PA and FA Services Pty Ltd v Fisher and Paykel Customer Services Pty Ltd

[2016] VCC 1384

IN THE COUNTY COURT OF VICTORIA Revised
Not Restricted
Suitable for Publication

AT MELBOURNE

COMMERCIAL DIVISON
GENERAL LIST

Case No. CI-15-05426

PA & FA SERVICES PTY LTD	Plaintiff
v.
FISHER & PAYKEL CUSTOMER SERVICES PTY LTD	Defendant

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JUDGE:	His Honour Judge Anderson
WHERE HELD:	Melbourne
DATE OF HEARING:	14 September 2016
DATE OF JUDGMENT:	20 September 2016
CASE MAY BE CITED AS:	PA & FA Services Pty Ltd v. Fisher & Paykel Customer Services Pty Ltd
MEDIUM NEUTRAL CITATION:	[2016] VCC 1384

REASONS FOR JUDGMENT

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Catchwords:              Practice and procedure – Security for costs – Franchisee bringing action against franchisor for failure to disclose a possible or likely change in its system of operations – Financial resources of corporate plaintiff and its sole director/shareholder limited – Security ordered in tranches.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr L. Magowan of Counsel	Choice Legal
For the Defendant	Mr E. Batrouney of Counsel	Holding Redlich

HIS HONOUR:

1The defendant seeks security for its costs of the proceeding. There is no issue that the plaintiff, as a company with limited resources, does not have the capacity to meet the defendant’s costs, if it were unsucessful in the proceeding.     

2Two issues arose for determination:

a.whether there were discretionary factors which made it appropriate for the Court to refuse the application;

b.if security should be provided, in what sum or sums and at what stages should it be provided.

3The discretionary matters raised by the plaintiff were whether:

a.the plaintiff’s impecuniosity has been caused by the conduct of the defendant;

b.an order for security would stultify the litigation;

c.the defendant had voluntarily entered contractual relations with the plaintiff;

d.the application for security was not brought promptly.

4The plaintiff also challenged the evidence advanced by the defendant as to its likely costs of the proceeding. I now provide reasons for my decision.

The plaintiff’s claim

5The defendant manufactures, sells and services products including white goods. In late 2013 and early 2014, the defendant had a system of servicing and repairing its goods which involved entering into franchise agreements with individual operators who were assigned a designated geographical area.

6The system had operated for many years although the franchise agreements were generally for a term of 5 years with limited guarantee of renewal. However, the agreements had apparently been routinely renewed, provided the operator was performing satisfactorily. In late 2013, Phillip Andrews purchased the rights of an existing operator. The franchise agreement had only 20 months to run of the 5 year term. The sale agreement required Mr Andrews to pay the existing operator $37,650 and was subject to a franchise agreement being entered into between the plaintiff and the defendant.

7The new franchise agreement entered into between them is dated 7 February 2014. It had a term of “1 year and 8 months” commencing 7 February 2014. The agreement provided in relation to a “further term” that, “There is no automatic right of renewal at the expiry of the Term. If the Franchisee has complied with this agreement at all times during the Term, Fisher & Paykel may, in its absolute discretion, grant a new franchise on terms and conditions to be determined by Fisher & Paykel at the expiry of this Agreement”.

8On 10 September 2014, the defendant decided to change the system of servicing and repair to a system where it “would eventually be done by [the defendant’s] employees and authorised service centres” rather than by franchisees. In November 2014, the franchisees were informed that the defendant “was moving to an employee model and there would not be further renewals of franchise agreements”.

9Mr Andrews said that he had entered into the franchise agreement on behalf of the plaintiff in the expectation that the defendant would not change the servicing and repair system that had “operated for the prior 15 years” and that the plaintiff’s franchise would be renewed at the completion of its term. If he had known that the defendant would be moving to a new system, the purchase agreement and the franchise agreement would not have been entered into.

10By its statement of claim, the plaintiff alleges in paragraph 10 that prior to entering into the agreements, “the defendant had:

a.decided to move from the franchise model to the employee model;

b.alternatively, had internally prepared detailed discussion papers, templates and financial modelling of the change from the franchise model to the employee model such that it was evident that change would likely occur”.

11The plaintiff alleges that the defendant’s failure to advise it of these matters:

a.breached the defendant’s disclosure obligations pursuant to the Trade Practices (Industry Codes – Franchising) Regulations 1998;

b.constituted misleading and deceptive conduct pursuant to the Australian Consumer Law;

c.constituted unconscionable conduct.

Discretionary factors

a.plaintiff’s impecuniosity caused by the defendant’s conduct: During the course of argument, plaintiff’s counsel Mr Magowan indicated that he would no longer rely on this matter. Mr Magowan indicated that he was reluctant to pursue an argument that might involve a weighing up of the merits of the plaintiff’s claim.

b.an order would stultify the plaintiff’s pursuit of its claim: Mr Phillips filed an affidavit indicating that the plaintiff has no assets and said that he personally did “not have available assets that would allow me to come up with a significant amount of money to provide by way of security”.

Mr Phillip’s affidavit indicates that he is employed as a courier earning approximately $900 (net) per week and has rental income from an investment property of about $400 per week. Using the local municipality valuation, he has an equity of about $150,000 in the property. He has a number of liabilities for loans, including credit card debt. His assets are about $40,000 more than his liabilities. He said that, “To date, I have funded this litigation from personal loans from friends and family”.

It is likely, in my view, that Mr Phillips would find it difficult to pay his own legal costs if he were required to provide security for the defendant’s costs.

c.voluntary contractual relations: The plaintiff was apparently “incorporated for the purpose of conducting the franchise business”. The defendant voluntarily entered into a contractual relationship with the plaintiff knowing it was a company with little or no financial capacity.

Under the franchise agreement, Mr Phillips personally guaranteed “prompt performance of all of the obligations of the [plaintiff] contained or implied under this agreement” and indemnified the defendant if it incurred loss because the plaintiff “fails to observe or is not bound by some or all of its obligations under this agreement”.

In these circumstances, it is submitted that the defendant has voluntarily assumed the risk that it may be sued by an impecunious plaintiff. Further, if the contracting party had been Mr Phillips personally, the defendant would not have had the opportunity to seek an order for security for its costs of the proceeding.

In a recent letter to the plaintiff’s solicitors, the defendant’s solicitors wrote as follows:

“Your letter admits that your client is impecunious. In the circumstances, our client requires details from you as to the financial position of Mr Andrews as the sole shareholder of the plaintiff, and the person who stands to benefit from the litigation (given that the plaintiff is not trading).

We also seek an undertaking from Mr Andrews that he is prepared to meet any costs orders made against the plaintiff in this Proceeding”.

The plaintiff did not respond to the letter by offering an undertaking to the defendant. When the matter was raised during the hearing, Mr Magowan sought instructions and offered an undertaking that his client would enter into a guarantee to pay any costs order in the defendant’s favour up to a limit of $20,000.

I consider that such an undertaking is not an appropriate response in the circumstances of this case and that the defendant could not reasonably be regarded as having accepted the risk of having to bear its own costs if it were able to successfully defend the proceeding.

To some extent this conclusion has involved a consideration of the matters in dispute in the proceeding. Also of relevance is the fact that the proceeding was issued in the County Court. During his submissions, Mr Magowan advised that the damages claimed by the plaintiff were limited to the costs it has incurred of $97,374.15, referred to in paragraph 8 of the statement of claim, and that this sum would be reduced by an allowance for the value of the motor vehicle at the expiry of the franchise term. There is clearly a risk that, even if successful, recovery by the plaintiff of damages of less than $50,000 may leave it exposed to a costs liability.

d.delay in bringing the application for security: The proceeding was commenced by Originating Motion filed 18 November 2015 seeking preliminary discovery from the defendant pursuant to Rule 32.05. Subsequently, the parties agreed that the action proceed with pleadings. The plaintiff delivered a Statement of Claim on 12 April 2016, an Amended Statement of Claim on 30 May 2016 and a Further Amended Statement of Claim on 12 July 2016.

Until the delivery of the Further Amended Statement of Claim, the plaintiff had not properly pleaded or particularised its claim, including the critical allegations in paragraph 10.

A defence was delivered on 3 August 2016. At that time, the defendant’s solicitors gave notice that it required the plaintiff “to put forward security for our client’s costs up to mediation in the amount of $60,000”.

In the circumstances, there was no relevant delay in foreshadowing the application for security such that it should cause the denial of an order. The other grounds relied upon by the plaintiff are also an insufficient basis to refuse to order the plaintiff to provide security for the defendant’s costs of the proceeding.

Quantum of security

12The defendant’s costs of the proceeding are calculated in an affidavit of Christopher Clement Brodrick who describes himself as “a partner of Holding Redlich [with] the primary responsibility for the conduct of these proceedings for the defendant”.

13In relation to his estimate of “future costs” the estimate is itemised by “task” and is broken down as to the costs of the solicitors and of counsel. The estimate is of solicitor-client costs and the total is reduced by 25-30% to calculate party-party costs.

14Whilst this may not be the most accurate method to estimate party-party costs, I consider that it is adequate for the purpose. I also consider that Mr Brodrick’s description of his position qualifies him to provide the estimate. In the Court’s Commercial Division, it is a regular task for judges to consider such estimates in the context of security for costs applications.

15I have fixed security to the completion of mediation in the sum of $20,000. The parties have agreed to a judicial resolution conference before a judicial registrar as an alternative to mediation. The defendant’s costs will include preparation for the conference, including taking instructions from the principal witnesses, and attendance with counsel at the conference.

16As for the costs to a point in advance of the final preparation for trial, I consider that such security should be provided by 11 November 2016 and should be in the further sum of $20,000. This sum is fixed on the basis that the plaintiff’s damages are limited to the incurred costs of $97,374.17, less an allowance for the residual value of the motor vehicle. This sum will include completion of the interlocutory steps, some preparation for trial, including for the court book, and the briefing of counsel.

17For the costs of final preparation for trial and the trial, such security must be provided by 27 January 2017 in the sum of $30,000. This sum includes a 2-3 day trial. If the parties were to agree that the evidence in the trial were to be limited to documents and an agreed statement of facts, the sum of $30,000 security might be reduced to $25,000.

Orders

18The orders I propose are as follows:

1.The orders made by His Honour Judge Anderson on 14 September 2016 are varied as follows:

a.paragraph 5(b) shall commence, “on or before 11 November 2016, the further sum of $20,000…”;

b.paragraph 5(c) shall commence, “on or before 27 February 2017, the further sum of $30,000…”.

2.        Reserve costs.

3.Reserve liberty to apply, including to reduce the amount specified in paragraph 1(b) hereof if the parties agree that the trial shall proceed on evidence limited to documents and an agreed statement of facts.

19The parties will be provided with a copy of these reasons by email. The parties will have until 4pm on 22 September 2016 to comment on the proposed orders. Final orders will then be made and sent to the parties.

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Certificate

I certify that these 6 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 20 September 2016.

Dated: 20 September 2016

Carla Cianfaglione 

Associate to His Honour Judge Anderson