Security for costs ordered against applicants in franchisee class action

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The judge in this case deliberated whether security for costs should be ordered against the applicants or the class members, finding that group members shouldn’t be required to pay due to the open nature of class actions in Australia. 

This is a class action on behalf of persons and entities who were Hogs Breath Café franchisees between June 2014 and October 2020. The proceeding is brought by St Mary’s Hog’s Pty Ltd, being the operator of the Hog’s Breath Café in St Mary’s, New South Wales (first applicant) and Messrs Goodwin (second applicant) and Blackstock (third applicant), who were its shareholders and guarantors at all material times. The respondents are the Hog’s Breath franchisor and its successor (the first and sixth respondents) and certain of its executives and directors (the second, third, fourth and fifth respondents) during the relevant period. The proceeding alleges that the respondents caused loss and damage to the applicants and class members by, inter alia, failing to properly promote the franchisees’ businesses; misappropriating franchisee funds from a dedicated marketing fund; opening competing restaurants within franchisees’ exclusive areas; and requiring franchisees to use sub-standard point-of-sale equipment. 

In this decision, Markovic J made orders requiring the applicants to provide security for the respondents’ costs of the proceeding in the total amount of $1.93 million in various tranches, such security to be in the form of a bank guarantee or paid into Court. Her Honour also ordered that the proceeding be stayed until the applicants pay the first tranches of security, which were due within 30 days of the Court’s orders. Her Honour neatly summarised her reasons for so ordering at [139] of the judgment:

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

However, her Honour refused to order that, to extent that the applicants are unwilling or unable to pay any security for their costs, class members be required to do so. Her Honour found that the first and third respondents’ reliance on the Full Court’s decision in Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 in support of the order was misplaced, as the Full Court neither supported nor made such an order in that proceeding, and in fact recognised (at [37]) that “group members are not parties to a class action, are not required to take active steps in the class action, and do not control the conduct of the proceeding”. Her Honour said that it would be strange if the Court could make such an order in circumstances where an applicant is unwilling to pay security, and the inappropriateness of such an order in the present case was highlighted by the fact that many class members had not been identified and no information had been provided about their financial position.

St Mary’s Hog’s Pty Ltd v HBCA Pty Ltd [2022] FCA 52

Federal Court of Australia, Markovic J,
4 February 2022

Applicants’ Solicitors: Keypoint Law;
First and Third Respondent’s Solicitors: Finn Roache Lawyers;
Second, Fourth and Fifth Respondent’s Solicitors: Thomson Geer Lawyers;
Sixth Respondent’s Solicitors: Tucker & Cowen Solicitors;
Applicant’s Funder: N/A

Austlii Link: Available here

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