IN THE FEDERAL COURT OF AUSTRALIA VICTORIAN DISTRICT REGISTRY EQUITY DIVISION No VG 13 of 1995 BETWEEN: KERISWEY PTY LIMITED Applicant AND: GRANNY MAY'S MANAGEMENT PTY LIMITED First Respondent ROBERT MICHAEL SMITH Second Respondent MICHAEL TENNER Third Respondent PAPER PLUS PTY LIMITED Fourth Respondent Coram: Olney J Place: Melbourne Date: 24 April 1995 MINUTE OF ORDER THE COURT ORDERS THAT: 1. The respondents' application to transfer the proceeding to the New South Wales Registry of the Court be dismissed. 2. The applicant provide security in the sum of $20,000 in a form approved by the Registrar as security for the respondents' costs to the end of the interlocutory stage of the proceeding with liberty to apply to increase the amount of security when the matter is ready for trial. 3. The application be stayed until such time as the security ordered in order 2 has been provided by or on behalf of the applicant. 4. Any party have leave to relist the proceeding for directions upon security being provided. 5. There be no order for costs on the respondents' motion filed 10 February 1995 and the amended motion filed 1 March 1995. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIAN DISTRICT REGISTRY EQUITY DIVISION No VG 13 of 1995 BETWEEN: KERISWEY PTY LIMITED Applicant AND: GRANNY MAY'S MANAGEMENT PTY LIMITED First Respondent ROBERT MICHAEL SMITH Second Respondent MICHAEL TENNER Third Respondent PAPER PLUS PTY LIMITED Fourth Respondent Coram: Olney J Place: Melbourne Date: 24 April 1995 REASONS FOR JUDGMENT This proceeding was commenced in the Victorian District Registry of the Court on 20 January 1995. The Court presently has before it a motion of which notice was filed on 10 February 1995 and which was amended by notice filed on 1 March 1995 whereby the respondents seek orders transferring the proceeding to the Sydney (sic, New South Wales) Registry and for the applicant to provide security for the respondents' costs in the sum of $36,360. The statement of claim contains 33 paragraphs and runs to 15 pages of typescript. It pleads a variety of causes of action including contravention of the Trade Practices Act, negligence, breach of warranty and breach of contract. I will endeavour to provide a brief outline of the facts pleaded, hopefully without doing any injustice to the pleader. The first respondent is a New South Wales company which carries on business as a franchisor for retailing gifts, stationery and the like through franchised retail outlets known as Granny May's Card & Gift Boutique. The second and third respondents are the joint managing directors of the first respondent and have effective control of it. Since 2 November 1988 the applicant, a Victorian company, has carried on business as a franchisee of the first respondent (the business) at premises in a suburb of Melbourne. The fourth respondent is a Victorian company which was the previous owner of the business. The second respondent was at all material times a director of the fourth respondent. By an agreement in writing dated 7 November 1988 the fourth respondent sold the business to the applicant for $152,524.78 plus stock, of which sum $150,000 represented goodwill. The applicant says that in order to induce it to purchase the business the second respondent, on behalf of the fourth respondent, represented that within 5 years the business would be worth $500,000 and could be readily sold. The applicant says it relied upon the representation and acquired the business. The applicant has since discovered that the representation was untrue and the applicant has thereby suffered loss and damage. Since 21 February 1992 the applicant has conducted the business and occupied the premises pursuant to a franchise agreement and a licence agreement with the first respondent. The applicant says that the first respondent has breached the terms of the franchise agreement whereby the applicant has suffered loss and damage. The applicant seeks: a) a declaration that the fourth respondent engaged in conduct in contravention of s 52 of the Trade Practices Act 1974. b) a declaration that the second respondent was involved in the fourth respondent's contravention of s 52. c) a declaration that the first respondent engaged in conduct in contravention of s 51AA of the Trade Practices Act. d) a declaration that the second and third respondents were involved in the first respondent's contravention of s 51AA. e) an order pursuant to s 82 of the Trade Practices Act that the respondents pay the applicant compensation. f) damages, alternatively equitable damages. g) an injunction to restrain the first respondent from terminating the franchise agreement and the licence or from taking possession of the business and the premises. h) interest i) costs j) further or other relief. Despite the length of the statement of claim and the variety of causes of action pleaded, this appears to be a fairly common type of proceeding in which a disenchanted franchisee seeks to recover its losses from a franchisor. On 10 March 1995 the respondents filed a defence which consists almost entirely of a denial of the facts alleged against them. On 6 April 1995 the first respondent filed a cross-claim against the applicant and two third parties, the directors of the applicant. In general terms the cross-claim relates to the franchise and licence agreements pleaded by the applicant and contains claims for possession of the premises from which the business is conducted and damages. It appears that the cross-claim was not filed within the time ordered by the Court and that the first respondent (cross-claimant) will require leave to proceed with it. THE TRANSFER APPLICATION Despite the fact that the first respondent is a New South Wales company having its principal place of business in that State, and the fact that the second and third respondents are based in New South Wales, the applicant's choice of venue cannot be regarded as capricious and indeed, but for one matter to which reference will be made, could not reasonably be challenged. The applicant is a Victorian company, its directors live and work in Victoria, the business and premises are in Victoria, and the representation alleged against the respondents was made in Victoria. It appears however that the franchise agreement contains the following provision: 38 Governing Laws This Franchise Agreement shall be construed and given effect in accordance with the law in force in the State of New South Wales which law shall be deemed to be the proper law of this Franchise Agreement and any dispute or difference shall be determined by the Courts having jurisdiction in the State of New South Wales and further, any proceedings arising from this Franchise Agreement or its interpretation shall be commenced in the Sydney Registry of such Court. The licence agreement contains a similar clause. To the extent that the applicant seeks relief against the first respondent for alleged breaches of the terms of the franchise agreement, the applicant was in breach of this clause in commencing the proceeding in the Victorian District Registry of this Court. However, a substantial part of the applicant's case relates to events which are said to have occurred prior to the execution of the franchise and licence agreements and is based upon non-contractual causes of action. But for the contractual provisions this is not a case in which a change of venue to New South Wales would ordinarily be seriously contemplated. However, the applicant's contractual obligation to the first respondent cannot be entirely ignored. It must however be recognised that the second, third and fourth respondents do not have any similar contractual provision to support their case for transfer. On balance, I am of the opinion that it would be inappropriate to order that the proceeding be transferred. Any detriment that the first respondent may sustain as a result of having to defend the proceeding in Victoria rather than in New South Wales is a matter that may have to be addressed at a later stage of the proceeding. SECURITY FOR COSTS If it appears on credible testimony that there is reason to believe that the applicant will be unable to pay the respondents' costs if the latter are successful in their defence of the proceeding, the Court may require sufficient security to be given for those costs and stay all proceedings until the security is given. (Corporations Law s 1335(1)). The respondents have adduced evidence, which is not seriously challenged, to suggest that the applicant's liability for costs in the event of the application not succeeding would be of the order of $36,620. This assessment includes $14,000 for the hearing of the action based upon an anticipated trial of 8 days. At this stage of the proceeding the estimate of an 8 day trial appears to be somewhat speculative although it cannot be said to be entirely unreasonable. There is evidence before the Court, which I find to be credible, that as at 30 June 1994 the applicant had net assets of $19,151. Its balance sheet as at that date disclosed current assets of $349,211 including unsecured loans at call to directors amounting to $263,318 and intangible assets of $157,241 including goodwill valued at $153,569. Against total assets of $528,499, the applicant had liabilities of $509,348 being: Bank overdraft $ 45,045 Trade Creditors $121,303 Secured loan from $223,000 National Australia Bank Secured loan from BN $120,000 Finance $509,348 The National Australia Savings Bank Limited and BN Finance Limited each hold a fixed and floating charge over the undertaking and all other property and assets of the applicant. The profit and loss account for the year ended 30 June 1994 showed a net operating profit of $588 before income tax. The liquidity of the applicant would seem to be dependent upon the goodwill of its bank and its ability to recover at call the loans to its directors. Although the applicant filed affidavit evidence in response to the application for security, such evidence is silent as to the ability of its directors to meet any call for payment of their loans nor has any indication been given as to the availability of credit from the applicant's bank or from any other source. From such evidence as is before the Court I draw the inference that there is reason to believe that the applicant will be unable to pay the respondents' costs in the event that the respondents are successful in their defence of the proceeding. The applicant has provided evidence of the existence of a policy of insurance held in the names of the directors of the company (but apparently treated by the insurer as being for the benefit of the company) whereby the insurer has agreed to provide cover in these terms: 2. Provided the insured has paid to the insurer the premium in the Schedule this policy covers the insured for all reasonable legal costs incurred by the insurer in relation to the Dispute including: (a) conducting any legal proceedings on behalf of the insured against the franchisor, (b) conducting any mediation or arbitration proceedings on behalf of the insured against the franchisor and (c) all legal costs ordered to be paid by the insured to the franchisor in the event that legal, mediation or arbitration proceedings the subject of this policy are unsuccessful or only particularly successful but limited to the Limit of Indemnity described in the Schedule concerning any one claim. If the insurer decides that it is not economically viable to continue with litigation on behalf of the insured, it may withdraw from the litigation subject to the right of the insured to submit the matter to independent legal advice, which advise shall be final and binding. By letter dated 21 February 1995, the insurer wrote to the applicant's solicitors advising that: the underwriter has granted indemnity to pursue the issues raised in your letter dated 7 December 1994 The "issues" raised in the applicant's solicitors' letter of 7 December 1994 are expressed as follows: Advice on the prospects of a potential action: In our view, the best way in which the insured's case might be presented is on the basis that the franchisor has breached its legal obligations by: (1) Breaching the express terms of the franchise agreement contained in clause 14(b); (2) Failing to comply with terms implied into the franchise agreement through the operation of paragraph 4.2 of the Franchising Code of Practice (under which the franchisor became registered); (3) Failing to comply with a term which was implied into the franchise agreement by virtue of the franchisor's membership of the Franchisors Association of Australasia and its consequent adoption of that Association's Code of Ethics; and/or (4) Contravening the provisions of section 51AA of the Trade Practices Act in having engaged in conduct that is unconscionable. The indemnity granted by the insurer in its letter of 21 February 1995 does not extend to all of the various causes of action pleaded in the application against the franchisor (the first respondent) and in any event does not cover any costs that may be awarded in favour of the second, third and fourth respondents. Furthermore, the insurer has the right to withdraw at any time if it considers that it is not economically viable to proceed with the litigation. In the circumstances, I do not regard the policy of insurance as providing any assurance to the respondents that their costs would be met in the event of them successfully defending the applicant's claim. The applicant has not asserted that an order for security for costs would cause it to be shut out of the proceeding, and there are no other factors of a discretionary nature which would militate against an order for security for costs being made. In my opinion it is appropriate to require the applicant to provide security in the sum of $20,000 for the costs up to the end of the interlocutory stage of the proceeding. The respondents should have liberty to apply for an increase in the amount of security when the proceeding is ready for trial. COSTS OF THE MOTION The respondents have been unsuccessful in their application to have the proceeding transferred to the New South Wales registry, whereas they have been successful in their application for security for costs. In my opinion substantial justice will be done between the parties if there is no order for costs in relation to the motion of 10 February 1995 and the amended motion of 1 March 1995. CONCLUSION The respondents' application to transfer the proceeding to the New South Wales Registry of the Court is dismissed. The applicant is ordered to provide security in the sum of $20,000 in a form approved by the Registrar as security for the respondents' costs to the end of the interlocutory stage of the proceeding with liberty to apply to increase the amount of security when the matter is ready for trial. The application will be stayed until such time as the security ordered has been given by or on behalf of the applicant. Any party will have leave to relist the proceeding for directions upon security being provided. There will be no order for costs on the respondents' notice of motion filed 10 February 1995 and the amended notice of motion filed 1 March 1995. I certify that this and the preceding 10 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney Associate: Dated: Heard: 23 March 1995 Place: Melbourne Judgment: 24 April 1995 Appearances: Mr P.K. Searle (instructed by Macpherson & Kelley) appeared for the applicant. Mr T.J. North (instructed by Davis Harris Hyde Page) appeared for the respondents.