FEDERAL COURT OF AUSTRALIA

Manhattan (Asia) Limited v Dymocks Franchise Systems (China) Limited [2014] FCA 1143

THE COURT ORDERS THAT:

1.    Paragraphs [23]-[30] (inclusive), [31]-[35] (inclusive), and [36]-[42] (inclusive) of the Statement of Claim be struck out

2.    Manhattan (Asia) Limited pay 75% of Dymocks Franchise Systems (China) Limited’s costs of this application.

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

REASONS FOR JUDGMENT

1    By originating application and statement of claim, Manhattan (Asia) Limited (Manhattan) seeks damages and rescission of a franchise agreement between Manhattan as franchisee, the respondent, Dymocks Franchise Systems (China) Limited (DFS China) as franchisor, and Kevin Patrick Mann (Mr Mann) and Li Chung Yan Hilda (Mrs Mann) as guarantors of Manhattan’s obligations (2010 Franchise Agreement).

2    Among other claims, Manhattan alleges that certain conduct of DFS China breached ss 52 and 59 and Part IVB (Industry Codes) of the Trade Practices Act 1974 (Cth) (Trade Practices Act) as in force before 1 January 2011. Unless otherwise indicated, all references to a provision of a statute in these reasons is a reference to a provision of the Trade Practices Act as in force at the time of the alleged contraventions, which all occurred prior to 1 January 2011. Manhattan also claims that DFS China failed to comply with the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (the Code).

3    These reasons deal with an interlocutory application by DFS China seeking orders striking out the Statement of Claim and dismissing or staying the proceedings. In the alternative, DFS China seeks an order that Manhattan give security for costs.

Background

4    Manhattan and DFS China are both registered in Hong Kong. Neither company is registered in Australia as a foreign company.

5    Manhattan pleads the background to its claims as follows:

a.    DFS China and Manhattan entered into franchise agreements in 1999 and 2006, pursuant to which Manhattan operated a “Dymocks” bookstore in the Prince’s Building in Hong Kong (referred to as the 1999 Franchise Agreement and the 2006 Franchise Agreement respectively). Manhattan was unable to procure an extension of the lease for the Prince’s Building beyond 31 December 2009. New premises were located in the Central Building, Hong Kong (Central Building Premises);

b.    From February 2009 to October 2009, Manhattan and DFS China had dealings with respect to the location and selection of new premises from which Manhattan could operate a “Dymocks” bookstore;

c.    On 27 November 2009, Manhattan entered into a three year lease for the Central Building Premises with a third party as the lessor (Lease). From January to March 2010, Manhattan operated a temporary store at the Central Building. In February 2010, Manhattan was given a document styled as a disclosure document. On 8 April 2010, Manhattan commenced operating a permanent “Dymocks” bookstore business at the Central Building Premises (Business). On 9 June 2010 the parties entered into a franchise agreement for the operation of the Business; it is the 2010 Franchise Agreement; and

d.    The Business ceased operating on 31 August 2012.

6    Jurisdiction of this Court is not in issue because DFS China has waived objection to service by filing a notice of address for service without raising objection under r 13.01 of the Federal Court Rules 2011 (Cth) (Rules): see r 10.43(1)(c). Each of the Franchise Agreements is governed by the law of New South Wales, Australia, and the parties submit to the jurisdiction of the courts of New South Wales and this Court.

7    Manhattan has advised DFS China that it has no assets in Australia. It is common ground that it has no assets of significant value in Hong Kong.

8    By affidavits sworn in relation to DFS China’s application, Mr Peter Sanfilippo (Mr Sanfilippo) of The Franchise Lawyer, solicitors for the applicant, says that Mr Mann (a director of Manhattan) left Hong Kong to work in Australia in October 2011 after Manhattan’s financial losses. Mrs Mann (who Mr Sanfilippo says is also a director of Manhattan), remained in Hong Kong with the Manns’ daughter. The Manns operate another “Dymocks” franchise at Lyndhurst Terrace in Hong Kong through Book Art (Hong Kong) Ltd, which is also incorporated in Hong Kong (Book Art). Mr Sanfilippo deposes that the Manns do not have significant unsecured personal assets.

Representations

9    In the Statement of Claim at [11], Manhattan pleads that, during the negotiation period of February 2009 to October 2009, DFS China (through its employees Mr Matthew Steele (Mr Steele) and Ms Jannie Tam (Ms Tam)) made various representations in Hong Kong to Manhattan (through Mr and Mrs Mann) in respect of the Central Building Premises (Representations).

10    Manhattan claims that DFS China made the following representations to Manhattan in a financial spreadsheet which Mr Steele emailed to Mr Mann on 24 September 2009, and they are collectively referred to as the Representations in the 24 September 2009 Spreadsheet:

    Daily pedestrian traffic was, or could be reasonably expected to be, 835 (First Daily Traffic Representation);

    DFS China expected the monthly sales revenue to be HKD1,064,583 (First Sales Revenue Representation); and

    DFS China expected the net profit of the “Dymocks” business to be HKD1,735,748, forecasted over five years (First Net Profit Representation).

11    Manhattan further claims that DFS China represented to Manhattan in relation to the Central Building Premises that:

    DFS China had observed there to be a reasonable flow of pedestrian traffic (representations made in an email dated 24 September 2009 from Mr Steele to Mr Mann and orally on several occasions in September and October 2009 by Mr Steele and Ms Tam to Mr and Mrs Mann) (Reasonable Traffic Flow Representations);

    DFS China had conducted measurements of pedestrian traffic at the premises (representations made orally in or around September and October 2009 by Mr Steele and Ms Tam to Mr and Mrs Mann) and implied by reason of DFS China having represented to Manhattan or entities associated with its directors that it had conducted measurements of pedestrian traffic in relation to other proposed premises (Traffic Count Representation); and

    The Central Building Premises were viable (made in writing by Ms Tam in emails dated 7, 14 and 23 October 2009 to Mr Mann, copied to Mrs Mann) (Viability Representations).

12    Manhattan claims that DFS China made the following representations in a financial spreadsheet which Mr Steele emailed to Mr Mann (copied to Mrs Mann) on 7 October 2009 (collectively the Representations in the 7 October 2009 Spreadsheet):

    The daily pedestrian traffic was, or could be reasonably expected to be, 886 (Second Daily Traffic Representation);

    DFS China expected the monthly sales revenue to be HKD1,129,833 (Second Sales Revenue Representation); and

    DFS China expected the net profit to be HKD987,849, forecast over five years (Second Net Profit Representation).

13    Manhattan also claims that DFS China represented that the Representations in the 7 October 2009 Spreadsheet were based on reasonable grounds (through the email dated 7 October 2009 from Ms Tam to Mr Mann), and implied from the conduct of DFS China between [an unnamed date] 1999 and October 2009 in locating, appraising and evaluating potential sites for “Dymocks” bookstores, through franchise disclosure documents and by the emails of 14 and 23 October 2009 from Ms Tam to Mr Mann) (Reasonable Grounds Representations).

Trade Practices Act claims

14    Manhattan claims that the Representations contravene s 52 (misleading or deceptive conduct by a corporation in trade or commerce) and s 59(2) (false or misleading statements with respect to the profitability or risk or any other material aspect of a business activity in relation to which a corporation, in trade or commerce, invites a person to participate or engage by investing money or performing work associated with the investment). As a foreign corporation, DFS China is a “corporation” as defined by s 4.

15    Manhattan pleads that the Representations were made “in trade or commerce”, being “trade or commerce between Australia and places outside Australia” within the meaning of s 4 of the Trade Practices Act.

16    Further or alternatively, Manhattan alleges that DFS China was a foreign corporation carrying on a business in Australia within the meaning of those expressions in ss 5 and 6 of the Trade Practices Act.

17    The particulars for these pleadings are that DFS China was at all material times controlled by Australian citizens or persons ordinarily resident in Australia:

… At all material times, [DFS China] was controlled by John Pemberton Curlewis Forsyth and Donald Grover, directors of [DFS China] who were Australian citizens or ordinarilyy residents of Australia, and all matters relating to the operations of [DFS China] in Hong Kong were subject to the approval or ratification of those persons in Australia. Persons in Australia acting on behalf of [DFS China] were also in regular telephonic and electronic contact with Kevin Mann and Hilda Mann on behalf of [Manhattan] in Hong Kong.

Claimed loss and damage

18    Manhattan pleads that, in reliance on the representations at [10]-[13] above, it entered into the Lease on 27 November 2009, commenced operating at the Central Building Premises on 8 April 2010, and entered into the 2010 Franchise Agreement on 9 June 2010. Manhattan claims to have suffered loss and damage as a consequence because the Business was not financially viable. Manhattan pleads that it suffered substantial trading losses including:

    Loss of Manhattan’s capital investment in the Business, including fit out expenses, franchise fee, security deposit for the Lease, capital injections to sustain operations, relocation expenses, and expenses in relation to the operation of a temporary store;

    Loss in relation to work done by the directors as employees (which they say exceeded the work they would have expected to do if the Business had been profitable); and

    Incidental losses.

Consideration

19    Sections 52 and 59 are in Div 1 of Part V of the Trade Practices Act. Section 5(1) extends the application of that Division and related provisions of the Trade Practices Act to conduct outside Australia by “bodies corporate incorporated or carrying on business within Australia”. Sections 5(3) to 5(5) limit claims under s 82 and applications under s 87 which relate to conduct under the extension provided by s 5(1) without Ministerial consent. On 8 April 2013, the then Minister gave consent to the proceedings under ss 5(3) and 5(4).

20    Section 6(2) extends the territorial application of Div 1 of Part V to trade or commerce between Australia and places outside Australia, and s 6(3) extends it to conduct which involves the use of “postal, telegraphic or telephonic services”.

21    It is common ground that because the impugned conduct took place outside Australia and DFS China is not incorporated in Australia, ss 52 and 59 can have operation only if DFS China carried on business in Australia at the relevant time and the Representations occurred in trade or commerce between Australia and a place outside Australia. It is also agreed that those are issues of fact. The main focus of argument was on whether the requirements of s 5(1) were satisfied; that is, whether it could be argued that DFS China carried on business in Australia.

22    In its submissions, Manhattan appeared to expand on the particulars set out at [17] above by suggesting that Manhattan carried on business in Australia through the conduct of its affairs by its parent, Dymocks Holdings Pty Limited (Dymocks Holdings), and “sister” subsidiary companies such as Dymocks Franchise Systems (NSW) Pty Limited (DFS NSW) (Dymocks Group of Companies). It suggested that employees of the Dymocks Group of Companies performed their functions as part of the international group headed by Dymocks Holdings; it says that work was conducted out of Dymocks Holdings’ Australian offices by Australian employees of companies in the Dymocks Group of Companies and that this was being done for a lengthy period before September 2009. Attachments to Mr Sanfilippo’s affidavit comprised (among other things):

(1)    copies of a 2003 Information Technology Store Support and Maintenance Agreement to which Manhattan and DFS NSW are parties, and a similar agreement dated in 2006 to which DFS China, Manhattan and DFS NSW are parties (2006 IT Support Agreement). Clause 3 of the 2006 IT Support Agreement requires DFS China “to perform or procure DFS NSW to perform” support services under the agreement, for which Manhattan must pay “support charges” to DFS China under cl 5;

(2)    emails issuing instructions and associated documentation to effect a mandatory change-over to inventory and point of sale software and hardware for the Prince’s Building in 2008 from Sydney based personnel of the Dymocks Group of Companies including Mr Michael Garas, General Manager, Information Technology of the Dymocks Group and Mr Stuart Smith, IT Support Manager;

(3)    a disclosure document and draft franchise agreement issued to Manhattan in Hong Kong under cover of a letter dated 2 February 2010 by Ms Louise Todd, the Franchise Administration Manager with an address in Sydney. The letter was copied to DFS China staff in Hong Kong; and

(4)    correspondence concerning a meeting and training conducted in Hong Kong by Australian based staff of Australian entities in the Dymocks Group of Companies.

23    DFS China argued that Manhattan’s pleadings support a contention only that DFS China carried on business in Hong Kong: that its operations may have been subject to supervision or control from Australia does not alter the fact that the business was carried on only in Hong Kong, or the nature of the trade or commerce between DFS China and Manhattan.

24    DFS China relied on an affidavit sworn by Mr Mark Buckland (Mr Buckland), general counsel to Dymocks Holdings. He says that:

(1)     Dymocks Holdings is the holding company of a group which trades as the “Dymocks Group of Companies”;

(2)     DFS China is, through a non-Australian intermediate holding company, owned as to 55% by Dymocks Holdings and 45% by the South China Morning Post;

(3)     DFS China is not registered as a foreign company in Australia;

(4)     DFS China’s business is to locate potential franchisees in Hong Kong, enter into franchise agreements in relation to the use of the “Dymocks” name for the operation of stores in Hong Kong, assist existing Hong Kong franchisees with site selection and store fit outs, and to manage franchises in Hong Kong;

(5)    all staff who perform those functions are located in Hong Kong and employed by DFS China; and

(6)    DFS China has never carried out these activities in Australia and has only ever carried out these activities in Hong Kong.

25    The factors enumerated by Mr Buckland indicate that DFS China’s business is conducted in Hong Kong. However, Mr Buckland’s conclusion that DFS China has nothing to do with the franchise network in Australia or business activities relating to the “Dymocks” name in Australia does not answer the question of whether DFS China also carries on business in Australia through the Dymocks Group of Companies. The fact that DFS China is not registered as a foreign company in Australia as required by s 601CD of the Corporations Act 2001 (Cth) (Corporations Act) for a corporation which is not incorporated in Australia but carries on business in Australia is not determinative of whether it should be. I reject DFS China’s submission that Mr Buckland’s affidavit evidence is sufficient to dispose of this matter on a summary basis. Mr Buckland’s evidence does not address issues of detail about how DFS China and the wider Dymocks Group of Companies conduct themselves, as raised by Manhattan’s submissions and Mr Sanfilippo’s affidavit.

26    The case law addressed by the parties relies on factual matters which are predominantly of a kind which would more readily support a conclusion that Australian based entities in the Dymocks Group of Companies may have been carrying on business in Hong Kong, rather than that DFS China was carrying on business in Australia. Having said that, much of the case law relates to service of process or enforcement of foreign judgments, which usually relies on having a place of business in a particular jurisdiction: see the cases cited by Merkel J in Bray v F Hoffman-La Roche Ltd (2002) 118 FCR 1 (Bray v F Hoffman-La Roche) at [61]-[75].

27    Counsel for DFS China acknowledged that there may be cases where a parent company carries on business through the agency of its subsidiary: see Amalgamated Wireless (Australia) Ltd v McDonnell Douglas Corporation (1987) 16 FCR 238 at 240-1. However, Counsel went on to argue that there cannot be a case of “mutual agency”. For the reasons suggested by Merkel J in Bray v F Hoffman-La Roche at [76], the conclusion on the facts in Amalgamated Wireless might be open to doubt as to whether the subsidiary was in fact the agent of its parent. However, the resolution of the questions of whether a parent operates though the agency of a subsidiary or (much more unusually) whether a subsidiary acts through the agency of a parent or a sibling subsidiary will always rely on the facts of how the group entities operate.

28    The question to be determined under s 5(1) of whether a corporation carries on business in Australia is very much a question of fact. The resolution of the question is not reliant on DFS China having a fixed place of business in Australia; it will usually involve finding “activities undertaken as a commercial enterprise in the nature of a going concern” on a “continuous and repetitive basis”: see Bray v F Hoffman-La Roche at [62]-[63], quoting the Victorian Court of Appeal in Pioneer Concrete Services Limited v Galli [1985] VR 675 at 701; see also Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd [2013] VSCA 237 (Sunland Waterfront v Prudentia Investments) at [400]-[408]. On the basis of these cases, it would not be enough for Manhattan to show that DFS China’s operations may have been subject to supervision or control from its Australian parent. Manhattan appears to be claiming more than that.

29    Manhattan accepts that the 2010 Franchise Agreement was entered into in Hong Kong by two companies registered in Hong Kong in respect of a store in Hong Kong. In contending that DFS China carries on business in Australia through the Dymocks Group of Companies, Manhattan relies on the test posited by, and reasoning of, Murray J in BHP Petroleum Pty Ltd v Oil Basins Ltd [1985] VR 725 at 733-734:

In these circumstances when one asks the question whether the defendant is carrying on its business in Victoria it is appropriate to ask what is its business and what functions does it perform both in Bermuda and in Victoria. I agree with Mr. Merralls’ submission that this is not to be tested by a comparison of the work done in Bermuda with the work done in Victoria. Indeed the evidence shows that the directors meet in Bermuda from time to time and give instructions to Arthur Robinson & Hedderwicks as to the disposal of the quarterly payments of royalty received. There is other administrative work to be done and when the royalty payment is made from the A.N.Z. Bank in Melbourne to the A.N.Z. Bank in New York the directors arrange for the conversion of Australian dollars into American dollars and the onward payment of the amounts due to the various persons entitled. The critical test in my opinion is, in the light of the nature of the defendant’s business, to examine what is done in Melbourne with a view to answering the question whether the defendant is merely employing solicitors and accountants to carry out certain work for reward or whether, in fact, the work carried out by the solicitors and accountants forms a part and a material part of the defendant’s business as a trustee. The work carried out by Arthur Robinson & Hedderwicks is by no means all work which is necessarily performed by solicitors. It may, from time to time, involve the giving of legal advice, particularly in relation to Australian taxation laws, but much of the work done is of the very essence of the defendant’s business, namely the receipt of the royalty payments, the ascertainment of the appropriate taxation retention, the apportionment of the payments, the transmission of payments to Weeks Petroleum and to other persons beneficially entitled. It is not to the point in my opinion in the present case to say that the solicitors have no independent discretion and no authority to do anything but to carry out the distribution in accordance with instructions received. For that matter, as Mr. Hayne pointed out and as Mr. White agreed in cross-examination, nor has the defendant itself any such discretion.

I therefore have come to the conclusion that the work carried out by Arthur Andersen & Co. and by Arthur Robinson & Hedderwicks does constitute the business of the defendant and that the defendant may be said to be “here” within the meaning of the authorities on that point.

30    Manhattan submits that in carrying out its obligations and its tasks as a franchisor, a material portion of DFS China’s business was conducted from Australia, among other reasons because DFS NSW, an Australian company, was issuing instructions to Manhattan in relation to its software and hardware systems and providing draft franchise agreements and related disclosure documents. The decision of the Victorian Court of Appeal in Sunland Waterfront v Prudentia Investments at [411]-[413] would call for a similar functional analysis, and not a simple enumeration of detailed characteristics, in determining whether any of the Representations were made “in trade or commerce” between Australia and a place outside Australia.

31    It is for the Court to decide, in the interests of justice, at what time the issue of whether s 5(1) has been satisfied should be determined: Bray v F Hoffman-La Roche Ltd at [187]; Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liquidation) (2003) 254 ALR 29 (Reinsurance v HIH) at [228] per Jacobson J. The matters which might demonstrate whether DFS China carried on business in Australia are to a significant extent within the knowledge of the Dymocks Group of Companies. DFS China has yet to put on a defence and no evidence has been adduced apart from the matters addressed by Messrs Buckland and Sanfilippo. It may be that Manhattan is in a position to provide better particulars of its claims as these processes are undertaken.

Disposition

32    Having regard to the reasons in Sunland Waterfront v Prudentia Investments, it may be difficult for Manhattan to establish its contention that DFS China carried on business in Australia through the Dymocks Group of Companies, or engaged in trade or commerce between Australia and Hong Kong. However, the question is not whether the facts pleaded are in themselves sufficient to give rise to a cause of action, let alone a successful one. Rather, the question is whether it would be open to Manhattan, upon the pleadings, to prove facts at the trial which would constitute a cause of action: see Pancontinental Mining Ltd v Posgold Investments Pty Ltd (1994) 121 ALR 405 at 414 per Beaumont J. Having regard to the factual nature of the enquiry and the early stage of the proceeding, Manhattan’s claims should not be struck out at this stage.

33    Nor do I consider that this claim should now be disposed of on a summary basis. The power to dismiss a claim because it discloses no reasonable cause of action will not lightly be exercised: see McKellar v Container Terminal Management Services Ltd (1999) 165 ALR 409 at [12]-[19] per Weinberg J and the cases there cited. At this stage it is not clear that Manhattan’s claim is so obviously untenable that it cannot possibly succeed; there may be relevant factual matters which are not yet in evidence and it cannot be discounted that there is a real issue to be tried: see: Commonwealth v Griffiths (2007) 70 NSWLR 268 at [11]-[12] per Beazley JA, Mason P and Young CJ in Eq concurring.

Franchising Code of Conduct

34    In connection with the 2010 Franchise Agreement and the previous franchise agreements entered into between the parties (the 1999 Franchise Agreement and the 2006 Franchise Agreement) (collectively Franchise Agreements), Manhattan pleads that DFS China induced and encouraged Manhattan to assume that:

    DFS China was bound by the provisions of Part IVB of the Trade Practices Act; and

    DFS China would comply with the provisions of the Code in its dealing with Manhattan.

35    Manhattan’s particulars of the inducements and encouragement, being acts by DFS China consistent with the obligations of a franchisor under the Code, include: (1) giving Manhattan a copy of the Code and a disclosure document and requiring certain acknowledgements from Manhattan about receipt of advice (as required by the Code) before each of the Franchise Agreements were signed in 1999, 2006 and 2010; (2) each of those Franchise Agreements contained provisions required by the Code and each is governed by the law of New South Wales and the parties submitted to the jurisdiction of the Courts of New South Wales and this Court; and (3) in relation to the 2010 Franchise Agreement, the disclosure document which DFS China gave to Manhattan contained a statement that the earnings information given to Manhattan was based on reasonable grounds. Manhattan pleads that it adopted those assumptions.

36    Manhattan says that, in connection with the (then proposed) 2010 Franchise Agreement, DFS China gave Manhattan earnings information for the purpose of item 19 of Annexure 1 of the Code. Manhattan claims that this information is: the Representations in the 24 September 2009 Spreadsheet, the Representations in the 7 October 2009 Spreadsheet, the Reasonable Traffic Flow Representations, and the Viability Representations. Manhattan claims this earnings information was not based on reasonable grounds and was consequently in breach of the Code.

Estoppel claim

37    Manhattan claims that in reliance upon the assumptions outlined at [34], Manhattan entered into the Lease, commenced operating the Business, and entered into the 2010 Franchise Agreement, thereby suffering loss and damage.

38    Manhattan says that it would be unfair and unjust to allow DFS China to resile from the assumptions at [34] and that, in respect of DFS China’s contravention of the Code referred to at [36], Manhattan is entitled to relief as though DFS China were bound by Part IVB of the Trade Practices Act: [30] of the Statement of Claim.

Consideration

39    It appears to be accepted by both parties that s 51AD in Part IVB of the Trade Practices Act, which forbids a corporation from contravening an applicable industry code, does not apply because none of the Franchise Agreements is a “franchise agreement” as defined in cl 4(1) of the Code. One of the necessary elements of a “franchise agreement” established by cl 4(1)(b) of the Code is that the franchisor confers on the franchisee a “right to carry on the business of offering, supplying or distributing goods or services in Australia”. It is common ground that Manhattan’s business under the Franchise Agreements was conducted wholly in Hong Kong. As a result, the statutory remedies under s 82(1) for damages and orders under ss 87(1) and 87(1A) for contravention of s 51AD are not available, even if there was conduct which might otherwise amount to a contravention of the Code.

40    The parties agree that Manhattan pleads a promissory estoppel. The essential element of a promissory estoppel is that it is a restraint on the enforcement of rights and must be negative in substance: see Saleh v Romanous (2010) 79 NSWLR 453 (Saleh v Romanous) per Handley AJA at [74].

41    Manhattan relied on Moratic Pty Ltd v Gordon [2007] NSWSC 5 at [33]. As was pointed out by Counsel for DFS China, it is useful to consider as well [32] in which Brereton J contrasted promissory estoppel and common law conventional estoppel:

In Waterman v Gerling Australia Insurance Co Pty Ltd [2005] NSWSC 1066, 65 NSWLR 300, I compared the elements of these two related estoppels – both are included in the rubric of estoppel in pais [Legione v Hateley, 430 (Mason and Deane JJ)] – so as to reveal their analogies and distinctions in the following terms. In equitable promissory estoppel, it is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of a legal relationship with the defendant; (2) that the defendant has induced or acquiesced in the plaintiff’s adoption of that assumption; (3) that the plaintiff has acted in reliance on its assumption; (4) that the defendant knew or intended that the plaintiff so act; and (5) that it will occasion detriment to the plaintiff if the assumption is not fulfilled [Waltons v Maher, 428-429 (Brennan J)]. In common law conventional estoppel, it is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of its legal relationship with the defendant; (2) that the defendant has adopted the same assumption; (3) that both parties have conducted their relationship on the basis of that mutual assumption; (4) that each party knew or intended that the other act on that basis; and (5) that departure from the assumption will occasion detriment to the plaintiff [Waterman v Gerling, [83], [96]].

The similarities between the two doctrines should not be allowed to mask their differences, which reflect the disparate origins of promissory estoppel and conventional estoppel. Promissory estoppel, a creature of equity, is, typically, focussed on the conscience of the defendant: it operates when the defendant has induced or acquiesced in the adoption by the plaintiff of an assumption that the defendant will not assert its strict legal rights, so to prevent unconscionable (or unconscientious) insistence by the defendant on its strict legal rights. On the other hand, conventional estoppel, a creature of the common law, is focussed on the consensual basis of the parties’ relationship: it operates when both parties have adopted the same assumption as the basis of their relationship, often without appreciating that any departure from the strict legal position is involved, so as to hold both parties to their common understanding.

42    Manhattan argued that DFS China could not, in good conscience, depart from the representation that Part IVB of the Trade Practices Act and the Code applied to their franchise arrangement. Manhattan submitted that its estoppel claim is negative in substance and DFS China is estopped from insisting on its legal rights if, contrary to the representations set out at [34] above (on which Manhattan says it relied), DFS China is not in fact bound by Part IVB of the Trade Practices Act and the Code.

43    However, it is Manhattan who is suing DFS China; DFS China is not asserting rights under any of the Franchise Agreements to make claims against Manhattan. I accept DFS China’s submission that Manhattan’s pleading amounts to an attempt to obtain positive rights to claim damages equivalent to those which a franchisee can obtain under the Code and the Trade Practices Act. The impermissibility of this approach is demonstrated by the analogous comments of Handley AJA in Saleh v Romanous at [73]: Handley AJA agreed that purchasers may establish a promissory estoppel which entitles them to restrain vendors from enforcing a contract of sale in a manner which is inconsistent with pre-contractual promises. But such an estoppel is not the equitable equivalent of a contract, and cannot give the purchasers the positive rights to rescind and recover their deposit that they would have had if the pre-contractual promise had contractual force. See also DHJPM Pty Ltd v Blackthorn Resources Ltd (formerly called AIM Resources Ltd) (2011) 83 NSWLR 728, where this issue was discussed [43]-[47].

Disposition

44    The estoppel claim should be struck out.

45    At the hearing, Counsel for Manhattan conceded the force of DFS China’s arguments against Manhattan’s claim of promissory estoppel and sought leave to amend the Statement of Claim to plead a conventional estoppel. While there was argument concerning whether such an estoppel could validly be pleaded, I do not consider that it is appropriate for the Court to enter into the issue on a hypothetical basis; Manhattan should consider its position and it has leave to amend its pleadings if it considers that it has grounds to do so.

Breach of implied term of contract claim

46    Manhattan’s breach of contract claim relates to the 2006 Franchise Agreement, not the 2010 Franchise Agreement, despite the fact that the Representations pleaded at [36] above related to the franchise to be operated at the Central Building under the 2010 Franchise Agreement which was ultimately executed in June 2010.

47    Manhattan pleads that it was an implied term of the 2006 Franchise Agreement that DFS China would comply with the provisions of the Code in its dealings with Manhattan. Manhattan says that the term is implied by reason of the circumstances set out at [35].

48    Manhattan pleads that DFS China contravened the Code by giving “earnings information” as defined in item 19 of Annexure 1 of the Code, being the Representations referred to at [36] above, which Manhattan says were not reasonably based. Manhattan says DFS China thereby breached the implied term of the 2006 Franchise Agreement and Manhattan consequently suffered the loss referred to at [18].

Consideration

49    Annexure 1 of the Code specifies the information which must be included in a disclosure document if annual turnover is expected to be $50,000 or more (cl 6(2) of the Code). Item 19 provides as follows:

19.1    Earnings information for the franchise, if it is given, must be based on reasonable grounds.

19.2    Earnings information may be given in a separate document attached to the disclosure document.

19.3    Earnings information includes information from which historical or future financial details of a franchise can be assessed.

19.4    If earnings information is not given – the following statement:

The franchisor does not give earnings information about a [insert type of franchise] franchise.

Earnings may vary between franchises.

The franchisor cannot estimate earnings for a particular franchise.

50    Clause 19 of the February 2010 disclosure document provided as follows:

19.1    Earnings information is attached to this Disclosure Document.

19.2     The earnings information is based on reasonable grounds but:

(1)    the earnings information is provided as a guide only and does not reflect the actual sales, margins, expenses or profitability that the franchisee may achieve from the franchised business; and

(2)    the earnings information is provided subject to all of the conditions set out in clause 2.1 of the franchise agreement.

51    It is common ground that there was no “earnings information” attached to the February 2010 disclosure document.

Application of the Code to Manhattan’s business and available remedy

52    DFS China submitted that as cl 4(1)(b) of the Code applies only to franchise agreements relating to goods or services supplied in Australia, even if DFS China was obliged to comply with the Code in its dealings with Manhattanthe Code did not impose any requirements in relation to that business.

53    DFS China further submitted that if the Code applies to its arrangements with Manhattan, then the remedies are statutory under s 51AD and s 82 of the Trade Practices Act. It says that statutory remedies do not become contractual remedies merely through the implication of a term into a contract; and even if it could be said that there was an implied term concerning compliance with the Code, that fact could not act to enlarge the remedies under contract by “attempting to shoehorn the Code into the contract.”

54    Manhattan conceded that the statutory remedies are not available but pressed the argument that damages was a remedy available for breach of such an implied term.

55    I would not strike out this claim on the bases identified by DFS China. Although no case was brought to my attention which squarely deals with this issue, there is no reason in principle why it is not open to parties to agree, expressly or impliedly, that they will conduct their relationship as though a statutory provision or regime of a domestic or foreign law applied to the relationship notwithstanding that it does not in its terms. Contrary to DFS China’s submissions, in my view the express terms of cl 4(1)(b) of the Code do not preclude an argument that there is an implied term that DFS China would comply with the Code in its dealings with Manhattan as though it did apply to a franchise agreement for a Hong Kong based business. While I accept that statutory remedies would not apply, the fact that there are statutory remedies where the Code does apply under the Trade Practices Act does not preclude an argument that Manhattan is entitled to damages as a remedy for proved failure by DFS China to act in accordance with such an implied term of a contract.

Basis for implying terms and implication into 2006 Franchise Agreement

56    DFS China referred to BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 and Strategic Property Holdings No 3 Pty Ltd v Austbrokers RWA Pty Ltd [2012] NSWSC 1570 which establish that the criteria for the implication of a term into a contract are that the term is:

    reasonable and equitable;

    necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;

    so obvious that it “goes without saying”;

    capable of clear expression; and

    does not contradict any express term in the contract.

57    DFS China submitted that the Representations set out at [36] are representations which relate to entry into the 2010 Franchise Agreement and there is no necessity for implying a term into the 2006 Franchise Agreement which relates to those Representations. I do not understand Manhattan’s argument to be confined to a term dealing with the Representations set out at [36]: Manhattan submits that the implied term is that DFS China would comply with the Code. The claimed breach of the 2006 Franchise Agreement by reason of the failure to comply with item 19 of Annexure 1 is simply one instance of an alleged failure by DFS China to comply with the implied term. It would be for Manhattan at trial to establish that the implied term is necessary for the business efficacy of the 2006 Franchise Agreement. While this may be a high hurdle at trial, given the length and complexity of the 2006 Franchise Agreement and related documents, Manhattan should not, for this reason, be precluded from pleading its claim at this stage.

58    DFS China submitted that an implied term of the 2006 Franchise Agreement that DFS China would comply with the Code is inconsistent with express terms of both the 2006 and 2010 Franchise Agreements, which contain clauses as follows:

(i)    clause 22.10)(1): All statutory or implied conditions and warranties which would otherwise be given by the Franchisor are excluded to the extent permitted by Law.

(ii)    clause 2.1(2)(g): The Franchisor gives no warranty as to the accuracy or reliability of the Earnings Information and neither the Franchisor nor any of its employees or agents accepts responsibility in any way to any person in respect of the Earnings Information including any errors or omissions however caused.

(iii)    clause 2.1(2)(h): Neither the Franchise Owner nor the Guarantor have relied to any extent whatever upon the Earnings Information in making a decision to execute this Agreement.

(iv)    clause 2.1(2)(a): The Earnings Information and all assumptions upon which it is based, have been supplied to and verified on behalf of the Franchise Owner by an independent accountant or an independent business Adviser.

(v)    clause 22.9(1): This Agreement (a) contains the entire agreement and understanding between the parties on everything connected with the subject matter of this Agreement; and (b) supersedes any prior agreement or understanding of anything connected with that subject matter.

(vi)    clause 22.9(2): Each party has entered into this Agreement without relying on any representation, promise or inducement made or given by any other party or any person purporting to represent that party.

59    For the purposes of both the 2006 and 2010 Franchise Agreements, “Earnings Information” includes “all financial projections, model figures and other material relevant to the earnings, projected earnings or financial performance of the Business attached to the Disclosure Document or produced by the Franchisor to the Franchise Owner at any time prior to the execution of this Agreement by the Franchise Owner”.

60    It is clear that the clauses identified by DFS China may provide a foundation for an argument that Manhattan is precluded from a claim to damages for loss because earnings projections provided to Manhattan before the 2006 Franchise Agreement or the 2010 Franchise Agreement were executed turned out to be incorrect, whether or not those projections were attached to a disclosure document. The clauses include express disclaimers of reliance, provision for the Franchise Owner to obtain independent verification of the earnings projections, and an entire agreement clause. Indeed, one might expect those clauses to be pleaded as a defence to the Representations claim.

61    Manhattan submitted that the clauses of the 2006 and 2010 Franchise Agreements referred to at [58] have no application because at the time the Representations set out at [36] were made in September/October 2009, the 2006 Franchise Agreement was already on foot and Manhattan was looking to renew or extend that agreement in respect of the Prince’s Building. Manhattan says that at that time DFS China was required to provide Manhattan a disclosure document under cl 6B(1) of the Code, which provides as follows:

(1)    A franchisor must give a current disclosure document to:

…

(a)    a prospective franchisee; or

(b)    a franchisee, if the franchisor or the franchisee proposes to renew, extend, or extend the scope of the franchise agreement.

62    Clause 6B(1) does not provide timing for when the disclosure document must be provided. That timing is supplied by cl 10 which provides:

A franchisor must give:

(a)    a copy of this code; and

(b)    a disclosure document; and

(c)    a copy of the franchise agreement, in the form in which it is to be executed;

to:

(d)    a prospective franchisee at least 14 days before the prospective franchisee:

(i)    enters into a franchise agreement or an agreement to enter into a franchise agreement; or

(ii)    makes a non-refundable payment (whether of money or of other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or

(e)    if the franchisor or franchisee proposes to renew, extend or extend the scope of the franchise agreement – a franchisee at least 14 days before renewal, extension, or extension of the scope of the franchise agreement.

63    Manhattan says that the commercial reality is that all of the relevant acts it relies on for its loss had already occurred by the time it entered into the 2010 Franchise Agreement; it had entered into the Lease in November 2009, it operated a temporary store in the Central Building from January to March 2010, and trading commenced at the permanent store in April 2010.

64    DFS China submitted that the Representations at [36] relate to the 2010 Franchise Agreement and it is inconsistent with the clauses set out at [58] for Manhattan to claim a right to rely on representations made after the 2006 Franchise Agreement was entered into on the basis of an implied term concerning compliance with the Code. There is considerable force to these arguments. However, DFS China has not pointed to any provision of the 2006 Franchise Agreement which negates reliance by Manhattan on post-contractual representations and that leaves open the issue of whether there is true inconsistency. That issue would appropriately be determined at trial.

What is “earnings information”?

65    The more difficult issue at this stage is whether Manhattan pleads a tenable claim that, in the absence of “earnings information” being attached to the February 2010 disclosure document, the requirement in item 19.1 of Annexure 1 to the Code that earnings information, “if it is given, must be based on reasonable grounds” applies to the “information from which historical or future financial details of a franchise can be assessed” provided by DFS China. Manhattan says that that information is the Representations set out at [36] which are alleged to have been made in September/October 2009 during the term of the 2006 Franchise Agreement and before Manhattan entered into the Lease in November 2009, and that this information is “earnings information”. Manhattan acknowledges that this involves an element of “time shifting”.

66    There is considerable force to DFS China’s argument that the item 19.1 requirement only applies to earnings information provided in or with a disclosure document and if there is to be a breach of the Code (and therefore of an implied term), it can only relate to the failure either to attach earnings information to or include a statement of the kind envisaged by item 19.4 in the February 2010 disclosure document. It is also difficult to see how oral representations (such as the Traffic Flow Representations which are alleged to have been made orally) could constitute “earnings information” for the purposes of item 19 of Annexure 1.

67    Clause 6(1) of the Code imposes the obligation to create a disclosure document before a franchisor enters into a franchise agreement and cl 6(2)(a)(i) establishes the requirement that it be in the form set out in Annexure 1 if expected annual turnover exceeds $50,000. Clause 7 of the Code requires that information in a disclosure document be set out in the form and order and under the numbering and titles prescribed by the relevant Annexure. Annexure 1 is headed “Disclosure document for franchisee or prospective franchisee”. All of these provisions would indicate that the items set out in Annexure 1 are directed only to the content of the disclosure document.

68    Clause 6A of the Code establishes the purpose of the disclosure document as being to give a prospective franchisee or a franchisee intending to renew, extend or extend the scope of a franchise agreement “information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise” and give the franchisee “current information from the franchisor that is material to the running of the franchised business”. As argued by Manhattan, cl 6B(1) requires a franchisor to give a current disclosure document to a prospective franchisee (that is, a person who deals with the franchisor for the right to be granted a franchise) or a franchisee if the franchisee or the franchisor proposes to renew, extend or extend the scope of the franchise agreement.

69    As a matter of policy, there is force to Manhattan’s argument that the time at which Manhattan needed the “earnings information” was before it entered into the Lease, even though DFS China had no obligation to enter into a franchise agreement with respect to the Central Building at that time. It exposes a gap in the scheme of the Code if the requirement in item 19.1 (that earnings information, if it is provided, be reasonably based) does not apply to financial forecasts provided by the franchisor otherwise than under a disclosure document where the franchisee relies on the forecast to undertake substantial obligations to third parties which are necessary to enable the conduct of the franchised business.

70    However, paragraphs (d) and (e) of cl 10 of the Code only require the franchisor to give the prospective franchisee or franchisee a disclosure document with the contents prescribed by Annexure 1 at least 14 days before entry into the franchise agreement, agreement to enter into a franchise agreement or the extension, renewal or extension of scope of a franchise agreement. The term of the 2006 Franchise Agreement was due to expire on 26 October 2006. Manhattan did not pursue a claim that its entry into the Lease in November 2009 with DFS China’s knowledge, and the conduct of Manhattan’s Business at the Central Building on a temporary basis from January 2010, amounted to “entry into a franchise agreement or an agreement to enter into a franchise agreement” or an extension, renewal or extension of the scope of the 2006 Franchise Agreement in breach of the Code because no disclosure document was given before that occurred. Instead, Manhattan acknowledged that the disclosure document in relation to the Central Building was provided in February 2010 (without attached earnings information) and that it related to the 2010 Franchise Agreement.

71    The scheme of the Code is to focus the obligation to provide a disclosure document on the decision to enter into, renew, extend or extend the scope of a franchise agreement. It does not focus that obligation on the time at which a franchisee or prospective franchisee enters into collateral arrangements with third parties who are not associated with the franchisor. The only general protection afforded by the Code to a franchisee in relation to representations made by a franchisor is under cl 16(1A), which prohibits a franchise agreement from containing or requiring a franchisee to sign a waiver of any verbal or written representation made by the franchisor.

Disposition

72    The question of whether the Representations set out at [36] constitute “earnings information” does not involve a factual enquiry: the fact that the February 2010 disclosure document did not have “earnings information” attached is not in dispute. There is only a question of interpretation of the Code, and in my view the interpretation posited by Manhattan is not available.

73    Accordingly, the implied contract term claim is doomed to fail and therefore should be struck out.

Misrepresentation

74    Manhattan claims that each of the First Daily Traffic Representation, the Second Daily Traffic Representation, the Reasonable Traffic Flow Representations, the Traffic Count Representation and the Reasonable Grounds Representations were false at the time they were made, and that they constituted misrepresentations. Manhattan says it was reasonable for it to rely on these representations, and that it suffered the loss specified at [18] above as a consequence.

75    For this reason Manhattan claims the 2010 Franchise Agreement is liable to be rescinded and/or any part of it set aside by the Court.

Consideration

76    DFS China submitted that this claim should be struck out on the basis that the relief sought by Manhattan is not available. DFS China submitted that the misrepresentation pleaded by Manhattan amounts to innocent misrepresentation since there is no pleading of negligent or fraudulent misrepresentation, a position not contested by Manhattan. The remedy for innocent misrepresentation (if found) is rescission ab initio of the 2010 Franchise Agreement and that is dependent on it being possible to restore the parties in substance to their pre-contractual position: see Hunter BNZ Finance Ltd v C G Maloney Pty Ltd (1988) 18 NSWLR 420 at 440.

77    DFS submitted that the 2010 Franchise Agreement was on foot and performed for several years with both parties obtaining the benefit of performance. DFS China said that Manhattan’s entry into the Lease and beginning to operate the Business are irrelevant as the 2010 Franchise Agreement did not operate to grant the Lease or convey the Business. Having regard to the nature of the 2010 Franchise Agreement (essentially a licence to use business names and systems), it is not possible to “wind-back” the obligations and performance of the parties. Rescission of the 2010 Franchise Agreement would only remove from Manhattan the licence it had to operate the Business so that it would have done so without authority. DFS China points out that the term of the 2010 Franchise Agreement has concluded and, although some rights and obligations have already accrued (Mr Buckland’s affidavit suggests that Manhattan owes DFS China money under the 2010 Franchise Agreement), the contract has no future operation.

78    Manhattan submitted that it is not rescission ab initio which it seeks. It contended that “rescission” is susceptible of more than one definition, citing the five different uses of the term “rescission” discussed in R Meagher, D Heydon and M Leeming, Equity: Doctrines & Remedies (4th ed, LexisNexis Butterworths, 2002) (Meagher, Gummow and Lehane) at [24-005]-[24-035]. In this case, Manhattan suggests that it is used in the sense that it is open to a party to a contract, upon breach by the other party, to elect to treat the contract as no longer binding: Shevill v Builders Licensing Board (1982) 149 CLR 620 (Shevill) at 625-6 per Gibbs CJ.

79    This is not a claim for breach of contract, or a situation where a contract has been repudiated, so the reasoning in Shevill has no application. It is a claim based on innocent misrepresentation and I accept that the relevant remedy is rescission ab initio (see Meagher, Gummow and Lehane at [24-020]; see also JW Carter, Contract Law in Australia (6th ed, LexisNexis Butterworths, 2013) at [18-37]-[18-38], [18-43]-[18-46]. As it is not possible to substantially restore the parties to their pre-contractual position, I will order that this claim be struck out.

80    Counsel for Manhattan made reference to the possibility of re-pleading this claim under s 87 of the Trade Practices Act, the Minister having given his consent under s 5(4). There would be no point to such re-pleading since the claims under ss 52 and 59 cover essentially the same territory and the remedies provided by s 87 can only be claimed for relevant contraventions of the Trade Practices Act.

Security for costs

81    DFS China sought an order that Manhattan give security for costs pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) (FCA Act), Part 19 of the Rules and s 1335(1) of the Corporations Act. Based on the affidavit of its solicitor, Mr Gavin Creighton (Mr Creighton), DFS China claims that its costs to the time of the hearing were $56,500 (plus GST) and its estimated future costs are $260,000 (plus GST), being an aggregate amount in the order of $350,000 (GST inclusive).

Principles

82    The discretion to order security for costs under both s 1335(1) of the Corporations Act and s 56 of the FCA Act has been described as “unfettered”, but it must be exercised “judicially”, by reference to established principles. The factors which have developed to guide the discretion broadly strike a balance between the interests of the plaintiff corporation in conducting litigation to protect or enforce its rights, and the interests of a defendant in not being exposed to the prejudice of being unable to recover costs if it is successful.

83    In Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 (Wollongong City Council v LBC) at [28]-[34], Beazley JA (as she then was, with whom Meagher and Barrett JJA agreed) summarised the manner in which a court should approach an application for security for costs against a corporate plaintiff under s 1335(1) of the Corporations Act and r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW):

[28] Both sources of power involve the exercise of a discretionary judgment. In approaching its task in the case of a corporation, the court should adopt a practical commonsense approach to the examination of the financial affairs of the corporation: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 at [15].

[29] The principles governing the exercise of the discretion are well established and are relevantly the same in respect of each source of power: see Livingspring v Kliger Partners at [10]. The party seeking an order for security for costs (who, for convenience I will refer to as the defendant) bears the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful: see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park Pty Ltd (in liq) v Australian and New Zealand Banking Corporation [2007] NSWCA 344; Prynew Pty Ltd v Nemeth [2010] NSWCA 94.

[30] There is no predisposition to the making of an order: see Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623–624; KP Cable Investments v Meltglow. Once the defendant has discharged the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the party against whom the order is sought (who I will refer [to] as the plaintiff) to establish a reason why security should not be granted: KP Cable Investments v Meltglow; Equity Access Ltd v Westpac Banking Corporation; Pioneer Park v Australia and New Zealand Banking Corporation; Prynew Pty Ltd v Nemeth.

[31] In Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643, Spender J, at [9], summarised the factors that have been identified in the case law as governing the exercise of discretion, namely:

(a)     The quantum of risk that a costs order will not be satisfied;

(b)     Whether the making of an order would be oppressive in that it would stifle a reasonably arguable claim;

(c)    Whether any impecuniosity of the applicant arises out of the conduct complained of;

(d)     The prospects of success;

(e)     Whether there are aspects of public interest which weigh in the balance against such an order;

(f)     Whether there are any particular discretionary matters peculiar to the circumstances of the case.

[32] Delay is also a relevant factor in determining whether an application for security for costs is to be made: Commonwealth v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 at 762; Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71; KP Cable Investments v Meltglow. However, delay is not of itself a disentitling factor: see Bryan E Fencott v Eretta; Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114.

[33] If the plaintiff’s adverse financial circumstances are alleged to be due to the effect of the defendant’s alleged conduct subject of the claim, the plaintiff bears the onus of establishing the adequacy of its financial position before the dealings with the defendant and that the defendant’s conduct either caused, or at least materially contributed to, the plaintiff’s inability to meet an order for costs: see Fiduciary v Morningstar Research [2004] NSWSC 664; 208 ALR 564 at [100]; Jazabas Pty Ltd v Haddad [2007] NSWCA 291. Further, where the plaintiff’s claim is based upon a loss of profit, the court will take a more cautious approach in its consideration of the cause of impecuniosity than where the claim is based on the infliction of damage: Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC 312; ATPR ¶40–544 at 46, 428; Jazabas v Haddad at [33].

[34] There is a further matter to which reference should be made. In some cases, persons who stand behind a plaintiff corporation, or who otherwise stand to benefit from the litigation, may offer to be responsible for the costs. Should that occur, it may provide a reason for the court to exercise its discretion in a plaintiff’s favour and not order security: see KP Cable Investments v Meltglow; Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306; Prynew v Nemeth at [33]–[45].

84    It is not disputed that Manhattan is a corporation registered in Hong Kong or that it has no assets in Australia. In exercising the discretion under s 56 of the FCA Act, the practice has been that a party who is not ordinarily resident in Australia and has no assets within the jurisdiction is normally ordered to give security for costs. These two factors are regarded as circumstances of “great weight” in determining whether such an order should be made, unless that party can point to other circumstances which overcome the weight to be accorded to those factors. The purpose is to provide a fund available within the jurisdiction of this Court against which it can enforce an order for costs, so that the respondent does not bear the risk as to certainty of enforcement in the foreign country and the time and complexity of any action which might be necessary to effect enforcement: see N.V. Sumatra Tobacco Trading Company v British American Tobacco Australia Services Limited [2008] FCA 1542 at [13]-[15] per Greenwood J.

Consideration

Choice of law

85    Manhattan submitted that the parties chose the jurisdiction of the Federal Court of Australia by agreement, and therefore the fact that Manhattan is an overseas company should not weigh heavily. I reject that submission. It is difficult to see why this factor should be relevant, but even if it were thought to be relevant, DFS China did not act oppressively by requiring choice of governing law or forum in a jurisdiction unfamiliar to the Manns and convenient to the Dymocks Group of Companies, whose head office is in Sydney. The Manns, through Mr Sanfilippo, said that Manhattan would not have entered into the Franchise Agreements had they not been governed by Australian law with the forum for disputes being Australian courts.

Manhattan’s financial position

86    Manhattan’s sole operations were the bookstore business in the Prince’s Building conducted under the 1999 and 2006 Franchise Agreements and the Business under the 2010 Franchise Agreement. Manhattan ceased operating the Business and surrendered the lease for Central Building in August 2012. Manhattan’s balance sheet since 2010 has had a negative balance. Mr Buckland’s affidavit annexed evidence of Manhattan’s audited September 2010 balance sheet which disclosed that it had net assets of HKD100,855 as at September 2009 and net liabilities of HKD942,945 as at September 2010. Mr Buckland suggested a conversion rate of HKD8 to AUD1 was appropriate, and that was not disputed. Mr Buckland also provided profit and loss statements for Manhattan which appear to have been generated using MYOB software for each quarter between 1 October 2010 and 30 September 2011 and three different statements which are each headed 1 October 2011-1 December 2011, but which appear to be for the three quarters of the 2012 financial year in which Manhattan operated; none was explained but all appear to demonstrate substantial operating losses.

87    It is not disputed that Manhattan is not itself in a position to meet a judgment for costs, and that accords with the evidence provided. It is therefore now for Manhattan to establish why an order for security for costs should not be made on a discretionary basis.

Was Manhattan’s impecuniosity caused by DFS China?

88    Manhattan submitted that its financial position is due to DFS China’s conduct about which Manhattan complains in these proceedings. Manhattan carries the onus of establishing both the adequacy of its financial position before the conduct complained of, and that DFS China’s conduct caused or at least materially contributed to Manhattan’s inability to meet an order for costs: see Jazabas Pty Ltd v Haddad [2007] NSWCA 291 (Jazabas v Haddad) at [94]-[95] per McClellan CJ at CL. Speculation is not appropriate: Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd (No 5) [2011] FCA 1041 at [33].

89     There are three pieces of evidence provided by Mr Sanfilippo:

    He says that over a ten year period between 1999 and 2009, while Manhattan conducted the business in the Prince’s Building, the Manns drew average salaries of around AUD220,000 per annum from the business’ revenue, and after adding back entertainment, vehicle, travelling and franchisee salary expenses, the average yearly profit was around AUD286,000 per year;

    He says that Mr Mann left Hong Kong in October 2011 to work in Australia because of the losses being incurred by Manhattan; and

    He annexes a balance sheet for Manhattan as at 30 September 2009 (all figures in HKD). The balance sheet shows: (1) inventories fell from $2,350,397 in 2008 to $1,887,502 in 2009; (2) cash and bank balances of $343,613 in 2008 rising to $937,403 in 2009; (3) trade creditors falling from $4,052,183 in 2008 to $3,762,609 in 2009; (4) a current SME bank loan of $160,200 and a non-current SME bank loan of $39,050 in 2009; (5) amounts due to a director of $302,261 in 2008 falling to $268,494 in 2009; and (6) net liabilities in 2008 of $231,542 rising to a net profit of $100,855 in 2009.

90    Manhattan’s audited accounts for the 30 September 2009/10 year, put into evidence by Mr Buckland, indicate (among other things) that (all amounts in HKD):

    Manhattan’s net assets/liabilities fell from $100,855 assets in 2009 to $942,945 liabilities in 2010;

    Manhattan’s revenue dropped from $19,535,276 in 2009 to $10,012,411 in 2010;

    bank loans increased from $199,250 in 2009 to $2,765,421 in 2010. It appears that the Manns supported the loans by the provision of guarantees;

    minimum lease payments for land and buildings fell from $3,663,640 in 2009 to $3,015,821 in 2010;

    the Manns made a $999,998 capital injection into Manhattan;

    in 2009, Manhattan owed a director $268,494. In 2010, a director owed Manhattan $414,490, and no amount was owing to a director;

    its profit before income tax dropped from $418,861 profit in 2009 to a loss of $2,043,798 in 2010;

    directors’ emoluments fell from $1,870,098 in 2009 to $1,341,036 in 2010. Applying an exchange rate of HKD8 to AUD1, this would indicate directors’ emoluments of approximately AUD233,800 in 2009 and approximately AUD167,600 in 2010;

    cash at bank fell from $937,403 in 2009 to $4,788 in 2010; and

    inventories fell from $1,887,502 in 2009 to $1,481,470 in 2010 and trade payables fell from $3,762,609 in 2009 to $2,240,940 in 2010.

91    The unaudited profit and loss statements for Manhattan which Mr Buckland put in evidence for the 2011 financial year and nine months of the 2012 financial year appear to demonstrate that Manhattan made a net loss of HKD2,696,886.52 in the financial year ended 30 September 2011, including “franchise owner” deductions for salary, housing allowance, child education allowance, motor vehicle and entertainment of approximately HKD1,466,790. In the 2012 financial year, the net loss was HKD477,610 with no apparent drawings related to the franchise owner; the statements show only minimal staff costs.

92    I accept Counsel for DFS China’s submission that the onus is on Manhattan to establish its contention by evidence. However, as DFS China has led evidence of Manhattan’s 2010 audited financial statements and its management accounts for 2011 and nine months of 2012, I should also take that evidence into account. No audited accounts were provided for the 2010/2011 or the 2011/12 financial years.

93    Mr Sanfilippo supplied no documentary evidence to support his evidence referred to at [89] above about level of the Mann’s drawings from Manhattan’s business between 1999 and 2009. Nor did he explain the exchange rate used to derive these figures. However, for the purposes of this interlocutory application, I accept the evidence that the Manns took drawings around AUD220,000 per annum with additional benefits in 2009, since this is supported by the audited financial statements for the 2009/10 financial year showing director emoluments of HKD1,870,098 (approximately AUD234,000) in 2009. It is not clear to what the amounts owing to “a director” in 2008-2009 related.

94    The Manns’ drawings from Manhattan, together with the 30 September 2009 balance sheet, indicate that the business was viable with relatively minimal bank loans for ten years.

95    DFS China submitted that there is no evidence that Manhattan would have been able to meet an order for security for costs as at 30 September 2009 because there is no evidence that the Manns would have been willing to forego drawings to enable Manhattan to support an order, and Manhattan only had net assets of approximately AUD12,500 (HKD100,855) at that time.

96    It is my view that as at 30 September 2009, it is more likely than not that Manhattan would have been in a financial position to meet an order for security for costs in the order of AUD230,000, being around two thirds of DFS China’s estimated costs and therefore in the order of a judgment for costs on a party/party basis if DFS China’s estimate were to be accepted. Manhattan had cash at bank of HKD937,403, which is more pertinent than the net assets position in what is essentially a cash flow business. There is evidence that the Manns were willing to support Manhattan. Manhattan’s balance sheet for 2009 indicates that there were amounts “due to a director”. Further, it is clear from the 2009/10 audited accounts that Manhattan was able to raise a bank loan of HKD3 million with the support of guarantees from the Manns, and they provided personal guarantees of Manhattan’s obligations under the Franchise Agreements.

97    The more difficult question is whether there is sufficient evidence that the apparent decline in Manhattan’s fortunes from 1 October 2009 was due to the conduct of DFS China. I accept DFS China’s submission that caution must be exercised as Manhattan’s claim relates to representations made by DFS China which Manhattan says led to its failure to make expected profits: Wollongong City Council v LBC at [33]. DFS China submits that to determine this issue, the Court must take a provisional view of the merits of Manhattan’s claims: Sylverton Pty Ltd v Minter Ellison [2011] FCA 1072 at [10].

98    It is difficult at this early stage of the proceedings to form a view of the merits of Manhattan’s claims when there is so little evidence and no pleadings other than the Statement of Claim. I have refused to strike out Manhattan’s Representations claims or to summarily dismiss them. The challenge to the Representations claims was jurisdictional, which is dependent on a factual situation which is not fully exposed at this point in the litigation. The substantive merits of the Representations claims have not been considered at all. Although they may face difficulties, Manhattan’s Representations claims appear bona fide and raise real issues to be tried. They are not doomed to fail. I will accordingly treat the strength of the Representations claims as a neutral factor in the exercise of discretion. See: Jazabas v Haddad at [83]-[84]

99    Counsel for Manhattan suggested that in view of s 51A of the Trade Practices Act, the onus of proof fell on DFS China to demonstrate that it had reasonable grounds for making the Representations. Section 51A deems to be misleading a representation as to a future matter made by a corporation without reasonable grounds, and says that the corporation will be deemed not to have reasonable grounds unless it produces evidence to the contrary. I consider Manhattan’s argument concerning s 51A to have been misconceived and commend the reasons of Foster J in SPAR Licensing Pty Ltd v MIS QLD Pty Ltd [2014] FCAFC 50 at [71]-[74] and the cases there cited.

100    It is clear that the revenue of Manhattan went into terminal decline when it left the Prince’s Building. Revenue fell from HKD19,535,276 in 2009 to HKD10,012,411 in 2010. The 2009/10 financial year is the one in which the Prince’s Building store closed (at the end of the first quarter in December 2009), there was a temporary store in the Central Building (from January to March 2010), and the Business traded from the permanent shop (for which Manhattan incurred expenditure for fit out) in the second half of the period; changes in revenue and profitability in this period are clouded by this disruption. The decline in the period after 1 October 2011 is obscured by Mr Mann’s departure from Hong Kong in October 2011: from the very low staff costs (comparatively) it appears that the shop was not run at full force in that period. For the nine months of that year, “total income” was HKD4,167,084 and net loss was (HKD477,610). However, the quarterly profit and loss statements for the period from 1 October 2010 to 30 September 2011 (which are not clouded by those issues) show that “total income” for the period was HKD7,516,518 and the net loss was (HKD2,696,885) (inclusive of drawings by the Manns for owner’s salary, accommodation allowance, motor vehicle/parking, child education allowance and entertainment of HK$1,466,790).

101    This material does invite a conclusion that it was the move to the Central Building which occasioned the precipitous decline in Manhattan’s revenue. Although the reason why Manhattan was unable to obtain a new lease at the Prince’s Building was unexplained, it is not disputed that Manhattan had operated a viable “Dymocks” franchise from that building for ten years and that was its sole business activity. This contrasts with Sharjade v Darwinia Estate Ltd [2006] NSWSC 708, in which the plaintiff was a $2 company with no business track record. Similarly, in M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97, the alleged unauthorised use of the plaintiff’s production company’s concept for a television program by the defendant television station did not cause the plaintiff’s impecunious state, it simply did not relieve it.

102    As deposed by Mr Buckland, it was DFS China’s function to assist franchisees with site selection for “Dymocks” bookstores in Hong Kong and there is evidence that DFS China employees performed that role in this case. On that basis, taking a neutral view as to the merits of Manhattan’s Representations claims, it can be said that DFS China’s conduct was factually a contributory cause of Manhattan moving to the Central Building, and hence to Manhattan’s impecuniosity. Although I am not in a position to form a view as to whether DFS China’s conduct amounted to “wrongdoing”, this factor is relevant in informing the manner of the exercise of the discretion.

Relative size of Manhattan and Dymocks Group of Companies and insurance

103    Manhattan has suggested that the Court should take into account the relative size of Manhattan and the Dymocks Group of Companies and the fact that DFS China has the benefit of insurance. Manhattan relied on the comment of Basten JA in Pioneer Park Pty Ltd v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344 at [56]:

It may be that a court will be more sympathetic to an application from a respondent with limited funds than a respondent which is a major corporation: see Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180 at 186 (King CJ) and Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61 at 65 (Ormiston J), referred to by McClellan CJ at CL in Jazabas Pty Ltd v Haddad [2007] NSWCA 291 at [76]. Nevertheless, as implied by Brooking J in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1989) 8 ACLC 29 at 32–33, large corporate defendants should not be seen as standing “outside the policy of the security for costs provisions”. However, to accept that they do not, does not in turn require the Court to ignore the fact that they “stand in no special need of care and protection”, as Brooking J expressed the point. Thus, it might be seen as oppressive to allow a large corporate defendant to obtain an order for security for costs which would be likely to stifle the litigation in circumstances where it could be seen that the claim had potential merit and that the quantum of costs would in any event be a relatively insignificant amount for the corporate defendant, though beyond the capacity of the corporate plaintiff to pay. To order security in such circumstances may constitute a form of “oppression”.

104    In this case, the Dymocks Group of Companies operates a significant network of “Dymocks” bookshop franchises, including those in Australia for which DFS NSW is the franchisor and those in Hong Kong for which DFS China is the franchisor. Although the possibility that a large commercial franchisor might use its greater means oppressively to deny a franchisee access to the courts by means of an application for security for costs is apparent, it has not been suggested that DFS China’s application has been made for an improper purpose of stultifying the litigation rather than protecting its own position. In those circumstances, the relative strength of DFS China’s financial position should not be regarded as oppressive: see Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 at [30]-[36].

105    DFS China concedes that it is insured but points out that there is no evidence before the Court of the amount of deductibles or other conditions which might attach to that insurance. The fact that DFS China has insurance coverage should not weigh in the balance: I accept the reasoning of Lindgren J in Instyle Contract Textiles Pty Ltd v Good Environmental Choice Services Pty Ltd (2009) 181 FCR 360 at [24]-[32]:

[24] Uninstructed by authority, I would have thought that the expression “the costs of the defendant” in s 1335(1) refers to the costs of the defendant as between defendant and plaintiff, and that insurance is irrelevant. That is to say, I would have thought that if the defendant has a solicitor on the record who is charging someone fees and disbursements there are “costs of the defendant” even if that solicitor is in fact retained by an insurer to which the solicitor addresses his or her invoices.

[25] Instyle relies on Remm Construction (SA) Pty Ltd v Wallbridge and Gilbert Pty Ltd (1991) 162 LSJS 99; [1991] SASC 3090 (Remm). In that case the relevant defendants were engineers. They had professional indemnity insurance, or at least the application for security before the Master proceeded on the assumption that they did with respect to the causes of action pleaded against them. The Master nonetheless ordered the plaintiff to provide a security. The plaintiff appealed.

[26] Mullighan J reviewed the authorities. There was an inconsistency of approach between that taken by Ormiston J in Irwin Alsop Services v Mercantile Mutual Insurance Company Ltd [1986] VR 61 (Irwin) and that taken by Brooking J in Prime Forme Cutting Pty Ltd v Baltica General Insurance Company (1989) 8 ACLC 29 (Prime Forme). In Irwin, the defendants were two pools of insurers. Ormiston J had described them (at 65) as “pre-eminently loss-bearing and loss-sharing entities, whose raison d’Être is their ability to shoulder the losses of others albeit on a commercial basis”. His Honour expressed the opinion (at 66) that “it is not ordinarily appropriate to grant security for costs in favour of an insurer defendant, certainly where the existence of a relevant policy is not in dispute”.

[27] In Prime Forme, Brooking J disagreed, saying that the fact that the party seeking security had substantial means or was liable to be sued because of its business or profession was irrelevant. His Honour considered (at 32) that s 533(1) of the Companies (Victoria) Code (a predecessor of s 1335(1) of the Corporations Act) should not be viewed as a provision designed to protect those unable to protect and cover themselves against the costs of litigation. Rather, his Honour thought that the provision was designed to protect defendants sued by insolvent companies against the risk that an order for costs in favour of the defendants would prove fruitless.

[28] In Remm, Mullighan J (at 111) accepted the views of Brooking J as “stating the current position”, although he distinguished Irwin as a case in which the insurer was the defendant and in any event said that a close reading of Ormiston J’s reasons in that case showed that his Honour had not regarded the presence of insurance as determinative against the ordering of security.

[29] Mullighan J concluded that the Master had not erred in exercising his discretion to order security for costs.

[30] The decision of Mullighan J in Remm does not support Instyle’s argument and is in fact against it.

[31] A solicitor who had the benefit of professional indemnity insurance sought security in Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 (Livingspring). The plaintiff urged the court to take the insurance into account. Maxwell P and Buchanan JA stated:

[67] We can see no reason in principle why an insured defendant should be in any different position from an uninsured defendant for this purpose. Let it be assumed that the insurer has agreed to indemnify the defendant against the plaintiff’s claims. The insurer should be regarded as having exactly the same entitlement as the insured defendant to protection against the risk that the plaintiff will be unable to meet an adverse costs order (cf [Prime Forme 8 ACLC at 32]).

[68] On this view, the fact that a defendant is insured is irrelevant to an application for security for costs. If, as [the plaintiff] argued, the judge had in fact been expressing that view, there would have been no error in doing so.

[32] I do not sustain Instyle’s submission and follow Prime Forme; Remm and Livingspring. It may be noted, incidentally, that if Instyle’s submission had been sustained, the respondents could have relied on s 56 of the FCA Act which is not subject to the same limitation.

Public interest

106    Neither party raised any issue of public interest which would militate against a security for costs order being made.

Stultification claim

107    Manhattan submitted that if an order for security is made for an amount as substantial as that sought by DFS China, it is very likely that Manhattan will be prevented from pursuing these proceedings. This would be a factor which, if established, would weigh against an order for security for costs, but it raises the question of the means of the persons standing behind Manhattan: BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 at 861 per Anderson J, Kennedy and Ipp JJ agreeing.

Position of persons standing behind Manhattan

108    It is for the company seeking to resist an order for security on the ground that granting security will frustrate the litigation to prove that those who stand behind it and who will benefit from the litigation if it is successful are also without means, whether they be shareholders, creditors or beneficiaries under a trust: see Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4 per Sheppard, Morling and Neaves JJ; Cashflow Finance Solutions Pty Limited v Compagnie Francaise D’assurance Pour Le Commerce Exterieur [2012] FCA 203 at [12]-[13] per Jacobson J.

109    Mr Sanfilippo says that he has been advised by Mr Mann that Mr Mann left Hong Kong in October 2011 “for financial reasons” after the Business at Central Building “continued to incur financial losses”, and Mrs Mann remained in Hong Kong with their daughter. Mrs Mann operates the DFS China franchised “Dymocks” bookstore at Lyndhurst Terrace, of which Book Art is the franchisee. Mr Sanfilippo says that the Manns “have an interest” in Book Art. No contemporary evidence has been given as to the ownership of either of Manhattan or Book Art. The Franchise Agreements entered into by Manhattan, and similar agreements in 2005 and 2011 between Book Art and DFS China, indicate that the Manns are shareholders as well as directors of each franchisee company and I will act on the assumption that that position prevails.

110    The Manns, who are parties to the Franchise Agreements as guarantors, have not offered personal security to satisfy a costs order. Mr Sanfilippo says that the Manns have no significant unsecured assets. However, Manhattan provided no evidence of the nature or extent of their assets, who holds security over their assets (external lenders or companies controlled by them), or the value of those assets before and after the amount secured is taken into account; there is no evidence of Mr Mann’s current salary or Mrs Mann’s drawings as franchise owner from operating Book Art.

111    Based on the scant evidence provided, Manhattan has not established that the Manns, as the people who stand to benefit through Manhattan from this litigation, are unable, as opposed to unwilling, to provide security, so I am not able to conclude that making an order for security for costs would stultify the litigation on the basis of Manhattan’s impecuniosity.

Disposition

112    Notwithstanding that DFS China’s actions may have contributed to Manhattan’s impecuniosity, I will order that Manhattan provide security for DFS China’s costs.

Costs of this application

113    DFS China has been successful in its application for security for costs and has had significant success in its strike out application. Recognising that I was not persuaded that the Representations claims should be struck out at this time, and that those claims are substantial, I consider that DFS China should be entitled to its costs of the application on the usual basis, discounted as to 25%.

Form of security for costs

114    Section 56 of the FCA Act provides as follows:

(1)    The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her.

(2)    The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs.

(3)    The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given.

(4)    If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed.

(5)    This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.

Book Art guarantee

115    Manhattan submitted that if the Court is minded to order security for DFS China’s costs, Manhattan would arrange for Book Art to provide a guarantee and the Court should order Manhattan to provide cash security for $15,000, the amount Manhattan suggests is the cost of registering an Australian judgment for enforcement in Hong Kong. Manhattan relied on Maxim’s Caterers Ltd v Magnona Pty Limited (No 1) [2010] FCA 450 (Maxim’s Caterers v Magnona), in which Jagot J ordered security of this kind on the basis that the applicant undertook not to seek security for costs in Hong Kong in relation to the enforcement of the Australian judgment.

116    As acknowledged by Jagot J in Maxim’s Caterers v Magnona at [5]-[7], the mere fact that an Australian judgment for money can be enforced in Hong Kong, without more, is not a decisive factor against ordering security. In Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336, Heerey J was not persuaded that this was a satisfactory form of security because there was simply no evidence that the applicant had any assets in Italy or elsewhere against which a costs order could be enforced. In Maxim’s Caterers v Magnona the applicant provided (1) evidence that Maxim’s Caterer’s Ltd had substantial fixed assets in Hong Kong, and (2) evidence of the cost and regime under which the judgment of an Australian court might be enforced in Hong Kong.

117    Mr Sanfilippo, based on instruction and belief, deposed that the Manns have had “an interest” in the “Dymocks” bookstore business at Lyndhurst Terrace in Hong Kong from its establishment around 2005 and that this store continues to operate under a franchise agreement between DFS China and Book Art. The Book Art 2005 and 2011 franchise agreements were put into evidence. Mr Sanfilippo went on to depose:

I am instructed by Mr Mann that he estimates the value of the business at Lyndhurst Terrace as at the date of this affidavit to be around A$295,000, calculated as follows:

a.    The adjusted yearly profits of the business for the year ended 30 September 2011 are A$73,663. This is based on Book Art’s audited financial statements for that period, being the last set of audited financial statements prepared for the company. The following expenses were added back for the purposes of adjusting the profit:

  i.    depreciation;

  ii.    entertainment;

  iii.    motor vehicle expenses;

  iv.    exchange losses;

  v.    penalties;

  vi.    travel;

vii.    staff salaries (were reduced to take into consideration recent reductions in staff);

b.    A capitalization rate of 25% was applied to the adjusted yearly profit to yield the estimated value of A$295,000.

118     I accept DFS China’s submissions that Manhattan’s proposal should not be accepted and Manhattan’s evidence is inadequate. Manhattan could have put into evidence Book Art’s last statutory accounts, but it did not. There is no evidence of Book Art’s current assets or of their realisable value if sold otherwise than as part of the sale of Book Art’s business. While Mr Mann may be in fact able to value a franchised business, there is no evidence of his expertise or why a capitalisation rate of 25% might be appropriate, or of the time that it might take to realise the value of the assets. I am not satisfied that Book Art’s business is of sufficient substance to provide adequate security for a costs order of any magnitude.

119    Further, while DFS China accepts that Australian judgments may be enforced in Hong Kong, the Court has no evidence of the current requirements including the cost to register a judgment. That $15,000 was an adequate amount in 2010 does not mean that it will be now. I do not accept that the decision in Maxim’s Caterers v Magnona is appropriate or sufficient evidence in that regard.

Other form of security

120    Mr Creighton, a partner of Colin Biggers & Paisley, solicitors to DFS China, swore an affidavit in which he deposed that costs and disbursements incurred from the commencement of proceedings to that time were $56,500 (exclusive of GST) comprising $48,000 of professional costs and $8,500 in disbursements. He provided a summary of the tasks undertaken to that time but not a detailed costing. The tasks included drafting a detailed notice to produce documents referred to in the Statement of Claim pursuant to r 20.31 of the Rules and attending before the Registrar on three occasions in relation to the notice to produce. Mr Sanfilippo contended that work done by Mr Creighton relating to the notice to produce had been excessive, noting that there was no need to file such a notice and the resulting four listings before a Registrar were unnecessary. Mr Creighton did not contest Mr Sanfilippo’s version of events or suggest that he had approached the Court for an order for production because of Mr Sanfilippo’s failure to comply with the notice to produce. Although Mr Sanfilippo did not depose to any efforts he made to contest this matter before the Registrar, there is considerable force to Mr Sanfilippo’s complaint.

121    There is much less force to Mr Sanfilippo’s complaint that the notice to produce related to a range of documents which were DFS China’s own documents (19 of 21 bundles) and more than 1600 pages of the 1673 pages produced comprised Franchise Agreements, disclosure documents and copies of the Code. DFS China is entitled to require copies of documents referred to in the Statement of Claim under r 20.31 and that serves a forensic purpose of ensuring that the applicant and respondent are referring to the same document in all respects.

122    While I have accepted that DFS China has brought the application for security for costs bona fide for the purpose of protecting its own position, evidence that DFS China’s lawyers are taking steps which are unnecessary to secure information to which they are entitled under the Rules could be regarded as oppressive and not deserving of the protection of a security for costs order. I do not consider that DFS China should be entitled to include Mr Creighton’s costs of preparation for or appearances before the Registrar in relation to the notice to produce in any claim for costs or security for costs.

123    Recognising the early stage of the proceedings at which the application had been made, Mr Creighton detailed his perception of the tasks to be undertaken in the event that the proceedings were not struck out or dismissed. Among other things, he recognised that in this case it would be necessary to obtain evidence from employees of DFS China resident in Hong Kong and it may be necessary to appoint an examiner to take evidence overseas. Mr Creighton estimated that inclusive of solicitors’ professional costs, disbursements (estimated to be $50,000) and counsel’s fees (estimated to be $60,000) a further amount of $260,000 (exclusive of GST) may be required. This resulted in an estimated total costs and disbursements of $348,150 (GST inclusive). He did not provide any breakdown of this estimate having regard to different stages of the proceedings.

124    Mr Sanfilippo queried why the DFS China employees could not be brought to Australia (rather than DFS China’s Australian lawyers travelling to Hong Kong) and suggested that Mr Creighton’s estimate was excessive, especially the estimate of $50,000 in disbursements. Mr Sanfilippo did not provide an alternative estimate of likely disbursements but suggested that the more likely estimate of total costs if they were to be assessed by a costs assessor was between $150,000 and $180,000 (inclusive of GST).

125    I encourage DFS China (and Manhattan) to conduct their roles in the proceedings consistent with the overarching purpose of efficient and cost effective litigation, and that might include the use of appropriate technology as opposed to travel. However, it is for each of the parties to determine how appropriately to serve the legitimate expectations of their clients in the conduct of their role in the proceedings. I do not consider that Mr Sanfilippo made out a case for any form of direction to DFS China that it need make its employees available in person in Australia.

126    The principles to be applied in determining the quantity of security were enunciated by Jacobson J in Reinsurance v HIH at [93]-[97].

[93] It is well established that in ordering security for costs the Court does not give a full indemnity; see Brundza v Robbie & Co (1952) 88 CLR 171 at 175 (Fullagar J).

[94] In my view the effect of this principle is that the Court has a discretion to fix such amount as it thinks fit in all the circumstances of the case. The amount will not exceed the estimate of party and party costs but it may be less; see Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 134 ALR 187 at 200 (Lindgren J).

[95] In Allstate, his Honour referred at 200 to a Canadian authority, Crowthers v Simpson Sears Ltd; Attorney-General (Alberta), Intervenor (1988) 51 DLR (4th) 529, in which it was said that the security is “but a drop in the total bucket of litigation expenses”. Here the bucket is a large one but the amount ordered for security, though substantial, will be a comparatively small part of it.

[96] As Lindgren J observed in Allstate at 201, the approach which the Court takes to the determination of the amount is to apply a “broad brush”.

[97] Moreover, as French J said in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 515, the process of estimation embodies to a considerable extent, reliance upon the “feel” of the case after considering relevant factors.

127    Manhattan submitted that if an order for security for more than $15,000 were to be made, it should be made in tranches. The estimates of costs provided by Messrs Creighton and Sanfilippo were not broken down by reference to stages of the litigation and no suggestion was made by either party as to how an order in tranches might be structured. However, I am satisfied that an order in tranches would have the least impact on Manhattan and therefore ameliorate the propensity of an order to stifle Manhattan’s capacity to prosecute its claims. Further, I consider that Manhattan should have available to it the option of providing a guarantee from a bank holding an Australian banking licence and capable of being called upon in Australia as an alternative to cash security.

128    I accept DFS China’s submission that it would be appropriate for the jurisdictional issues relevant to the Representations claims under ss 52 and 59 of the Trade Practices Act be determined as a preliminary issue. If Manhattan is successful in persuading the Court that it has jurisdiction, then the application may add some cost to the proceedings. However, if Manhattan is not successful, it will likely avoid the costs of expert witnesses. I am inclined to the view that the factual matters which would be relevant in determining the jurisdictional issues can best be determined after pleadings have closed and on the basis that all lay evidence has been provided. Provision of expert evidence would be deferred until after the preliminary issue has been determined.

129    I will give the parties an opportunity to provide submissions concerning:

    Their estimate of the aggregate of DFS China’s costs and disbursements (inclusive of GST) to the end of the hearing of the preliminary issue;

    The estimate should be broken down by reference to estimates of costs and disbursements for the periods (1) to the close of pleadings; (2) from the close of pleadings to the close of lay evidence; and (3) from the close of lay evidence to the determination of the preliminary issue;

    Any discount to be applied on the basis that any award of costs would be made on the usual basis; provisionally, that discount would be one third.

130    I will direct the parties to confer as to the headings which should be employed in an breakdown of estimated costs.

131    Orders giving effect to these reasons will not preclude DFS China from making a further application for security for costs in relation to conduct of the proceedings after determination of the preliminary issue should Manhattan be successful on the jurisdictional issue or if Manhattan amends its Statement of Claim pursues claims for which the jurisdictional issue is not relevant.

Associate:

Dated:    27 October 2014