Veneziano Coffee Roasters WA Pty Ltd v Healthy Nut Café Pty Ltd

[2018] WASC 363

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   VENEZIANO COFFEE ROASTERS WA PTY LTD -v- HEALTHY NUT CAFE PTY LTD [2018] WASC 363

CORAM:   LE MIERE J

HEARD:   ON THE PAPERS

DELIVERED          :   27 NOVEMBER 2018

FILE NO/S:   CIV 3217 of 2016

BETWEEN:   VENEZIANO COFFEE ROASTERS WA PTY LTD

Plaintiff

AND

HEALTHY NUT CAFE PTY LTD

Defendant

Catchwords:

Procedure - Security for costs - Whether plaintiff's impecuniosity is a compelling reason to order security - Whether defendant's delay in bringing application is significant factor in court's discretion against ordering security - Whether application is oppressive - Turns on own facts

Legislation:

Nil

Result:

Application allowed

Category:    B

Representation:

Counsel:

Plaintiff	:	No appearance
Defendant	:	No appearance

Solicitors:

Plaintiff	:	Stenta Legal
Defendant	:	Gilbert + Tobin

Case(s) referred to in decision(s):

Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664

Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744

Odyssey Financial Management Pty Ltd v QBE Insurance (Australia) Ltd [2012] NSWCA 113

LE MIERE J:

Summary

1. The plaintiff operates a business supplying coffee, coffee machines and coffee training services to cafés in Western Australia.  The defendant is the franchisor of the business Health Freak Café which, through franchisees, operates Health Freak Café stores in Western Australia. The plaintiff claims damages from the defendant for breach of contract, misleading or deceptive conduct and estoppel.  The defendant denies the contract, representation and assumption on which each of the plaintiff's claims is based.

2. The defendant has applied for an order for security for costs.  The form of security sought is that each of the directors of the plaintiff provide a guarantee to pay the defendant's costs in the sum of $58,740 or alternatively that the plaintiff give security in that sum.  The plaintiff opposes any order for security for costs.  For the reasons which follow the action should be stayed unless the plaintiff provides security within 28 days of this order, or such other period as I am persuaded is reasonable, for the costs of the defendant in the amount of $50,000 by way of guarantees by the plaintiff's directors to the satisfaction of the defendant, or as approved by the court, or by way of unconditional bank guarantee, or by way of paying the amount into court.

Security for costs ‑ Corporations Act s 1335

1. The Corporations Act 2001 (Cth) provides that the court may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

2. I find that it appears by credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if it is successful in its defence.  There is no real contest about that.  There is argument between the parties whether the plaintiff is insolvent.  That is not the test.  The evidence is that the plaintiff has no significant assets or means to pay any costs order against it other than from funds provided to it by its directors or associated entities.  The real contest is whether the court should exercise its discretion to make a security for costs order.

Reasons to order security for costs

1. The defendant advanced three principal arguments in favour of security being ordered.  First, the plaintiff's impecuniosity is itself a compelling reason to order security.  Secondly, it would be unjust to allow directors, shareholders or third parties to finance the plaintiff's action in the knowledge that if the action is successful they will stand to benefit but if the action is unsuccessful they will not be liable for the defendant's costs and the defendant will be unable to recover its costs.  Thirdly, the plaintiff's case is hopeless.

2. A corporation's impecuniosity is itself a factor favouring the court ordering security.  Not only does proof of the unsatisfactory financial position of the corporate plaintiff trigger the court's discretion, but that evidence is also a substantial factor in the exercise of the discretion:  Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [56] ‑ [57]; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [36]. Indeed it has been said that once the defendant has shown that the corporate plaintiff will be unable to meet the defendant's reasonable costs, the evidentiary burden shifts to the plaintiff to satisfy the court that, taking into account all relevant factors, the court should exercise its discretion by refusing to order security or by ordering security of a lesser amount than the defendant seeks: Idoport at [60]-[62], Fiduciary at [36].

3. The plaintiff has sued in its own name.  However, in its submissions the plaintiff says it owns the business in its capacity as the trustee of the Veneziano Coffee Roasters WA Unit Trust and the case is brought by the plaintiff in its capacity as trustee.  The beneficiaries of the trust stand to benefit if the plaintiff succeeds.  That is so notwithstanding that unit holders are discretionary trusts, which the plaintiff asserts in its submissions.  On the other hand, if the plaintiff fails the defendant will not be able to recover its costs from the plaintiff or from the trust beneficiaries who stand to gain if the plaintiff is successful. That is a factor in favour of ordering security.

4. The defendant says that the plaintiff's case is hopeless.  I will address that argument together with the plaintiff's argument that it has a strong case.

Reasons not to order security

1. The plaintiff advances five principal reasons for not ordering security:

   1.the plaintiff has a strong case;

   2.the defendant has delayed in applying for security;

   3.the plaintiff's impecuniosity was caused by the defendant's conduct;

   4.the security application is oppressive; and

   5.the directors of the plaintiff have offered sufficient security which has not been accepted by the defendant.

Strength of the plaintiff's case

1. The plaintiff's contract claim is based on its claim that it entered into an agreement (Coffee Supply Agreement) with the defendant which is partly in writing, partly oral and partly implied.  The plaintiff says that the terms of the Coffee Supply Agreement include that each week there would be a minimum of 450 kg of coffee, in total, ordered by the Health Freak franchise stores.  The plaintiff says that the Health Freak franchise stores failed to order 450 kg of coffee each week and thereby repudiated the Coffee Supply Agreement.  The plaintiff says that it accepted the defendant's repudiation.

2. The plaintiff's misleading or deceptive conduct claim is based upon representations allegedly made by the defendant to the plaintiff that the Health Freak franchise stores would order at least 450 kg of coffee from the plaintiff each week for four years (the Representation).  The plaintiff says the Representation was misleading or deceptive because the defendant had no reasonable basis for making the Representation.

3. The plaintiff's estoppel claim is that the defendant's conduct in the course of negotiating and making the Coffee Supply Agreement and making the Representation caused the plaintiff to assume that the Health Freak franchise stores would order at least 450 kg of coffee each week for four years (the Assumption).  In reliance upon the Assumption it supplied and installed coffee machines, supplied coffee and provided a coffee training session to franchisees of the defendant.  The plaintiff says that by the franchisees failing to order 450 kg of coffee per week the defendant has acted contrary to the Assumption and the plaintiff has suffered detriment.  The plaintiff says that the defendant's conduct is unconscionable.

4. The defendant denies the Coffee Supply Agreement was made.  The defendant says that if an agreement was made it was a different agreement (Trial Agreement).  The defendant denies the Representation was made.  The defendant denies each element of the plaintiff's estoppel claim.  The defendant counterclaims for a declaration that the Coffee Supply Agreement is not a binding contract and if it is, a declaration that the plaintiff has breached the agreement in failing to pay to the defendant rebates due under the agreement.

5. The plaintiff says that it has a prima facie strong case with a reasonable prospect of success and that the evidence filed is overwhelmingly in favour of the plaintiff.  The defendant says that the plaintiff's claim is hopeless.  The defendant goes into detail in support of its argument.  In the circumstances it is not appropriate that I make any attempt to assess the relative strengths of the plaintiff's and defendant's cases on this interlocutory application for security for costs.  I will proceed on the basis that the plaintiff's claim is prima facie regular on its face and discloses a cause of action and is bona fide with a reasonable prospect of success.

Delay

1. An application for security should be bought promptly.  Delay by a defendant is a relevant factor in the exercise of the discretion:  Idoport [68]. The passage of time is only one item in the list of factors to be taken into account in the balancing exercise. The delay must be weighed not only in terms of prejudice but also in terms of the factors that have led to the delay.

2. The defendant applied for security for costs by way of a minute of proposed orders of 17 August 2018.  That was almost 20 months after the plaintiff had commenced the action.  Furthermore, the plaintiff claims that it has incurred substantial costs in pursuing the action and the action is ready for trial.  Those are significant factors in favour of exercising the court's discretion against ordering security.  However, the strength of that factor is undermined by two matters.  First, the defendant requested security for costs before the plaintiff commenced the action and repeated its requests, albeit the defendant made no application until August 2018.  Secondly, the plaintiff provided the defendant with financial statements which showed the plaintiff to be in a much stronger financial situation than was revealed when the defendant received the plaintiff's financial statements for 2016/2017 on 24 May 2018.  Furthermore, there were apparent discrepancies in the plaintiff's financial statements and it took the defendant some time to assess the plaintiff's parlous financial situation.

3. The defendant warned the plaintiff on 23 November 2016, shortly before the plaintiff commenced the action on 23 December 2016, that the defendant would apply for security for costs.  On 23 December the plaintiff asked the defendant for details of the amount the defendant sought as security for its costs.  On 3 January 2017 the defendant requested that the plaintiff provide security for the defendant's costs in the amount of $120,000.  On 23 January 2017 the plaintiff's solicitors said that an application for security for costs would not be successful but in the interests of having the issue finalised attached the plaintiff's financial statements for the defendant's consideration.  Those statements showed that the plaintiff had current assets of $107,435 together with long-term assets of $101,302 for total assets of $208,737 and net equity of $65,024.  The statements showed net earnings of $64,444 for the six months July to December 2016.  Those statements paint a very different picture than the financial statements which have now been produced.  On 10 February 2017 the defendant's solicitors stated that the defendant was concerned that the plaintiff's financial situation is weak and they expected to be instructed to apply for security for costs.  It appears the defendant did not pursue the matter until 7 March 2018 when its new solicitors requested that the plaintiff provide current and detailed information regarding its financial position to alleviate the defendant's concerns as to the plaintiff's ability to pay its legal costs.  The defendant foreshadowed an application for security for costs if the information was not provided.  On 20 March 2018 the plaintiff's solicitors replied saying that they had already provided the plaintiff's financials, that the defendant had not pursued its threatened application and since that time the plaintiff's financial position had not materially changed.  It was not until 24 May 2018 that the defendant received the plaintiff's financial statements which revealed its weak financial position.

The plaintiff's impecuniosity and the defendant's conduct

1. Where a plaintiff's lack of funds has been caused or contributed to by the defendant, the court will take this consideration into account.  The onus is on the plaintiff to prove that it was in an adequate financial state, before its association with the defendant began, to have been able to meet an adverse costs order in the proceeding:  Fiduciary [86] ‑ [87]. That does not mean that the court cannot conclude that the defendant's wrongdoing caused the plaintiff's impecuniosity unless there is evidence to establish the plaintiff's financial health before the wrongdoing occurred. However, the plaintiff must prove causation in the circumstances of the case. On the evidence, the plaintiff has failed to do so.

The security application is not oppressive

1. I am not satisfied that the security application is oppressive.  The evidence does not establish that the effect of an order for security would be to stifle the plaintiff's claim.  In this case it is appropriate to look behind the nominal litigant to examine the means of others who stand to benefit from the litigation.  In Odyssey Financial Management Pty Ltd v QBE Insurance (Australia) Ltd [2012] NSWCA 113, McColl JA at [17] said that to demonstrate that there was such oppression, it would be necessary for those who stood behind the corporate plaintiff to demonstrate that they were also without the means to provide an order for security in the relatively modest amount sought by the corporate defendant. In this case the plaintiff has not established that those who stand behind the plaintiff do not have the means to provide security.

Plaintiff's directors offered security

1. The directors of the plaintiff offered to put up security in the sum of $10,000.  That is wholly inadequate for an action in this court where it is estimated the trial will take eight days.  It was entirely reasonable for the defendant to reject that offer.

On balance security should be ordered

1. Having weighed up the factors for and against, the proper exercise of my discretion is to order security.  The factors I have referred to in favour of ordering security outweigh those against.  However, in view of the defendant's delay in prosecuting its application for security it is appropriate to order security for costs only prospectively.

Quantum of security

1. The defendant has provided an estimate or outline of its costs at trial.  Those costs total $58,740.  The costs are calculated in accordance with the relevant scale based on a six day trial.  The parties now estimate the trial will take eight days.  The costs must be reasonable and cannot be calculated with mathematical certainty.  I will order security in the sum of $50,000.  In my experience that is a reasonable sum for an eight day trial in this court.

Form of security

1. The usual form of security is to order that the plaintiff provide security for the defendant's costs by paying an amount into court by a specified date or otherwise providing security for that amount in a manner satisfactory to the defendant and to order that the proceedings be stayed if the amount has not been paid by that date.

2. The appropriate form of order in this case is to order that the plaintiff provide security within 28 days of this order, or such other period as I am persuaded is reasonable, for the costs of the defendant in the amount of $50,000 by way of guarantees by the plaintiff's directors to the satisfaction of the defendant, or as approved by the Court, or by way of unconditional bank guarantee, or by way of paying the amount into court, or otherwise providing security for that amount in a manner satisfactory to the defendant and the proceedings be stayed if that amount has not been paid within that time.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

RK
ASSOCIATE TO THE HONOURABLE JUSTICE LE MIERE

27 NOVEMBER 2018