Madden International Limited v Lew Footwear Holdings Pty Ltd
[2015] VSCA 90
•8 May 2015
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2014 0148
| MADDEN INTERNATIONAL LIMITED | Applicant |
| v | |
| LEW FOOTWEAR HOLDINGS PTY LTD | Respondent |
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| JUDGES: | MANDIE, BEACH JJA and DIXON AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 1 May 2015 |
| DATE OF JUDGMENT: | 8 May 2015 |
| MEDIUM NEUTRAL CITATION: | [2015] VSCA 90 |
| JUDGMENT APPEALED FROM: | Lew Footwear Holdings Pty Ltd v Madden International Limited [2014] VSC 320 (Elliott J) Lew Footwear Holdings Pty Ltd v Madden International Limited (No 2) [2014] VSC 541 (Elliott J) |
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PRACTICE AND PROCEDURE —Application for leave to appeal —Proposed ground that judge erred in refusing to set aside service outside Australia on the basis that the plaintiff had a ‘strongly arguable’ case —Whether appeal had real prospect of success — Whether Agar v Hyde applicable to applications to set aside service — Application for leave to appeal refused.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr R M Garratt QC with Ms A M Folie | Sladen Legal |
| For the Respondent | Mr L Glick QC with Mr C G Juebner | SBA Law |
MANDIE JA:
Introduction
The applicant for leave to appeal (‘Madden’) supplied footwear and other products to the respondents (‘Lew Footwear’) pursuant to a written Licence Agreement. Lew Footwear commenced a proceeding in the Commercial and Equity Division against Madden alleging, inter alia, misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) and claiming relief including damages. Madden is incorporated in Hong Kong and is the wholly owned subsidiary of a company based in New York. Madden has no offices or employees in Australia. The writ and statement of claim were served on Madden in Hong Kong. In September 2013, Madden filed a notice of conditional appearance and a summons making application pursuant to r 8.09 of chapter 1 the Supreme Court (General Civil Procedure) Rules 2005 (‘Rules’), seeking relief, inter alia, that the writ be set aside.
A judge in the Trial Division handed down reasons for judgment on 8 August 2014,[1] after which Lew Footwear filed, by leave, further affidavits. After a further hearing, the judge handed down further reasons for judgment on 30 October 2014.[2] Madden’s application was dismissed in essence because the judge held that Lew Footwear’s claims fell within r 7.01(1) of the Rules and that Lew Footwear had a ‘strongly arguable case’ of misleading and deceptive conduct.
[1]Lew Footwear Holdings Pty Ltd v Madden International Limited [2014] VSC 320 (‘First Reasons’).
[2]Lew Footwear Holdings Pty Ltd v Madden International Limited (No 2) [2014] VSC 541 (‘Second Reasons’).
Madden seeks leave to appeal from that dismissal, by application dated 12 December 2014. The application sets out the following reasons for granting leave to appeal:
1. The proceeding raises the question as to what needs to be established under Rule 7.01(1) and Rule 7.05 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) to make an overseas defendant amenable to the jurisdiction of the Supreme Court of Victoria.
2. Although interlocutory in appearance, the decision of the primary judge is final in effect, for it subjects the defendant to litigation in Australia to which it would otherwise not be amenable despite the plaintiff’s agreement to litigate in the overseas forum. Such a result would amount to a substantial injustice to the defendant.
3. The proceeding concerns a distributorship agreement entered into by the plaintiff with the defendant in November 2009 which ran until July 2014. The distributorship concerned the defendant’s fashion goods (shoes principally) for which the plaintiff opened many stores. The plaintiff pleads that the business was loss-making at all times. By way of damages the plaintiff claims all trading and capital losses sustained in the conduct of the business.
4. The proceeding, as ultimately re-pleaded, concerns five alleged representations which found the plaintiff’s statutory misleading and deceptive conduct claims.
5. The first two representations were allegedly implicitly made prior to entry into the distributorship in November 2009 and concerned the future preparation of invoices under the distribution agreement. So too did the fifth alleged representation, which was pleaded as made in February 2012. The plaintiff disavowed any allegation that the defendant did not intend at the time the alleged representations were made to conduct its affairs in the manner allegedly represented.
6. The third alleged representation was to the effect that invoices delivered from time to time complied with the pricing arrangement between the parties, and the fourth representation (pleaded as made in February 2012) was to the effect that Madden ‘had put systems in place’ for the correct calculation of invoiced prices. As regards the third, fourth and fifth representations it was pleaded that Lew Footwear ‘continued the operation of its loss-making distribution business’ on the faith of them.
In support of serving process out of Australia the plaintiff filed extensive affidavit material for the purpose of verifying its claims as pleaded and re-pleaded. The case of the plaintiff as verified on affidavit exhibited the following features:
(a) no witness for the plaintiff deposed that he or she actually regarded the defendant’s conduct as giving rise to any of the alleged representations;
(b) no witness for the plaintiff deposed that he or she actually consciously relied upon the first or second representations in entering into the distribution agreement between the parties; and
(c) no witness for the plaintiff gave evidence as to the matters actually taken into account in the course of evaluating whether the plaintiff would take on or continue a distributorship of the defendant’s fashion goods.
8. The defendant’s contention below and in this court was and would be that the required basis for serving proceedings out of the jurisdiction was not established, namely, that the plaintiff had not demonstrated any (strongly arguable) case that it had relied upon the representations and been thereby caused the pleaded loss (which was all its capital and trading losses in the course of conducting the distributorship between 2009 and 2014).
The application sets out the following proposed ground of appeal:
1. The learned primary judge erred in holding that the plaintiff had established a strongly arguable case for the purposes Order 7 of the Supreme Court (General Civil Procedure) Rule [sic] 2005 in circumstances where:
(a) the plaintiff filed affidavit material;
(b) no witness for the plaintiff deposed that he or she regarded the defendant’s conduct as giving rise to any of the alleged representations;
(c) no witness for the plaintiff deposed that he or she actually consciously relied upon the alleged representations in entering into the relevant contract or in deciding to continue the loss-making business;
(d) the plaintiff did not contend that the defendant did not intend at the time of entry into the agreement to have an appropriate accounting system in place; and
(e) there were substantial other causes for the plaintiff acting as it did (including the quality, reputation and consumer appeal of the fashion goods), about which the plaintiff gave no evidence at all, and which were far more probable than the claimed representations as to future or existing accounting arrangements within the defendant’s office.
Lew Footwear says that the judge was not in error as so contended by Madden. Alternatively, by way of proposed notice of contention, Lew Footwear says that, on a proper construction of the Rules, it was not required to make out a ‘strongly arguable case’, but it was sufficient to show that the relevant pleading, and/or the evidence, brought the proceeding within the jurisdiction of the Court, having regard to the requirements of r 7.01(1) of the Rules. In this regard, Lew Footwear refers to the decision of the High Court in Agar v Hyde.[3]
[3](2000) 201 CLR 552, (‘Agar’).
Amended statement of claim
In the course of the hearing before the learned judge, Lew Footwear’s statement of claim was amended on several occasions and the final version of the pleading, so far as it relates to the misleading and deceptive conduct claim was as follows:
5. There were terms of:
(a) the Licence Agreement, amongst others, that Lew Footwear would buy the Products directly from Madden on an ‘agreed cost’ basis, such cost to be factory cost plus reasonable costs of sampling, testing, agent and Hong Kong office fees etc, such reasonable costs not to exceed 13% (Pricing Term);
Particulars
The Pricing Term is in writing, at clause 12 of the Licence Agreement. Lew Footwear will refer to and rely on the full terms and effect of clause 12 of the Licence Agreement at trial.
…
6. In order to induce Lew Footwear to enter into the Licence Agreement, during the Negotiations Madden represented to Lew Footwear that:
(a) Madden would, during the continuation of the Licence Agreement, have systems in place capable of calculating prices for Products purchased by Lew Footwear from Madden equal to an ‘agreed cost’ basis, such cost to be factory cost plus reasonable costs of sampling, testing, agent and Hong Kong office fees etc, such reasonable costs not to exceed 13% (First Representation);
(b) Madden would, during the continuation of the Licence Agreement, render invoices to Lew Footwear at prices for Products purchased by Lew Footwear from Madden equal to an ‘agreed cost’ basis, such cost to be factory cost plus reasonable costs of sampling, testing, agent and Hong Kong office fees etc, such reasonable costs not to exceed 13% (Second Representation).
Particulars
The First Representation and the Second Representation were each made by implication.
The First Representation and the Second Representation were implied from the following facts and circumstances.
·The fact that Kenmar (on behalf of Lew Footwear) had insisted on the Pricing Term, as evidenced by his correspondence to Alan Novich (on behalf of Madden) sent on each of 3 September 2009, 18 September 2009, 2 October 2009 and 9 October 2009.
·The fact that Hammerschlag (on behalf of Lew Footwear) had insisted on the Pricing Term during his negotiations with Madden's representatives, including:
owith Funk on or about 22 September 2009;
owith Funk and John Madden throughout the night from 9 to 10 October 2009, in the course of which Hammerschlag advised that Funk should not travel to Australia because there was no agreement on the pricing term and that agreement on that term was fundamental to the negotiations moving forward.
·The fact that after the repeated requests made by Kenmar and Hammerschlag referred to above. on 29 October 2009 Funk sent an email to, inter alia, Hammerschlag, proposing a pricing clause which included a mark-up on factory cost for ‘reasonable costs of sampling, testing. Agent’s fees. Hong Kong office fees etc. not to exceed 13%’ and that on 10 November 2009 Novich provided a revised draft of the licence agreement by email to Hammerschlag (on behalf of Lew Footwear) which. for the first time, included the final wording of the Pricing Term.
·The fact that thereafter. the Pricing Term remained in each further draft of the licence agreement.
·The fact that Madden was well aware of the importance of the Pricing Term to Lew Footwear, particularly after Hammerschlag advised that Funk should not travel to Australia because there was no agreement on the pricing term and that agreement on that term was fundamental to the negotiations moving forward.
·The fact that the Pricing Term was included in the Licence Agreement as a binding term.
·The fact that, in order to comply with its contractual obligations with respect to the Pricing Term, Madden was required to have a system in place capable of calculating prices for Products in accordance with the Pricing Term.
A copy of the correspondence is in the possession of Lew Footwear's solicitors.
6A. Further, during the period from about 28 April 2010 until about 2 January 2014 and in purported performance of its obligations under the Pricing Term, Madden rendered invoices to Lew Footwear in respect of the sale of Products.
…
7. By its conduct referred to at paragraph 6A herein, on each occasion on which Madden rendered an invoice to Lew Footwear for Products, such conduct amounted to a representation that the price specified in each such invoice complied with the Pricing Term (the Third Representation).
7A. In breach of the Third Representation, not less than 26 of the invoices referred to in paragraph 6A did not comply with the Pricing Term in that the prices specified were excessive and were greater than the amount permitted under the Pricing Term (each a Non-compliant Invoice and collectively Non-compliant Invoices).
…
12. Lew Footwear, in reliance on the accuracy of each of:
(a) the First Representation; and
(b) the Second Representation;
was induced thereby to enter into the Licence Agreement and the Royalty Agreement and, thereafter, to incur expenditure and liabilities in establishing a market for the Products in Australia.
Particulars
Lew Footwear's reliance on the First Representation and the Second Representation was constituted by the following conduct of Kenmar and Hammerschlag.
In the course of the Negotiations, Kenmar made it known to Novich that the pricing of Products by Madden was critical to Lew Footwear, including by the correspondence sent by Kenmar to Novich referred to in the particulars to paragraph 6 above. In the course of the Negotiations, Hammerschlag made it known to Funk and John Madden that the pricing of Products by Madden was critical to Lew Footwear, as alleged in the particulars to paragraph 6 above.
If Kenmar had known prior to the entry into the Licence Agreement that Madden would not, during the continuation of the Licence Agreement:
(a) have systems in place capable of calculating prices for Products purchased by Lew Footwear from Madden equal to an ‘agreed cost’ basis, such cost to be factory cost plus reasonable costs of sampling, testing, agent and Hong Kong office fees etc, such reasonable costs not to exceed 13%;
(b) render invoices to Lew Footwear at prices for Products purchased by Lew Footwear from Madden equal to an ‘agreed cost’ basis, such costs to be factory costs plus reasonable costs of sampling, testing, agent and Hong Kong office fees etc, such reasonable costs not to exceed 13%.
Kenmar would have immediately brought these matters to the attention of Hammerschlag and Hammerschlag would have instructed Kenmar to cease any further negotiations with Madden and Hammerschlag would himself have ceased such negotiations.
If Hammerschlag had known prior to the entry into the Licence Agreement that Madden would not. during the continuation of the Licence Agreement:
(a) have systems in place capable of calculating prices for Products purchased by Lew Footwear from Madden equal to an ‘agreed cost’ basis. such cost to be factory cost plus reasonable costs of sampling, testing, agent and Hong Kong office fees etc. such reasonable costs not to exceed 13%;
(b) render invoices to Lew Footwear at prices for Products purchased by Lew Footwear from Madden equal to an ‘agreed cost’ basis, such costs to be factory costs plus reasonable costs of sampling, testing, agent and Hong Kong office fees etc. such reasonable costs not to exceed 13%.
Hammerschlag would have instructed Kenmar to cease any further negotiations with Madden and Hammerschlag would himself have ceased such negotiations.
In those circumstances. Lew Footwear would not have entered into the Licence Agreement.
Believing that Madden would have systems in place and render invoices as alleged Hammerschlag and Kenmar proceeded with the negotiation of the Licence Agreement and Lew Footwear (by Kenmar) entered into the Licence Agreement and the Royalty Agreement.
Having entered into the Licence Agreement, Lew Footwear commenced to incur expenditure to establish a market for Products in Australia by establishing stores.
Lew Footwear established stores at the following addresses with the following lease commencement dates and store opening dates:
[Table omitted]
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13A. Contrary to the First Representation. Madden did not, during the continuation of the Licence Agreement, have systems in place capable of calculating prices for Products purchased by Lew Footwear from Madden in accordance with the Pricing Term.
13B. The First Representation amounted to a representation with respect to a future matter within the meaning of s. 51 A of the TPA.
13C. Madden did not have reasonable grounds for making the First Representation.
Particulars
The fact that Madden did not have reasonable grounds for making the First Representation is to be inferred from Madden's conduct in systematically rendering invoices in breach of the Pricing Term.
13D. Further, or in the alternative, by reason of s. 51 A of the TPA. Madden is deemed not to have had reasonable grounds for making the First Representation.
13E. In the premises. Madden has engaged in conduct which is misleading or deceptive or likely to mislead or deceive in contravention of s.52 of the TPA in making the First Representation.
13F. Contrary to the Second Representation. Madden rendered invoices to Lew Footwear at prices for Products purchased by Lew Footwear from Madden which were not in accordance with the Pricing Term.
Particulars
Refer to the particulars to paragraph 7A.
13G. The Second Representation amounted to a representation with respect to a future matter within the meaning of s. 51A of the TPA.
13H. Madden did not have reasonable grounds for making the Second Representation.
Particulars
The fact that Madden did not have reasonable grounds for making the Second Representation is to be inferred from Madden's conduct in systematically rendering invoices in breach of the Pricing Term.
13I. Further, or in the alternative, by reason of s.51A of the TPA, Madden is deemed not to have had reasonable grounds for making the Second Representation.
13J. In the premises, Madden has engaged in conduct which is misleading or deceptive or likely to mislead or deceive in contravention of s.52 of the TPA in making the Second Representation.
Reasons for judgment
In his second judgment, the judge explained that the sole issue before the Court, at that stage, was whether the totality of the evidence as then filed by Lew Footwear established a ‘strongly arguable case’, that the conditions in r 7.01(1)(i) and (j) of the Rules had been met in relation to the claims in the proposed amended statement of claim.[4]
[4]Second Reasons [6].
The judge said that in essence it was alleged that certain representations were made in trade or commerce by Madden, both before the Licence Agreement was entered into and while it was on foot and that pursuant to the Licence Agreement, Lew Footwear had become a distributor of Madden, opened a number of retail stores in Australia, and suffered loss and damage by or because of the making of the alleged representations.[5]
[5]Second Reasons [9].
The judge said that the First and Second Representations were alleged to be implied from the facts and circumstances leading up to the execution of the Licence Agreement and that the Pricing Term formed part of the Licence Agreement.[6]
[6]Second Reasons [12]. The judge also refers to an alleged Fourth Representation and a Fifth Representation but it is not necessary to consider those for present purposes.
The judge said that Lew Footwear had, since his first judgment, filed a significant body of additional evidence, the deponents of further affidavits being, Daniel Hammerschlag (‘Hammerschlag’), Stephen Kenmar (‘Kenmar’) and Solomon Lew (‘Lew’).
The reasons continue as follows:
Lew described himself as the ultimate decision maker of the affairs of the Lew group of companies, including Lew Footwear.
Neither Kenmar nor Lew had previously provided any evidence themselves. Further, in contrast to the evidence previously before the court, both Hammerschlag and Kenmar gave direct evidence on issues of reliance and causation relevant to all of the Representations Claims. Furthermore, Lew gave evidence concerning certain matters in 2012 and 2013.
It is convenient to refer to some of the additional evidence by reference to matters already set out in the Principal Judgment.
Paragraph 13 of the Principal Judgment reads as follows:
Notwithstanding the position taken by Madden, Lew Footwear was persistent in relation to some of the changes it wanted made to the Licence Agreement before it was executed. One of those amendments related to the Pricing Term. There were numerous exchanges in relation to this clause.
The further evidence of Hammerschlag (including evidence previously the subject of a claim of client legal privilege) provided greater detail of negotiations concerning Lew Footwear’s attempts to reach agreement on the Pricing Term. This evidence sought to demonstrate that the Pricing Term was an important matter and that Lew Footwear required satisfactory wording in the pricing clause before it was willing to enter into the Licence Agreement.
Hammerschlag gave extensive evidence of his role and responsibility in his more than 20 years with the Lew group of companies. By July 2009, Hammerschlag had been responsible for the opening and operation of approximately 250 retail stores. He had also been responsible for the business relationship in respect of 3 established international licences, together with the evaluation of 4 further potential licences that did not proceed.
Further, Hammerschlag referred to a business plan (‘the Business Plan’) that he prepared in anticipation of Lew Footwear becoming a distributor for Madden. The Business Plan contemplated 29 stores being established in 2010, 5 in 2011, 10 in 2012, 5 in 2013 and 6 in 2014 (being a total of 55 stores). Self-evidently, the Business Plan envisaged large volumes of the Products being traded. This fact was specifically addressed as part of the reliance evidence now before the court. The Business Plan was for internal purposes. Hammerschlag prepared a document based on the Business Plan, which was forwarded to Madden on 5 August 2009.
In addition, the Business Plan forecast a very large capital investment over an ongoing period of time, with projected losses in 2010, but profits thereafter. Hammerschlag deposed that, from and after the time the Business Plan was prepared, he believed that the purchase price of the Products, including transparency with respect to the purchase price, was critical to the success of any distribution arrangement with Madden. In this regard, Hammerschlag also stated:
I believed [in August 2009] that Madden, as a large and well-connected purchaser of footwear and accessories, was able to buy product from manufacturers at good prices. Therefore, I believed that our success was in part dependent upon us being able to acquire the [P]roducts at the factory prices (or close to) charged to Madden. I understood that Madden was to benefit financially from the distribution arrangement through the payment of buying commission and royalties.
Hammerschlag also gave evidence that, in late September 2009, prior to the Pricing Term being agreed, the wording being proffered by Madden did not give him sufficient comfort in relation to pricing. This evidence was clearly directed to some of the issues raised in paragraph 213 of the Principal Judgment. In this regard, he stated as follows:
I believed that there was insufficient certainty as to the cost at which [Lew Footwear] would purchase [P]roducts from Madden. Further, the suggestion of negotiating a price for each product was unworkable. … It was completely impractical to suggest that [Lew Footwear] would negotiate with Madden the price at which each product would be purchased before placing orders. The sheer volume of product required to stock the retail stores made any negotiation on a product by product basis entirely unworkable. I believed that the only workable way forward was an assurance from Madden that [Lew Footwear] would pay factory cost for each relevant product, except that I was agreeable to paying some additional costs associated with transport or third party royalties.
Equally, Kenmar gave extensive evidence in relation to the negotiations to demonstrate the importance of the Pricing Term to Lew Footwear. He also provided evidence of his long and extensive involvement in negotiating contracts, including licence and distribution agreements, on behalf of companies in the Lew group of companies.
Paragraphs 14 and 15 of the Principal Judgment read as follows:
In the last written communication from Lew Footwear on this topic, on 9 October 2009, [Kenmar], a director and in-house counsel for Lew Footwear, contended that the then existing draft prepared by Madden left Lew Footwear very vulnerable as Lew Footwear could not know what the costs referred to in the Pricing Term would be. Kenmar also contended that, as there was no formula, Lew Footwear could not ascertain how costs were to be apportioned between Lew Footwear and other Licencees of Madden.
On 10 November 2009, in response to Lew Footwear’s concerns, Madden proposed a change to the Pricing Term. This change was accepted by Lew Footwear and was incorporated into the Licence Agreement. In short, it was only in the month leading up to the execution of the Licence Agreement that the form of words the subject of the Pricing Term was agreed. There was no suggestion in any of the exchanges between the parties that Madden had put in place some form of system to ensure that the Pricing Term as finally agreed would be complied with.
Further evidence was led by Lew Footwear concerning the events between 9 October 2009 and 10 November 2009. Without descending to the detail, this evidence also emphasised the significance of the Pricing Term to Lew Footwear and the manner by which the Pricing Term was capped at 13 percent in relation to any mark ups to be charged by Madden. The evidence shows Lew was briefed by both Hammerschlag and Kenmar on difficulties that were being experienced in negotiating satisfactory wording with respect to pricing.
At paragraph 20 of the Principal Judgment, some broad details were given in relation to stores opened by Lew Footwear under the Licence Agreement. Based on the evidence before the court, it was stated that of the 15 stores opened, 5 had been closed and 10 continued to operate. In fact, as at the hearing date on 10 June 2014, only 5 stores remained open. The further evidence demonstrates that since 10 June 2014 the remaining 5 stores have also been closed, the last closure occurring on 22 July 2014.
The evidence now shows that a meeting was held on 16 October 2013, attended by Hammerschlag, Kenmar, Lew and others, at which it was decided by Lew to wind down the business conducted by Lew Footwear under the Licence Agreement and to close all the stores as soon as practicable. Lew directed Hammerschlag to implement the decision.
At paragraphs 61 to 63 of the Principal Judgment, reference was made to various amendments proposed in the Proposed Statement of Claim. In so doing, the following observations were made:
The particulars also include details of Lew Footwear establishing 15 stores in reliance on the First Representation and the Second Representation. There is no suggestion that Kenmar, a director of Lew Footwear from 2 October 2009 and in-house counsel, was responsible for the decision to establish the 15 stores. No person is identified in the Proposed Statement of Claim in this regard. Given Kenmar’s position, and although he executed the Licence Agreement, it seems highly unlikely that he alone would have represented the ‘mind’ of Lew Footwear and been responsible for the commercial decisions to proceed with the execution of the Licence Agreement and to open the stores. No submission to this effect was made by Lew Footwear.
The Proposed Statement of Claim also alleges that reliance was placed on the Third Representation, the Fourth Representation and the Fifth Representation by making payments on invoices rendered by Madden and continuing to incur expenditure and liabilities in establishing a market for the Products in Australia. Again, no person from Lew Footwear is identified as having placed such reliance upon the Third Representation, the Fourth Representation and the Fifth Representation. On the matter of reliance, reference is simply made to ‘Lew Footwear’. It is stated further in the particulars that Lew Footwear opened an additional store in reliance on the Fourth Representation and the Fifth Representation. The person or persons involved in this decision are not identified.
Kenmar gave no evidence contradictory to this passage, although he did give some relevant evidence on the matters raised. However, it was principally Hammerschlag’s further evidence that addressed the issues raised in the preceding paragraph.
Coupled with providing evidence of his substantial experience in relation to retailing in the footwear and accessory market in Australia, Hammerschlag deposed that, in mid-2009, he was acutely aware of the need for certainty with respect to pricing under any arrangement with Madden because of recent litigation in which he had been involved. This litigation, to which a company in the Lew group of companies was a party, included allegations of inflated prices charged by a supplier by reason of an agent’s undisclosed commissions. These commissions had been discovered by inadvertent disclosure to the Lew group of companies of the cost basis for products supplied and invoiced.
Based on this specific example, but also his experience generally, Hammerschlag stated his position at the time was that the opportunity with Madden would only be pursued if Lew Footwear could achieve a sufficient level of satisfaction about price control so as to achieve the gross margin which had been budgeted for in the Business Plan.
Kenmar also gave evidence of his involvement in this earlier litigation and his awareness of the concern held in the Lew group of companies about appropriate mechanisms and transparency to ensure pricing of products was charged as agreed.
Hammerschlag stated that he was responsible for making decisions on behalf of Lew Footwear about the location and number of stores which Lew Footwear would open for the purpose of retailing the Products. The number of stores actually opened was in excess of that required under the Licence Agreement. As can be seen from the Business Plan, the intention was to open stores at a level that far exceeded the number of stores Lew Footwear was contractually required to open. There was no suggestion on the evidence that Lew played an active role in the negotiations with Madden or was directly involved in deciding that the wording of the Pricing Term was satisfactory.
…
Hammerschlag stated as follows:
Having fought so hard for the [P]ricing [T]erm in the course of the negotiations and as a result of Madden ultimately agreeing to a pricing term which was acceptable to Lew Footwear, I believed at the time that the [Licence Agreement] was executed that Madden would render invoices which were compliant with the [P]ricing [T]erm and that it had, or would put, systems in place capable of rendering compliant invoices.
Had I been advised after we agreed to the final pricing term on 29 October 2009 that Madden could not ensure that it had, or would have, systems in place capable of calculating prices for [P]roducts purchased by Lew Footwear in accordance with the [P]ricing [T]erm that we required, I would have instructed [Kenmar] to immediately cease any further negotiations with Madden. Similarly, if [Kenmar] had advised me that he was not happy with the proposed pricing term, I would have told [Kenmar] to make it clear to Madden that Lew Footwear required the [P]ricing [T]erm, that it was a ‘deal breaker’ and unless we were happy with the drafting there was no point proceeding further.
Of course, Lew Footwear was happy with the drafting. But, on the case put by Lew Footwear, that drafting must be understood as carrying with it the implied representation encapsulated in the First Representation and the Second Representation.
The additional evidence from Kenmar was similar to that of Hammerschlag. Kenmar stated that it was a necessary incidence of Madden’s contractual obligation that Madden had the ability and capacity to comply with the Pricing Term and, accordingly, he assumed at the time he executed the Licence Agreement that Madden had the ability and capacity to do so. Kenmar also stated that, if he had been advised at any stage during the negotiations before the Licence Agreement was entered into that Madden could not ensure the necessary systems were in place, he would have immediately brought that matter to the attention of Hammerschlag. Further, Kenmar gave evidence that if the drafting of the Pricing Term had not satisfied him, he would have drawn that to the attention of Hammerschlag.
One further matter needs to be addressed in relation to the evidence. In the Principal Judgment, reference was made to correspondence in February 2012 in which Lew Footwear thanked Madden for Madden’s openness and transparency when the issue of overcharging had been raised by Lew Footwear and resolved. Further submissions were made by Lew Footwear on this evidence.
In fact, at the time a resolution was reached in February 2012, it appears that the parties agreed to Madden charging a flat 13 percent (referred to in the correspondence as ‘13% commission’). In other words, it appears Madden did not undertake an exercise of actually recalculating previous invoice amounts incorrectly charged by applying the Agreed Cost Basis, but rather charged a flat 13 percent. Accordingly, notwithstanding the reference by Lew Footwear to Madden openly working with Lew Footwear and giving ‘full transparency on the commission discrepancies’, there does not appear to be any evidence before the court (and Madden pointed to none) which demonstrated that any system or appropriate accounting procedures were in place to ensure compliance with the Pricing Term.
Madden submitted that the evidence did not show that Madden did not have systems in place. It also submitted that no representation is alleged to have been made that there would not be mistakes in the future. I agree with both of these submissions. However, as Madden chose not to give any evidence on the issue, it is a matter of the proper inference to be drawn.
It follows that, although there is only direct evidence of the Pricing Term not being complied with from 15 March 2011, no inference could properly be drawn on an interlocutory basis on the evidence before the court that the Pricing Term was being complied with before 15 March 2011. The claim in the Proposed Statement of Claim (repeated in the Further Proposed Statement of Claim) is that ‘not less than’ the invoices specified in the particulars were the subject of overcharging. It is not clear on the evidence whether Madden ever charged Lew Footwear in accordance with the Agreed Cost Basis.
As a result of the further evidence relied upon by Lew Footwear, significant amendments were made to its pleading. The Further Proposed Statement of Claim substantially amended the particulars relied upon in order to establish reliance. In substance, the particulars now support a case that, prior to the Licence Agreement being entered into, negotiations would have ceased if Hammerschlag had been aware that Madden would not have systems in place capable of calculating prices in accordance with the Pricing Term. In those circumstances, it is alleged that Lew Footwear would not have entered into the Licence Agreement at all.[7]
[7]Second Reasons [19]–[49] (footnotes omitted).
The judge concluded as follows:
In light of the way in which the case of Lew Footwear is now put in relation to reliance and causation, together with the substantial further evidence on that issue, in my view there is a strongly arguable case that the conditions in r 7.01(1)(i) and (j) with respect to the Representations Claims have been met. Without being exhaustive or repeating what is stated in the Principal Judgment, the foundation for this conclusion includes the following:
(1)There is now a substantial body of evidence to strongly argue that the proper administration by Madden of matters pertaining to the Pricing Term was of critical importance to Lew Footwear, so much so that Lew Footwear would not have entered into the Licence Agreement if Lew Footwear knew systems were not, or would not be, in place to ensure compliance. If this case is established at trial, the fact that there may have been other factors that induced Lew Footwear to enter into the Licence Agreement is no answer to the causes of action pleaded.
(2)There is nothing in the language of the Pricing Term that is inconsistent with the First Representation and the Second Representation having been impliedly made. Based on the facts before the court presently, it is strongly arguable each of the First Representation and the Second Representation was made.
(3)The making of the Third Representation from 28 April 2010 to 2 January 2014 is strongly arguable. There is nothing in the evidence to suggest that, save for the invoices that were accepted by Madden to be incorrect, Madden indicated to Lew Footwear it would not be complying with the Pricing Term. It must follow that the existence of the Pricing Term coupled with Madden rendering invoices purportedly in accordance with the Licence Agreement means that it is strongly arguable Madden was representing the Pricing Term had been complied with when each invoice was rendered.
…
(5)It is apparent from the further evidence that it is strongly arguable that a system of some sort needed to be in place for the Agreed Cost Basis to be duly implemented and the Pricing Term to be complied with. By way of submission only, Madden stated that it ‘had, and had to have, an accounts department’. It also stated that there must have been an employee or employees responsible for preparing the invoices in accordance with the Pricing Term. Further, Madden asserted in submissions that beyond this it was not necessary for Madden to have, or to put an accounting system in place. In my view, this submission (although it may ultimately be successful at trial) does not alter the fact that, on the evidence before the court presently, Lew Footwear has established a strongly arguable case. Such evidence as is available strongly suggests that particular accounting systems or procedures needed to be in place given the volume of sales expected to be made, the wording of the Agreed Cost Basis contained in the Pricing Term was out of the ordinary for Madden and that there is a substantial body of evidence that Madden failed to charge in accordance with the Agreed Cost Basis.
(6)The uncontroversial evidence of a failure of Madden to comply with the Pricing Term for extended periods of time is highly probative of an absence of a relevant system or accounting process to ensure compliance with the Pricing Term.
(7)Although Lew Footwear did not complain for approximately 16 months after the Licence Agreement was entered into about non-compliance with the Pricing Term, it was not within Lew Footwear’s capacity to precisely check the means by which amounts were calculated for the purposes of the invoices rendered by Madden. The fact that Lew Footwear knew what the Products ought to be costing based on past experience is not decisive on the issue of reliance in light of the further evidence. The evidence is that, notwithstanding this knowledge, it took many months of Madden acting in breach of the Pricing Term before Lew Footwear suspected the breach might be occurring. A like observation may be made for the period after 21 February 2012 (when the Fourth Representation and the Fifth Representation were allegedly made). There is nothing to suggest that, until Madden forwarded emails on 18 April 2012 (dealing with the period from 10 February 2012 to 31 March 2012) and 27 August 2012 (dealing with the period from 1 April 2012 to 30 June 2012), Lew Footwear had any knowledge that the Pricing Term was again not being complied with. On the contrary, the evidence demonstrates a strongly arguable case that Lew Footwear was acting in reliance upon the Fourth Representation and the Fifth Representation. This position of Lew Footwear appears to have continued until late 2012 or early 2013.
(8)Even though, in February 2012, Lew Footwear expressed its gratitude for Madden working openly and with full transparency (a matter which plainly remains relevant to the issue of reliance and causation ), on a careful reading of the relevant correspondence there is nothing to demonstrate that any appropriate system was in place at any time before February 2012 (or, for that matter, any time thereafter).
(9)Hammerschlag has now given extensive evidence on the nature of the industry, together with certain logistics pertaining to this particular relationship. None of his evidence concerning the impracticality of negotiating prices for individual Products was the subject of any contradictory evidence. Hammerschlag’s evidence significantly increases the likelihood of reliance placed by Lew Footwear upon each of the Representations.
In reaching this conclusion, I have not ignored the fact that the manner in which the case has been pleaded has changed a number of times. Certainly, this fact must weaken the credibility of Lew Footwear’s case to some extent. No doubt this may be relevant at any trial of this proceeding. But, in my view, this circumstance does not detract from the fact that the court now has before it affidavit evidence from witnesses experienced in the industry who have demonstrated that the Representations were critical to Lew Footwear’s decision-making process, both in relation to entering into the Licence Agreement, and also maintaining the contractual relationship with Madden up until more recently. The causal link between how Lew Footwear says it would have acted differently and the loss claimed is obvious.
Despite being of limited importance, for completeness there is a further matter to note. Although the application is interlocutory and Madden was not compelled to give any relevant evidence on the issue, it is of some significance, in deciding whether the causes of action are strongly arguable, that Madden gave no evidence of having any relevant systems in place for the purpose of complying with the Pricing Term. This must be viewed in light of the fact that Madden chose to lead some evidence on the application, and in light of the reliance by Lew Footwear on s 51A of the Trade Practices Act and s 4 of the Australian Consumer Law in relation to the onus of proof with respect to future matters. [8]
[8]Second Reasons [60]–[62] (footnotes omitted).
Basis for leave to appeal
The Court of Appeal may grant an application for leave to appeal only if it is satisfied that the appeal has a real prospect of success.[9]
[9]Supreme Court Act 1986, s 14C. Contrary to the submissions of the respondent, no leave is required under s 17(4)(b). The present proceeding is neither a criminal, nor a quasi-criminal, proceeding.
Submissions
Madden submitted that the judge erred in finding that there was a strongly arguable case of a cause of action within the meaning of r 7.01(1)(i) of the Rules.[10] Madden submitted that it was not open to the judge to find, on the evidence, a strongly arguable case that the alleged representations were made, that they were relied upon by Lew Footwear, or that they caused damage to Lew Footwear. Madden submitted that there was no evidence that any person on the part of Lew Footwear actually or consciously considered that the negotiations for the Licence Agreement gave rise to the First or Second Representations. Madden further submitted that it did not follow, because Lew Footwear might, before entering into the Licence Agreement, have considered that the proper administration of the Pricing Term was of critical importance, that Madden officers were making implicit representations at that time about future accounting or invoicing systems, particularly when none of the Lew Footwear witnesses gave evidence that that was how he construed the negotiations over time. Further, Madden submitted that proof of reliance was not made out by establishing what a plaintiff would or would not have done with knowledge of the future — what one would have done with hindsight was no substitute for what one actually did in reliance on something perceived at the time and that no Lew Footwear witness gave evidence that he perceived the negotiation exchanges with Madden officers as implying the First or Second Representations, or that he acted or omitted to act on that basis.
[10]For present purposes, Madden accepted the judge’s ruling that a proceeding based on misleading and deceptive conduct was one founded on ‘torts committed within Victoria’.
On the other hand, Lew Footwear submitted (in writing) that there was direct evidence that the First and Second Representations (the pre-contractual implied representations) had been relied upon by Lew Footwear. Lew Footwear made specific reference in that regard to the evidence of Hammerschlag and Kenmar, as to their beliefs at the relevant time, namely, their beliefs that Madden had in place, or would put in place, systems capable of calculating prices in accordance with the Pricing Term. Lew Footwear also pointed to the evidence as to the importance of the Pricing Term to it, and the consequent likelihood that the alleged Representations contributed to Lew Footwear’s decision to enter the Licence Agreement and to establish retail stores.
Does an appeal by Madden have a real prospect of success?
In my opinion, an appeal by Madden does not have a real prospect of success. Looking at the judge’s reasons as a whole and in particular those passages set out above, I consider that it was well open to the judge to conclude that Lew Footwear’s misleading and deceptive conduct claim was strongly arguable and that Madden does not have a real prospect of establishing that the judge erred in that conclusion. It is strongly arguable that the First and Second Representations were necessarily implied from, and inherent in, the nature of the Pricing Term. Contrary to Madden’s submissions, I think that there is clear evidence of reliance. It is strongly arguable, having regard to the beliefs of the Lew Footwear officers which were deposed to,[11] that Lew Footwear would not have entered the Licence Agreement but for its belief that the nature of the Pricing Term was such that Madden had in place, or would put in place, the necessary systems to ascertain the cost of the products (the factory cost plus reasonable costs of sampling, testing etc) as defined in the Licence Agreement. The judge rightly considered in his first judgment[12] that what was missing was ‘evidence duly establishing reliance’ but, in his second judgment, that this was cured by the further affidavits filed.
[11]See the affidavit of Kenmar sworn 22 August 2014, [16], [38], [39], [61] and [62] and the affidavit of Hammerschag sworn 22 August 2014, [67]–[69]; see too Second Reasons [43]–[44].
[12]First Reasons [245].
For those reasons, I would refuse leave to appeal.
I would refuse leave to appeal for a further reason. If it be assumed, not only that there is a real prospect of establishing that the judge was in error (contrary to my view), but that indeed the judge was in error in concluding that Lew Footwear’s misleading and deceptive conduct case was strongly arguable, I consider that the test applied by the judge was too stringent and indeed incorrect on a proper construction of the Rules. If the judge applied the incorrect test, that would normally lead to a grant of leave to appeal but, in my opinion, it would be futile to grant such leave because application of the correct test would lead inevitably to a dismissal of the appeal.
The issue of the proper construction of the Rules is discussed by the judge in some detail.[13] His Honour points out that under the former Supreme Court Rules governing service outside the jurisdiction, the test of a ‘strongly arguable case’ was applied.[14] His Honour then refers to the plurality judgment in Agar,[15] a case involving the New South Wales Supreme Court Rules. Their Honours said that, in deciding whether relevant rule in New South Wales applied, and thus permitted service outside of Australia:
attention must be directed to the way in which the claims made by [the plaintiffs] are framed. The paragraphs speak of ‘proceedings [which] are founded on’ a specified matter such as a cause of action arising in the State or a tort committed in the State. That focuses attention on the nature of the claim that is made. That is, is the claim a claim in which the plaintiff alleges that he has a cause of action which, according to those allegations, is a cause of action arising in the State?
The inquiry just described neither requires nor permits an assessment of the strength (in the sense of the likelihood of success) of the plaintiff’s claim. The Court of Appeal was wrong to make such an assessment in deciding whether the Rules permitted service out… The application of these paragraphs … depends on the nature of the allegations that the plaintiff makes, not on whether those allegations will be made good at trial. Once a claim falls within the relevant paragraph or paragraphs… service outside Australia is permitted, and prima facie the plaintiff should have leave to proceed.[16]
[13]First Reasons [77]–[135].
[14]See WA Dewhurst & Co Pty Ltd v Cawrse [1960] VR 278 and Williams v The Society of Lloyd’s [1994] 1 VR 274.
[15]Gaudron, McHugh, Gummow and Hayne JJ, commencing at 565.
[16]Agar [50]–[51].
In Agar, their Honours went on to consider the proper approach to applications to set aside service under the New South Wales Supreme Court Rules. Their Honours pointed out that a number of considerations might be relevant on an application to set aside service, but for present purposes it sufficient to note their reference to one basis for setting aside service, namely, ‘that the claims made have insufficient prospects of success to warrant putting an overseas defendant to the time, expense and trouble of defending the claims.’[17] Their Honours go on to say that the same test should be applied in the case of an overseas defendant, as in the case of a local defendant—the question was whether the claims had such poor prospects of success that the proceedings should not go to trial (as is applied in an application for summary judgment by a defendant, served locally).[18]
[17]Ibid [55].
[18]Ibid [58]–[60].
Since the decision in Agar, a number of cases have been decided in Victoria. In some cases, it appears to have been assumed that the ‘strongly arguable test’ was still applicable and the question whether the New South Wales Supreme Court Rules considered in Agar were different to the Victorian Rules, was not canvassed.[19] In Schib Packaging Srl v Emrich Industries Pty Ltd,[20] the Court of Appeal[21] appears to have made that assumption as no reference was made to Agar and it does not appear that any question was raised as to what was the correct test.
[19]For example, in Eagle v Delta Haze Corporation [2000] VSC 513 references to Agar were made but the ‘strongly arguable’ test was applied — the parties do not appear to have contended that any other test was applicable. I was the trial judge, but I cannot recall any debate about the relevant test.
[20](2005) 12 VR 268, (‘Schib’).
[21]Charles and Ashley JJA.
As the learned judge points out,[22] in Puccini Festival Australia Pty Ltd v Nippon Express (Australia) Pty Ltd,[23] Cavanough J suggested that the observations of the plurality in Agar have changed the test to be applied in Victoria.
[22]First Reasons [110].
[23](2007) 17 VR 36.
In Castel Electronics Pty Ltd v TCL Airconditioner (Zhongshan) Co Ltd,[24] Davies J concluded that the ‘strongly arguable’ test remained applicable, opining that the New South Wales Rules were distinguishable.
[24][2013] VSC 92.
The judge below considered that he was bound by Schib.[25] However his Honour went on to express the opinion that the New South Wales Rules were not relevantly different and:
[25]First Reasons [118].
Absent some binding authority to the contrary, I could see no proper basis for superimposing on the language of rr 7.01 and 7.05 any further requirement or threshold. The rule indicates that the subject matter must be within a paragraph or paragraphs of r 7.01(1). Once that is established, the discretion of the court is enlivened. Of course, that discretion must be exercised judicially, taking into account all relevant considerations. But beyond that, the language of the rule does not permit the court to engage in any assessment of the merits of the dispute.
In short, on the face of the rule, the merits of a claim are not to be taken into account. If this construction were accepted, an Originating Party ought to be able to prosecute its case if the court is satisfied that the subject matter of each claim is within r 7.01 (putting aside forum issues or where a case might be futile or have no real prospects of success, which would be a basis to have the court exercise its discretion against the Originating Party).
Such a conclusion is supported by the plurality judgment in Agar v Hyde, which makes it plain that there is no principle upon which a court could properly impose some higher threshold. On the contrary, the points referred to above make it plain that the rules must be given their natural and ordinary meaning, without reference to general considerations concerning comity and restraint.
Absent the decision of the Court of Appeal in Schib Packaging Srl v Emrich Industries Pty Ltd, I would have considered myself bound to reject the traditional approach. Given the state of the authorities at first instance in Victoria, the language of the rule itself and the clear directive from the plurality judgment in Agar v Hyde as to how courts of this century ought to approach the proper construction and operation of provisions such as r 7, the traditional approach does not readily appear to be applicable.
As will already be apparent, in reaching this conclusion, I do not agree with the process of reasoning of McDonald J in contrasting the Supreme Court Rules with the New South Wales Supreme Court Rules to arrive at the construction that his Honour did. In short, comparing ‘satisfied’ under r 7.04 with the same term in the old New South Wales rule for seeking leave to serve out as a ground for maintaining the test of a strongly arguable case was, based on the plurality judgment in Agar v Hyde, a flawed approach.
It also follows that, if I did not consider myself bound by Schib Packaging Srl v Emrich Industries Pty Ltd, I would have seen no proper basis for following WA Dewhurst & Co Pty Ltd v Cawrse. It is a decision of over 50 years ago, when the courts took a fundamentally different approach to service out of the jurisdiction, including service out of Australia. This different approach was reflected not only in the rules of court at that time, but also in the statements of principle as to the approach to be taken in relation to service out. In present times, in my respectful opinion, such previous statements of principle are not appropriate to impose a threshold beyond what is contained in the language of the Supreme Court Rules.
In these circumstances, regrettably, I am compelled to the view that the decision of Davies J in Castel Electronics Pty Ltd v TCL Airconditioner (Zhongshan) Co Ltd was wrong insofar as her Honour suggested the New South Wales Rules were ‘materially’ different to the Supreme Court Rules concerning an application under r 7.05.
Also, I find it difficult to accept that it was implicit from the judgment in Eagle v Delta Haze Corporation that the approach of the plurality in Agar v Hyde was considered inapplicable to r 7.01(1). This is because Mandie J in that case referred to a passage in the plurality judgment with approval, in which passage reference was made to the relevant rules of the New South Wales Supreme Court Rules. Further, in addition to the reference to Gleeson CJ in Agar v Hyde, Mandie J referred with approval to the earlier decisions of this court without seeking to make any material distinction between the Supreme Court Rules and the New South Wales Rules.
In summary, if I had been at liberty to do so, I would have found the correct approach for the court to take, when an application is made by an Overseas Defendant to set aside the originating process or stay the proceeding, is as follows:
(1)The court must determine whether the subject matter of the proceeding is within r 7.01(1).
(2)The question as to the subject matter of the proceeding, ordinarily, is to be answered by reference to the allegations made in the originating process, plus any evidence beyond the pleaded allegations to the extent that the pleading does not contain allegations necessary to establish the claim is of a requisite kind to satisfy a paragraph or paragraphs of r 7.01(1). (It is possible that the Originating Party must also produce an affidavit or other evidence showing the grounds on which the application is made.)
(3)The court may consider further evidence beyond that referred to in (2) above, directed towards whether the facts as alleged or the additional facts put forward by way of evidence are plainly incorrect.
(4)Save for the circumstances in (3), for the purpose of determining whether or not r 7.01(1) has been complied with, the court should not consider the merits of the claims. If a party demonstrates the subject matter is within the paragraph or paragraphs of r 7.01(1) relied upon, then, prima facie, the party is entitled to proceed with its claims.
(5)Each cause of action must be considered individually, and only those causes of action consisting of subject matter within r 7.01(1) may be continued.
(6)If it has been determined that the claims are of the requisite kind, the court may then, before exercising its discretion, consider whether this court is an inappropriate forum and, where appropriate, consider whether the claims made are futile or have insufficient prospects of success to warrant putting the Overseas Defendant to the time, expense and trouble of defending the claims. The test to be applied is the same as the test applicable in an application for summary judgment.[26]
[26]First Reasons [127]–[135] (footnotes omitted).
I expressly agree with what was said by the learned judge below and would adopt his statement as set out above.[27] I consider that the correct test under the Rules (i.e. in Victoria) is on this aspect of the matter, namely the extent to which merits are
relevant on an application to set aside service, that stated by the plurality in Agar. An application of that test shows that it cannot be said that Lew Footwear’s cause of action for misleading and deceptive conduct has prospects of success insufficient to warrant putting Madden, an overseas defendant, to the time, expense and trouble of defending the claims.
[27]Madden submitted that the judge’s textual approach was wrong and that the Rules should be interpreted in the context of s 8 of the Civil Procedure Act 2010. I disagree. Apart from anything else, that Act post-dates the Rules in their current form by some years. That said, even if the Rules were to be interpreted 'in the context of s 8', this would not alter the test as I have stated it. Additionally, Madden's submission that the Court is now more firmly of the view than it once was that parties should be held to contractual terms requiring them to litigate elsewhere, and that the Rules should be interpreted in this context, is without merit.
For those additional and alternative reasons, I would refuse leave to appeal.
BEACH JA:
I agree with Mandie JA that this application must be refused. I do so, for the reasons given by his Honour.
DIXON AJA:
I agree.
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