Whyked Pty Limited v Yahoo Australia and New Zealand Pty Limited

[2006] NSWSC 1236

CITATION:	Whyked Pty Limited v Yahoo Australia and New Zealand Pty Limited [2006] NSWSC 1236
HEARING DATE(S):	3/11/06, 17/11/06
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Einstein J
EX TEMPORE JUDGMENT DATE:	11/17/2006
DECISION:	Security for costs to be ordered
CATCHWORDS:	Practice and Procedure - Costs - Security for costs where personal as well as corporate plaintiffs resist making of order - Party suing for benefit of another - Necessity for all shareholders in corporate plaintiffs to disclose their net assets
LEGISLATION CITED:	Fair Trading Act 1987 (NSW) Trade Practices Act 1974 (Cth)
CASES CITED:	Bell Wholesale Co Pty Limited v Gates Export Corporation (No 2] (1984) 2 FCR 1 Dijkhuijs v Barclay (1988) 13 NSWLR 639 Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 Rugby Union Players Association Inc v Australian Rugby Union Ltd [unreported, Supreme Court of New South Wales, per Giles J, 30 July 1997, BC 9703332] Winnote Pty Limited (in liq) v Page [2005] NSWCA 362
PARTIES:	Whyked Pty Limited - Plaintiff Yahoo Australia and New Zealand Pty Limited - Defendant
FILE NUMBER(S):	SC 50044/06
COUNSEL:	Mr P King (Plaintiff) Mr DB Studdy (Defendant)
SOLICITORS:	Russell McLelland Brown (Plaintiff) Gilbert & Tobin (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Friday 17 November 2006 ex tempore
Revised 20 November 2006

50044/06 Whyked Pty Limited v Yahoo Australia and New Zealand Pty Limited

JUDGMENT

The notice of motion

1 There is before the Court a notice of motion filed on 4 October 2006 by which Yahoo Australia and New Zealand Pty Limited seeks security for its costs of these proceedings.

2 The damages claim by the plaintiffs is for $143,206,902 and the causes of action include a claim in deceit.

The nature of the proceedings

3 The proceedings have a history of movement in terms of the forensic decision as to who should be the plaintiffs in a somewhat complex circumstance.

4 This difficulty apparently arises for the reason that at the time of the 15 January 2000 agreement [between Yahoo and the persons then trading as Ezysend, for the appointment by the first defendant of Ezysend as a preferred supplier of freight management services to confirmed registered users of Yahoo], the partnership then trading as Ezysend was comprised of Mr Darren Gibson and Mr Michael Dwyer. The claim is that there were then two assignments:

i. an assignment of 14 December 2005 by Mr Dwyer of his interest in the partnership to Mr Gibson and to Mr Gibson's parents and to Mr Moubayed;

ii. an assignment by the assignees [which took place on the following day] of all of the relevant interests to Whyked Pty Ltd trading as Ezysend.

5 Since the commencement of the proceedings by Whyked as the sole original plaintiff, Mr Darren Gibson has been joined to the proceedings as a second plaintiff and Mr Dwyer has been joined to the proceedings as the second defendant. All of these changes took place after interlocutory applications including a strike out application.

6 Mr Darren Gibson owns 50 percent of the shares in Whyked, which has not lodged a tax return since its inception during the financial year 2004.

The causes of action

7 There are number of causes of action against Yahoo which, without being exhaustive, include:

i. A claim pursued in contract [by the first plaintiff in respect of contractual causes of action as assignee] for breaches of the agreement by Yahoo resulting in loss of business opportunity, business interruption and other alleged damages;

ii. An alternative claim by Ezysend [pressed in the event that the Court should hold that the sale and/or assignments of the contractual choses in action to the first plaintiff are ineffectual] in respect of the contractual causes of action where putative judgment in favour of Ezysend is claimed to be held in trust for the first plaintiff;

iii. A further claim by Ezysend in respect of a number of non-contractual causes of action where again the contention is that any judgment in favour of Ezysend will be held in trust for the first plaintiff: [these claims rely upon conduct said to be unconscionable in contravention of the Trade Practices Act s 51AC and/or s 52 and/or the Fair Trading Act s 52 as well as the first defendant, by its servants or agents, knew that particular representations were erroneous or false, as well as claims that misrepresentations were made negligently.

8 The claims include claims in deceit and seek aggravated and exemplary damages.

The litigation of the security for costs application

9 There has been no issue raised as to the principles to be applied on such an application. They were generally summarised in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [44] et seq.

10 It was conceded that if the first defendant was to succeed in the proceedings neither of the plaintiffs would be in a position to satisfy an adverse costs order in relation to the proceedings.

11 The evidence relied upon by Yahoo includes an affidavit by Mr McGuinness made on 3 October 2006, he being the solicitor for Yahoo and having been admitted and having practised in the area of commercial litigation for approximately 17 years. He has estimated [with the relevant detail being conveniently set out in a chart] that the total costs and disbursements of Yahoo inclusive of GST, upon the basis of an assumption of a hearing time of one week, would be $298,804.

12 Upon the basis that if Yahoo was successful it would be in a position to recover approximately 75% of solicitor/client costs on a party/party basis, Yahoo seeks the sum of $225,000 by way of security for costs.

13 It is unnecessary for present purposes for the Court to detail the financial position disclosure by Mr Darren Gibson in his affidavit of 19 October 2006, otherwise than to make plain that this evidence shows that neither he nor the first plaintiff has any prospect of funding more than a miniscule, if anything, segment of the party/party costs which the first defendant would obtain, if successful.

14 When this notice of motion for security for costs initially came on for hearing on 3 November 2006 it became apparent that a likely very particular difficulty for the plaintiffs in resisting the security for costs application was posed by the circumstance that there was no evidence whatever before the Court as to the financial position of Mr Darren Gibson's fellow shareholders in the first plaintiff, namely his parents [Mr Robert Gibson, who held a 12.5 percent shareholding in the company, and Mrs Patricia Gibson, who held a 25 percent shareholding in the company] and Mr Mohammad Moubayed, who held a 12.5 percent shareholding interest in the company.

15 There is clear authority that a relevant factor to be taken into account on a principled approach to the discretion to order or to refuse to order security for costs is whether any other persons standing behind the company are likely to benefit from the litigation. Commonly persons standing behind a company will be required to offer personal undertakings to be liable for all or part of the costs. The rationale is that those who will benefit from success in the proceedings, whether as shareholders in or creditors of a corporation or as third parties for whose benefit the plaintiff sues, should not be able to litigate and expose the defendant to the risk of irrecoverable costs while themselves shielded, by reason of the interposition of the impecunious plaintiff, from the burden of an adverse order for costs The matter was put as follows in Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523 at 532:

"The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play"
[cf Rugby Union Players Association Inc v Australian Rugby Union Ltd [unreported, Supreme Court of New South Wales, per Giles J 30 July 1997, 50225/96, BC 9703332]

16 The Full Federal Court’s decision in Bell Wholesale Co Pty Limited v Gates Export Corporation (No 2) (1984) 2 FCR 1 at page 5 confirmed the following as the relevant principle:

“In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation, unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful, whether they be shareholders, creditors or in the case of beneficiaries under a trust, are also without means. It is not for the party seeking security to raise the matter, it is an essential part of the case of the company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit to prove the necessary facts.”

17 The matter had been dealt with in Idoport at 66 as follows:

“As to the first of these matters, the plaintiff bears the onus of proving the factual substratum to make good the relevant assertion. Notwithstanding the fact that neither Idoport nor Market Holdings have themselves the capacity by reference to their own assets to provide security and to continue funding the litigation, the plaintiffs appear to have recognised and in any event the Court holds that in failing to call the necessary evidence to establish what are the assets of shareholders or creditors of the plaintiffs, or of persons or companies with whom the plaintiffs had funding arrangements or agreements, the relevant evidentiary onus was not discharged.”

The evidence is supplemented

18 The proceedings were stood over to permit the plaintiffs, should they be disposed to do so, to supplement their evidence to clarify the position of Mr Darren Gibson’s fellow shareholders. In that regard the plaintiffs have placed before the Court today the additional evidence to be found in the affidavits of Mr Robert Gibson, Mrs Patricia Gibson and Mr Mohammad Moubayed.

19 It is unnecessary to presently set out the whole of the detail given in those respective affidavits. Suffice it to say that Mr and Mrs Gibson together own a family home, which is variously estimated at value between $550,000 and $570,000 and which is mortgaged in the sum of $300,000. Mr Moubayed owns a family home, the estimated value being $400,000, which is mortgaged at $230,000. It follows that the equity of Mr and Mrs Gibson, in their family home is in the order of, I will take it, $250,000 [making allowance for difficulties of estimating the value] and that the equity of Mr Moubayed in his home is in the order of, say, approximately $170,000, although I accept that there again, there are question marks as to the proper estimate of the value. In general terms the equity in their principal asset – the family homes - established from those three shareholders is obviously in the order of between $400,000 and $420,000.

20 That is not to say that there are not other assets disclosed in the respective affidavits of Mr Darren Gibson’s fellow shareholders. The fact is that those affidavits do disclose that Mrs Gibson has other net assets and has joint assets with Mr Gibson, that Mrs Gibson has a gross weekly wage and that Mr Gibson has some other net assets and that Mr Gibson has a gross weekly wage. Likewise Mr Moubayed has other net assets, which are identified in the affidavit, and has a gross weekly wage of approximately $1,000.

21 These other assets of Mr Darren Gibson’s fellow shareholders when cumulated are not by any means insignificant, but one does obviously have to take into account the undoubted fact that, focussing only on a gross weekly wage and not including the necessity to take into account matters such as mortgage payments would be to close one’s eyes to the realities of life. A gross weekly wage by any of these shareholders is not really the figure to look at when one is requiring to look at the post-tax circumstance.

22 In the manner in which the Court approaches the application for security for costs, that which has become clear from the evidence of these three shareholders is that they are able to fund the whole of the $225,000 amount sought by Yahoo in its security for costs application, were this necessary in the principled exercise of the Court’s discretion.

23 There are a number of relatively unusual parameters thrown up by the circumstances of the current litigation. In that regard this is of course not the first time when it has become necessary for a court to work through the principled fashion of treating with a suit in which there are certain plaintiffs who are natural persons and other plaintiffs who are corporate entities. In a circumstance where one had the mix as between a personal and corporate plaintiff, Mason P has observed that no sharp principle emerges from the cases in the area: Winnote Pty Limited (in liq) v Page [2005] NSWCA 362 at [35].

24 In that regard, cases such as Winnote appear to turn on their own unique facts. In the main a significant question which arises concerns whether or not the defendant is seen to be protected as to costs by a particular plaintiff or plaintiffs, in which event, if all plaintiffs are persons, some plaintiffs [who might otherwise have been obliged to put up security for costs] are relieved of that obligation because those in a common interest would in any event fund the litigation. Hence the proposition that where grounds for ordering security have been made out against only some of several personal plaintiffs, the ordinary principle is that security for costs will not be awarded against any of the plaintiffs, this reflecting the entitlement of co-plaintiffs [against whom no arguable basis for security has been established] to have the matter proceed to hearing. However, as is made plain in Ritchie ‘Uniform Civil Procedure NSW’ [at 42.21.75], this assumes that the co-plaintiffs interests are common and that any costs orders that the defendants obtain will be enforceable against all of the co-plaintiffs.

25 There is authority that where co-plaintiffs include corporations and natural persons and the personal plaintiffs are in substance the moving parties who are likely to suffer an order for the whole of the costs if the proceedings fail, an order for security ought not be made against the corporation. However, there is also authority to the effect that security would be ordered if there are large areas of claim that are not common between the plaintiffs and, as a result the personal plaintiffs are not likely to suffer an order for the whole of the costs if the proceedings fail [Ritchie at 42.21.75].

26 It does seem that the judicial discretion simply requires to be exercised taking all of the particular circumstances before the Court in a particular piece of litigation closely into account, it being inappropriate to purport to harness the discretion by attempting to formulate any guidelines intended to cover all situations: cf Dijkhuijs v Barclay (1988) 13 NSWLR 639 per Kirby at 652:

‘…to the extent that the categories listed [by the trial judge] purport to harness the discretion stated in the wide terms of s9(1) of the Act, I consider that they impede rather than help the performance of the task assigned to the Court by Parliament.’

27 The instant proceedings are unusual in the extreme in that the pleadings appear to make clear that the proposition for which the plaintiffs contend is in every circumstance, that any judgment is to be held in trust for Whyked: [Although it is fair to comment that reading the pleading closely, those words are followed on appropriate occasion by the words “or as the Court shall determine”.]

28 Returning briefly to first principles, if the only plaintiff was the first plaintiff and neither it nor its shareholders were able to fund a security for costs application, the principled exercise of the discretion would likely be to dismiss the application for security. Then again, if the only plaintiff was the second plaintiff, the authorities suggest that as impecuniosity is not itself a ground for ordering security, security should not be ordered.

29 It should be noted that Yahoo on the last occasion conceded that for present purposes the proceedings are bona fide with a reasonable prospect of success.

30 Dealing with the sundry defences raised to the security for costs application, the finding is that on the evidence it cannot be suggested that Yahoo has been guilty of relevant delay in advancing the application for security for costs. The correspondence in which it has been made clear that applications for security for costs would be made as appropriate prior to trial commenced on 9 May 2006 and was reiterated in the later correspondence, Yahoo taking the legitimate forensic and communicated decision that, in the event that it was unsuccessful in its application to have the proceedings struck out and the plaintiffs did not provide evidence or a bank guarantee to show that they had the wherewithal to meet a costs order, an application for security for costs would be pressed.

Returning to the instant pleading

31 In my own view, the proper approach to the further amended commercial list statement is to regard that document as effectively pleading that should the first plaintiff not succeed and should the Court hold that the sale and/or assignments of the contractual choses in action to the first plaintiff were ineffectual, then Ezysend in fact sues in respect of the contractual causes of action seeking an order that any judgment in Ezysend’s favour be held in trust for the first plaintiff. Likewise the principled reading of the further amended commercial list statement is that Ezysend sues in respect of each of the non-contractual causes of action as the owners of the business at the time the causes of action arose and as sellers and/or assignors thereof under statute and/or at law and/or in equity and will seek an order that any judgment in favour of Ezysend be held in trust for the first plaintiff.

32 The words “or as the Court shall determine” at the end of paragraph 3(b) and paragraph 3(c) are inelegantly drafted and insufficiently precise for the Court to be in a position to follow how it is that the plaintiff puts that proposition.

33 Notwithstanding that mode, as it seems to me, of reading the further amended commercial list statement, the simple fact here is that one does have a corporate first plaintiff; one does have shareholders of that corporate first plaintiff, some of whom are sufficiently unfinancial to not be in a position on the evidence to participate in the provision of security for costs, and others of whom are clearly in a position to so contribute. That being the case, applying the principles already referred to, the Court does not permit shareholders who stand to benefit should the company succeed, to be in a ‘win-win situation’ such that should the suit fail the shareholders are shielded from any obligation to contribute to costs, but should the suit succeed the shareholders gain a windfall.

34 There is also a second basis upon which it may be said that, in the present instance at least, Mr Darren Gibson is suing for the benefit of the corporate first plaintiff: that is the claim in the pleadings that any such success will enure for and on behalf of and as trustee for the first plaintiff.

35 During the course of address Mr King submitted that if the second plaintiff succeeded on various causes of action it would be necessary for him to account to the second defendant in some way, but at the same time Mr King put that this was not to submit that the first plaintiff was suing on behalf of the second defendant.

36 At the end of the day, in this unusual environment [where there is a mixing and matching of plaintiffs, personal and corporate], it does seem to me that the Court must fall back upon the clear principled approach to ordering security for costs which views the circumstances on the basis that it cannot be said that the second plaintiff is in substance the moving party. That seems to me to be an important consideration.

37 Ultimately, the principled exercise of the Court’s discretion requires the Court to take into account the net asset position of each of the three shareholders who have the above-described financial wherewithal to provide the security for costs funds.

38 Mr King contended that there was a real unfairness in the Court effectively requiring shareholders in the first plaintiff to utilise, for example, their family homes and/or the other of their assets, to provide security for costs. That submission flies in the face of the obvious fact that these shareholders are behind the first plaintiff and, for all the claim of the type of hardship which would be involved if they had to sacrifice their homes or further mortgage their homes or other assets, there is the principled countervailing circumstance that fairness where they stand to gain, and to gain in terms of their shareholding interests in the claim currently of $143 million, requires the Court to be fairly rigid in its approach to the security for costs application.

39 Having said all of that, the application for security for costs in the sum of $225,000 as already indicated does take into account some discount allowance, namely the 75 percent of solicitor-client costs on a party/party basis recoverability allowance. My own view is that the Court has a discretion in a case such as this to further lower for exigencies, the amount to be paid by way of security for costs. The case may settle; the case may not take the time which is estimated, and cases such as this do have a history of movement in terms of issues being dropped and sometimes other issues added.

Decision

40 To my mind, taking all of the circumstances into account and being as fair as one practicably can to the notion that the pleading may possibly be fairly read as a pleading which is bifurcated and as a pleading in respect of which at least the second plaintiff may ultimately succeed personally and for himself, the principled approach to the exercise of the relevant discretion is to make an order that the first and second plaintiffs pay the sum of $175,000 by way of security for costs.

41 From time to time the Court endeavours to treat with security for costs applications in a staged way. All other things being equal, unless there was some aberrant circumstance, it would seem to me unlikely that the first defendant will be able to persuade a court that some further, other or additional security should be provided. On the other hand, applications of that nature are not unknown and things do change. All applications are always dealt with on their merits.

42 In relation to the amount of $175,000, to my mind the plaintiffs should be ordered to pay that amount on a stepped basis: the plaintiffs should be ordered to pay the amount of $100,000 in a first tranche and the amount of $75,000 in a second tranche. The first tranche it seems to me should be payable on or before 31 May 2007 and the second tranche should be payable on or before 31 August 2007. All applications are always dealt with on their merits

43 Having indicated those dates for respective tranches, the Court grants leave to approach the Court in the event, for example, that a hearing date which makes these tranches inappropriate, is given by the list judge. I note that I have ordered these tranches against a general guess as to the state of the list judge's list for next year, assuming as I do that it is probably unlikely that the matter could be fixed much before September or October of next year. Should I turn out to be wrong, then the parties would be entitled to approach the list judge or myself to perhaps slightly vary the precise dates for these stepped payments.

44 The principled approach to the exercise of the discretion with respect to costs, in my view, in a case such as has presently been before the Court, is the unusual circumstances of the case do warrant the Court simply ordering that costs of the security for costs application be costs of the cause. I think that is appropriate.

[Counsel for the defendant then sought an opportunity to address on costs]

45 Mr Studdy and Mr King may address on costs on 24 November 2006.

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