FEDERAL COURT OF AUSTRALIA Australian Competition & Consumer Commission v Samton Holdings Pty Ltd [1999] FCA 1451 PROCEDURE – application to strike out part of cross-claim – unconscionable conduct – no point of principle General Steel Industries Ltd v Commissioner for Railways (NSW) (1964) 112 CLR 125 applied Crooks Nominees Pty Ltd v Verge (1995) 15 WAR 343 referred to Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 referred to Maguire v Makaronis (1997) 188 CLR 449 referred to ACCC v SAMTON HOLDINGS PTY LTD & ORS W 20 of 1999 CARR J 15 JULY 1999 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 20 of 1999 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant AND: SAMTON HOLDINGS PTY LTD (ACN 062 688 359) First Respondent FRANCO PARASILITI Second Respondent GAETANINA PARASILITI Third Respondent SALVATORE PARASILITI Fourth Respondent MARIA PARASILITI Fifth Respondent FELICE ANTONIO SCIARRETTA Sixth Respondent SILVANA SCIARRETTA Seventh Respondent NEIL PHILIP GENTILLI Eighth Respondent SAMTON HOLDINGS PTY LTD (ACN 062 688 359) First Cross Claimant FRANCO PARASILITI Second Cross Claimant GAETANINA PARASILITI Third Cross Claimant SALVATORE PARASILITI Fourth Cross Claimant MARIA PARASILITI Fifth Cross Claimant FELICE ANTONIO SCIARRETTA Sixth Cross Claimant SILVANA SCIARRETTA Seventh Cross Claimant FRANK MARK RANALDI First Cross Respondent EXECUTIVE BLOODSTOCK SERVICES PTY LTD Second Cross Respondent NEIL PHILIP GENTILLI Third Cross Respondent JUDGE: CARR J DATE OF ORDER: 15 JULY 1999 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The motions of the applicant and the first and second cross-respondents filed, respectively, on 1 July 1999 and 6 July 1999 be dismissed. 2. The costs of each of those motions be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W 20 of 1999 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant AND: SAMTON HOLDINGS PTY LTD (ACN 062 688 359) First Respondent FRANCO PARASILITI Second Respondent GAETANINA PARASILITI Third Respondent SALVATORE PARASILITI Fourth Respondent MARIA PARASILITI Fifth Respondent FELICE ANTONIO SCIARRETTA Sixth Respondent SILVANA SCIARRETTA Seventh Respondent NEIL PHILIP GENTILLI Eighth Respondent SAMTON HOLDINGS PTY LTD (ACN 062 688 359) First Cross Claimant FRANCO PARASILITI Second Cross Claimant GAETANINA PARASILITI Third Cross Claimant SALVATORE PARASILITI Fourth Cross Claimant MARIA PARASILITI Fifth Cross Claimant FELICE ANTONIO SCIARRETTA Sixth Cross Claimant SILVANA SCIARRETTA Seventh Cross Claimant FRANK MARK RANALDI First Cross Respondent EXECUTIVE BLOODSTOCK SERVICES PTY LTD Second Cross Respondent NEIL PHILIP GENTILLI Third Cross Respondent JUDGE: CARR J DATE: 15 JULY 1999 PLACE: PERTH REASONS FOR JUDGMENT Introduction 1 The Court has before it two motions to strike out the first six paragraphs of the cross-claimants' cross-claim. The motions are moved in relevantly identical terms by the applicant, the Australian Competition and Consumer Commission ("the Commission"), and the first and second cross-respondents, Mr Frank Mark Ranaldi and Executive Bloodstock Services Pty Ltd ("Executive Bloodstock") (of which Mr Ranaldi is a director and in which he holds half the share capital). The Commission brings these proceedings partly for the benefit of Executive Bloodstock which was not a party to these proceedings until sued as second cross-respondent in the cross-claim, or in the alternative for Mr and Mrs Ranaldi neither of whom were original parties in the proceedings. Mr Ranaldi is now the first cross-respondent. Factual and Procedural Background 2 The following narrative of the factual background is taken from the pleadings. These proceedings concern the business of a lunch bar conducted at premises in Canning Vale under the name "Canning Vale Lunch Bar". I shall refer to that business as "the Business" and the premises upon which it has been conducted as "the Premises". The Premises form part of a larger piece of land which I will call "the Land" on which is also operated a service station business which I will call "the Mobil Service Station". It would appear that the Mobil Service Station is operated by interests associated with the respondents. Between June 1992 and February 1997 a Mr and Mrs Farrugio carried on the Business, that is, the Canning Vale Lunch Bar. They had the right to occupy the Premises for that purpose by reason of a lease dated 20 March 1992 from the then registered proprietors to a company known as Banquet Holdings Pty Ltd and a Deed of Assignment dated 15 June 1992 of that leasehold interest. On or about 29 January 1993, the second to seventh respondents, being various members respectively of the Parasiliti and Sciarretta families became registered as proprietors of the Land as tenants in common ("the Proprietors"). They thereby became the lessors of the Premises. The term of the lease was due to expire on 2 June 1997. However, the lease contained an option whereby the term of the lease could be extended for seven years from 2 June 1997 upon the lessee giving written notice to the lessors to that effect at least three months prior to, but not earlier than six months prior to, 2 June 1997 ("the Option"). According to the terms of the Option, written notice was required to be given by the lessee by 2 March 1997. 3 On 2 December 1996 Mr and Mrs Farrugio agreed to sell the Business to Executive Bloodstock for $205,000 allocated as to $145,000 for goodwill, $50,000 for plant and equipment and $10,000 for stock-in-trade. It was an express condition of that agreement that the Proprietors would consent to the assignment of the lease of the Premises to Executive Bloodstock. In or about January 1997 a request was made on behalf of Executive Bloodstock to the Proprietors for their consent to the assignment of the lease to it. Mr Neil Philip Gentilli, the eighth respondent (and third cross-respondent), was at all material times the solicitor for the Proprietors. Mr Gentilli, on behalf of the Proprietors, asked for financial information relating to Executive Bloodstock and its directors for assessment by and consideration of the Proprietors. That information was forthcoming and on or about 18 February 1997 the Proprietors consented to the assignment of the lease of the Premises to Executive Bloodstock. By a Deed of Assignment of Lease undated but stamped on 17 March 1997, entered into between and executed by the Proprietors as lessors, Mr and Mrs Farrugio as assignors, Executive Bloodstock as assignee and Mr and Mrs Ranaldi as guarantors, the lease was assigned from Mr and Mrs Farrugio to Executive Bloodstock. Settlement of the purchase of the Business by Executive Bloodstock took place on or about 26 February 1997. The applicant asserts (and this is in issue) that, on or about 28 January 1997, Mr Ranaldi on behalf of Executive Bloodstock orally advised the Proprietors that it intended to exercise the Option. On or about 18 March 1997 Executive Bloodstock purported to give written notice to the Proprietors of its intention to exercise the Option. Immediately thereafter, the Proprietors took the position (and told the Ranaldi interests) that the Option had not been validly exercised and that Executive Bloodstock would have no lease of the Premises after 1 June 1997. In the ensuing weeks, negotiations took place between the parties. It is the applicant's case that the proprietors "invoked a requirement" of payment of $70,000 as consideration for taking the steps necessary to vest a further seven year leasehold term in Executive Bloodstock. The first to seventh respondents deny this, and say that Mr Ranaldi approached them with a proposal that Executive Bloodstock pay initially $50,000 for a new term of lease. The respondents say that this is an important factual issue. Eventually the parties reached agreement in respect of such an arrangement. The arrangement was adopted to avoid the "key money" provisions of the Commercial Tenancy (Retail Shop) Agreement Act 1985 (WA). They involved the Proprietors granting a lease of the Premises to a company of which all the Proprietors except Mr Francesco Parasiliti were directors. The precise role of Mr Gentilli in relation to the arrangement is the subject of some contention. However, I think it is common ground that he advised the Proprietors about overcoming any problems under the Commercial Tenancy (Retail Shop) Agreement Act and prepared the necessary documentation. On 29 May 1997 the Proprietors executed a lease of the Premises in favour of the first respondent, Samton Holdings Pty Ltd ("Samton"). On or about the same day the Proprietors caused an assignment of that lease to Executive Bloodstock to be delivered to it for execution. Part of the terms of that document provided that it was conditional upon and would have no force and effect until payment by Executive Bloodstock to Samton of $50,000 before 2 June 1997. It also contained an agreement that Executive Bloodstock would pay Samton the sum of $70,000 by paying the sum of $50,000 on 2 June 1997 and the balance of $20,000 by ten equal consecutive monthly instalments from 3 July 1997. The Deed of Assignment was duly executed, Executive Bloodstock paid the sum of $50,000 to Samton and between June 1997 and May 1998 paid the balance of $20,000. 4 On one reading of paragraph 40(b) of the statement of claim, it might be thought that the applicant's position was that Executive Bloodstock had a legal right to the extended term by reason of the steps which Mr Ranaldi had taken in relation to the Option. This morning, senior counsel for the applicant made it clear that the applicant was not asserting that the respondents had, as he put it, "any legal obligation to permit exercise of the option". That coincides with the first to seventh respondents' position, namely that there was no oral or written exercise of the Option. 5 The applicant's case, in summary, is that at all material times Executive Bloodstock as tenant and/or Mr and Mrs Ranaldi as its sole shareholders were in a situation of special disadvantage compared with Samton which Samton and the Proprietors knew or ought to have known of. The applicant pleads that Samton, by imposing the condition that it be paid $70,000 for the assignment of the seven year term, engaged in conduct that was unconscionable within the meaning of the unwritten law within, in turn, the meaning of that expression in s 51AA of the Trade Practices Act 1974 (Cth) ("the Act"). The applicant claims that the Proprietors and Mr Gentilli were (in different ways) directly or indirectly knowingly concerned in or party to Samton's contravention of the Act. 6 The applicant seeks a wide range of orders. They include declarations that the respondents have contravened the Act in the manner which I have summarised above, injunctions restraining them in various ways, an order that the respondents compensate Executive Bloodstock and/or Mr and Mrs Ranaldi, publication of advertisements, findings of fact, the undertaking of compliance programmes and costs. 7 The applicant filed a statement of claim with its application and the matter has proceeded on pleadings. Samton and the Proprietors have filed a joint defence. Mr Gentilli has filed another defence. Broadly speaking, there is general agreement about the factual context which I have just outlined. There are some factual disputes. The major dispute is whether the first respondent engaged in conduct that was unconscionable. That is very much in issue, as is the alleged accessorial liability of the other respondents. It is not necessary, at this stage, to refer any further to Mr Gentilli's defence. I turn then to the defence filed on behalf of Samton and the Proprietors. As I have mentioned, it contains various denials some of which are of more importance than others. All of these respondents deny that Executive Bloodstock and/or Mr and Mrs Ranaldi were in a position of special disadvantage compared with Samton. I now set out certain further portions of their defence starting with paragraph 21.1: "21.1 neither Executive Bloodstock nor the Ranaldis (as mere guarantors under the Lease) had any rights, legitimate or otherwise, to obtain an extension of the Lease; and 21.2 the alleged lack of relative bargaining power pleaded in subparagraph 40(c) if it existed, which is not admitted, was a consequence of the failure of Executive Bloodstock to give notice in writing prior to 2 March 1997 to exercise the Option and not by reason of any of the matters pleaded in paragraph 38 of the statement of claim. . . . 24 Pursuant to the compromise Executive Bloodstock was granted a right to occupy the premises and carry on business therefrom for 7 years from 3 June 1997 ("the second assignment"). 25 But for the compromise the proprietors would have resumed possession of the premises as was their lawful entitlement and the proprietors would by the occupancy of the premises and the conduct of a business thereon have derived a financial benefit. 26 It would be unconscionable for the Court to grant the relief sought by the applicant as such would enable Executive Bloodstock to have had the benefit of the compromise and to have denied the proprietors the benefit pleaded in paragraph 25 above without any payment. 27 The respondents say further in answer to the application that their conduct could not have been unconscionable as alleged by reason of the following matters: 27.1 the proprietors were lawfully entitled to refuse Executive Bloodstock any extension of the Lease and to resume possession of the premises on expiration of the Lease; 27.2 the applicant alleges that such conduct would have caused Executive Bloodstock to suffer loss and damage in the order of $180,000; 27.3 by virtue of the compromise Executive Bloodstock was permitted to continue its business which it sold for $180,000 for goodwill and plant in June 1998; 27.4 by reason of the respondents' alleged unconscionable conduct Executive Bloodstock was advantaged to the extent of $110,000 plus the profits it derived in the conduct of the business from June 1997 to June 1998." 8 On 25 May 1999 Samton and the Proprietors filed a cross-claim against Mr Ranaldi as first cross-respondent, Executive Bloodstock as second cross-respondent and Mr Gentilli as third cross-respondent. It is not necessary for me to say anything about their cross-claims against Mr Gentilli, other than to say they are based on alleged breach of contract and/or duty of care. By their cross-claims against Mr Ranaldi and Executive Bloodstock, the Proprietors seek indemnity from them in respect of any liability found due by the cross-claimants to the Commission, an account of any benefits received by the first and/or second cross-respondents by their conduct of the Business and its sale over and above the fair market value of the plant used in the Business as at 2 June 1997, and an indemnity in respect of their costs in defending the applicant's claim. It will be remembered that the applicant is the Commission. The cross-claimants also seek their own costs of the cross-claim. The paragraphs which the Commission, Executive Bloodstock and Mr Ranaldi seek to have struck from the cross-claim read as follows: "1. The cross claimants repeat their defence in the above proceedings a copy of which is attached hereto ("the defence"). 2. Pursuant to the compromise and in performance of their obligations thereunder the Proprietors instructed the third cross-respondent to prepare the lease and second assignment as pleaded at paragraphs 33 and 34 of the statement of claim by which the Proprietors granted to the first cross claimant a lease for 7 years which was assigned to the second cross respondent and thereby deprived the Proprietors of a right of possession. 3. Implicit in the compromise and the second assignment was a representation by the second cross respondent that it accepted the second assignment in settlement of its asserted right to compel the Proprietors to permit exercise of the Option and that no claim would be asserted by the second cross respondent to recover the $70,000 it had agreed to pay. 4. In reliance upon the representation pleaded in paragraph 3 above the Proprietors granted the second assignment and did not themselves take possession of the demised premises. 5. It would be unconscionable for the second cross respondent to be permitted to have the benefit of the second assignment whilst recovering from the cross respondents the monies paid therefor. 6. The representations made by the first and second cross respondents pleaded in paragraph 14 of the defence were made in the course of trade and commerce." The Commission's Contentions in its Strike-Out Motion 9 In relation to the contention that the cross-claim discloses no reasonable cause of action, the Commission accepts that the classic test is whether the case sought to be made in the cross-claim is so clearly untenable that it cannot possibly succeed: General Steel Industries Limited v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129. The Commission also accepts that only in the most exceptional cases will an action be struck out on this ground. The Commission says that this is such an exceptional case. The Commission says that the alleged representation pleaded as being an "implicit representation" made by Executive Bloodstock in accepting the assignment of the new lease that it would not make any claim to recover the $70,000 is "… no more than the corollary of the existence of the assignment. It has no independent existence". The Commission contends that the representation should not be implied, or relied upon in circumstances where the alleged representor has entered into the contractual arrangement by reason of unconscionable conduct on the part of the representee as alleged by the Commission against Samton and the Proprietors. The Commission describes that allegation as "the primary allegation". If, so it is put, the primary allegation succeeds, then the cross-claimants will be unable to raise their cross-claim. If the primary allegation fails however, the Commission says that the assignment of the new lease will stand. The Commission contends that the issue sought to be raised on the cross-claim is properly to be determined in what it describes as "the main action", that there is nothing to be done by the cross-claim and it cannot possibly succeed. The Commission submits that the cross-claim is not simply weak but that it is hopeless and no amendment could cure the defect. 10 Next, and in the alternative, the Commission submits that the cross-claim against Mr Ranaldi and Executive Bloodstock is "totally unnecessary" and would have the tendency to prejudice, embarrass and delay the trial. Further or alternatively, the Commission claims that the cross-claim against Mr Ranaldi and Executive Bloodstock is vexatious having been instituted with the intention of annoying or embarrassing them or brought for collateral purposes not to have the Court adjudicate on the issues to which they give rise or (once again) being utterly hopeless. Finally, the Commission claims that the relevant cross-claim is an abuse of process, being one which could be brought by any party procuring a contract by unconscionable conduct, duress, extortion or fraud so as to legitimise the contract thus secured. Contentions of the Cross-Respondents in their Strike-Out Motion 11 The first and second cross-respondents adopted the submissions put forward on behalf of the Commission. The Cross-Claimants' Contentions 12 The cross-claimants disagree with the assertion of the Commission and the cross-respondents that the implicit representation pleaded in the cross-claim has no independent existence. They rely upon Crooks Nominees Pty Ltd v Verge (1995) 15 WAR 343 at 358F-G. In that case Steytler J followed a Full Court decision of this Court in Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 at 487 in holding that if conduct is constituted by representations which are incorporated as terms of an agreement, those representations, if false, are capable of constituting a contravention, in those cases of s 52 of the Act. The cross-claimants say that even if the Commission is successful in establishing unconscionable conduct on the part of Samton, they (the cross-claimants) are still entitled to relief as against Mr Ranaldi and Executive Bloodstock whereby they should be obliged to give up what, on the cross-claimants case, they gain from the transaction. This is put on the basis of the equitable principles explained by the High Court of Australia in Maguire v Makaronis (1997) 188 CLR 449. The cross-claimants say that the Commission's contention based on the fact that the cross-claim could be brought by any party in their position is hardly an answer. They say that if the claim can be fairly pleaded then that is the end of it. They add that it is rare in a case of unconscionable conduct for the alleged "victim" to have instigated the damage which on their case is sought to be retrieved. 13 Mr Metaxas, counsel for the cross-claimants, says that they have pleaded an estoppel. Whether that is the case can, I think, be left for another day. Mr McKerracher in reply, I think, tentatively acknowledged that an estoppel might be found within the matters pleaded in the cross-claim. For the purpose of today's proceedings I do not think that much depends on that question. As I understand the relevant paragraphs of the cross-claim, particularly in view of the reference to trade and commerce in paragraph 7, the cross-claimants are relying on the provisions of Part IVA of the Act and the general law of unconscionablity. My Reasoning 14 I do not of course have to decide anything today on a final basis. All I have to decide is whether the claims in the cross-claim which are under challenge are doomed to failure or are otherwise prejudicial, frivolous, vexatious or an abuse of process. 15 I think that it is arguable that Mr Ranaldi and his company Executive Bloodstock (through him) engaged in conduct before entering into the compromise contract which represented that (as the cross-claimants plead) Executive Bloodstock accepted the second assignment in settlement of its asserted rights to compel the Proprietors to permit exercise of the Option and that no claim would be asserted by it to recover the $70,000 it had agreed to pay. I think it is also arguable that such a representation was incorporated into the terms of the compromise agreement and became relevant conduct in the manner referred to in the two cases to which I have referred. The cross-claimants plead that they relied on such representations and they seek indemnity against Mr Ranaldi and Executive Bloodstock, neither of whom (as I have mentioned) were originally party to the application. The cross-claimants seek to argue that if the applicant is successful in recovering compensation against them on behalf of Mr Ranaldi and/or Executive Bloodstock, then the latter ought to give up what they gained from the transaction. I think it is possible to imagine a situation in which the Commission might be successful in some part of its proceedings (for example obtaining orders for publication of advertisements, compliance programmes and the like) but not an order for compensation, or there might be an order for partial compensation. Alternatively, it may transpire that there is a substantial issue as between the cross-claimants on the one hand and Mr Ranaldi and Executive Bloodstock on the other as to how much benefit, if any, the latter derived from the transaction as a whole. 16 I think that it is important to bear in mind how this matter of compensation for Mr and Mrs Ranaldi and Executive Bloodstock comes before the court. The relevant provisions of the Act are s 87(1A) and s 87(1B) which I incorporate into these reasons. The commission has invoked those and other sections of the Act. I have mentioned the other remedies, apart from compensation for the first two cross-respondents. The orders which ss 87(1A) and 87(1B) speak of are orders against, in this case, the respondents for compensation to be paid to those cross-respondents. 17 Not surprisingly, those subsections say nothing about the making of orders against any person on whose behalf the Commission may bring proceedings for compensation. Nevertheless, the width of the language in those sub-sections is such that in an ordinary case of a person suffering loss, but deriving some benefit, orders could be moulded to do justice to the parties. By an ordinary case I mean one where no party is seeking to allege a degree of wrongdoing on the part of what might be described as "the victim". But that is precisely what the cross-claimants allege here. 18 The cross-claimants, on their pleaded version of what happened, seek orders as against the first two cross-respondents in the event that they are ordered to pay compensation. They seek an account of any benefits which the first two cross-respondents may have received and an indemnity in respect of any liability found due by the cross-claimants to the Commission. On their case, they say that even if they are found to have contravened the Act, there are circumstances which entitle them to financial and other relief by way of orders against the first and second cross-respondents. 19 I do not think that it is sufficiently clear that if the Commission is successful in its application, then that will dispose of the claims which the cross-claimants seek to bring. It may well turn out at trial that there is a complete overlap of the issues and the relief sought, but I do not think that, at this stage, that can be said to be a foregone conclusion. The Commission relies on one species of what is said to be unconscionable conduct. The cross-claimants point to the conduct of the first and second cross-respondents which they contend amounts to matters not simply of defence, but give rise to positive rights as between them and the first and second cross-respondents, being persons who would not otherwise be parties to the proceedings and against whom it would in all probability not otherwise - by otherwise I mean in their absence as parties - be appropriate or just to make any findings as to any equitable disentitlement, least of all contraventions by them of the Act. 20 I take into account that, so far as it is incorporated into the Act, this is a fairly new area of law where it cannot be said that the principles are well settled. This of course includes the area of remedies. I do not think that the cross-claim would have the tendency to prejudice, embarrass or delay the trial. It seems to me that most of the evidence in the cross-claim will be likely to be relevant in the application itself. Neither the Commission nor the cross-respondents have satisfied me that the cross-claimants have instituted the cross-claim with the intention of annoying or embarrassing the cross-respondents or for any collateral purpose not involving this Court adjudicating on the issues to which they give rise. 21 I do not think that the relevant cross-claims so clearly fail the well-known tests as to justify their being struck out summarily. I think that, on the present state of the law, the cross-claimants are entitled to have their day in court against these two cross-respondents with whom they dealt and who would not otherwise be parties to the proceedings. The strength of their cross-claim is, of course, an entirely different matter, involving questions of fact and law which will need to be resolved at the trial. 22 The conclusion is that both motions should be dismissed. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment of Justice Carr. Associate: Dated: Counsel for the Applicant: Mr N.W. McKerracher QC, with him Mr T.J. Carey Solicitor for the Applicant: Australian Government Solicitor Counsel for the first and second cross-respondents: Mr P.C. Doherty Solicitor for the first and second cross-respondent: Messrs Minter Ellison Counsel for the first to seventh respondents: Mr A. Metaxas Solicitor for the first to seventh respondents: Messrs Arthur Metaxas & Co Counsel for the eighth respondent: Ms J.E. Bartlett Solicitor for the eighth respondent: Messrs Jackson McDonald Date of Hearing: 15 July 1999 Date of Judgment: 15 July 1999