Industrial Court of New South Wales CITATION: Master Education Services Pty Ltd and Ors v Ferfolia (No 2) [2009] NSWIRComm 82 FIRST APPELLANT Master Education Services Pty Ltd SECOND APPELLANT Robert Athol Ollis PARTIES: THIRD APPELLANT Suzanne Gai Ollis RESPONDENT Vicki Anne Ferfolia FILE NUMBER(S): IRC 352 of 2009 CORAM: Staff J APPEAL - Unfair contract - Stay granted on conditions - Stay dissolved - Application for security of costs - Principles - Two appellants natural persons - Order for security of costs CATCHWORDS: COSTS - Security for costs against appellants - Appeal - Unfair contract - Stay granted on conditions - Stay dissolved - Principles - Natural persons - Order for security of costs LEGISLATION CITED: Corporations Act 2001 (C'th) Industrial Relations Act 1996 Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 Idoport Pty Limited & Anor v National Australia Bank Limited & 8 Ors; Idoport Pty Limited & Market Holdings Pty Limited v Donald Robert Argus; Idoport Pty Limited "JMG" v National Australia Bank Limited [35] [2001] NSWSC 744 Ingot Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd [2002] NSWSC 609 CASES CITED: Jazabas Pty Ltd & Ors v Haddad & Ors [2007] NSWCA 291 K & J Acquisitions Pty Ltd & Anor v Manauzzi & Anor [2009] NSWSC 279 Robert Ferfolia and anor v Master Education Services Pty Ltd. Application under s 106 of the Industrial Relations Act 1996 [2009] NSWIRComm 25 Robert Mario Ferfolia and anor v Master Education Services Pty Ltd & ors [2009] NSWIRComm 17 Williamson v Service Corporation International (Australia) Pty Limited [2003] 130 IR 247 HEARING DATES: 21 May 2009 DATE OF JUDGMENT: 2 June 2009 APPELLANTS Mr V Bedrossian of counsel Solicitor: Mr P Meehan Meehans Solicitors LEGAL REPRESENTATIVES: RESPONDENT Mr SJ Burchett of counsel Solicitor: Mr RA Mason Mason Lawyers JUDGMENT: - 1 - INDUSTRIAL COURT OF NEW SOUTH WALES CORAM: STAFF J Tuesday, 2 June 2009 Matter No IRC 352 of 2009 MASTER EDUCATION SERVICES PTY LTD & ORS v VICKI ANNE FERFOLIA (NO 2) Application by Master Education Services Pty Ltd and others for leave to appeal and appeal against a judgment and orders given by Justice Haylen on 24 February 2009 and 4 March 2009 in matter No IRC 4847 of 2004 JUDGMENT [2009] NSWIRComm 82 1 On 24 February 2009, Haylen J determined an application pursuant to s 106 of the Industrial Relations Act 1996 ("the Act") in favour of Vicki Anne Ferfolia ("the respondent") to these proceedings. His Honour found that a franchise agreement between the parties, which involved the provision of student tuition, was unfair: Robert Mario Ferfolia and anor v Master Education Services Pty Ltd & ors [2009] NSWIRComm 17. 2 On 4 March 2009, his Honour made agreed orders in chambers: Robert Ferfolia and anor v Master Education Services Pty Ltd. Application under s 106 of the Industrial Relations Act 1996 [2009] NSWIRComm 25. 3 On 17 March 2009, Master Education Services Pty Ltd, Robert Athol Ollis and Suzanne Gai Ollis ("the appellants"), filed a notice of appeal against his Honour's judgment and sought a stay of the orders made by his Honour. 4 On 27 April 2009, I determined the appellants' application for a stay of his Honour's orders. I granted a stay upon the following conditions: 1. The judgment of his Honour Haylen J given on 27 February 2009 and 4 March 2009 in Matter No IRC 4847 of 2004 is stayed pending determination of the appeal. 2. The appellant shall deposit the sum of $150,000 into a controlled monies account established by the solicitors for the appellant and the solicitors for the respondent within 14 days of today. 3. A solicitor from the appellants' firm of solicitors and a solicitor from the respondent's firm of solicitors shall act as trustees to this account. 4. An amount of $40,000, being the estimate of the costs that the respondent will incur in defending the appeal, shall be paid from this account to the respondent within 21 days of today. 5. The solicitor for the appellant and the solicitor for the respondent will each advise the Industrial Registrar in writing within 28 days of today that orders 2, 3 and 4 of these orders have been complied with. 6. The balance of the money paid into the controlled monies account shall not be paid out pending further order of this Court. The costs of today's stay application will be reserved. Motion for security of costs 5 On 27 April 2009, the respondent filed a notice of motion which sought a security of costs order. In light of the orders that I made in respect of the stay, Mr SJ Burchett of counsel, who appeared for the respondent, requested that the notice of motion only be dealt with in circumstances where the appellants failed to comply with the orders made in respect of the stay. Mr V Bedrossian of counsel, who appeared for the appellants, accepted that if the orders made in respect of the stay were not complied with, then the stay should automatically dissolve. 6 The respondent has sought to exercise the leave granted to it to have the notice of motion heard and determined in circumstances where the appellants have failed to comply with the orders made in respect of the stay. The respondent sought the following orders: 1. That within 14 days, the appellants in these proceedings give security for the respondent's costs of these proceedings, by way of either: (a) paying into Court the sum of $39,303; or (b) providing to the Court a bank guarantee in the sum of $39,303. 2. Pending the posting of security the appeal be stayed. 3. In the event of failure to post security within the time stipulated, the appeal stand dismissed. 4. The respective costs of the parties to this application be their respective costs in the proceedings. The evidence 7 The grounds and reasons relied upon were those set out in two affidavits of Ross Andrew Mason sworn on 24 April and 20 May 2009. Mr Mason is the respondent's solicitor, who was not required for cross-examination. Mr Mason's evidence included the following: (i) the respondent's costs of the appeal were estimated to be approximately $39,303. A document setting out the basis of this calculation was annexed to the affidavit; (ii) the respondent resides at a property in Victoria. A title search disclosed that the property was purchased on or about 22 October 2008 for $325,000. A loan of $51,000 from the Perpetual Trustee Co Ltd was obtained to assist in the purchase. An additional loan was provided, as referred to in a caveat on the title in the sum of $19,047.41. The respondent has credit card liabilities of approximately $52,000. Copies of credit card statements confirming such liabilities were annexed to the affidavit; (iii) the respondent owes her solicitors the sum of $152,319 for legal services performed in the period up to 31 March 2009 in relation to these proceedings and other proceedings commenced by the first appellant against the respondent in the Supreme Court; (iv) the total liabilities of the respondent are $274,490.90; (v) the respondent's sole source of income is a DSS pension of approximately $489 per fortnight; (vi) the respondent is unable to pay her existing liabilities or fund these proceedings without either; a) recovering the judgment in the original proceedings in the Industrial Relations Commission, or b) selling her property in Victoria. (vii) the respondent is prepared to provide to the appellants a mortgage over her property in Victoria to secure the judgment debt and her costs of these proceedings; (viii) prior to the commencement of these proceedings, the first appellant commenced proceedings against the respondent in the Supreme Court of New South Wales seeking, inter alia, to enforce the restraint of trade provisions in the franchise agreement between the first appellant and the respondent. The Supreme Court proceedings are still pending and will not be disposed of until after these proceedings have been determined; (ix) in the Supreme Court proceedings, each of the second and third appellants have provided security for costs; (x) an Australian Securities and Investments Commission search of the first appellant discloses that the second and third appellants are directors of the first appellant. They own, as joint tenants, a property at Austinmer, New South Wales; (xi) the first appellant has been, or is, involved in proceedings with two other franchisees, namely, Ketchell and Duchesne. (xii) the proceedings with Mrs Ketchell; a) were originally determined by the Local Court; b) appeals then followed through the Supreme Court of New South Wales, then the New South Wales Court of Appeal and ultimately to the High Court; c) [Mrs Ketchell] was successful in the New South Wales Court of Appeal and obtained an order that the first appellant pay her costs of the appeal and of the appeal to the Supreme Court; d) it was a condition of the granting of leave to appeal to the High Court that the first appellant pay the costs of Mrs Ketchell of and incidental to the appeal to the High Court and that the first appellant not seek to disturb the costs orders in favour of Mrs Ketchell made in the New South Wales Court of appeal; and e) accordingly, the first appellant was required to pay Mrs Ketchell's costs of the Supreme Court proceedings, the New South Wales Court of Appeal proceedings, the High Court proceedings and also required to pay costs of defence of Local Court proceedings. (xiii) the proceedings involving Duchesne were recently settled before the Industrial Relations Commission. 8 Mr Mason annexed to his second affidavit copies of Australian Securities and Investments Commission historical personal extract searches in respect of the second and third appellants and a company search in respect of Master Coaching (Franchising) Pty Ltd. 9 The appellants called no evidence. They relied upon the orders made by Walton J, Vice-President on 1 April 2009, which required the respondent to file any notice of motion seeking a security for costs by no later than Friday 3 April 2009. Submissions of the parties 10 In summary, Mr Burchett submitted that the Court has power to order security to be posted for the costs of the proceedings, including the appeal, either in relation to a corporation under s 1335 of the Corporations Act 2001 (C'th), the Rules of the Court, or in the inherent jurisdiction of the Court. 11 Counsel submitted that the respondent was put in a position of now having to deal with the expense of the proceedings in circumstances where it appears that she will not be able to recover the costs of the proceedings, let alone the judgment she obtained below. Furthermore, counsel contended that the lack of evidence capable of showing the appellants are of substantial means, weighs heavily in favour of the making of the order. 12 Mr Bedrossian resisted an order for security on three bases. First, delay. Counsel submitted that the failure to comply with the Vice-President's order demonstrated delay on the part of the respondent. Secondly, that two of the appellants are natural persons, and thirdly, that the appellants have a genuine appeal "which is not some type of ruse or device to achieve some improper purpose." Notice to produce 13 The appellants also made application to have set aside a notice to produce served upon them by the respondent which sought financial statements and income tax returns of the appellants for the financial year ending 30 June 2008; management accounts of the first appellant; any valuations or market appraisals in respect of real estate owned by one or more of the appellants and balance sheets of any businesses conducted by the appellants. The costs incurred in respect of this and other litigation by the appellants was also sought. In light of the conclusion that I have reached in this matter, it is not necessary to determine this aspect of the matter at this time. Relevant principles 14 The principles by which orders for security of costs are to be determined were recently set out by McClelland CJ at CL (Mason P and Basten JA agreeing) in Jazabas Pty Ltd & Ors v Haddad & Ors [2007] NSWCA 291. His Honour stated at [74]: A convenient summary of the relevant principles was made by Beazley J, as her Honour then was, in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189. Her Honour's judgment has been applied in many subsequent cases. Beazley J said at 196-198: "Principles governing application for security for costs The law is now settled that the discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: see the review of the authorities by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 AT 509. See also Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624 and Zeeman J's decision in Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 at 188. In Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415, Cooper J stated that: '[i]t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 at 643.' Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are: 1. That such applications should be brought promptly. This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne (1876) 1 CPD 143; see also Smail v Burton; Re Insurance Associates Pty Ltd [1975] VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 at 313; Bryan E Fencott at 514. I should state immediately that there is no issue of delay in this case. 2. That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations: see M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Bryan E Fencott at 514. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. ( Bryan E Fencott at 514). 3. Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim: see M A Productions v Austarama Television at 100. 4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms: '[t]he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.' This factor is related to the next, namely: 5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu Pty Ltd v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123; Bryan E Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows: ' ... a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors) ... Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.' 6. An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325. 7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (1979) ACLC 32,446; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping where Zeeman J stated (at 189): '[t]he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order ... [see] Sydmar Pty Ltd v Statewise Developments Pty Ltd and Interwest Ltd v Tricontinental Corporation Ltd." [emphasis added.] See also the discussion in "Law of Costs" (LexisNexis Butterworths, 2003) by G E Dal Pont at [29.10]–[29.29], [29.78]-[29.98]. Consideration 15 In considering the foregoing principles, as I have already observed, the appellants have not complied with the orders made by me on 27 April 2009, or by Haylen J on 4 March 2009. Nor have the appellants put before the Court any undertaking in respect of those orders or regarding the security for costs. 16 There is no issue regarding the Court's powers to make orders in relation to security for costs. The respondent relied on the Court's inherent jurisdiction: see Williamson v Service Corporation International (Australia) Pty Limited [2003] 130 IR 247 at [36] - [46] and the appellants took no issue with that submission. 17 In view of the appellants' resistance to the notice to produce, it cannot be concluded that the failure to tender evidence in relation to the financial position of the appellants was an oversight. This was not suggested to the Court. Furthermore, in light of the appeal and the failure by the appellants to meet the conditions imposed in respect of the stay, it can only be assumed that a considered decision has been made by the appellants to confine the evidence in respect of their financial positions. The absence of other evidence in light of the orders already made weighs heavily in favour of the making of an order for security: see Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1. In a joint judgment in that case, Sheppard, Morling and Neaves JJ expressed the view that a court should not decline to order security on the ground that to do so would frustrate the litigation, unless the company "establishes that those who stand behind it and who will benefit from the litigation if it is successful are also without means." 18 In relation to the application for security having been brought properly and without delay, it was not. However, it is difficult to see how it could be said that it has prejudiced the appeal in circumstances where the appellants sought a stay which was granted on conditions that has now dissolved. I do not consider much turns on the question of delay. 19 There was no evidence that the appellants' financial circumstances, assuming them to be strained, were caused by the respondent's conduct, which is the subject of the claim. There was also no evidence that the respondent's application for security is oppressive in the sense that it is being used merely to deny a right to appeal. In respect of these issues, the respondent relied on evidence of her financial position (she is in receipt of a DSS Pension of approximately $489 per fortnight as her only source of income), and offered to provide to the appellants a mortgage over her property to secure firstly, payment to her in satisfaction of the judgment and secondly, payments in respect of the costs of this appeal. 20 Mr Bedrossian submitted that the Court had not been taken to any authority where the financial position of an applicant for security was relevant. The authorities make it abundantly clear that the discretion is to be unfettered and exercised in accordance with what the particular circumstances of the case require. In taking into account the overall interest of justice between the parties, it seems to me that the respondent's financial position is a relevant factor to be considered in determining this application. 21 In staying the orders made by Haylen J, I observed that from a preliminary view ... "it cannot be said that the appellants have no prospects of success in the appeal. However, in my view, they do face significant hurdles in challenging the findings of credit made by his Honour and challenging the factual findings." Due to the absence of evidence in respect of the appellants' financial position, the appellants have failed to prove that there is a distinct possibility that their appeal will be stultified if an order for security is made. The absence of such evidence, as I have already observed, weighs heavily in favour of the making of an order for security (see Bell Wholesale). This is a factor to be taken into account in the exercise of discretion. 22 The mere fact that a respondent is impecunious does not provide a gateway into security: Idoport Pty Limited & Anor v National Australia Bank Limited & 8 Ors; Idoport Pty Limited & Market Holdings Pty Limited v Donald Robert Argus; Idoport Pty Limited "JMG" v National Australia Bank Limited [35] [2001] NSWSC 744 at [53]. The appellants pointed to the requirement for exceptional circumstances where an order is sought against natural persons, which are present here, and submitted that the balance falls in favour of not granting the respondent's order. Mr Bedrossian referred the Court to the judgment of K & J Acquisitions Pty Ltd & Anor v Manauzzi & Anor [2009] NSWSC 279 in which Kirby J observed at [36]: ... the cases suggested a principle that where there are two plaintiffs, one a company and the other a natural person, and an interlocking between their respective cases, security will not be ordered. 23 The application before his Honour was for additional security from the second plaintiff (a natural person) where it was common ground that he was "a man of substance". After a careful analysis of the authorities and the plaintiffs' cause of action, his Honour determined at [56]: ... "that, on the pleadings, the overlap between the cases of each plaintiff is substantial. Assuming both plaintiffs fail, it is likely in my view that costs would be awarded against both. The defendants could then look to either. If the costs order discriminated between the two, and ordered a greater proportion against the company, again I cannot imagine that the difference would exceed the security lodged by the company. The defendants in that circumstance could look to Mr Carter for the balance. There is, accordingly, no warrant in that event for increasing the security already lodged." 24 Counsel for the respondent observed that it appeared that Kirby J had not been referred to Jazabas, and furthermore, that his Honour had found that the applicant was a "man of substance". Bergin J in Ingot Investments Pty Ltd & Ors v Macquarie Equity Capital Markets Ltd [2002] NSWSC 609 drew a distinction between a plaintiff of substantial means and an impecunious plaintiff in determining whether an order for security should be made. 25 In this case, the appellants have not placed any evidence before the Court that would enable the Court to draw inferences about its financial position. However, the failure to meet the conditions of the stay that they sought and were granted and the failure to put before the Court any offer of security shows a prima facie likely inability to meet any order for costs. 26 The success of the respondent's application being brought against natural persons and a corporation is dependent upon the respondent establishing exceptional circumstances. The factors in favour of granting the respondent's application include first, that the appellants are not impeded from pursuing their appeal if an order for security was made. The absence of evidence in relation to the financial position of the appellants weighs heavily in favour of the making of an order, particularly, as the stay of the compensatory orders made by Haylen J has dissolved. Second, I find that there has been no appreciable delay on the part of the respondent in bringing its application, for reasons earlier addressed in this judgment. Third, the appellants declined to give the Court an undertaking with counsel submitting that it was unnecessary because two of the appellants, although natural persons, were party to the proceedings and would attract a costs order if the appeal was dismissed. 27 In the exercise of the Court's discretion, particularly taking into account the factors set out in these reasons and weighing the overall interests of justice between the parties, in my view, the balance falls in favour of the respondent's application being granted. 28 The respondent also sought orders that pending the posting of security, the appeal be stayed and in the event of a failure to post security within the time specified, the appeal be dismissed. It is to be observed that it is a usual concomitant of an order to provide security for costs that proceedings are stayed until the order is complied with; and on the other hand, even if the only order made is one staying the proceedings until the provision of security, persistent failure to provide this security could justify striking out the proceedings. These are matters that should more properly be considered by the Full Bench on 9 July 2009, when the appeal is listed for hearing, if there has been a failure to comply with the order for security. ORDERS 1. Within 14 days of the date of this judgment, the appellants in these proceedings are to give security for the respondent's costs of these proceedings, by way of either: (a) paying into Court the sum of $39,303; or (b) providing to the Court a bank guarantee in the sum of $39,303. 2. Costs are reserved. ------------------------------------ DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.