Klein v Mochkin [No 2]
[2024] VSCA 223
•2 October 2024
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2022 0115 |
| YECHIEL KLEIN & ORS (ACCORDING TO THE ATTACHED SCHEDULE) | Appellants |
| v | |
| YOSEF MOCHKIN & ANOR (ACCORDING TO THE ATTACHED SCHEDULE) | Respondents |
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| JUDGES: | KENNEDY, WALKER and MACAULAY JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 5 September 2024 |
| DATE OF JUDGMENT: | 2 October 2024 |
| MEDIUM NEUTRAL CITATION: | [2024] VSCA 223 |
| JUDGMENT APPEALED FROM: | [2022] VCC 1385 (Judge Burchell); [2022] VCC 1835 (Judge Burchell) |
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PRACTICE AND PROCEDURE – Orders – Where trial judge had made referral to special referee – Changes required to directions to special referee following successful appeal.
PRACTICE AND PROCEDURE – Costs – Where appellants had only partial success on appeal – Whether respondents should pay all of appellants’ costs – Respondents ordered to pay 80 per cent of appellants’ costs.
PRACTICE AND PROCEDURE – Stay – Whether appropriate to order stay of execution of judgment pending application for special leave to appeal to High Court – Principles applicable to stay – No order for stay.
Nom de Plume Nominees Pty Ltd v Fingal Developments Pty Ltd [No 2] [2016] VSCA 233, applied; Mann v Paterson Constructions Pty Ltd [2018] VSCA 313, discussed.
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| Counsel | |||
| Appellants: | Mr AL Ounapuu | ||
| Respondents: | Mr MI Ravech | ||
Solicitors | |||
| Appellants: | Rosendorff Lawyers | ||
| Respondents: | Rotman & Morris | ||
KENNEDY JA
WALKER JA
MACAULAY JA:
In this matter, the Court allowed an appeal from a decision of a judge of the County Court.[1] The Court sought and received written submissions from the parties about the appropriate orders that ought to be made as a consequence. The Court also heard oral argument on some of the matters raised in the written submissions.[2] The parties were, in large measure, in agreement about the form of orders, but differed in relation to two matters:
(a)whether certain consequential amendments ought to be made to the trial judge’s orders; and
(b)the extent to which the appellants ought to recover their costs of the appeal.
[1]Klein v Mochkin [2024] VSCA 174 (‘Principal Reasons’).
[2]Justice Kennedy was not present at the hearing of further oral argument but, with the consent of the parties, read the written submissions and the transcript of the hearing of further oral argument.
In addition, the second respondent, JMEC Retail Pty Ltd (‘JMEC’), submitted that it ought not be liable for any of the appellants’ costs, and both respondents sought a stay of any orders, pending an application for special leave to appeal to the High Court.
These reasons deal with the above matters and are to be read with our Principal Reasons.
Background
The first respondent, Yosef Mochkin, and two of the appellants, Yechiel Klein and Menashe Segman, had formerly operated an online retailing business together through a partnership. At trial Mochkin and JMEC (the respondents to the appeal) succeeded in establishing that Klein and Segman had breached their fiduciary duties by use of partnership property in the running of a new business and that the third appellant, Getafix Café Pty Ltd (‘Getafix’), was a knowing participant in the breach. The judge:
(a)rejected Klein’s, Segman’s and Getafix’s unclean hands defence;
(b)made orders for an account of profits in relation to profits of the new business (the ‘William Klein business’) up to the date of the trial (‘past profits’);
(c)made orders that Klein, Segman and Getafix were to account for the capital value of the William Klein business, in addition to the profits up to the date of trial; and
(d)made orders for a special referee to be appointed for the taking of accounts.[3]
[3]Mochkin v Klein [2022] VCC 1385; Mochkin v Klein [No 2] [2022] VCC 1835.
By their application for leave to appeal, Klein, Segman and Getafix sought to overturn the judge’s conclusion in relation to the unclean hands defence (ground 1). If that ground was successful, Klein, Segman and Getafix would have no liability to account to Mochkin for their breach of fiduciary duty: the judge’s orders would be set aside in their entirety and Mochkin’s claim dismissed.
In the alternative, Klein, Segman and Getafix sought to overturn the judge’s conclusion about the extent to which they ought to account to Mochkin for their breach of fiduciary duty. They sought to vary the judge’s orders in relation to past profits (ground 2) and to set aside the judge’s order in relation to the capital value of the William Klein business (grounds 3 and 4).
Klein, Segman and Getafix failed on ground 1 because, although the judge had applied the wrong test in relation to unclean hands, her conclusion that the defence was not made out was correct.[4] They also failed on ground 3, which concerned the construction of s 33(1) of the Partnership Act 1958.[5] However, Klein, Segman and Getafix succeeded in relation to ground 2 (the extent of the account of past profits) and in relation to ground 4 (the capital value issue).[6]
[4]Principal Reasons, [70].
[5]Principal Reasons, [110].
[6]Principal Reasons, [91], [121].
In relation to ground 2, which was upheld, Klein, Segman and Getafix had sought an order confining the account of past profits to the first year after the breach of fiduciary duty. This Court did not accept that that was the appropriate order. Rather, we concluded that we should make an order that resulted in some (as yet unquantified) reduction in the past profits for which Klein, Segman and Getafix were to account over a period of four years.[7]
[7]Principal Reasons, [144].
In relation to ground 4, the Court concluded that there should be no order for Klein, Segman and Getafix to account for the capital value of the William Klein business.[8]
[8]Principal Reasons, [136].
What consequential amendments ought to be made to the trial judge’s orders?
The parties agreed that an additional question ought to be asked of the special referee as a consequence of this Court’s reasons for judgment. That question is as follows:
(1)What is the value of the profits of the WilliamKlein Business:
(a)in the period 11 August 2018 to 11 August 2019 (ie, the first 12 months), less the amount of such profits as are attributable to the eBay business;
(b)in the period 11 August 2019 to 11 August 2020 (ie, the second 12 months), less the amount of such profits as are attributable to the eBay business;
(c)in the period 11 August 2020 to 11 August 2021 (ie, the third 12 months), less the amount of such profits as are attributable to the eBay business; and
(d)in the period 11 August 2021 to 11 August 2022 (ie, the fourth 12 months), less the amount of such profits as are attributable to the eBay business?
The parties also agreed that certain amendments ought to be made to the trial judge’s orders directed to the special referee. They initially disagreed as to one matter: whether paragraph 12(l) of Annexure 2 (Conduct of the Reference) ought to be deleted. That paragraph is as follows:
12.The following items constitute property, assets and profits of the Partnership for the purposes of the taking of accounts:
…
(l) the eBay Account, including the data of the Partnership Business that was stored on it;
Initially, Klein, Segman and Getafix sought to have this paragraph deleted, while Mochkin and JMEC sought to have it retained. In the course of argument, it became apparent that Klein’s, Segman’s and Getafix’s concern was that the inclusion of that paragraph might mislead or confuse the special referee, because in answering the question the special referee is to deduct the eBay profits from the value of the William Klein business.[9] They also submitted that the use of the phrase ‘eBay Account’, when this Court’s reasons used the phrase ‘eBay business’, might cause some confusion.
[9]Principal Reasons, [144].
We do not consider there is any real likelihood that the special referee will misunderstand the question they are being asked to address, given that they will have this Court’s Principal Reasons (and these reasons). As made clear by the additional question for the special referee, the end point sought to be ascertained is to quantify the profits of the Wiliam Klein business for a particular period, excluding any profits attributable to the use of the eBay account. The initial inclusion of the eBay account as part of the ‘property, assets and profits’ of the William Klein business does not affect that exercise. Indeed, it may be helpful for those profits to be included in order for the questions proposed by the parties to be properly considered.
In light of the submissions made, we will vary paragraph 12(l) by adding, at the end of it, the following: (the ‘eBay business’), so as to ensure that it is clear that there is no real difference between the terms ‘eBay business’ and ‘eBay account’.
What order ought to be made in relation to the costs of the appeal?
In relation to costs, the appellants submitted that they should receive their full costs on the standard basis. They submitted that they had enjoyed ‘near complete success’ because any requirement to account for the capital value of the William Klein business had been set aside and their liability in relation to past profits had been ‘revised downward by a significant amount’. They submitted that grounds 1 and 3, in relation to which they had failed, did not involve a ‘separate, and sizeable, portion of the appeal that might be regarded as wasted’. They further submitted that there is ‘no obvious basis upon which costs might be apportioned’. They also submitted that the facts relevant to ground 1 were also relevant to ground 2, on which they succeeded.
The respondents submitted that the appropriate order in relation to costs is an order that Mochkin pay 75 per cent of Klein’s, Segman’s and Getafix’s costs of the appeal. They submitted that JMEC had not been a proper or necessary party to the appeal, because it had not been a party to Mochkin’s claim below; thus its presence was not required on the appeal. As a consequence, it ought not be liable for Klein’s, Segman’s and Getafix’s costs. In relation to the appropriate percentage, they submitted that Klein, Segman and Getafix had only mixed success on the appeal: they were unsuccessful in relation to grounds 1 and 3, and succeeded on grounds 2 and 4, which resulted in them having to account for a reduced share of the past profits, and none of the capital value.
The Court has, of course, a broad discretion in relation to an order for costs. In relation to whether a costs order ought to be reduced where a party has had mixed success, in Nom de Plume Nominees Pty Ltd v Fingal Developments Pty Ltd [No 2] this Court said as follows:
[W]hile the general rule is that costs should follow the event, where there is a multiplicity of issues and mixed success has been enjoyed by the parties, the court may take a pragmatic approach in relation to costs, taking into consideration the success (or lack of success) of the parties on an issues basis. Such an approach will be primarily a matter of impression and evaluation.[10]
[10][2016] VSCA 233, [13] (Tate, McLeish JJA and Ginnane AJA).
In this case, the issues presented in the application for leave to appeal divided themselves into an attack on the existence of any liability at all (based on the unclean hands defence) and, if that failed, an attack on the quantum of the profit to be disgorged (concerning both past profits and capital value). That division was reflected in separate arguments being advanced on each issue, although the factual substratum overlapped.
We regard the failure of Klein, Segman and Getafix to overturn the judgment below in its entirety as relevant to the determination of where costs should fall. Furthermore, Klein, Segman and Getafix enjoyed only partial success on ground 2, because their duty to account for the past profits of the William Klein business was reduced to a lesser extent than they had sought. In contrast, they enjoyed complete success on ground 4, in having their liability to account for the capital value of the William Klein business set aside.
The division between the three issues does not permit any precise demarcation. However, it can be said that Klein, Segman and Getafix, in broad terms, achieved success in substantially reducing — but not eliminating — their liability to account to Mochkin for their breach of fiduciary duty.
In those circumstances, we consider that Klein, Segman and Getafix are entitled to an order for costs in respect of the appeal, but there should be a modest reduction in recognition of the discrete area on which they failed.
As for the question of to whom the costs order should be directed, we consider that there is no basis for making a costs order directed only to Mochkin. JMEC was a party to the proceeding below because Klein, Segman and Getafix had (successfully) sought that it, together with Mochkin, disgorge profits they had made using partnership property. There was no appeal against the judge’s orders in that regard. JMEC participated in, and was represented on, the appeal. At no stage did JMEC seek to be removed as a party to the appeal. In those circumstances, we do not consider that it ought to be excluded from the order for costs.
In light of the above matters, we would order that the respondents pay 80 per cent of the appellants’ costs of the application for leave to appeal and the appeal.
Should this Court stay its orders pending an application for special leave to appeal?
Finally, Mochkin and JMEC sought a stay of this Court’s orders, pending an application for special leave to appeal to the High Court. They sought a stay of execution of any order that sets aside the trial judge’s declaration concerning capital value (paragraph 2 of her Honour’s declarations) and any order that varies the trial judge’s declaration concerning past profits (paragraph 4 of her Honour’s declarations). They submitted that, absent a stay, the constructive trusts imposed by the trial judge for the benefit of Mochkin over the profits and total capital value of the William Klein business, including its assets, will be set aside. In that event, the beneficial interest in that property, which currently subsists in favour of Mochkin by operation of the constructive trusts, would disappear thereby leaving the respondents at liberty to dispose of the property which could render the appeal nugatory. They further identified proposed grounds of appeal, which they said were ‘at least arguable’.
The principles relevant to this Court’s jurisdiction to grant a stay of its orders pending an application to the High Court for special leave to appeal were set out by this Court in Mann v Paterson Constructions Pty Ltd.[11] Relevantly, those principles may be summarised as follows:
[11][2018] VSCA 313, [17]–[26] (Kyrou, McLeish and Hargrave JJA). See also Hoser v Pelley [No 4] [2023] VSCA 319, [32] (McLeish, Walker JJA and Elliot AJA).
(a)This Court has the power to stay the operation of its orders pending the hearing and determination of an application to the High Court for special leave to appeal,[12] either pursuant to rr 64.39 and 66.16 of the Supreme Court (General Civil Procedure) Rules 2015 or in an exercise of inherent jurisdiction.[13]
[12]Jennings Construction Ltd v Burgundy Royale Investments Pty Ltd [No 1] (1986) 161 CLR 681, 684 (Brennan J); [1986] HCA 84 (‘Jennings’).
[13]R v IBAC [No 2] [2015] VSCA 280, [8] (Priest and Kaye JJA) (‘IBAC’).
(b)The Court may stay the operation of an order wholly or in part and may do so on terms, such as the giving of an undertaking or the provision of security.[14]
[14]Alexander v Cambridge Credit Corporation Ltd (recs apptd) (1985) 2 NSWLR 685, 694–5 (Kirby P, Hope and McHugh JJA).
(c)A stay to preserve the subject-matter of litigation pending an application for special leave to appeal is an extraordinary jurisdiction and ‘exceptional circumstances must be shown before its exercise is warranted’, such as the immediate threat of the destruction of the subject matter of the litigation or of grave and irreparable damage being sustained.[15]
[15]Jennings (1986) 161 CLR 681, 684 (Brennan J); [1986] HCA 84; Rahme v Commonwealth Bank of Australia (1993) 117 ALR 618, 620 (Deane J); [1993] HCA 62; Edelsten v Ward (No 2) (1988) 63 ALJR 346, 346 (Brennan J); Federal Commissioner of Taxation v Myer Emporium Ltd (No 1) (1986) 160 CLR 220, 222 (Dawson J); [1986] HCA 13 (‘Myer’); Petrotimor Companhia de Petroleos SARL v Commonwealth [2003] FCAFC 82, [16]–[24] (Beaumont J, Black CJ and Hill J agreeing at [7]).
(d)The following factors are relevant to this Court’s exercise of the discretion:
(i)whether there is a substantial prospect that special leave to appeal will be granted (although that does not require that the prospects of a grant of special leave be ‘high’);[16]
(ii)whether the grant of a stay will cause loss to the respondent;[17] and
(iii)where the balance of convenience lies.[18]
(e)Many considerations may be relevant to the Court’s assessment of where the balance of convenience lies. They include the following:
(i)whether, if a stay is not granted, there is a real risk that it will not be possible for an ultimately successful appellant to be restored substantially to its former position if the judgment against it is executed;[19]
(ii)whether, if a stay is not granted, there is a real risk that a successful appeal would be rendered nugatory,[20] for example where, due to the respondent’s financial state, there is no reasonable prospect of recovering moneys paid pursuant to the judgment at first instance;[21]
(iii)whether, if a stay is granted and either the application for special leave to appeal or any ensuing appeal is unsuccessful, there is a real risk that the respondent would be deprived of the fruits of its judgment.[22]
[16]Mercanti v Mercanti (2017) 340 ALR 225, 227 [11] (Kiefel J); [2017] HCA 1 (‘Mercanti’). This is a factor of ‘central significance’ (CPB Contractors Pty Ltd v JKC Australia LNG Pty Ltd [No 3] [2017] WASCA 132, [13] (Buss P, Murphy and Beech JJA)) but not an essential prerequisite for the grant of a stay. However, it will be rare for a stay to be granted in a case in which there is no substantial prospect of success: Rinehart v Welker (2012) 83 NSWLR 347, 358 [48] (Bathurst CJ, Beazley and McColl JJA).
[17]Jennings (1986) 161 CLR 681, 685 (Brennan J); [1986] HCA 84.
[18]Jennings (1986) 161 CLR 681, 685 (Brennan J); [1986] HCA 84; IBAC [2015] VSCA 280 [7]–[8], [10] (Priest and Kaye JJA); Hamersley Iron Pty Ltd v Lovell [No 2] (1998) 20 WAR 79, 85 (Ipp J, Pidgeon J agreeing at 80).
[19]Myer (1986) 160 CLR 220, 223 (Dawson J); [1986] HCA 13.
[20]Myer (1986) 160 CLR 220, 222 (Dawson J); [1986] HCA 13; Jennings (1986) 161 CLR 681, 683 (Brennan J); [1986] HCA 84.
[21]Myer (1986) 160 CLR 220, 223–4 (Dawson J); [1986] HCA 13.
[22]P Aker Flowerbulbs Pty Ltd v Coulter (2004) 140 FCR 410, 418 [39] (Weinberg J); [2005] FCA 1486.
We will refuse the respondents’ application for a stay of our orders pending any application for special leave to appeal.
First, although we accept that the proposed grounds are ‘at least arguable’, as Mochkin and JMEC submitted, we are not persuaded that the respondents’ proposed application for special leave to appeal has substantial prospects of success. In that regard, no application for special leave has yet been filed; however, that does not preclude an assessment of its prospects, or the grant of a stay. Noting the proposed grounds of appeal identified in Mochkin’s and JMEC’s written submissions, it does not appear to us that the proposed application for special leave will raise any matter of public importance. Nor is the case one in which the High Court would be called upon to resolve a difference of opinion between different courts as to the state of the law. These are important factors in the High Court’s decision whether to grant special leave.[23] In our opinion, any application for special leave to appeal is likely to have limited prospects of success.
[23]Judiciary Act 1903 (Cth) s 35A.
In so far as the balance of convenience is concerned, we observe that no affidavit was filed in support of the application. There is no evidence to suggest that Klein, Segman and Getafix propose to dissipate the assets of the William Klein business in the immediate future. Furthermore, Klein, Segman and Getafix will be subject to orders concerning the past profits of the William Klein business.
We are prepared to proceed on the assumption that, if a stay is not granted, there is at least some risk that the assets of the William Klein business will be dissipated. It does not appear to us that this would affect the operation of the orders concerning the past profits. However, we accept that the dissipation of assets would affect the efficacy of the order concerning the capital value of the William Klein business, if that order were to be reinstated by the High Court. The difficulty for Mochkin and JMEC is that neither their proposed grounds of appeal nor their written submissions clearly identify any basis on which this Court’s decision to exclude the capital value of the William Klein business from any account of profits might have been in error. Furthermore, in relation to that aspect of this Court’s decision, we consider that there is no real likelihood that, were Mochkin and JMEC to do so, they would be successful.
Recalling that an exceptional case is required to grant a stay, we do not consider that this case is an exceptional case.
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SCHEDULE OF PARTIES
S EAPCI 2022 0115
| YECHIEL KLEIN | First Appellant |
| MENASHE SEGMAN | Second Appellant |
| GETAFIX CAFÉ PTY LTD (ACN 619 126 582) | Third Appellant |
| v | |
| YOSEF MOCHKIN | First Respondent |
| JMEC RETAIL PTY LTD (ACN 628 234 953) | Second Respondent |
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