Morris v Hanley - [2001] NSWCA 374

NEW SOUTH WALES COURT OF APPEAL

CITATION: Morris v Hanley & Ors [2001] NSWCA 374

FILE NUMBER(S):
40752/00

HEARING DATE(S): 23 October 2001

JUDGMENT DATE: 23/10/2001

PARTIES:
Janine Morris (Appellant)
Jack Norman Hanley (First Respondent)
Geoffrey Donald Reid (Second Respondent)
Lynda Maree Cole (Third Respondent)
Christine Valmae Hayward (Fourth Respondent)
Anthony Bodycote (Fifth Respondent)
Robyn Janelle Haydon (Sixth Respondent)
Daphne Olive Boyd (Seventh Respondent)
Beverley Joy Armfield (Eighth Respondent)
Gayle Hanley (Ninth Respondent)
Cecil Bellchambers (Tenth Respondent)
Mariani Holdings Pty Limited ACN 333 468 620 (Eleventh Respondent)

JUDGMENT OF: Heydon JA Foster AJA Rolfe AJA

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): ED 2650/97

LOWER COURT JUDICIAL OFFICER: Young J

COUNSEL:
Mr M F Holmes QC/Mr J R Clarke (Appellant)
Mr P T Taylor/Mr D R Stack (Respondents)

SOLICITORS:
Mark Fraser (Appellant)
Parker & Kissane (Respondents)

CATCHWORDS:

LEGISLATION CITED:

DECISION:
See para 32

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40752/00
ED 2650/97

HEYDON JA
FOSTER AJA
ROLFE AJA

23 October 2001

MORRIS v HANLEY & ORS

Judgment

HEYDON JA: This is an appeal by leave granted on 19 March 2001 against orders of Young J which, inter alia, were to the effect that the plaintiff provide the sum of $115,000 as security for the costs of the defendants and that the proceedings be stayed until the security was given.
The plaintiff alleges breaches of duty by the defendants mainly in the period 13 May 1988 to 5 March 1992. The proceedings commenced on 30 May 1997.
On 7 January 1998 Hamilton J refused an application by the plaintiff for interlocutory injunctive relief with costs. He gave reasons for those orders on 8 January 1998. Those reasons revealed that the cause of action which the plaintiff was then relying on was a claim that the original members (the first-tenth defendants) of the eleventh defendant, a company, were under a fiduciary duty to the persons who from time to time were the permanent employees of the eleventh defendant to institute a continuous scheme of workers’ co-operative employment, and one of the elements of that duty was that persons becoming permanent employees should be informed of their right to take up shares in the eleventh defendant.
Hamilton J said: “the plaintiff does have a fairly arguable case, that a fiduciary relationship did arise despite the novelty of the proposition in such a situation”. But he said the case for permanent injunctive relief against the sale of the eleventh defendant’s business was, though “fairly arguable”, not “strong”. He refused interlocutory relief on the balance of convenience.
It seems that on some date in 1999 the proceedings were listed for final hearing before Hamilton J for seven days on 6 March 2000. The trial did not in fact proceed on that day.
On 14 April, 8 May and 23 May 2000 argument took place before Hamilton J on whether the plaintiff should be allowed to amend her Statement of Claim. She sought leave to file a Third Amended Statement of Claim; in the course of the hearing she abandoned the document originally proffered under that title and replaced it with a further document. Hamilton J said:
“It is most unfortunate that quite radical amendments to the plaintiff’s Statement of Claim are made at this late stage without any good reason being assigned as to why the amendments, which do not depend on recent events or discoveries, are being made so late. For reasons put to me on behalf of the defendants during the course of argument it is probable that as a result of the amendment, if granted, the fixture on 31 July 2000 will also have to be vacated.”
31 July 2000 was the date which replaced 6 March 2000 as the first day of the trial.
Hamilton J described the cause of action in the Statement of Claim in its then existing form in similar fashion to the way he described the cause of action relied on on 7 January 1998. He said three causes of action were intended to be added by the amendments. The first was an action against directors for breach of the type of duty owed to the shareholders of the eleventh defendant which was described in Brunninghausen v Glavanics (1999) 46 NSWLR 538. The second was said to be a similar action against the eleventh defendant itself. The third was a common law cause of action in conspiracy. Hamilton J said that these causes of action were “reasonably arguable” and granted leave to the plaintiff to file a new Statement of Claim. That document also contains an allegation of negligence.
On 23 March 2000 counsel for the defendants, in the course of a hearing before Hamilton J, handed counsel for the plaintiff a Notice of Motion seeking security for costs. Though it was not apparently filed until 5 May 2000, it alarmed the plaintiff sufficiently to cause her to have prepared written submissions dated 6 April 2000 opposing the application for security foreshadowed in the Notice of Motion. Hamilton J noted the existence of the Notice of Motion in his reasons for judgment of 23 May 2000.
The Notice of Motion seeking security for costs was heard on 25 August 2000, and Young J delivered an ex tempore judgment in part acceding to it on that day.
The essence of the primary judge’s reasoning was put thus:
“The leading cases show that the factors a Court must take into account when considering the general question as to whether the inherent power should be exercised to order security for costs include:
(a)whether the plaintiff’s claim is bona fide and not a sham;
(b)whether the plaintiff has a reasonably good prospect of obtaining the orders he or she seeks;
(c)whether an order for security would bring the proceedings to an end;
(d)whether the plaintiff has a want of assets and how this was brought about;
(e)whether there is anyone standing behind the plaintiff who might benefit from the action but who is unwilling to contribute to the risk involved in the action; and
(f)the question of delay.
…
So far as the first matter is concerned, whether the action is bona fide, there is some material which suggests that the present action is one which is on foot for the purpose of harassing the defendants. There is evidence that the plaintiff’s husband, Mr John Morris, had said that he would pursue this case forever because he had solicitors and barristers working for him on a concession basis and he had nothing to lose and everything to gain. Mr Morris is supposed to have said that the litigation doesn’t bother him at all because it would not cost him anything. The second defendant says that he replied to this: ‘We would all be broke and living in tents’ but Mr Morris said that that was the result of preventing the plaintiff from being a shareholder, and that he would not be happy until he had won and the defendants were broke. An offer of settlement of a five figure sum to ‘go away’ was made, which was dismissed as derisory. There is other material along the same lines. None of this is contradicted.
…
Next, is the plaintiff really just a nominee for her husband? The answer to that question must be ‘No’, for the reason that was given by Sheppard J in Orr’s case. In that case, his Honour said that as the plaintiff had the claim at law because he was the actual party to the contract, he was not a nominal party even though the facts appeared to show that he was being used as a matter of convenience by somebody else who had the real axe to grind. In the instant case, if there is any fiduciary duty owed it is owed to the plaintiff and not to her husband, so she cannot be considered to be a nominal plaintiff. On the other hand, the fact that her husband is obviously very interested in this action is something that one bears in mind.
It is clear that the plaintiff is insolvent and it also appears clear that unless an underwriter comes in on behalf of the plaintiff, the probabilities are that the action will cease if any substantial order for security for costs is made. It is clear that the plaintiff’s counsel and solicitors are acting on a speculative basis.
The fact that the action will probably be stultified if any substantial order for security for costs is made is to my mind an extremely important factor against making an order for security for costs.
One then has to consider the strength of the case. Obviously I cannot try the case because it is one which is likely to take two to three weeks on counsels’ estimation. I have already referred to Hamilton J’s interlocutory decision in 1998, which at least shows that the case is arguable. However, there is no doubt at all, whichever way one looks at it, that there are very great difficulties in the way of the plaintiff’s success.
First, there is the problem that it is a case of first impression. This is not fatal but, as even Mr J Clarke, who appeared for the plaintiff conceded, it is a matter of difficulty to convince a Court that a fiduciary duty exists in the current set of circumstances.
Secondly, it is basic to a claim for breach of fiduciary duty that the defendants should have undertaken to the plaintiff to act in the plaintiff’s interests. What appears to be the situation is that the defendants agreed with the Government that they would make available to the plaintiff and others the opportunity to become involved in the company. There was no direct undertaking to the plaintiff. It may be that the defendants did not comply with their undertaking to the Government but that does not assist the plaintiff in showing there was an undertaking to act on her behalf.
Thirdly the plaintiff contends that the ten controlling shareholders and directors had a duty in equity to inform the plaintiff of her rights. Sometimes trustees may have that duty (see the cases referred to in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 411 and following and in my judgment at first instance in that case, Rydge v Hartigan Nominees Pty Ltd 10 October 1990, unreported). It is treading new ground to allege that people who are personally interested in a company and who have each risked $10,000 of their own money in order to save the company that was employing them have a duty to inform another employee that she has the right to join and that that right may lead to profit but it may very well not.
Fourthly, Mr Stack submitted on more than one occasion that this is really a case of a plaintiff seeking to enforce a gift. He says the facts are that the plaintiff was an employee of the eleventh defendant, she was paid the award wage for her work. As a result of the investment by the defendants, their own risk of capital and the organising of the defendants as directors, a profit was made and the plaintiff, who invested absolutely nothing and took no risk, is now saying that she should have a share of that profit. That is not the sort of case that equity, in Mr Stack’s submission, should countenance.”
After discussing six instances where the maxim that equity does not assist a volunteer operates, Young J set out a seventh as follows:
“More importantly for the present case, equity may assist a volunteer when to decline to do so would be against the conscience of the defendant, who would be taking advantage of his own wrong; see Gilbert’s Lex Pretoria at page 306 which is relied on by Fonblanque in his Treatise of Equity, Volume 1, page 349 where he says:
‘So where the remainder man gets the deed into his possession and will not allow the tenant for life to have a sight of it, it is as though he does not pursue the terms of the power, yet equity will relieve because the remainder man will not take advantage of his own wrong by withholding power’.”
He continued:
“This does seem to provide some juristic basis for the proposition that the non-provision of information by a person which leads to that person making a profit may be actionable as a breach of fiduciary duty to an appropriate person. However, apart from Fonblanque and his reliance on Gilbert’s Lex Pretoria, there is no other authority I know of for that proposition.
Pulling those threads together, it must be the situation that the plaintiff’s action could succeed but there are tremendous difficulties in the way of it succeeding.
Accordingly, it is not an action ‘which may probably succeed’ as that expression is used in security for costs applications.
Other circumstances to take into account are the large costs to the defendants that are involved. The defendants are not a multi-national corporation. They are, it would seem, working people in the Casino area, though the plaintiff strongly suggests they made a million dollars profit or $100,000 profit each out of the venture. Even so, the evidence before the Court is that costs have already been incurred of over $128,000, and, if the case goes two to three weeks as it has been estimated to go, a further $150,000 in costs will be incurred. If the defendants succeed, they will recover none of this unless there is security for costs.
In all these circumstances, should I permit this action, in the exercise of my discretion to continue without security for costs? The chances of success are not overwhelming. The action, which is partly brought to harass the defendants, is an extremely expensive one and may well bankrupt the defendants even if they win.
It is a difficult decision to make but it is a decision that has to be made.
In my view, the various factors in favour of granting security for costs far outweigh the factors against making the order. The factors against making the order mainly are poverty and the taking away from the plaintiff the right to have an action tried which might succeed. They are weighty factors. However, to my mind they are not as weighty as the other factors which I have reviewed in favour of the defendants.
It probably does not matter what order for security for costs is made. However, I would in the first instance order security in the sum of $115,000, which appears to be the costs of the first week of the hearing on the estimate that was given, with liberty to the defendants to apply no later than seven days before the hearing is fixed to increase that amount when the actual length of the case can more accurately be stated. The plaintiff should have 21 days to provide such security, which may be by cash, cheque or bank bond, and the proceedings are to be stayed until the security is given. The plaintiff should pay the defendants’ costs of this motion.
Accordingly, the orders are:
1.The plaintiff provide the sum of $115,000 as security for costs of the defendants.
2.Liberty to the defendants to move the Court to increase such security no later than seven days before the date fixed for the final hearing of the proceedings.
3.Order that the proceedings be stayed until security is given.
4.Order the plaintiff to pay the defendants’ costs of this motion.”
The sole ground of appeal is expressed thus:
“His Honour erred in upholding the application of the Respondents in reaching a result which is plainly unreasonable and unjust in all the circumstances.”
The primary judge’s judgment was a discretionary judgment. The appeal must demonstrate an error of fact, an error of principle, a failure to take some material matter into account, the taking of an immaterial matter into account, or a result which is so unjust as to suggest that one of the foregoing errors must have been committed, even though it is not apparent.
The plaintiff relied on four alleged errors.
Delay
The first error was said to be that the primary judge failed to take into account the defendants’ delay in making the application for security for costs. The delay relied on was delay between the institution of proceedings on 30 May 1997 and the handing of the draft Notice of Motion to counsel for the plaintiff on 23 March 2000, or its filing on 5 May 2000. The delay was said to be gross and unexplained. The application was said to be made on the basis of matters known to the defendants for some years before they made it.
During the period from April 1997 to 23 March or 5 May 2000, the plaintiff spent $46,717.45 in legal fees on various pleading amendments, discovery and inspection, the filing and service of evidence (thirteen affidavits and statements) and a tender bundle, the application for interlocutory injunction and the answering of requests for particulars. That proposition is supported by an affidavit of the plaintiff sworn on 19 June 2000, which affidavit was read to the primary judge. The plaintiff in her submissions to this Court said she was now ready for trial.
The plaintiff submitted:
“Young J said (at para [23(f)] that the court must take into account, inter alia, the question of delay. But there is no evidence that the circumstances of the delay by the Respondents in this case were properly considered if at all. In the judgment, Young J said the ‘basic question’ was whether the action was harassing and vexatious (para [24]). When considering the factors against making the order (paras [39-42]), no mention was made by Young J of the delay in making the application.
…
In circumstances where such delay exists, it is necessary for the Respondents to provide reasons for that delay: P G Gabel Pty Limited v Katherine Enterprises. No explanation has been proffered, and Young J did not take account of that fact.”
The defendants argued, first, that “an assertion that the trial judge has failed to consider a relevant matter is not made out merely by pointing to brevity in the reasons for decision.” In effect the defendants submitted that it could be inferred that the primary judge considered the delay by the defendants because he mentioned it as a relevant factor, and both sides put submissions about it.
The defendants argued, secondly, that it was only in 2000 that circumstances justified the application for security. They said:
“Those circumstances include ‘the failure of the Plaintiff to proceed to the hearing of the matter in March 2000 and August 2000’. The vacation of the March 2000 hearing dates happened ‘as a consequence of the Plaintiff seeking leave to further amend her Statement of Claim’, and the August dates were lost ‘as a consequence of the Plaintiff being given leave to file its Fourth Further Amended Statement of Claim’. Contrary to the Appellant’s submissions put at the leave application, the application for security did not precede the application to further amend the Appellant’s pleadings. Annexed to these submissions is the covering letter from the Appellant’s solicitors of 15 February 2000, and the computer printout of the court file dated 16 February 2000, plainly showing that the foreshadowing of amendments preceded the application for security and the vacation of the March 2000 hearing dates. The proposed amendments raised all the ‘alternate causes of action’ referred to in the Appellant’s Written Submissions at paras [16] and [18].”
The argument advanced in the first sentence of that passage was put more fully to the primary judge as follows:
“These Proceedings were listed for final hearing before Justice Hamilton in the Supreme Court for 7 days between 6 March 2000 and 14 March 2000.
However, on 16 February 2000, Justice Hamilton vacated this hearing date as a consequence of the Plaintiff seeking leave to further amend her Statement of Claim.
These Proceedings were again listed for final hearing before Justice Hamilton in the Supreme Court for 10 days between 31 July 2000 and 11 August 2000.
However, on 9 July 2000, Justice Hamilton again vacated this hearing date as a consequence of the Plaintiff being given leave to file its Fourth Further Amended Statement of Claim.”
The defendants also submitted that the case was not ready for trial, because discovery and affidavit evidence dealing with the further causes of action brought in by leave on 23 May 2000 was not complete. These submissions were repeated to the court orally this morning. The defendants did advance in more detail a submission to the effect that the role of delay in relation to the application for security for costs could not have been large, because there was in truth very little delay, since the events properly triggering the applications were events which took place in 2000. These were events associated with the cancellation of two fixtures and the substantial amendments brought in by reason of the grant of leave by Hamilton J on 23 May 2000. It was submitted that it was not open to the defendants to make an application for security for costs at the start of the proceedings, when all that was known at that stage was that the plaintiff was probably impecunious. Alternatively, it was submitted that any such application would have failed, and that the appropriate time for bringing the application was when it was brought.

The duty of judges to give reasons for the directions and orders they make must be lower where interlocutory orders affecting matters of practice and procedure are involved than they are where orders are made after a trial. That must be so if for no other reason than that litigation would clog up to the point of stagnation if full reasons had to be given for the tens or hundreds of interlocutory orders which many primary judges make in a week in busy trial courts. However, though applications for security for costs are matters of practice and procedure, they can have a significant impact on the substantive rights of plaintiffs, because if the order is made, the plaintiff may not be able to provide security for costs where one of the grounds for the application is that plaintiff’s lack of funds. If so, that will prevent the plaintiff being able to have a judicial examination of the complaints made on the merits. Accordingly it would not be right to hold that there is no duty, or only a very exiguous duty, on a primary judge to give reasons for making an order as to security for costs.
The primary judge in giving his reasons for the orders under appeal in many respects went well beyond what was called for by the duty to give reasons. The reasons for judgment he provided, particularly given that they were ex tempore, set out in considerable detail his approach. However, there is force in the argument of the plaintiff that insufficient reasons were given in relation to the question of the defendants’ delay. There is no doubt that the plaintiff advanced in writing arguments essentially to the effect of those advanced on appeal, that the defendants attempted to deal with them, and that the significance of the defendants’ delay was squarely in issue.
The primary judge certainly said that the question of delay was a relevant factor, but it would not be possible for the plaintiff to ascertain from the reasons for judgment how the primary judge took into account in arriving at his discretionary judgment the delay by the defendants and the circumstances relating to it. It would certainly be possible to reach the same conclusion as the primary judge did notwithstanding the delay of the defendants, because, for example, it might well have been thought by the defendants inappropriate to apply for security for costs soon after 30 May 1997, but appropriate to do so in 2000 when it became apparent that the plaintiff was having difficulty in formulating or adhering to any particular form of the case she wished to advance, and was incurring liability for costs orders which she was unlikely ever to be able to satisfy. An argument of that kind appears to have been advanced to the primary judge, or alternatively considerations were put to the primary judge which would have enabled him to embrace reasoning of that kind. Sometimes what might otherwise be said to be a deficiency in the reasons of a primary judge can be compensated for by a clear explanation in the course of argument by the primary judge for the outcome. However, that cure cannot be resorted to here. This Court does not have before it any transcript of the oral argument before the primary judge, and it has before it no affidavit indicating anything he may have said in the course of argument which would explain how he took the defendants’ delay into account.
In those circumstances there is an error of principle in the primary judge’s approach.
Should the matter be remitted to the Equity Division so that the discretion can be exercised afresh by it, or should this Court do so? In view of the disgraceful delays which one or other or both of the parties have brought about in these proceedings, it is desirable for this Court to exercise the discretion for itself. Since questions of credit do not arise - there was no cross-examination of the deponents of the affidavits before the primary judge - it is open to this Court to do so.
There is no doubt that the plaintiff is a person of limited means. There is also no reason to doubt that she has spent a significant sum of money in readying the matter for hearing. She swore that on 19 June 2000. She was not cross-examined about that. The defendants before this Court referred to evidence which the plaintiff wished to rely on before this Court but which was not before the primary judge. The evidence in question was part of an affidavit of Mr John Morris, the plaintiff’s husband, to the effect that up until shortly prior to the commencement of the proceedings, he was aware that she had paid approximately $45,000 to her legal representatives in respect of these proceedings. However, the defendants did not read that evidence. Accordingly it must be left out of account.
The defendants also referred to some evidence of Mr Geoffrey Donald Reid in an affidavit of 26 May 2000, which was relied on before the primary judge. That evidence referred to a conversation between himself and Mr John Morris in which Mr John Morris was alleged to have said that he had solicitors and barristers working for him on a “success basis” and that he had nothing to lose and everything to gain. If there is any conflict between what Mr Reid said and what the plaintiff said in the affidavit material before the primary judge, it was not resolved in cross-examination. In all the circumstances it seems appropriate to act on the sworn evidence of the plaintiff.
The plaintiff says she is ready for hearing. The defendants say they are not. In this respect what the defendants say is not implausible in view of the breadth of the further allegations made in the pleadings as amended by leave on 23 May 2000. The case may not be ready for hearing, but the plaintiff has evidently suffered a substantial diminution in financial resources with a view to readying it for hearing. It is never easy for defendants to succeed in an application for security for costs against a natural person where that application is in part based on the ground of that natural person’s lack of funds. It becomes significantly harder for defendants to succeed where they permit the plaintiff to throw money away on the litigation which will never be recoverable in a costs order against the defendants by reason of the successful application for security. As the primary judge rightly said, the decision whether or not to order security in this case “is a difficult decision”.
In my judgment it is appropriate for this Court to exercise the discretion against the defendants because they have not explicitly explained why they delayed until 2000 before making the application, though there are circumstances which might indicate why they delayed, and because of the hardship suffered by the plaintiff in having expended significant sums on costs during the period of that delay. There can be little doubt that at least some of the matters on which the defendants relied in their application were known to them well before it was made. The affidavits on which the defendants relied referred to incidents in the years 1996, 1997 and 1998. Further, the searches which the defendants procured their solicitors to make, and consequential inquiries, which were made in 2000 could have been made in earlier years. There can never have been any reason for supposing that the plaintiff was anything other than a person of very limited assets.
Other alleged errors
It is not necessary to consider the remainder of the plaintiff’s criticisms of the primary judge’s reasoning.
Orders
The orders proposed are as follows.
1. The appeal is allowed.
2.The orders of the primary judge made on 25 August 2000 are set aside.
3.The defendants’ Notice of Motion dated 5 May 2000 is dismissed with costs.
4.The respondents are to pay the appellant’s costs of the appeal.
5.The respondents are to have a certificate under the Suitors Fund Act if entitled.
FOSTER AJA: I agree, I have nothing to add.
ROLFE AJA: I also agree.
HEYDON JA: The court additionally orders that the sum of $8,000, which was paid into court as security for the respondents’ costs of the appeal, be released to the appellant forthwith.

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LAST UPDATED: 25/10/2001