Federal Court of Australia

Goodwin v HBCA Pty Ltd [2022] FCAFC 166

ORDERS

THE COURT ORDERS THAT:

1.    The application for leave to appeal be dismissed with costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MIDDLETON AND LEE JJ:

A    INTRODUCTION

1    This is an application for leave to appeal from a decision of the primary judge by which orders were made for security for costs: St Mary’s Hog’s Pty Ltd v HBCA Pty Ltd [2022] FCA 52 (primary judgment or J).

2    The order for security was made in a class action commenced pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) (FCA Act). The class action was commenced by a franchisee, St Mary’s Hog’s Pty Ltd (franchisee), and two shareholders, Mr Luke Goodwin and Mr Todd Blackstock (together, the representative applicants). The franchisee entered into a franchise agreement with HBCA Pty Ltd (franchisor), under which Mr Goodwin and Mr Blackstock were guarantors. The claim is advanced against the franchisor, the licensor of the franchise system, Hog’s Breath Company Pty Ltd (owner), and four officers of either the franchisor or the owner, being Messrs Alfred Dryland, Ross Worth, Steven Spurgin and Matthew Jesse (officers).

3    The group members were either franchisees or guarantors of obligations to the franchisor under similar franchise agreements (who have not released their claims in relation to alleged wrongful conduct described in an amended statement of claim): J [1]. The number of group members is unclear. The evidence of the solicitor for the representative applicants was that: (a) there are at least 100 franchisees or former franchisees who are group members (more than half of which have ceased operating); and (b) a large number of individual group members, being guarantors of franchisees. This definition means there are probably several hundred group members.

4    On analysis, given the way the application was run before the primary judge, the proposed appeal raises no point of principle. If different or more complete evidence had been adduced as to the inability to fund the proceeding by the applicants and group members, the outcome of the application below may have been different, but this is no indication of error. Leave to appeal should be refused.

B    BACKGROUND

5    The background and procedural history were set out comprehensively by the primary judge (at J [1]–[60]) and need not be restated at any length.

6    Breaches of contract, unconscionable conduct and unlawful exclusive dealing are alleged. The officers are said to have been knowingly concerned in the franchisor’s unconscionable conduct. In short, the legal consequence of all the pleaded wrongful conduct is said to be an entitlement to statutory compensation. Leaving aside niceties about set-off, the practical consequence of the claim would mean that, if successful, the franchisor has no entitlement to recover an amount of alleged unpaid royalties and other amounts sought against the franchisee (and those group members who are also franchisees under similar franchise agreements). If this is correct, this would, of course, mean that those group members who are guarantors would not be required to pay amounts otherwise payable to the franchisor.

7    The commencement of the class action came after the franchisor had commenced a proceeding in the Local Court of New South Wales (Local Court Proceeding) against the franchisee, Mr Goodwin and Mr Blackstock, as well as commencing similar proceedings against other franchisees and guarantors in the Local Court, the Magistrates Court of Queensland and the Magistrates Court of the Australian Capital Territory (together with the Local Court Proceeding, the State Court Proceedings). In addition to the Local Court Proceeding, Mr Goodwin and Mr Blackstock are defendants to three of the other State Court Proceedings. Other than discontinuing two of the State Court Proceedings that have resolved, no further steps have been taken in any of the State Court Proceedings since the class action was commenced.

8    After a detailed review of the evidence, the primary judge ordered that the representative applicants, that is, the franchisee, Mr Goodwin and Mr Blackstock, provide security for costs in the total amount of $1,934,257 in the class action.

C    SOME IMPORTANT FINDINGS AND THE DECISION BELOW

9    In the decision below, the primary judge made the following important findings:

(1)    The representative applicants have a bona fide case with reasonable prospects of success: J [109].

(2)    The application for security was brought promptly: J [139].

(3)    The evidence does not establish that the representative applicants’ impecuniosity was caused by the respondents’ conduct: J [139].

(4)    There is reason to believe that the franchisee will be unable to pay the respondents’ costs, as currently estimated, if they are successful in their defence: J [103], [108].

(5)    Although Mr Goodwin and Mr Blackstock proffered undertakings to be personally liable for any costs order made in favour of the respondents, given they have no assets in their respective names and no ready access to assets or funds, those undertakings are “of little, if any, value”: J [107], [118].

(6)    In the absence of any evidence taking issue with the estimates of costs provided for security, the amounts sought by way of security were neither “too high” nor “inappropriate”, and separate representation, which was a premise upon which the estimates were made, was proper: J [146]. Hence, the quantum of security sought was appropriate.

10    The primary judge (at J [139]) drew together the factors her Honour considered relevant in the exercise of her discretion as follows:

In summary, these applications were brought promptly; the evidence establishes that the applicants are unlikely to be able to pay the respondents’ costs of the proceeding should an order for costs be made; the evidence does not establish that the applicants’ impecuniosity was caused by the respondents’ conduct, the more likely and, indeed, admitted cause being the COVID-19 pandemic; the undertakings proffered by Messrs Goodwin and Blackstock are not, in the circumstances of this case, a complete answer to the applications for security and in the absence of evidence of their financial worth are of very limited assistance; relatedly the proceeding is brought for the benefit of others; the applicants, who bear the onus, have not established that the making of orders for security will stultify the proceeding; there is insufficient evidence of the ability and willingness of group members to contribute to any order for security; and the claims made by the applicants on behalf of all group members are commercial in nature. Based on those factors, subject to one matter which I address below, I am satisfied that I should exercise my discretion in favour of making orders for payment of security for the respondents’ costs.

11    The “one matter” her Honour addressed, as referred to in the above summary, was the rejection of a fundamentally misconceived prayer for relief sought by the franchisor and one of the officers, Mr Worth that, to the extent the applicants were “unwilling or unable” to provide security, security ought to be provided directly by the group members (being persons, of course, who were not represented before her Honour, had no notice of the application and, in any event, enjoyed a costs immunity).

D    THE PROPOSED APPEAL

12    The proposed notice of appeal is somewhat unconventional. There are five proposed grounds of appeal, four of which are then sub-grouped into several assertions of error, and one “ground” is not a ground at all. In any event, as was accepted by senior counsel for the representative applicants at the end of his helpful oral argument, the arguments can be more usefully summarised by the following three overarching contentions that her Honour erred in:

(1)    failing to find that the representative applicants had, to the extent that it was relevant, proven stultification (Evidentiary Contention);

(2)    placing determinative or excessive weight upon the fact that the representative applicants had not proven they had insufficient funds to provide security (Second Contention); and

(3)    placing no or insufficient weight on the fact that the exercise of discretion to award security was happening in the context of a class action (Third Contention).

13    We will deal with each of these contentions below, but at the outset, it is appropriate to restate the relevant principles in considering the application for leave.

E    RELEVANT PRINCIPLES

14    As was noted in Nationwide News Pty Limited v Rush [2018] FCAFC 70 (at [2]–[4] per Lee J with whom Allsop CJ and Rares J agreed generally), the starting point in exercising the power to grant leave to appeal is that regard must be had to the statutory charge in s 37M(3) of the FCA Act that the power must be exercised or carried out in the way that best promotes the overarching purpose, being the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. As was further observed in Bellamy’s Australia Limited v Basil [2019] FCAFC 147; (2019) 372 ALR 638 (at 640 [6] per Murphy, Gleeson and Lee JJ), the reticence in allowing leave against interlocutory judgments on matters of practice and procedure facilitates this purpose: see also Sir Frederick Jordan’s oft-cited remarks from In re the Will of F. B. Gilbert (Deceased) (1946) 46 SR (NSW) 318 (at 323).

15    Consistently with the facilitation of a just resolution, an applicant must usually show that: (a) in all the circumstances, the decision to be appealed is attended with sufficient doubt to warrant its reconsideration on appeal; and (b) supposing the decision to be wrong, substantial injustice would result if leave were refused: Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 (at 398–399 per Sheppard, Burchett and Heerey JJ).

16    Finally, and more specifically, the practice and procedure discretion exercised in this case is a broad one. Like the different discretion in consideration in Klemweb Nominees Pty Ltd (as trustee for the Klemweb Superannuation Fund) v BHP Group Limited [2019] FCAFC 107; (2019) 369 ALR 583 (per Middleton, Beach and Lee JJ), a docket judge’s decision as to security is usually informed by a number of factors, including countervailing ones. The ultimate evaluation as to whether security ought to be ordered may be one upon which reasonable minds might differ. In these circumstances, to paraphrase Sir Frederick Jordan, applications for leave to appeal against an order of this type must be assessed against the backdrop that it would not be proper for a Full Court to embark upon a re-assessment of diverse factors considered by the primary judge, unless satisfied that the primary judge has acted upon a wrong principle, or has neglected to take into account something relevant, or has taken into account something irrelevant, or that the result is so out of all kilter to the facts proved in evidence that the order should not be allowed to stand. Put in more familiar terms, given that it is necessary to demonstrate sufficient doubt in respect of the decision to be appealed, this first limb of the Décor test will not be satisfied unless there is some real basis for considering that some House v The King (1936) 55 CLR 499 error is able to be established should leave to appeal be granted.

F    CONSIDERATION

F.1    Evidentiary Contention

17    The representative applicants submit that the primary judge erred in principle in relation to the importance of stultification in the context of this class action but also, to the extent the concept was material, erred in aspects of her Honour’s findings relevant to this issue. The issue of principle will be addressed below, as it is convenient to deal initially with why the primary judge made the findings she did, and whether there was arguable error in her Honour doing so. As to this topic, in addition to finding there was reason to believe that the franchisee will be unable to pay adverse costs, and that the proffered undertakings were of little value, her Honour also made the following three findings.

18    First, the representative applicants did not provide “any evidence about the financial position of Messrs Goodwin and Blackstock”: J [119]–[120].

19    Secondly, the primary judge also found that the class action “is brought for the benefit of others” (at J [139]) and the representative applicants should have taken steps to demonstrate that they could not meet any order for security with support from other group members, which they failed to do. There was no evidence that the assets of the franchisee group members would be available to meet any adverse costs orders, no undertakings were proffered to do so and there was no evidence of the financial position of group members who are not related to the applicants: J [104]–[105], [119]. Instead, the financial positions of group members were not revealed (beyond the very general evidence of the applicants’ solicitor that a few group members have said that they could not afford to contribute). Further, her Honour found there was a want of evidence as to the willingness or otherwise of group members to contribute if an order for security were to be made: J [121], [124].

20    Thirdly, on the evidence adduced, her Honour was not satisfied that there was sufficient explanation as to why the representative applicants could not obtain third-party funding: J [122].

21    As to each of these matters, the following can be noted.

The representative applicants and related interests

22    Although, as noted above, the primary judge ultimately found that the representative applicants were unlikely to be able to pay adverse costs from recourse to their assets, this was an inference drawn by reason of the insufficiency of their evidence: J [118].

23    But more generally there was an opaqueness as to the financial position of the entities associated with the representative applicants. One of the curiosities of the way this application was resisted below is that the representative applicants sought to adduce some limited evidence of their broader financial position, but implicitly suggested in submissions before the primary judge, that this was relevant only to their submission that there were substantial assets available to meet a costs order at the final hearing. The evidence disclosed that persons or entities associated with Messrs Goodwin and Blackstock held interests in a number of current and former franchisees – each of which is a group member and potential beneficiary of the class action: J [34]–[38], [104]–[106]. As to these “Current Franchisees” (being seven franchisees associated with Messrs Goodwin and Blackstock), the representative applicants submitted:

Based on the Balance Sheets of the Current Franchisees, as at 30 June 2021 (being the most recent accounts available): (i) the combined net assets of the Current Franchisees were $6,318,124; although (ii) there is currently a negative balance of current assets minus current liabilities of $869,135, reflecting the ‘Covid related trading conditions’.

(Citations omitted, emphasis in original).

24    But this evidence merely highlighted that the representative applicants had not disclosed all that could have been disclosed and provided undertakings from all the entities they controlled, and which could benefit from the class action. Importantly in this regard, the franchisee company itself is not wholly owned by Messrs Goodwin and Blackstock. Additional shareholders existed, being Ms Alison Beth Goodwin, Ms Alicia Jane Blackstock, Ms Marguerite May Nicks, Mr Shakeel Ahmed, GFDT Pty Ltd, and Mr Russell Donald Scott. Despite this, the asset positions of GFDT Pty Ltd, Mr Ahmed, and Mr Scott were not disclosed, and none of these persons, who might be thought to likely benefit from the claim, proffered any undertakings.

25    In these circumstances, the finding made by her Honour as to the insufficiency of evidence as to the overall financial position of Messrs Goodwin and Blackstock (and, it might be added, entities and persons associated with them) was inevitable.

The group members

26    In the affidavit of Mr Philip Nathan Argy affirmed 2 September 2021, the following was said:

71    I am informed by Mr Goodwin, Mr Blackstock and Mr MacCarthy [the secretary of an unincorporated organisation known as the Hog’s Breath Café Franchisees’ Association] that they have made enquiries with a number of Group Members that are currently trading who have advised they could not afford to contribute to the costs of the proceeding.

72    Further, given the widespread impact of the COVD-19 [sic] emergency lockdowns imposed in various States on the restaurant industry, I consider it likely that other Group Members would not be in a financial position to contribute to an order for security in the proceeding.

73    In any event, in my view there is no practical way to pre-determine what security could or should be provided by each Group Member by reference to the value of their claims. Quantum of damages will need to be proven individually by each group member, and will likely involve expert evidence and a consideration of specific financial evidence for each Group Member. Undertaking such an excise [sic] for the purpose of ordering security would be complex, impractical and disproportionately costly.

27    This was the extent of the evidence relating to those group members with whom Messrs Goodwin and Blackstock were not involved.

28    An objection was pressed to [71]. In relation to the objection, an exchange occurred between her Honour and then senior counsel for the representative applicants (T9.45–10.18):

MR CASTLE: Your Honour, we tender this to indicate that some attempt has been made by us to inquire in relation to this matter. We don’t lead it as evidence that – we don’t lead it as evidence of the ultimate fact that these group members could not afford to contribute. We simply lead it as evidence that inquiries have been made.

HER HONOUR: It’s not very useful evidence, even in that form. If that’s all it seeks to establish, one couldn’t give it very much weight at all. An inquiry has been made, but nobody knows what that inquiry was or what its outcome is.

MR CASTLE: No, your Honour. The ultimate submission that we make, as I think your Honour has seen in our written submissions, is that your Honour will apply common sense as Lee J did and the Full Court upheld in the Zoetis case. But lest it be said that we had not made some efforts – we have made some, but I accept that on a question of weight rather than admissibility, your Honour won’t attach much to that. But I don’t want to be met with the submission that we’ve done nothing, because we have. We’ve done something. It might have been inadequate, but we’ve done something.

HER HONOUR: All right. I will allow the evidence, but you can address me on weight, Mr Hogan-Doran, if I haven’t already made my view known.

(Emphasis added).

29    The concession that the evidence may have been inadequate and was only pressed for a limited purpose makes it clear that the representative applicants made a forensic choice not to adduce evidence as to the financial position of group members because of the view they took as to the relevance of such evidence (a contention we will come to below). For present purposes, however, there is no basis to doubt it was open for her Honour to find there was no evidence of any weight as to the ability and willingness of group members to contribute to any order for security.

Funding

30    The primary judge noted (at J [122]) that there was only limited evidence of attempts to obtain funding. Her Honour did not consider that the evidence adduced amounted to “sufficient explanation that the applicants could not obtain third party funding”.

31    With respect to the primary judge, it is unclear why this was the case. The solicitor had given evidence that an experienced funder had represented that “there is no way any litigation funder would consider funding this action” because the franchisor had ceased trading and there were potential difficulties in pursuing recovery. Given the nature of and likely quantum of monetary relief able to be obtained by the class action, the correctness of this unchallenged evidence might have been thought compelling. Although for our part, we do not consider there was any insufficiency of explanation, it nevertheless appears this factor did not weigh significantly in the finding that her Honour was not satisfied stultification had been proven or, more generally, in the overall exercise of her Honour’s discretion as to ordering security (as is evident from any possibility of funding not being mentioned in the summary reproduced at [10] above).

Conclusion

32    The factual findings as to stultification (to the extent this finding was relevant) were open on the evidence. No arguable error warranting leave is established in this regard.

F.2    Second Contention

33    The representative applicants advanced several arguments as to why they contended that the primary judge erred in placing determinative or excessive weight upon the fact that the representative applicants had not proved that they had insufficient funds in order to provide security.

Arguments distinguishing between representative arguments

34    Some of the arguments were focussed on the fact that any failure to prove stultification should have been irrelevant to making an order for security against the individuals. This argument appeared to have two components. First, there is a core and long-standing principle of the Australian justice system that individual citizens are not barred by impecuniosity from having access to justice, hence “special circumstances” must be identified before security can be awarded against an individual. Secondly, and relatedly, it is said that the only reason identified for an award against the individuals rested upon two findings the primary judge ought not to have made, being: (a) it was not apparent that Messrs Goodwin and Blackstock are necessary parties; and (b) that “the proceeding in this Court is clearly brought for the benefit of others”.

35    This argument can be rejected as resting upon an insecure premise. If security was otherwise to be awarded against the representatives in a class action, there was no principled reason for distinguishing between one representative and others.

36    Further, and in any event, the primary judge’s findings were correct. Messrs Goodwin and Blackstock were clearly not necessary parties. Indeed, it would have made perfect sense for there to be one representative applicant being the franchisee, with Messrs Goodwin and Blackstock being non-party group members. Of course, in accordance with standard Pt IVA case management, this would not have prevented the individual claims of Mr Goodwin and Mr Blackstock from being determined at the initial trial (nor presumably would it, if explained, undermined the utility of a submission that the Local Court Proceeding should not proceed until their claims were resolved in the class action). It is contended that Mr Goodwin and Mr Blackstock became representatives in response to the Local Court Proceeding, in order to advance causes of action, relief and remedies not otherwise available in that Court, and to bring all matters in controversy before this Court. All this may be accepted, but this did not require them to be parties at this time. In any event, the only point being made by her Honour was that if the franchisee was the sole representative applicant and was successful in its claim, Mr Goodwin and Mr Blackstock would, in any event, take the benefit of that success in their capacity as guarantors (and, one might add, as group members).

37    As to the second impugned finding (that “the proceeding in this Court is clearly brought for the benefit of others”), this conclusion was correct as a statement of fact. Of course, the representative applicants each had their individual claim, and they were entitled to pursue those claims as they saw fit, but they also decided to act in a representative capacity. The group members’ claims gave rise to a substantial common issue of law and fact and her Honour was correct to conclude there were class members who benefitted. Obviously enough, they could take advantage of any “statutory estoppel” following an initial trial and the making of s 33ZB orders under the FCA Act. In this sense, any class action is brought for the benefit of the represented persons.

Relevance of stultification generally

38    The real relevance of the characterisation of the class action litigation as being for the benefit of others is how this conclusion is then used as a springboard relevant to the question as to whether those benefitting should contribute to the representative applicants providing security.

39    It is submitted that her Honour’s reference to the “benefit of others” bespeaks an error of principle as suggesting “a prima facie presumption that security ought to be ordered in a representative proceeding”. It is suggested that Derrington J said the same thing in Its Eco Pty Ltd v BPS Financial Limited [2022] FCA 842.

40    It may be accepted that Derrington J made an obiter observation (at [38]) that “there are strong policy reasons for Courts adopting a predisposition” in awarding security for costs in class actions where the lead applicants are not in a position to meet an adverse costs order, but the primary judge’s reasons do not suggest her Honour approached the matter on the basis of any such presumption or predisposition. Accordingly, although (with respect) we do consider that there are strong policy reasons for Courts adopting such a predisposition (and indeed consider there are stronger policy reasons as to why such a predisposition should not exist), this point of principle does not presently arise.

No arguable House v King error

41    The difficulty for the representative applicants is that they cannot make out a relevant mistake on the facts or that issues as to stultification were irrelevant considerations. In these circumstances, it is hard to characterise this aspect of the representative applicants’ argument as being that the primary judge acted upon a wrong principle or that, in the absence of identification of specific error, the decision must be regarded as unreasonable or clearly unjust. Establishing objective error involves more than submitting that the Full Court should attach different and lesser weight to the failure to prove stultification than that done by the primary judge.

F.3    Third Contention

42    The argument that the primary judge placed no or insufficient weight on the fact that the exercise of discretion to award security was happening in the context of a class action suffers from the difficulty of seeking to elevate a discretionary conclusion reached based on the evidence in one case into a principle of broader application. This flaw can be seen in the submission made by the representative applicants that error is said to be revealed by reason of the fact that the primary judge did not adopt the approach taken in Abbott v Zoetis Australia Pty Ltd (No 2) [2019] FCA 462; (2019) 369 ALR 512 (per Lee J at 523 [33]–[41]).

43    But this submission pays insufficient attention to a point stressed in that case. As Lee J observed (at 513 [2]):

Given the heterogeneity of class actions, to speak in definitive and broad terms about how principles of practice and procedure should generally be applied is to court danger.  Of course, there are some rules, largely statutory in nature, which necessarily apply to all proceedings, but there is a real danger of elevating statements concerning practice and procedure made in one context into statements of Talmudic significance which must be invariably or uncritically applied.  Case management and the application of the practice and procedure provisions of both Part IVA of the [FCA Act] and the provisions of the Federal Court Rules 2011 (Cth)… is a task to be performed on a bespoke basis depending upon the particular facts and circumstances that present themselves.  Put another way, care must be taken to “avoid reading judgments on fact specific interlocutory issues of practice and procedure as if they were determinative of precepts and principles of general application”: see Regent Holdings Pty Ltd v State of Victoria [2012] VSCA 221; (2012) 36 VR 424 at 429 [19] (Nettle, Redlich and Osborn JJA); Gill v Ethicon Sàrl (No 2) [2019] FCA 177 at [6] (Lee J).

(Emphasis added).

44    In Abbott (at 523–525 [33]–[41]), the following points were made:

(1)    the nature of the claim advanced in the relevant class action is highly relevant;

(2)    that the respondent in that case could not realistically expect to obtain an order for security in an individual case brought by such claimants and that this was relevant;

(3)    that it was relevant that generally group members are entitled to play a passive role while the claims of the applicant and common issues are determined;

(4)    the stage at which the provision of security is proposed is relevant;

(5)    an award of security in that case would have caused complications (and not only to group members) and that this was relevant;

(6)    it is simplistic to apply indiscriminately to Part IVA proceedings the approach to stultification adopted in ordinary, inter partes proceedings; and

(7)    it was at least relevant that the Court ought not to put barriers in the way of self-funding class actions.

45    The primary judge (at J [134]–[138]) identified factors considered by her Honour to be relevant to the circumstances presented in this commercial class action with identifiable group members. The primary judge made reference to Abbott (at J [123]) which her Honour described, correctly, as a mass tort or product liability open class action. To have an appeal ground that asserts error because the primary judge failed “to conduct an analysis of the position of the first and second appellants in accordance with the approach adopted” in a quite different case is insufficient.

46    In Abbott, after considering the Full Court decisions in Bray v F Hoffman-La Roche Ltd [2003] FCAFC 153; (2003) 130 FCR 317 and Madgwick v Kelly [2013] FCAFC 61; (2013) 212 FCR 1, Lee J observed (at 517 [15]):

Critically, however, context is everything, and nothing in Bray or Madgwick should be seen as delimiting or attenuating the broad discretion the Court has to order, or decline to order, security.  It is a discretion to be exercised judicially, having regard to a consideration of the particular facts of the case: Merribee Pastoral Industries Pty Limited v Australia and New Zealand Banking Group Limited [1998] HCA 41; (1998) 193 CLR 502. If they are relevant, the factors that may be taken into account are unrestricted, and the weight to be given to them depends upon the fact’s own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: see Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114; Morris v Hanley [2000] NSWSC 957 at [11]–[21]; Acohs Pty Ltd v Ucorp Pty Ltd [2006] FCA 1279; (2006) 155 FCR 181 at 185-186 [12].

47    As the Full Court explained in Zoetis Australia Pty Ltd v Abbott [2019] FCAFC 153 (at [7]–[9] per Allsop CJ, Perram and Beach JJ), in refusing the application for leave to appeal, this paragraph revealed a balancing had taken place of all matters considered relevant, including those identified above (at [44]).

48    It may be accepted that just because group members can obtain the benefit of s 33ZB orders from the answers to common questions, it is simplistic to apply indiscriminately to class actions the approach to stultification adopted in ordinary, inter partes proceedings. It may also be accepted that aspects of her Honour’s reasons might be thought to reveal an approach to stultification which apparently placed minor significance on the special role of group members and the structure and policy of Pt IVA. But read fairly, a balancing also took place in the present case. The primary judge was alive to the proceeding being a class action but thought it was appropriate to characterise the representative proceeding as being commercial in nature and, given the ability to identify the group members, considered, in all the circumstances, there should have been some evidence of the ability and willingness of group members to contribute to any order for security.

49    The mere fact that minds might legitimately differ as to the outcome of the balancing of relevant considerations does not reveal any arguable error.

50    Before leaving this topic, it is worth making a further point. The written submissions on the application noted that recently, in Its Eco Pty Ltd v BPS Financial Limited, Derrington J made reference to Turner v Tesa Mining (NSW) Pty Ltd [2019] FCA 1644; (2019) 290 IR 388 (at 408 [71]), where Lee J had observed the following in relation to applications for security for costs in an unfunded industrial class actions:

In the context of class actions, in Abbott at [31]-[38], I set out a series of considerations, which assume importance in applications for security for costs. I do not propose to repeat those considerations, but it is worth noting that if this had been an unfunded class action where group members were bearing the costs, or if the solicitors were working on a speculative basis, I do not consider that any proper exercise of discretion could have led to award security for costs against the applicant (even though non-parties, in the form of group members, were attempting to obtain a financial benefit out of the class action). For the reasons I discussed at length in Abbott, such a course would undermine the central purpose of Pt IVA proceedings of facilitating access to justice. Nor, in a class action seeking relief such as the present, could I conceive of circumstances where security would be awarded against an industrial organisation even if such an organisation provided assistance to its members in maintaining the litigation.

51    In Its Eco Pty Ltd v BPS Financial Limited, his Honour noted (at [14]) that if Lee J’s observations:

are intended to be taken as a statement of general principle that an order for security for costs should not be made in class actions which are unfunded or where the solicitors are working on a speculative basis, I would respectfully disagree.

52    It is worth clarifying that we do not read anything said in Turner as a statement of general principle applicable to all applications for security in all unfunded class actions or where the class action is conducted by reference to a conditional costs agreement. Justice Lee’s comment was made in the context of a particular type of industrial class action. This is not to say that the considerations identified in Abbott will not be highly relevant to many unfunded class actions of other types, but this is a different point.

53    In any event, as we have explained, no point of principle emerging from differing emphasis on the importance of these considerations arises in the present case.

G    CONCLUSION AND ORDERS

54    This was quintessentially a practice and procedure decision. No arguable error has been identified sufficient to warrant a grant of leave to appeal. Further, on analysis, no point of principle arises.

55    Accordingly, it is unnecessary to consider any issue of substantial injustice if leave is refused. Further, no-one suggests we consider in this case the question of whether, if security is ordered in a class action, the order in default of security should necessarily be a stay of the entire class action (or whether a preferable remedial response would be a more refined “declassing” order, which would allow the individual claim of the applicant to be maintained).

56    The application for leave to appeal should be dismissed with costs.

Associate:

Dated:    26 September 2022

REASONS FOR JUDGMENT

DERRINGTON J:

57    I agree with Middleton and Lee JJ that no point of principle arises in the proposed appeal and that no error has been demonstrated in the reasons of the primary judge which would justify the granting of leave to appeal. For those reasons the application for leave should be refused.

58    The learned primary judge correctly assayed the factors relevant to the exercise of the discretion to make an order for security for costs and, upon weighing them, concluded that an order should be made. In the course of addressing the issue of whether the proceedings would be stultified by the making of an order, her Honour correctly turned her attention to the issue of whether those who stood behind the representative applicants and who might benefit from the proceedings were also without means. Her Honour’s consideration of that issue included the observation that the financial position of the group members had not been revealed such that it had not been demonstrated that those members would be unable to meet any order for security for costs. As Middleton and Lee JJ recognise, there was no error in her Honour adopting that approach. Indeed, her Honour merely followed the established principle to that effect.

59    Similarly, Middleton and Lee JJ also recognise that no error arose from her Honour granting security for costs in the context of class actions and that must necessarily be so. There is neither an express nor implied prohibition to be found in Part IVA of the Federal Court of Australia Act 1976 (Cth) on the ordering of security for costs in class actions and nor is the making of such orders contrary to the policy of that Part. So much was the assumed orthodoxy underpinning the Full Court’s decision in Madgwick v Kelly (2013) 212 FCR 1 (Allsop CJ, Jessup and Middleton JJ) which concluded both that the making of an order for security for costs does not undermine the protection provided for in s 43(1A) and that the unwillingness of group members to contribute to a litigation fund and their ability to do so is a relevant consideration in determining whether an order should be made. No doubt has been or can be cast on the correctness of that decision.

60    The reasons of Middleton and Lee JJ might be taken as suggesting that my approach in Its Eco Pty Ltd v BPS Financial Limited [2022] FCA 842 to the application of the principles relating to security for costs in class actions was “simplistic”. It seems to be thought that there is a lack of sophistication in applying the usual principles concerning stultification of actions in security for costs applications indiscriminately to group proceedings merely because the group members might benefit from s 33ZB orders (which bind them and the defendants to the judgment on common questions). However, the effect of s 33ZB establishes overwhelmingly that the proceedings are being conducted for the benefit of those group members who, if the action is successful, obtain an enforceable determination of their rights as against the respondents without ever being exposed to an adverse costs order. In this respect, s 33ZB satisfies the raison d’etre for the consideration of the financial position of the group members in determining whether the proceedings will be stultified if an order for security is made. Moreover, as was mentioned in Its Eco Pty Ltd v BPS Financial, it is not merely the effect of s 33ZB which renders the ability of the class members to contribute to a litigation fund relevant to the issue of stultification. It is, more relevantly, that (a) the class members stand behind the representative applicants in that they will benefit in a real and material way from the successful outcome of litigation which resolves or partly resolves their claims, (b) that they are protected from any adverse order for costs by reason of s 43(1A) of the Federal Court of Australia Act, and (c) that, far from being a passive element of the litigation, the existence of the class members generates substantial additional expense for both the applicants and respondents. In this latter respect it is invariably the case that a successful representative applicant will seek to recover their costs from the respondent, including the significant added expenditure incurred in the conduct and management of the action on behalf of group members. The consequence of the foregoing is the creation of a substantial asymmetry in the respective parties’ ability to recover costs at the litigation’s conclusion and that asymmetry must necessarily be a weighty factor in the exercise of the discretion as to whether an order for security should be made. Absent the making of such an order the representative applicants, if successful, will usually recover their full costs from the respondents, including the additional expense of conducting the proceedings as a class action whereas, any successful respondents are limited to attempting to enforce a correspondingly large costs order against a representative applicant which is usually without the means to pay it or any substantial part of it. As I said in Its Eco Pty Ltd v BPS Financial at [14]:

… The litigious process must be fair and be seen to be so. One side of the record in litigation ought not to be granted the luxury of litigating without risk of the consequences of a costs order should the litigation not result in their favour. That extends to those who stand behind one of the litigants and who may benefit from the successful outcome of the action. Such persons should not be allowed to enable others, whether that be corporate entities, trustees or lead applicants, to act as “stalking horses” in the litigation which will enure for their benefit.

61    Of course, representative applicants faced with an application for security for costs have it within their power to reduce the consequence of this asymmetry in their favour. They may bind themselves to an undertaking not to seek to recover costs from the respondents which are greater than would have been awarded in ordinary bilateral litigation and further undertake to indemnify the respondents in relation to any additional costs which they might incur as a result of the action involving the class members. To some degree this would bring the circumstances nearer to a scenario where the only impact of the nature of the proceedings as a class action relative to the security for costs application is that the group members can obtain the benefit of the s 33ZB orders. If, as is sometimes suggested, the group members are a passive element of the litigation and their presence benign, the offering of these undertakings cannot impose any substantial burden on the representative applicants. In the absence of such an undertaking it is not open to representative applicants to submit that the usual principles relating to stultification are inapplicable because the only consequence of the form of the proceedings is that the class members may obtain the benefit of s 33ZB orders in due course.

62    It should also be kept in mind that whilst it is true that class actions in this Court are intensively managed, as they ought to be, they are not thereby transmogrified into being inquisitorial in nature. They remain wholly adversarial and subject to the long-standing and well-established principles of the Common Law courts relating to the payment of costs by the losing party. The “costs indemnity rule” that the successful party is entitled to be indemnified in respect of their costs of prosecuting or defending proceedings is directed to achieving the ends of justice because the party who turns out to have been unjustifiably brought to court by another or who has been required to bring another to court, is entitled to have recourse to that other party for recompense in relation to their costs. Underpinning the appellants’ submissions in this appeal was the theory that, given the nature of class actions under Part IVA, it is generally inappropriate to make orders requiring the representative applicants to provide security for costs. They seemed to advance the proposition that this theory should apply even when, as in this case, the class members are all parties to failed commercial ventures. Clearly enough, that theory should be soundly rejected. It would have the most unusual outcome that an applicant’s adoption of one of the most expensive forms of litigation would effectively deprive a successful defendant of any opportunity to obtain recompense for the substantial costs it might incur in defending itself.

Associate:

Dated:    26 September 2022

SCHEDULE OF PARTIES