St Leger Investments Pty Ltd v True Blue James Pty Ltd and Ors (No.2)

[2014] FCCA 2048

FEDERAL CIRCUIT COURT OF AUSTRALIA

ST LEGER INVESTMENTS PTY LTD v TRUE BLUE JAMES PTY LTD & ORS (No.2) [2014] FCCA 2048

Catchwords:
CONSUMER LAW – Costs – alleged unmeritorious conduct of successful respondents – withholding of information known to them – failure to disclose a known material fact until late in hearing – obligation to the Court to be full and frank in disclosure – obligation to contribute to the fair and expeditious conduct of the proceeding – the usual order that costs be awarded to the successful litigant not applied – discounted order made in favour of the successful respondents.

DISCOVERY – Failure to disclose documents confirming a material fact in dispute which were once under the control of a party and the existence of which was known to that party.

Calderbank v Calderbank[1975] 3 All ER 333
Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No.2) [2005] VSCA 298
Molloy v Shell UK Limited [2001] EWCA Civ 1272
SMEG Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323
United Salvage Pty Ltd v Louis Dreyfus Armateurs SNC [2006] 1611

Applicant: ST LEGER INVESTMENTS PTY LTD

First Respondent: TRUE BLUE JAMES PTY LTD

Second Respondent: RUSHLYN PTY LTD

Third Respondent ROBERT JAMES

File Number: MLG 43 of 2011

Judgment of: Judge O'Dwyer

Hearing dates: 16, 17, 19 and 20 April 2012

Date of Last Submission: 25 July 2013

Delivered at: Melbourne

Delivered on: 4 September 2014

REPRESENTATION

Counsel for the Applicant: Mr Nixon

Solicitors for the Applicant: Foster Nicholson Jones Lawyers

Counsel for the Respondents: Mr Mylne

Solicitors for the Respondents: Mason Sier Turnbull

ORDERS

1. The applicant pay to the respondents 75% of the respondents’ costs of and incidental to the proceeding on a party/party basis.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT MELBOURNE

MLG 43 of 2011

ST LEGER INVESTMENTS PTY LTD

Applicant

And

TRUE BLUE JAMES PTY LTD

First Respondent

RUSHLYN PTY LTD

Second Respondent

ROBERT JAMES

Third Respondent

REASONS FOR JUDGMENT

Introduction

1. At the end of a four day trial concerning a dispute about the purchase of a franchise, I indicated that there might be a basis for a departure from the usual order that costs follow the event. The respondents were successful against a claim by the applicant who alleged it was induced into entering into a franchisee agreement by false and misleading representations and further, that there was a failure to provide a Disclosure Statement as required under the Franchising Code of Conduct (“the Code”). That allegation was dependant on establishing a franchise agreement existed between the first and second respondents. The respondents denied such a franchise agreement, thus putting the applicant to the task of proving the same; unnecessarily as it transpired as set out below. The respondents had counterclaimed against the applicant for a breach of the franchise agreement. The quantum of the claim by the applicant was in the sum of $268,764.35, whereas the counterclaim was in excess of $500,000.

2. As the third respondent was a common director of both corporate respondents, and was their controlling mind, for the sake of convenience they will be collectively referred to as the respondents, save where it is appropriate to otherwise identify them.

3. My reason for inviting submissions on costs arose from, on the face of it, unmeritorious behaviour by the successful respondents. The trial lasted four days and it was only late on the third day that the respondents made certain admissions. One being that there was a franchise agreement between the first and second respondents which existed at the relevant time, but its existence was denied up to the third day of the trial. The other being that the first respondent had entered into an agreement appointing a State Wide Major Franchisee approximately 5 weeks prior to the trial.  This last admission on the third day had the effect of diminishing the counterclaim from $500,000 to $16,500.

Should costs follow the event?

1. The respondents contended that costs should follow the event, having been successful. The basis of their success was the failure of the applicant to prove its case. The respondents highlighted that the applicant failed to prove:

   (i)That any of the alleged oral representations were made;

   (ii)That the representations were misleading;

   (iii)That the representations induced the applicant to enter into the franchise agreement;

   (iv)That the failure to provide disclosure documents in accordance with the Code affected the Applicant’s decision to enter into the franchise agreement.

2. The respondents also highlighted my finding that the Applicant had repudiated the subject franchise agreement and was required to pay the counter claim of $16,500.

3. In the ordinary course of events, having had such a successful outcome, the respondents’ expectation that costs would follow the event was to be expected and pursued. In addition the respondents sought indemnity costs from the date of sending the Calderbank[1]  letter.

   [1] Calderbank v Calderbank[1975] 3 All ER 333

4. The applicant, in an attempt to persuade the Court to exercise its discretion to refuse the respondents’ claim for costs and, indeed, in support of the applicant’s claim for its costs, cited a number of reasons. In short summary they were:

   (a)The respondents failed to disclose until the third day of the trial, having been aware of the situation five weeks prior to the trial, of the appointment of a new Victorian State Major Franchisee. It was said that this was a significant concealment which had the effect of reducing the counterclaim by 97%. This concealment, in my view, was improper in that the Court and the applicant were led to believe that there was a significant bona fide counterclaim in the region of $500,000.
    In the event, however, the failure to disclose this fact had no adverse affect on the outcome of the case, the respondents submitted, or the applicant as the end result was a significant reduction in the counterclaim, which was to the applicant’s benefit. Be that as it may, in my view, the conduct of the respondents in withholding this material fact amounted to contemptuous disregard for an overarching obligation to give the Court the benefit of full and frank disclosure. In my view, there was a duty to the Court, as well as to the applicant, to make disclosure of a material fact when known. This should not pass without some penalty in the form of a reduction of the respondents’ entitlement to costs.

   (b)The respondents failed to disclose documents showing the relationship between the first and second respondents was one under a franchise agreement between them. The documents said to have been concealed by the respondents were from two sources. First, there were the documents brought to light by obtaining by application to the Court in South Australia for the Court file there which involved the respondents as parties to a claim against them. The file contained documents which were tendered to that Court showing payment of franchise fees from the first and second respondents. They were tendered in early November 2011, some 7 months before the trial. Secondly, there was a failure by the respondents to produce relevant financial documentation evidencing payments of franchise fees between the first and second respondents that were in the care and control of the respondents, and held by their accountant/bookkeeper. The failure to disclose these financial documents was a breach of my orders made in respect of discovery on 22 December 2011. The respondents conceded as much. It is to be noted that the documents from the Court proceedings in South Australia and from the account/bookkeeper were only produced after application to the Court in South Australia and under subpoena.  They were not voluntarily disclosed. The respondents in respect of the accountant/bookkeeper’s documentation asked the Court to consider that this was an oversight as claimed by the third respondent. However, the invitation to take the third respondent’s evidence at face value belies my finding about his veracity. In respect of the South Australian Court documents, it was said not to have come under any category of discoverable documents as set out in my orders of 22 December 2011. I do not accept this as category 7, as set out in the annexure to my orders specifies that documents evidencing all financial dealing between the first and second respondents be discovered.
   The contention by the respondents, in my view, that those documents were out of the care and control of the respondents as they were held by the Court does not persuade me that they should not be discovered. In my view this act of concealment attracts some costs consequences for the respondents.

   (c)An important aspect of the applicant's case was its attempt to construct through the interpretation of a particular clause of the Franchising Code of Conduct an argument that the applicant should have disclosed the names and contact details of two other franchisees that were unsuccessful in the conduct of their franchises. Had documentary evidence as to the  status of the relationship from the South Australian Court and that which was subpoenaed been produced and an admission made, the applicant would have been spared the expense and time devoted to the establishment of this argument. The nature of the relationship between the first and second respondents was an important relationship for the applicant to establish and was important in respect of the respondents’ defence that there was "no franchise agreement" thus relieving the respondents of providing a Disclosure Statement.
   The documents discovered by subpoena fit into category 7 on the annexure to my orders of 22 December 2011.  In the event, I found that had the applicant been informed of the two other, earlier franchisees and had Mr Tyler (Director of the applicant) been given contact details, he would nonetheless have proceeded with the subject franchise agreement.
   However, in my view, this nondisclosure on the part of the respondents warrants critical consideration when determining costs.

   (d)The applicant submitted that the above failures were so grave that the respondents should be denied their costs and  should pay the applicant's costs. In support of this submission the applicant asserted that the nondisclosure was deliberate, dishonest and evidenced a contumelious disregard for the Court rules.

5. A significant aspect of the applicant's submissions was the repeated accusation that the respondents were dishonest in the conduct of their defence and counterclaim. It was said by the applicant that the respondents “cynically manipulated" the disclosure it had to make under its “no franchise agreement” argument and in support of its counterclaim until the third day of the trial. Having made those allegations the applicant then relied on various authorities centred on the concept of dishonesty and, because of such, a denial of costs in favour of the successful, but dishonest party.[2]

   [2]     Molloy v Shell UK Limited [2001] EWCA Civ 1272

6. The applicant submitted that the respondent should never have pursued the defence that there was no franchise agreement within the meaning of the Code as between the first and second respondents. The applicant was only able to extract the admission that there was a franchise agreement between them when overwhelming evidence to that effect was presented by the applicant requiring the respondents in the afternoon of the third day of the four day trial to make the admission. The stand taken by the respondents incurred, I accept, significant costs in obtaining documentary evidence to support the applicant’s assertion that the respondents were required under the Code to provide the applicant with a disclosure document. The respondents were reliant on the evidence of the third respondent to explain what had happened.
   The third respondent’s evidence (on behalf of all the respondents), as stated in my reasons, was not particularly impressive and I expressed my lack of confidence in his veracity. I found him to be "defensive, prevaricating, evasive and generally unable to make small concessions, even when such concessions had no real significance, but seem to be resistant out of an anxiety not to say too much which might prove harmful to his case." When the nature and quality of the evidence of the third respondent is taken into account and having regard to the background of the failure to disclose, I am of the view that the respondents have not acted in a manner required of them by allowing me, and the applicant to harbour, in respect of the Court, for three days and in respect of the applicant, for many months, under an understanding that the existence of an agreement was a live issue which had to be addressed by the applicant.  It was within the capacity of the respondents to disabuse the applicant that this was a live issue many months before the trial, they chose to manipulate the disclosure, as stated by the applicant.

7. The respondents have also claimed costs under the franchise agreement as a contractual obligation. Under Clause 20.1 of that agreement an obligation is imposed on the applicant to pay the legal costs arising from a breach of the Regional Masters Franchise Agreement.

   
   

   The applicant submits that the costs of the first respondent in defending the claim made by the applicant are not costs arising from the breach of the Regional Master Franchise Agreement. The only costs that can be properly attributed to a breach of the Regional Master Franchise Agreement are those set out in the counterclaim. It is my view in any event, that it is the Court’s function to assess costs that might be related to the prosecution of the respondents’ defence and counterclaim.

The Calderbank letter

1. The Calderbank letter dated 23 March 2011 from the solicitors for the respondents to the solicitors for the applicant complied with the usual requirements of a Calderbank offer; namely, that it was clear, precise, certain and capable of acceptance. Indeed, in that letter the respondents identified the nature of the letter as being a Calderbank letter and set out the consequences of a refusal to accept an offer of $5000 in full settlement of the applicant’s claim. This offer was made early in the proceedings at a time when the quantum of the applicant’s claim was in excess of $250,000. In my view, that offer was not unreasonably rejected at that stage of the proceeding as its quantum, on the face of it, was offensive to the then not unreasonable expectations of the applicant. In my view, at the time of the rejection of the offer the applicant cannot be said to be “imprudent” or “unreasonable” or “imprudent, reckless or unreasonable.”[3] Accordingly, I am not satisfied that a departure from the ordinary rules as to costs and imposition indemnity costs is warranted.[4]

   [3]   See United Salvage Pty Ltd v Louis Dreyfus Armateurs SNC [2006] 1611 at [18]; see also Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No.2) [2005] VSCA 298

   [4]     SMEG Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA  323 per Gyles J at [37]

Conclusion

1. In civil litigation there is, in my view, an overarching obligation on the part of the litigants not to mislead the Court by not disclosing documents relating to material facts that would be dispositive (or conversely supportive) of a litigant’s claim, or part of it. Such nondisclosure causes unnecessarily, a waste of Court time and added expense for the other litigant. It does not redeem the respondents’ behaviour to come, so to speak, clean near to the end of the trial.

   
   

   The applicant contended that such conduct was deliberate and dishonest and undermined the judicial process. I accept that it may be calculated and undermining of the judicial process – an abuse of the Court’s process.

2. This conduct, it was said by the Applicant, was so exceptional as to disqualify the respondents from obtaining any costs order in their favour, and further, required the respondents to pay the applicant's costs of the proceeding. I am not satisfied that the conduct complained of warrants an order that the successful respondents pay the costs of the unsuccessful applicant. However, there are grounds for an order that the usual practice in respect of costs should be varied.

3. The respondents have sought 95% of the party and party costs up to the date of the Calderbank letter and thereafter 95% of the indemnity costs. The applicant seeks its costs of the proceeding, or alternatively, its costs in defending the counterclaim and asks that there be no costs in favour of the respondents.

4. The discount proffered by the respondents was on the basis of the respondents failure to disclose the account/bookkeeper’s documents

5. In my view, after consideration of the submissions, this is a case that warrants that the usual practice that costs follow the event, but there should be a discount of 25% on such costs because of the contumelious behaviour of the respondents as discussed above.

I certify that the preceding sixteen (16) paragraphs are a true copy of the reasons for judgment of Judge O'Dwyer

Associate:  G. Car

Date:  4 September 2014