FEDERAL COURT OF AUSTRALIA SSY Holdings Pty Ltd v Manella Designs Pty Ltd (as Trustee for The Mannella Designs Trust) [2012] FCA 475 Citation: SSY Holdings Pty Ltd v Manella Designs Pty Ltd (as Trustee for The Manella Designs Trust) [2012] FCA 475 Appeal from: [2011] ATMO 38 Parties: SSY HOLDINGS PTY LTD (ACN 141 653 974) v MANELLA DESIGNS PTY LTD (AS TRUSTEE FOR THE MANNELLA DESIGNS TRUST) (ACN 118 637 586) File number(s): VID 524 of 2011 Judges: MURPHY J Date of judgment: 4 May 2012 Catchwords: No catchwords Legislation: Federal Court of Australia Act 1976 s 43(3) Federal Court Rules r 40.7(1)(d) Cases cited: Attorney-General v Wylde (1946) 47 SR (NSW) 99 Bray v Dye (No 2) (2010) 27 VR 324 Doulaveras v Daher [2009] NSWCA 58 Doulman v ACT Electronic Solutions Pty Ltd [2011] FMCA 232 FMP Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 Knight v FP Special Assets (1992) 174 CLR 178 Re Bendeich (No 2) (1994) 53 FCR 422 Sitzler Savage Pty Ltd v Northern Mining Holdings Pty Ltd [2012] VSC 104 Yonge v Toynbee [1910] 1 KB 215 Date of hearing: 4 May 2012 Place: Melbourne Division: GENERAL DIVISION Category: No Catchwords Number of paragraphs: 38 Counsel for the Applicant: Mr D Bongiorno Solicitor for the Applicant: Ms K Moorhouse Perks Counsel for Monaco Lawyers: Mr J Tsalanidis Solicitor for Monaco Lawyers: Monaco Lawyers IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 524 of 2011 ON APPEAL FROM THE REGISTRAR OF TRADE MARKS BETWEEN: SSY HOLDINGS PTY LTD (ACN 141 653 974) Applicant AND: MANELLA DESIGNS PTY LTD (AS TRUSTEE FOR THE MANNELLA DESIGNS TRUST) (ACN 118 637 586) Respondent On the Interlocutory Application BETWEEN: SSY HOLDINGS PTY LTD (ACN 141 653 974) Applicant AND: MONACO LAWYERS Respondent JUDGE: MURPHY J DATE OF ORDER: 4 MAY 2012 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application that Monaco Lawyers pay the costs of Mannella Designs Pty Ltd in the proceeding herein be dismissed. 2. Mannella Designs Pty Ltd pay the costs of Monaco Lawyers of this application on a party-party basis. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 524 of 2011 ON APPEAL FROM THE registrar of trade marks BETWEEN: SSY HOLDINGS PTY LTD (ACN 141 653 974) Applicant AND: MANELLA DESIGNS PTY LTD (AS TRUSTEE FOR THE MANNELLA DESIGNS TRUST) (ACN 118 637 586) Respondent On the Interlocutory Application BETWEEN: SSY HOLDINGS PTY LTD (ACN 141 653 974) Applicant AND: MONACO LAWYERS Respondent JUDGE: MURPHY J DATE: 4 MAY 2012 PLACE: MELBOURNE REASONS FOR JUDGMENT Introduction 1 This matter relates to an application by the respondent, Mannella Designs Pty Ltd (as trustee for the Mannella Design Trust), for an order that Monaco Lawyers, the former solicitors for the applicant SSY Holdings Pty Ltd, pay the costs incurred by the respondent in proceedings No VID 524 of 2011. The facts 2 The matter has a somewhat complex factual history. It is necessary that some of this be set out in order to properly understand the basis of the application and my ruling. I note however that my recounting of this history is based on a review of statutory declarations and affidavits filed by the parties, which have not been tested in cross-examination. Most of the finer detail is of no great significance but I must accept the possibility that in delivering this extempore judgement I may make a factual error, for which I now apologise. 3 By a Heads of Agreement entered into on 24 February 2010 a consortium of 14 parties entered into a commercial arrangement whereby SSY Holdings Pty Ltd ("SSYH") became the holding company for all assets and intellectual property of a new business. 4 The terms of the Agreement included that Soda Kids Holdings Pty Ltd controlled by Mrs Josephine Mannella would transfer its retail children's clothing business and the Soda Kids trademarks to SSYH and Mrs Ya Fang Zheng would likewise transfer the Australian rights to her China based clothing labels. Another new company, SSY Investments Pty Ltd ("SSYI") would operate the new business to be managed by Mrs Mannella and a Mrs Bussolaro. Mrs Zheng was to meet all the costs of the new business including the costs of an aggressive growth campaign to set up a large number of children's clothing stores under the Soda Kids brand. 5 Mrs Zheng paid $500,000 to Mrs Mannella. Mrs Zheng describes that amount as a loan while Mrs Mannella describes it as part of an agreement for Mrs Zheng to purchase the wholesale business of Soda Kids. 6 The directors of SSYH are Mrs Zheng who holds 51% of the shares through Ya Fang Duo Investments Pty Ltd, Mr Yao who holds 25% of the shares through Jin and Yao Investments Pty Ltd, and Mrs Mannella who has what appears to be a half interest in 24% of the shares through a joint shareholding with Mrs Bussolaro in J & D Fashion House Pty Ltd. 7 On 29 March 2010 Mrs Mannella signed an agreement to assign the Soda Kids Trademarks from Mannella Designs Pty Ltd ("Mannella Designs") to SSYH ("the Trademark Assignment") and faxed that document to Monaco Lawyers, the solicitors for SSYH. 8 The Agreement then unravelled and Mrs Mannella's solicitor purported to terminate it by letter on 21 May 2010. 9 On 25 June 2010 Monaco Lawyers, in reliance on the Trademark Assignment, filed an application to Record an Assignment of a Trade Mark with IP Australia so as to record the assignment of the Soda Kids trademarks to SSYH. IP Australia recorded that change in ownership on 6 July 2010. 10 On 27 July 2010 Mrs Mannella wrote to IP Australia objecting to IP Australia recording the assignment and requesting that the ownership details be changed back to Mannella Designs. In order to determine the correct ownership of the trademarks, the Delegate of the Registrar of Trade Marks ("the Delegate") gave Mrs Mannella and SSYH the opportunity to file evidence and be heard. 11 To the surprise of SSYH Mrs Mannella submitted that although a shareholder of Mannella Designs, she was not a director and did not have any authority to execute the Trademark Assignment. Her husband Mr Rocco Mannella is the sole director and, while he conceded that he was aware of the Agreement reached and that it included an obligation to transfer the Soda Kids trademarks to SSYH, he contended Mrs Mannella had no authority to sign it. 12 While expressing concerns as to the conduct of Mrs Mannella, the Delegate determined that the assignment to SSYH was not adequately established. The register was corrected to reflect Mannella Designs' continuing ownership of the Soda Kids trademarks. Procedural history 13 On 1 June 2011 SSYH commenced an appeal in this Court seeking to set aside the decision of the Delegate. 14 On 16 March 2012 SSYH discontinued its appeal by agreement with Mannella Designs as to costs. Although the order for discontinuance was made on the basis that SSYH pay Mannella Designs' costs, Mannella Designs promised not to enforce that costs order. The apparent basis for the existence of the costs order against SSYH was so as to assist Mannella Designs in its pursuit of its costs from the former solicitors for SSYH, Monaco Lawyers. 15 On 13 March 2012 Mannella Designs filed an application seeking an order that Monaco Lawyers be ordered to pay the costs of Mannella Designs in defending these proceedings. The contentions of Mannella Designs 16 Mannella Designs relies first on rule 40.7(1)(d) of the Federal Court Rules which provides: A party who has reasonable cause to believe that additional costs have been incurred because of the party's lawyer's misconduct, may apply to the Court for an order: … (d) that the lawyer indemnify any other party against any costs payable by that party. … Misconduct is defined to include where a lawyer incurs costs improperly or without reasonable cause. 17 It also relies on s 43(3) of the Federal Court of Australia Act 1976 (Cth) which provides a broad discretion to the Court to award costs against a party's lawyer personally. The principles set out in Knight v FP Special Assets (1992) 174 CLR 178 ("Knight") make it clear that the Court has a broad power to award costs against non-parties, such as Monaco Lawyers. The Court in Knight noted per Mason CJ and Deane J at 192 that there are "a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party." 18 The question is whether the Court ought exercise its discretion to order costs against Monaco Lawyers in the circumstances of this matter. 19 The points made by Mannella Designs in favour of an order include the following: (a) SSYH has three directors namely Mrs Zheng, Mr Yao, and Mrs Mannella; (b) SSYH also has three corporate shareholders namely: (i) Ya Fang Duo Pty Ltd apparently controlled by Mrs Zheng holding 51% of the shares; (ii) Jin and Yao Investments Pty Ltd apparently controlled by Mr Yao holding 24% of the shares; (iii) J & D Fashions Pty Ltd apparently controlled by Mrs Mannella and Mrs Bussolaro holding 25% of the shares; (c) SSYH had no constitution and accordingly the "replaceable rules" under the Corporations Act applied to the conduct of the affairs of the company; (d) The replaceable rules require that the business of the company be managed by the directors, that Directors' Meetings be called by giving notice to the other directors, and that the directors may pass a resolution without meeting if they all sign a document containing that statement. These matters are all common ground. 20 Most importantly, it is common ground that no Directors' Meeting was called to authorise the institution of the appeal or to instruct Monaco Lawyers to bring it, and that no resolution signed by all directors authorising institution of the appeal or the instruction of Monaco Lawyers was made. Mrs Mannella also deposes that it was known by Mr Stefano Del Monaco of Monaco Lawyers that Mrs Mannella was a director of SSYH as he was involved in the negotiation of the Agreement. Mr Del Monaco did not swear an affidavit in opposition. 21 On this basis Mannella Designs contends that Monaco Lawyers acted without proper instructions in bringing proceedings on behalf of SSYH, and should personally meet the costs incurred by Mannella Designs in defending the litigation. 22 In submissions Mannella Designs noted that the principles in relation to ordering costs against a solicitor who commences proceedings without instructions were recently discussed by Judd J in Bray v Dye (No 2) (2010) 27 VR 324 where his Honour noted at [67]: The "principle" is that legal practitioners, usually the solicitors, who have improperly put forward a person as a plaintiff, are to be substituted for that plaintiff and must pay the costs that the plaintiff has been ordered to pay to the defendants. 23 Mannella Designs also relied on Sitzler Savage Pty Ltd v Northern Mining Holdings Pty Ltd [2012] VSC 104 at [195] per Associate Justice Zammitt where her Honour held: …it is imperative that solicitors observe the professional requirement and obligation to the Court not to institute or conduct litigation without authority. To take such a step will result in an order that the solicitor pay the costs on an indemnity basis. 24 Counsel for Mannella Designs referred to the discussion of the authorities in Doulman v ACT Electronic Solutions Pty Ltd [2011] FMCA 232 at [79] to [83]. For example, in Yonge v Toynbee [1910] 1 KB 215 Swinfen-Eady J noted at 233-4: I wish to add that in the conduct of litigation the Court places much reliance upon solicitors, who are its officers; it issues writs at their instance, and accepts appearances for defendants which they enter, as a matter of course, and without questioning their authority; the other parties to the litigation also act upon the same footing, without questioning or investigating the authority of the solicitor on the opposite side; and much confusion and uncertainty would be introduced if a solicitor were not to be under any liability to the opposite party for continuing to act without authority in cases where he originally possessed one…It is in my opinion essential to the proper conduct of legal business that a solicitor should be held to warrant the authority which he claims of representing a client; if it were not so, no one would be safe in assuming that his opponent's solicitor was duly authorised in what he said or did, and it would be impossible to conduct legal business upon the footing now existing; and, whatever the legal liability may be, the Court, in exercising the authority which it possesses over its own officers, ought to proceed upon the footing that a solicitor assuming to act, in an action, for one of the parties to the action, warrants his authority. 25 In Attorney-General v Wylde (1946) 47 SR (NSW) 99 at 109, Davidson J sitting in the Full Court said: Primarily it is essential that a suit should be instituted and prosecuted by or on behalf of a person to whom recourse may be had for indemnity in respect of costs in case of failure to support his case, otherwise the defendant might suffer severe prejudice. Necessarily, therefore, solicitors act at their peril if they assume to commence or continue litigation without authority. Consideration 26 Notwithstanding the submissions made on behalf of Mannella Designs I consider that there are some powerful reasons why my discretion to order costs personally against Monaco Lawyers should not be exercised. 27 As was noted by the NSW Court of Appeal in FMP Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 in which Basten JA with whom Beazley and Giles JJA agreed held at [214]: The criteria identified in Knight v FP Special Assets should not ultimately be treated as separate and independent factors. Each requires an evaluative assessment of factors which will clearly tend to interact. Nor should it be forgotten that the power is only to be exercised in exceptional cases. (Emphasis added) 28 Further, in Re Bendeich (No 2) (1994) 53 FCR 422 per Drummond J at 426 to 427 his Honour noted: As the Chief Justice observed in Bent v Gough at 207, the power to award costs against a solicitor personally involves special considerations. The cases show that this jurisdiction must be exercised with caution. … Lawyers should know that, so long as they are not guilty of either professional misconduct or gross, as opposed to mere, negligence in the way they conduct their client's case, they will not be exposed to any personal liability to pay either the costs of their own client or those of the opposing litigant. … …I must be satisfied, first, that [the negligent solicitor] has committed a breach of his duty to the Court to conduct the litigation on behalf of his client…with due propriety; secondly, that that breach involves conduct more than mere negligence and amounts, at the very least, to gross negligence… 29 The case before me is quite different from many of the cases relating to the institution of proceedings on behalf of a plaintiff without proper authority. It is clear from the affidavits filed by, or on behalf of, two of the three directors of SSYH that they were in favour of the institution of the appeal and the retainer of Monaco Lawyers to conduct it. Mr Yao and Mr Collingwood (who held a General Power of Attorney for Mrs Zheng) have both deposed that they provided instructions to Monaco Lawyers to institute the appeal. The documents exhibited to the affidavit of Mr Collingwood also demonstrate that these two directors acted in pursuit of SSYH's interests in so doing rather than for any other purpose or in favour of a "real party". I note also that both directors swore affidavits in support of the appeal which is another very potent indicator of their support for the institution of proceedings. 30 It is conceded by counsel for Monaco Lawyers that, because Mrs Mannella was not given notice of it, a meeting held on 26 May 2011 between Mr Yao and Mr Collingwood (as Mrs Zheng's Attorney) to discuss the institution of the appeal was not a valid Directors Meeting. No attempt is made to portray the decision made at that meeting to institute the appeal and to retain Monaco Lawyers as a resolution properly made by SSYH. 31 However, in the exercise of my discretion as to whether to order costs against Monaco Lawyers personally this meeting is a relevant consideration. The decisions made at the meeting illustrate that two of the three directors of SSYH, representing 75% of its shareholders, then supported the institution of the appeal and the retainer of Monaco Lawyers to do so. 32 Accepting that it is dangerous to speculate as to the result of the meeting had it been properly notified and conducted, it is clear that Mrs Mannella was by that time clearly "at war" with the other two directors. She had just completed the first round of litigation before the Delegate in relation to ownership of the trademarks and was still embroiled in a dispute in the County Court of Victoria over $500,000 paid to her by Mrs Zheng. Mrs Mannella was very much in the minority in SSYH both as a director and as a shareholder. She did not even enjoy the continued support of Mrs Bussolaro in relation to the joint shareholding of J & D Fashion House. Further, there must be a question as to whether Mrs Mannella would have been able to participate in any meeting which was properly called because by then she had a clear conflict of interest in relation to the Soda Kids trademarks. She was fighting to retain ownership of those trademarks by Mannella Designs against the interest of SSYH of which she was a director. 33 This is quite different to the circumstances pertaining, for example, in Sitzler Savage. In that matter a director who was the controlling shareholder was clearly opposed to the institution of proceedings in the name of the company by a director who was a minority shareholder. Here, counsel for Mannella Designs concedes that the majority of the directors and the majority of shareholders of SSYH were in favour of the appeal and the retainer of Monaco Lawyers. 34 Another difference is that in Sitzler Savage the minority shareholder purported to bring the court proceedings in the company's name against strenuous objections of the majority shareholder and other parties as to his power to do so. The failure of the solicitors to respond appropriately in the face of these objections was a factor in the decision of the Court to order costs personally against the solicitors. In the case before me no objection was taken until after the case had been resolved. Mannella Designs did not object even though the failure of SSYH to hold a directors meeting so as to resolve to institute the appeal must have been well known to Mrs Mannella from the outset. It is established that the accepted way to challenge a solicitor's retainer is by summons in the proceeding rather than at trial, and that the party challenging the authority has the burden of proof: Doulaveras v Daher [2009] NSWCA 58 at [160]. 35 I note that had Mannella Designs made application to stay these proceedings at the appropriate time most of the expense would have been avoided, or a meeting of SSYH may then have been called to ratify the proceeding nunc pro tunc. 36 A remark to similar effect is made by the court in Knight where Mason CJ and Deane J held at 191: The availability of an order for security for costs at an earlier stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party… 37 For these reasons I refuse to order that Monaco Lawyers pay the costs of Mannella Designs in defending the proceedings herein. 38 The usual rule is for costs to follow the event. Counsel for Monaco Lawyers submits that there is no reason to depart from the usual course. Counsel for Mannella Designs did not argue for a departure from the usual rule. I order that Mannella Designs meet the costs of Monaco Lawyers of this application on a party-party basis. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy. Associate: Dated: 14 May 2012