for security; but the appellant argues in effect that there was no reasonable basis in the evidence for the view on which his Honour acted. The issue raised is primarily a factual one, but something should be said about the proper practice to be followed. The court hearing an application for security for costs is not obliged to go at length into the merits of the action brought; to do so would ordinarily be a waste of resources. Where, however, the argument against ordering security is that there is a prima facie case that the plaintiff's impecuniosity has been caused by wrong-doing on the part of the applicant defendant, it will be necessary to attempt to form at least a provisional view of the strength of the plaintiff's case.

The statement of claim delivered in the action alleges that there was an agreement between the appellant and the respondent under which the respondent was to have the exclusive right to market the appellant's products in Australia, New Zealand and South East Asia for a period of five years. The agreement is said to have been partly oral and partly in writing; its terms are alleged to be contained in a letter of 16 May 1990. That letter, written by one Sands on behalf of the appellant, says that:

"...we will arrange through our solicitors to draw up a five year contract giving Impex Pty Ltd exclusivity for the following regions: Australia, New Zealand, South East Asia.".

It appears that this did not occur: no formal contract was drawn up. Subsequent paragraphs in the letter dealt with matters relevant to sales to the respondent, such as replacement of faulty products, payment terms and the like, but failed to stipulate any quantity or type of products which the respondent should be obliged to purchase or the appellant to sell. As will appear, that omission was subsequently relied on by the respondent, in contacts with the appellant about the nature of their relationship. It is desirable to give some brief account of the relevant correspondence, which illustrates the difficulty created by the absence of any agreement as to quantities and types of goods to be sold and purchased.

In early 1991 letters passed between the respondent and Jeyes Overseas Ltd, the second defendant in the action, with a view to having discussions about future dealings between the appellant and the respondent. On 12 April 1991 a Mr de Wild, on behalf of Jeyes Overseas Ltd, sent a fax to the respondent saying, among other things:

"I understand that you have not ordered recently excepting one container in
January, so I encourage you to replenish your stocks if you need to.
...
Concerning contractual agreements, I have been informed that the discussed
proposals about entering a long-term commercial agreement were never drawn
up formally. Bob Sands has indicated that a level of four containers per month
was broadly agreed under certain payment terms and that there has been some
difficulty in obtaining such payment from you for a significantly lower level of
input."

That elicited a response dated 26 April 1991 which did not dispute the assertion that nothing had been ordered since January; the respondent's letter said:

"In the negotiation which lead (sic) to the contract formed in May, 1990 there was never any mention of quantities required to be ordered by us. For this reason no quantities were included in the correspondence which evidenced the formation of the contract".

It should be noted that if, as the sentences last quoted appear to imply, the agreement between the parties did not require the respondent to order any quantities of goods, it was an agreement of a rather one-sided kind. Presumably, although it was not made very clear in argument before us, the respondent's case is that the appellant was obliged under the agreement to supply such goods as the respondent might choose to order.

There was further correspondence, but it is necessary to mention only a letter of 22 July 1991 in which de Wild, on behalf of the appellant, purported to give the respondent 12 months' notice of termination of the arrangement between the two companies; that letter reiterated the complaint that no orders had been placed since the beginning of the year and added that "much of the stock previously ordered is still in your warehouse and remains unsold". The latter assertion is consistent with para. 34 of an affidavit of a Mr P J Cannon, filed on behalf of the respondent, saying that:

"By the end of the 1991 financial year the Plaintiff was left with stock to a
value of $166,062.00"

It seems clear that if there was a legally binding agreement, it was one which contemplated that during the five year period of exclusivity goods would be sold by the appellant to the respondent: as I have pointed out, the letter of 16 May 1990 referred to various sale terms, but apart from that the whole purpose of the agreement, from the appellant's point of view, was to achieve sales of its goods. It would, no doubt, be possible to make an agreement for exclusive agency which placed no obligation on the agent to buy anything, but merely gave the agent the right, during the period specified, to delivery of such goods as it ordered. But such terms are not spelled out in the letter on which the respondent relies, nor alleged in the pleading; nor would they readily be implied, in ordinary commercial dealings.

Here, the absence of any agreement with respect to the quantities and types of goods to be bought and sold had, as has been mentioned, practical consequences, in the sense that it was relied on by the respondent in answer to the appellant's complaint that it had ordered only one container of goods in 1991. The affidavit to which reference has been made gives a further indication of the respondent's approach to the problem. After referring to "eight new lines of the First Defendant's [i.e., the appellant's] products" the affidavit says, among other things:

"By December, 1990 the company had established which of the new lines were
going to be good sellers. Of the new lines introduced we had decided to keep
the bees wax polish, the wax free polish and the apple and lavender air
fresheners"
...
"By December, 1990 the products with which we were going to continue were
selected...".

This is written on the basis that the respondent had the right to select which, if any, of the goods the subject of the exclusivity agreement it would buy. If that is so, it is not easy to see how the agreement set up has any plausible content; presumably, on the respondent's view of the matter, it could decide to sell only one line, while retaining exclusivity as to all.

It is neither necessary nor desirable to reach a concluded view on the point being discussed; but enough has been said to demonstrate that the issue raised by the appellant as to whether the alleged agreement was complete and immediately binding appears to be one on which it might be difficult for the respondent to succeed. It should be added that the pleading raises a cause of action in the alternative, on the basis that the respondent fails to establish a contract; nothing was said about it before us and I do not think it necessary to deal with that aspect of the matter.

I pass to consider the appellant's argument that it was not shown that the respondent's admittedly bad financial position was due to any alleged wrong-doing on the part of the appellant. On this point the judge expressed a view favourable to the respondent, but it was said for the appellant that the evidence could not support his Honour's conclusion.

The critical paragraphs in the affidavit filed for the respondent and referred to above

read in part as follows:

"...If we had managed to have been kept in supply with the products for the second half of the tax year, I estimate that the revenue earned by the company would have doubled and the expenses would have increased only marginally.

8. I am confident that had we been able to continue to trade in accordance with our Contract we would have finished the first major year of trading (the 1990/91 tax year) showing a small profit and we would have been well placed to earn substantial profits for the balance of the Contract term."

The tax year referred to in para. 7 is that ended 30 June 1991. It will be noted that the implication is that there was a problem about being "kept in supply". The correspondence to which I have referred is quite inconsistent with that. In de Wild's letter of 12 April 1991, it is plainly asserted that there had been no orders since January 1991, to which the respondent replied by saying that there had been no discussion of quantities required to be ordered, nor did the contract mention any quantities. Further light is thrown on the position by the circumstance that the respondent admittedly had a substantial quantity of stock at the end of the financial year and by a fax from the respondent to the appellant dated 27 August 1990;

that communication dealt in part with a delay in payment by the respondent for goods supplied,
but concluded:

"At present business in Australia is really turned down due to economic condition and the Middle East war crisis. Business is very slow even in the major chain store. Tight budget has also hit hard for the Australians.

We hope that down turn will improve towards October onwards."

Whether the slowness of business referred to in August 1990 continued, or whether some other cause operated, it seems plain on the documents that the respondent's suggestion that its difficulty was in obtaining a supply of goods in the 1990/91 year can hardly be accepted as representing the truth. Further, there is nothing in the pleading about difficulty in obtaining supply. The facts, so far as one can judge from the documents presently available, appear to be that during the 1990/91 year the respondent had difficulty selling goods the subject of the exclusive agency arrangement, that it ordered none after January 1991 and that it made a nett loss of $337,112 on its trading in that year. Mr Toogood gave the Court to understand that the respondent had at relevant times no other business than the agency in question; so that during the year when supply was apparently available the respondent made a considerable loss on its agency. According to the passage from the affidavit quoted above, if it had been able to trade in accordance with the agreement, it should have shown a small profit.

In my opinion, on this evidence there was no reasonable basis for a conclusion that the respondent's lack of funds was caused or substantially caused by anything done by the appellant. It was always, so far as the evidence shows, in a very poor position, having a deficiency of assets in an amount of $427,375 on 30 June 1991, and a deficiency of $611,690 at the end of the following year. The cause of that position is not satisfactorily explained.

In summary, I have come to the conclusion that the respondent's cause of action is, as presently pleaded, one which is likely to be difficult to establish and that no proper basis has been established for a finding, or adoption of a prima facie view, that the matters of which it complains in this action were responsible for its apparently disastrous financial position. The appeal must be allowed.

The orders will be as follows:

1.          Appeal allowed.

2.          Orders of the primary judge made on 27 September 1993 set aside.

3.          Order that the respondent give security for the costs of the appellant in defending the action, No. 564 of 1992, to the satisfaction of the Registrar, in the sum of $34,500.

4.          Order that unless such security be given on or before Friday 3 June 1994 the plaintiff's action be stayed until the security ordered is given.

5.          Order that the respondent pay the appellant's taxed costs of the application for security and of this appeal.

THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 212 of 1993

Brisbane

Before Macrossan C.J.

Pincus J.A.

McPherson J.A.

[Impex Pty. Ltd. v. Crowner Products Ltd.]

BETWEEN

IMPEX PTY LTD.

(Plaintiff) Respondent

AND

CROWNER PRODUCTS LIMITED

(Defendant) Appellant

AND

JEYES OVERSEAS LIMITED

(Second Defendant)

AND

JEYES GROUP PLC

(Third Defendant)

REASONS FOR JUDGMENT - McPHERSON J.A.

Judgment delivered the Thirteenth day of May 1994

I agree that this appeal should be allowed for the reasons given by Pincus J.A. The orders to be made should be those specified in his reasons for judgment.