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- Hyperion Technology Pty Ltd v Queensland Motorways Ltd[2013] QSC 20
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Hyperion Technology Pty Ltd v Queensland Motorways Ltd[2013] QSC 20
Hyperion Technology Pty Ltd v Queensland Motorways Ltd[2013] QSC 20
SUPREME COURT OF QUEENSLAND
CITATION: | Hyperion Technology Pty Ltd v Queensland Motorways Ltd [2013] QSC 20 |
PARTIES: | HYPERION TECHNOLOGY PTY LTD |
FILE NO: | SC No 12127 of 2010 |
DIVISION: | Trial Division |
PROCEEDING: | Application |
ORIGINATING COURT: | Supreme Court of Queensland |
DELIVERED ON: | 19 February 2013 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 11 July 2012 Written submissions |
JUDGE: | Daubney J |
ORDERS: | 1.Within 28 days, the plaintiff shall provide, in a form satisfactory to the Registrar, security for the defendant’s costs up to and including the first day of trial in the amount of $400,000. 2.The plaintiff shall pay the defendant’s costs, including any reserved costs, of and incidental to the application for security for costs. |
CATCHWORDS: | CORPORATIONS – LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS – EXTERNAL LITIGATION PROCEDURE – COSTS – SECURITY FOR COSTS – DISCRETION OF COURT – where plaintiff contended that contract had been repudiated by defendant – where plaintiff challenged defendant’s application for security for costs order – where plaintiff contended that defendant’s delay caused prejudice – where plaintiff contended that security for costs order would be oppressive – where no security offered by plaintiff’s shareholders or creditors - where plaintiff contended that plaintiff’s financial position was caused by defendant’s conduct - whether discretion to order security for costs should be exercised CORPORATIONS – LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS – EXTERNAL LITIGATION PROCEDURE – COSTS – SECURITY FOR COSTS – QUANTUM AND SUFFICIENCY – where dispute as to quantum of costs – where expert evidence as to costs likely to be incurred relied upon– whether discretion to order security for costs should be exercised Uniform Civil Procedure Rules 1999 (Qld) Corporations Act 2001 (Cth) Australia Equity Investors v Colliers International (NSW) Pty Ltd [2012] FCAFC 322, considered Aqua Blue (Noosa) Pty Ltd v Soil Surveys Engineering Pty Ltd [2010] QSC 176, considered Base 1 Projects Pty Ltd v Islamic College of Brisbane Ltd [2012] QCA 114, considered Bell Wholesale Co Ltd v Gates Export Corporation (1984) 52 ALR 176, considered Bryan E Fencott and Assoc Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497, considered Covecorp Constructions Pty Ltd v Indigo Projects Pty Ltd [2007] QSC 262, considered Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, considered Jazabas Pty Ltd v Haddad (2007) 65 ASCR 276, considered MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97, considered Sharjade v Darwinia Estate [2008] NSWSC 569, considered Specialized Explosives Blasting & Training Pty Ltd v Huddy’s Plant Hire Pty Ltd [2009] QCA 254, considered Telford Property Ltd v Ackama Investments Pty Ltd (unreported QSC No 896/86, 24 October 1986), distinguished Westralian Gold Mines Ltd v Westralian Minerals & Drilling Pty Ltd (in liq) (1986) 4 ACLC 167, considered |
COUNSEL: | G A Thompson SC and GD Sheahan for the Plaintiff D R Cooper SC and C Wilson for the Defendant |
SOLICITORS: | DLA Piper for the Plaintiff Slater and Gordon for the Defendant |
- The defendant has applied for security for costs.
- It is not in issue that the plaintiff’s financial capacity is such that it would not be able to meet an adverse order for costs if it is unsuccessful at trial. Accordingly, the discretion to make an order for security for costs is enlivened under UCPR Chapter 17 Part 1 and s 1335 of the Corporations Act.
- The plaintiff has pointed to a number of matters which it contends militate against the exercise of the discretion to order security for costs. Before dealing with those matters, it is convenient to give some context by outlining the nature of the plaintiff’s claim, as articulated in its further amended statement of claim (“FASOC”).
- In brief, the plaintiff claims as follows:
(a)The plaintiff was in the business of designing and developing radio frequency identification tolling transponders (commonly known as “eTAGS”);
(b)The defendant owned and operated toll roads in South East Queensland, and owned and operated the electronic toll collection points on those toll roads;
(c)The plaintiff and the defendant entered into an agreement for the plaintiff to investigate and determine why eTAGS provided by certain other suppliers experienced high levels of battery failure;
(d)Subsequently, in 2006 the plaintiff and the defendant entered into an “R & D Agreement” for the plaintiff to design, supply and sell eTAGS to the defendant;
(e)By not later than 2007, certain terms of the R & D Agreement were varied. The variations concerned the sale of certain eTAGS to determine compatibility, the testing of those eTAGS in specified toll plazas, and to provide that, if the field tests were acceptable to the plaintiff and the defendant, the defendant would purchase 10,000 of the plaintiff’s Version 1 eTAGS;
(f)On 19 December 2007, the plaintiff supplied, and the defendant purchased, 220 test eTAGS pursuant to the varied R & D Agreement;
(g)The defendant failed to conduct the requisite field tests in a timely manner;
(h)Throughout the period of its dealings with the plaintiff, the defendant was also dealing with a competing eTAG supplier, and ultimately in July 2008, after a tender process, entered into an agreement for the supply by the competitor of eTAGs at a much cheaper price than the competitor had previously charged, being a price which was significantly less than that provided for under the varied R & D Agreement;
(i)The defendant repudiated the varied R & D Agreement by its failure to conduct field tests in a timely manner and by its conduct in stating to the plaintiff, in effect, that if the plaintiff did not significantly reduce its price for eTAGs, the defendant would terminate the R & D Agreement;
(j)By a letter from its solicitors dated 7 July 2010, the plaintiff accepted the repudiation;
(k)The plaintiff claims damages for:
(i)costs incurred in performing the R & D Agreement of $871,544.11;
(ii)having lost the opportunity to earn profits of some $626,000 under the varied R & D Agreement;
(iii)having lost the opportunity to otherwise exploit “an advantageous position to negotiate and enter into a new agreement, arrangement or understanding” for the plaintiff to supply eTAGs to the defendant on an ongoing basis and for the loss of the opportunity to sell its eTAGs to other parties on an ongoing basis. The net profits which the plaintiff says it would have earned from these lost opportunities is some $7.4 million.
- As already noted, counsel for the plaintiff quite properly conceded that the plaintiff is incapable of meeting an order for costs if it is unsuccessful in the action.
- The managing director of the plaintiff, Dr Robert Dew, was cross-examined before me. He confirmed that the 2,072,450 issued ordinary shares in the plaintiff are held as follows:
-about one third of the shareholding (747,497 ordinary shares) is held by Dr Dew and a company with which he is associated, Coriolis Pty Ltd;
-about 500,000 ordinary shares are held by Mr Andrew Deans and a company with which he is associated, Mycelia Pty Ltd;
-about 215,000 shares are held by a Mr Kearney and in the name of Mr Kearney’s superannuation fund;
-some 300,000 ordinary shares were held by Commercial Capital Ltd, a company which Dr Dew said was “either in administration or under receivership or defunct”.
- Dr Dew confirmed that these four shareholding groups accounted for “most if not all” of the issued ordinary shares in the plaintiff.
- In addition to the ordinary shares, the plaintiff issued preference shares in satisfaction of claims by some creditors, and also to a number of individuals (including Dr Dew, Dr Dew’s wife, and Mr Kearney) in return for the provision of investment capital. Dr Dew said that less than $100,000 worth of preference shares were issued to creditors. According to his affidavit, some $340,000 worth of preference shares were issued for investment capital.
- In his evidence, Dr Dew also identified the plaintiff’s creditors as comprising some $70,000 owed to RF Technologies, about $75,000 (plus GST) owed to a company associated with Mr David Robinson, and an overdraft of less than $15,000 with the Bank of Queensland.
- None of the plaintiff’s shareholders, or any of the other entities with an interest in the plaintiff succeeding in this action, have either offered to put up security for the defendant’s costs or offered personal undertakings with respect to the defendant’s costs. Nor have any of those individuals and entities put on any evidence to demonstrate their own financial circumstances. The closest one gets is the following in Dr Dew’s affidavit, in which he is speaking of events after the defendant’s alleged repudiation:
“50.In about mid 2009, Hyperion’s four major shareholders, being my wife and myself, Peter Kearney, Brad Fitzgerald (of Commercial Capital) and Andrew Deans refused to fund an action for Hyperion, because even if Hyperion was successful against QML:
50.1any ability for Hyperion to sell tags in the future was ruined;
50.2QML’s delays had closed the window of opportunity for Hyperion to compete in Australia or overseas because of increased competition in the tag market and developments in tag technology during delays in getting Hyperion’s eTags into the market locally and overseas;
50.3Efkon (a large European manufacturer) had entered the Australian market and Dejai (another Australian start up) had begun to develop a rear vision mirror with an eTag inside;
50.4Kapsch and QFree had dropped the price of their tags to around $25 from the $50 at the start of the project with QML; and
50.5instead of having a successful first customer product launch to leverage off, Hyperion instead would have commenced proceedings against its first customer, leading to a destroyed industry reputation.
- As a direct result, the shareholders were of the view that investing more money in the project was impractical and unwise. In addition my wife and I didn’t really have much capacity to borrow any more money. We had already put all of our self managed superannuation fund into Hyperion and owed $300,000 against our house which was worth about $650,000 at the time.”
- That being said, in response to the present application for security for costs, no-one standing behind the plaintiff put on evidence to demonstrate their current financial circumstances, or from which it could properly be inferred that those who will benefit from the litigation if the plaintiff is successful are without means.
- It is well settled that, the threshold question of the plaintiff’s incapacity to meet an adverse order for costs after trial having been satisfied, the Court has an unfettered discretion on the question of ordering security for costs, and this discretion is to be exercised after taking account of all of the circumstances of the case. Within that range of circumstances, the impecuniosity of the plaintiff company will always be a relevant, and sometimes decisive, factor. As Connolly J (Campbell CJ and Demack J agreeing) said in Harpur v Ariadne Australia Ltd[1]:
“For practical purposes, once the legislature has made it legitimate to regard the lack of means of the plaintiff and its likely inability to meet an order for costs, this must always be a consideration of great weight and will frequently be the determining factor.”
- It is appropriate now to consider the various matters which the plaintiff contended weigh against the exercise of the discretion.
Delay
- It was argued for the plaintiff that the “most compelling circumstance is that [the defendant] has stood by with knowledge of [the plaintiff’s] financial position since the start of these proceedings in November 2010”.[2] Reference was made to numerous authorities which speak to the need for an application for security for costs to be made in a timely fashion, including the following observations by French J (as he then was) in Bryan E Fencott and Assoc Pty Ltd v Eretta Pty Ltd[3]:
“The further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur without steps being taken to apply for an order for costs, the more difficult it will be to persuade the Court that such an order is not, in the circumstances, unfair or oppressive.”
- In Covecorp Constructions Pty Ltd v Indigo Projects Pty Ltd[4], Martin J conveniently collected many of the principles relating to delay in the context of an application such as this:
“[25]The Court has an unfettered discretion when determining an application for security for costs: Sir Lindsay Parkinson & Co v Triplan Ltd [1973] QB 609. Of course, such a discretion must be exercised judicially having regard to the circumstances of the case.
[26]UCPR 672 sets out a number of discretionary matters to which the Court may have regard. Although delay in making an application is not listed, it is still a relevant factor for consideration.
[27]The principles to be applied in this respect seem to be:
- An application for security must be made promptly: Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1; Buckley v Bennell (1974) 1 ACLR 301 at 308; Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 123.
- It would be unfair to allow a defendant security if that defendant has stood by and allowed the plaintiff to work on its case and incur significant expense: Smail v Burton; Re Insurance Associates Pty Ltd (in liq) (1975) 1 ACLR 74 at 75; King v Commercial Bank of Australia Ltd [1921] VLR 48 at 54; Stack v Brisbane City Council (1996) 71 FCR 523 at 531.
- Although delay is a significant factor, there is no rule requiring refusal of an application on that basis alone. It is a factor to be taken into account with other discretionary criteria. Commonwealth of Australia and Another v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 at 762; Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 at 332-3 per Lee J. For example, security for future costs was awarded to the defendant in Commonwealth v Cable where there had been a delay of 4 years after the proceedings had commenced.
- The issue of delay will weigh more significantly in some cases than others. Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71. In Crypta Fuels Lehane J noted that the cases in which orders for security were made despite delay have usually involved one or both of two factors, those being:
a)“…that the hearing or resumed hearing was not immediately imminent…”; and
b)“…that there has been some forewarning: usually correspondence concerning the financial standing of those who might benefit from the success of an applicant or plaintiff, and often detailed correspondence foreshadowing an application for security for costs.” (at 71).
- To similar effect was the statement by French J in Bryan E Fencott P/Lv Eretta P/L (1987) 16 FCR 497 at 514:
“The further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur without steps being taken to apply for an order for costs, the more difficult it will be to persuade the court that such an order is not, in the circumstances, unfair or oppressive.”
- In Buckley v Bennell (1974) 1 ACLR 301 at 309 Moffitt P put the matter as follows:
“The right to seek security for costs and to stay proceedings, with the possible result that a claim for damages is frustrated, is a powerful weapon. Therefore, the litigant who seeks to use it against his opponent is at risk of not having it available, unless the application is made and persevered with in circumstances involving the least oppression of his opponent. The primary reason why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or permits substantial sums of money towards litigating its claim.” [emphasis added].
[28]When determining the weight to be afforded the effect of delay, the following issues need to be considered:
- is there an explanation for the delay and, if so, what is its weight? (Bailey v Beagle Management Pty Ltd (2001) 105 FCR 136 at 144; where the length of the proceedings was not foreseen when they commenced (Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 at 308); Thirteenth Corp Pty Ltd v State (2004) 50 ACSR 425; James v Australia and New Zealand Banking Group Ltd (No 1) (1985) 9 FCR 442 at 446; Stack v Brisbane City Council (1996) 71 FCR 523 at 532; per Drummond J.)
- the level of prejudice caused to the plaintiff if required to lodge security at a late stage (Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 at 333)
- the timing of the application for security (James v Australia and New Zealand Banking Group Ltd (No 1) (1985) 9 FCR 442)”
- The plaintiff argued that the defendant’s delay of 16 months from the commencement of the proceeding to the filing of the present application was so extreme as to result in, relevantly, prejudice to the plaintiff by reason of it having incurred substantial costs during that time.
- A review of the correspondence (exhibited to the affidavit of the defendant’s solicitor, Mr Forbes) tells a different story. It is not necessary to recount that correspondence in detail, but sufficient to note the following:
(a)Correspondence between the parties’ solicitors started in July 2010, when the defendant’s solicitors responded to the letter of repudiation which the plaintiff’s solicitors had sent to the defendant on 7 July 2010;
(b)Over the following months, correspondence passed between the solicitors directed to, amongst other things, setting up a without prejudice meeting in order to seek to settle the dispute;
(c)The attempts to convene this meeting were unsuccessful, and on 8 November 2010 the plaintiff’s solicitors filed and served the claim and statement of claim on the defendant’s solicitors (who had instructions to accept service);
(d)Correspondence then ensued between the solicitors with respect to matters such as the date for service of the defence;
(e)As early as 17 December 2010, the defendant’s solicitors raised the prospect that disclosure in the proceeding would involve many thousands of relevant documents, and suggested a draft Document Management Protocol under Practice Direction 8 of 2004;
(f)In early 2011, the solicitors continued to correspond about pleadings and the appropriateness of effecting electronic disclosure under a relevant protocol;
(g)On 21 April 2011, the plaintiff’s solicitors wrote to the defendant’s solicitors confirming that the plaintiff’s reply and rejoinder would be delivered by 6 May 2011, and then proposing that a mediation be held in the fortnight commencing 16 May 2011;
(h)The defendant’s solicitors responded promptly on 27 April 2011, suggesting a panel of mediators;
(i)Correspondence then passed between the solicitors directed to identifying an appropriate date for mediation, applying to have the matter placed on the Commercial List, and for the parties to engage in a limited form of disclosure prior to the mediation;
(j)Ultimately, consent orders were made on 9 September 2011 by the Commercial List judge in respect of disclosure in accordance with the specified Document Plan and for the parties to engage in a mediation;
(k)The parties did not resolve the dispute at the mediation, which was held on 1 November 2011;
(l)On 3 November 2011, the plaintiff’s solicitors wrote to the defendant’s solicitors advising that “following receipt of your client’s Critical Documents and preliminary disclosure and consideration of matters arising out of the mediation on 1 November 2011, our client intends to amend its statement of claim”. The letter went on to suggest that the parties defer further steps with respect to the “expansive disclosure process” outlined in the Document Plan until the re-pleading was completed;
(m)On 20 December 2011, the plaintiff’s solicitors served the FASOC;[5]
(n)In January 2012, the parties’ solicitors corresponded with respect to timing of further pleadings;
(o)On 27 January 2012, the defendant’s solicitors wrote to the plaintiff’s solicitors specifically raising the question of the plaintiff’s capacity to meet an order for costs. This letter stated:
“Timetable and Costs
The proposed timetable has been under our consideration. However, before this case proceeds any further, we require Hyperion to provide evidence of its capacity to meet an order for costs.
We have reassessed the likely duration of a trial and the likely cost to be incurred by our client in defending your client’s claim. Our estimate is that both parties will need evidence from at least an equal number of lay and expert witnesses, the total number of witnesses might be 12 – 15. The expert evidence will take up much of the Court’s time and conservatively, the trial would occupy the better part of three weeks.
Your estimate of Hyperion’s recoverable costs as at the date of the mediation was $250,000. The recoverable costs of each party at the end of a trial will be many times that amount. The cost of senior and junior counsel instructed by a senior solicitor or partner and assisted by a junior solicitor for 15 days of trial we estimate in the order of $300,000 for each party. In addition to that sum would be the cost of engaging in a complex discovery of records, the proofing of witnesses and the general preparation for trial. Conservatively speaking the recoverable costs by QML to the end of the trial might amount to $800,000 to $1,000,000.
It is apparent form the preliminary discovery and our assessment of your client’s case that it has minimal or no prospects of success. It would also seem that this litigation is being conducted by Hyperion for the benefit of a number of other persons not just Mr Dew but other major shareholders and creditors.
Hyperion has no apparent assets or financial capacity to meet an order for costs in the sum of $1 million. My Lytras’ examination of Hyperion’s company finances revealed that creditors have not been paid and in some cases outstanding debt has been converted into shareholding in the company. With the exception of the 2006 and 2009 financial years when it generated minor net profit results, Hyperion has not traded profitably and has an accumulated loss in the period 1999 to 2011 of $861,953. As at the date of entering into the R & D Agreement, Hyperion’s accumulated loss was at least $505,039. See the attached schedule prepared by Mr Lytras.
Our client requires written third party assurance that Hyperion has assets or financial capacity to meet an order for costs in the sum of $1 million. We await your reply by 3 February 2012.”
(p)It would seem there was no immediate response from the plaintiff’s solicitors, and on 17 February 2012 the defendant’s solicitors wrote again seeking assurance of the plaintiff’s capacity to meet an order for costs;
(q)On 21 February 2012, the plaintiff’s solicitors responded, relevantly saying:
“The proceeding was issued in November 2010. Your client has considerably delayed in raising an issue as to our client’s financial capacity and should your client apply for an order for security for costs our client will suffer real prejudice in the numerous steps already taken to advance this claim, including preliminary disclosure, mediation and amendments to pleadings.”
(r)On 27 February 2012, the defendant’s solicitors responded, taking issue with the assertion that the defendant had delayed in any part of the litigation, let alone in respect of the raising of the question of security for costs. This letter advised of the imminent filing and service of the present application and supporting material;
(s)The present application was then filed on 29 February 2012.
- It is fair to say that the FASOC did not materially alter the legal basis of the plaintiff’s claim against the defendant. It is, however, equally fair to say that the FASOC significantly expanded the factual allegations on which the plaintiff relies, particularly in relation to its allegation of a variation of the R & D Agreement and concerning the matters and circumstances of which various of the defendant’s employees were aware.
- It is also, I think, fair and accurate to say that a very significant part of the activity between the parties during a significant period of time after the commencement of the proceedings was directed to having the matter mediated and to limit the disclosure obligations prior to mediation. There is nothing in the material to suggest that either party was anything less than genuine in their efforts to set up and participate in a mediation of the dispute. Notwithstanding that the defendant’s solicitor may, as he confirmed in evidence, have had a negative opinion of the plaintiff’s prospects of success from a relatively early point in the proceeding, I do not consider it was at all inappropriate for the defendant, in the context of this proceeding, to refrain from raising the issue of security for costs while the parties were progressing to mediation. Indeed, if the defendant’s solicitors had raised the issue of security for costs during the pre-mediation period, it may well have derailed the parties’ mutual efforts to participate meaningfully and constructively in the mediation.
- Once the mediation had failed and the plaintiff delivered its FASOC, however, the circumstances changed considerably. This change was reinforced by the plaintiff’s confirmation of the need for the parties to engage in much more expansive disclosure than had previously been undertaken for the purposes of the mediation. That was the appropriate time for the defendant to raise the issue of security for costs. As appears from the chronology above, the defendant did not delay in raising the issue and bringing the necessary application.
- It is, of course, the case that the plaintiff incurred costs during 2011. But, as appears from what I have already written, I consider that a significant part of this cost was directed appropriately to genuine and meaningful participation in the mediation.
- Accordingly, I do not consider in the particular circumstances of this case that the bringing of the application for security for costs is attended by such delay as to warrant an exercise of the discretion against the making of an order for security for costs. This is not, in my view, a case in which “the defendant has effectively stood by while the plaintiff incurred [its pre-mediation] expense”, nor is it a case where there “is no reasonable excuse for the defendant’s delay, to which the plaintiff in no degree contributed”.[6] Rather, in the circumstances of this particular case, the period of time between the institution of the proceeding and the filing of the application for security for costs is completely explicable.
The application is oppressive
- The plaintiff argued that the application for security for costs was oppressive because:
(a)the financial imbalance between the defendant and the plaintiff is such that the Court ought be slow to make an order that would have the effect of shutting a small company like the plaintiff out of litigating against a large well-resourced company such as the defendant; and
(b)the defendant was well aware before the parties fell into dispute of the plaintiff’s financial position, and this gave rise to a “special relationship” that made the grant of security oppressive, unreasonable and unjust in the circumstances.
- As to the first of these points, it is appropriate to refer to the following observations by McClennan CJ at CL (Mason P and Basten JA agreeing) in Jazabas Pty Ltd v Haddad[7]:
“[75] The nature of the defendant is some times relevant to the exercise of the discretion to make an order. The courts are reluctant to make an order which would have the effect of shutting out a small company from making a genuine claim against a large well-resourced and amply-funded body such as the state, a council or a major corporation (see KP Cable Investments at 197; Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 at 50,635 and 50,637 per Hill J. A plaintiff should not be denied access to the courts unless the justice of the case makes it imperative: Law of Costs at [29.87]).
[76] In Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180, which involved litigation between an insured person and insurer, King CJ said that the ability of the insurer-defendant ‘to absorb the costs, if he is unable to recover them from the plaintiff, is a relevant consideration’ (at 186). Likewise, in Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61; 10 ACLR 176, Ormiston J described insurers 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…’. However, in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1990) 8 ACLC 29, referring to financial institutions, engineering and construction companies, newspaper proprietors, public authorities and other powerful companies in litigation-prone sectors, Brooking J expressed a word of caution. His Honour said at 32:
“These large corporations stand in no special need of care and protection. Suing and being sued is for them a normal part of this imperfect world. They can afford to pay the piper, just as they will expect to call the tune. But if one of these wealthy, powerful institutions is sued by an insolvent company, why should it be viewed as outside the policy of the security for costs provisions?”
- I respectfully subscribe to the note of caution mentioned at the end of that passage. At its highest, the relative financial standing of the parties may be a factor of relevance to be weighed in the mix in an appropriate case. In the present case, however, it is not a factor to which I would ascribe much weight.
- As to the second matter, the authority relied on by the plaintiff in support of the contention that a pre-existing “special relationship” between the parties is influential in the exercise of the discretion was Westralian Gold Mines Ltd v Westralian Minerals & Drilling Pty Ltd (in liq)[8]. That case was completely different to the present. In that case, the litigation was between a holding company and a subsidiary which had been put into liquidation. The liquidators pursued an action on behalf of the subsidiary against the holding company seeking damages recoverable under an alleged agency agreement between the companies. Brinsden J (Pidgeon J agreeing) assessed the relevance of the holding company/subsidiary relationship between the parties in that case in the context of a security for costs application as follows:
“On the other hand as I have already pointed out it is clear the impecuniosity of W.M.D. is a direct result of the actions of Westralian. W.M.D. was the creature of Westralian in the sense that they had a common directorship and W.M.D.’s capacity to fulfil its obligations in respect of any debt contracted by it was entirely dependent on Westralian. It was Westralian which chose the time to put an end to W.M.D.’s capacity to pay its creditors and it was that company which put it into liquidation. It is worth remembering it was Westralian which defaulted under the terms contracts thus causing the asset to be lost and wasting the expenditure already incurred towards the exploitation of that asset. Master Seaman was right to place weight on the special relationship between the companies in the particular circumstances surrounding the creation of the liabilities. In my view commercial morality will be served if this litigation proceeds so as to determine whether it be the fact that in contracting these debts W.M.D. acted as agent for Westralian and I do not think the continuance of the litigation should be threatened by requiring the subsidiary, W.M.D., to put up security for costs in the circumstances of this case.”
- The present case is quite different. It involved commercial transactions between arms-length parties. I do not consider that there was any “special relationship” such as that contended for by the plaintiff which is relevant to the exercise of the discretion in the present case.
No security offered by shareholders or creditors
- Counsel for the plaintiff acknowledged that the plaintiff’s shareholders and creditors have not offered security, and contended it would not be reasonable, in practical common sense terms, to expect a financially capable creditor to give security in this case.
- In many cases, the failure of those who stand to benefit from a plaintiff’s success in litigation to offer security, or at least offer personal undertakings, in respect of the defendant’s costs is a highly relevant consideration. It is unnecessary for the purposes of the present case to essay the authorities concerning the approach to be adopted when such security has been offered by those standing behind an impecunious plaintiff company[9]. In the present case, no such security has been offered, nor has any evidence been put on to demonstrate the incapacity of those standing behind the plaintiff to offer any such security.
- In Bell Wholesale Co Ltd v Gates Export Corporation[10] the Full Federal Court said:
“In our opinion a court is not justified in declining to order security on the ground that do so will frustrate any litigation unless a company in the position of the appellant here establishes that those who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.”
- These observations were referred to by the Full Federal Court in Australia Equity Investors v Colliers International (NSW) Pty Ltd[11]. The Full Court observed at [30]:
“We do not accept these arguments. The passage in Bell Wholesale is not to be read like a statute and the discretion thereby ossified. It does not require that the class of those benefited by the litigation be divided into two further sub-classes viz those standing behind the applicant and those standing, presumably, elsewhere. The principle at play is a simple one: those who stand to share the benefits of litigation cannot shirk its burdens. We do not think the Court in Bell Wholesale intended to say any more than that. Indeed this is clear from the last sentence of the passage quoted above which, in terms, talks only of those standing to benefit from the litigation. It follows that the concepts of ‘benefiting from’ and ‘standing behind’ are elements in the same concept. It is no surprise, therefore, that arms length creditors have been held to be persons to whom the principle applies: see, for example, Cosdean Investments Pty Ltd v Football Federation of Australia Limited (No 2) [2007] FCA 163 at [15]-[29] per Mansfield J. Mr Lee SC invited us to regard Cosdean as wrongly decided because his Honour had misquoted Bell Wholesale by substituting an ‘or’ where there should have been an ‘and’. The relevant passage is at [25] and does not, so it seems to us, contain the suggested misquotation. Contrary to the submission put, we see nothing heterodox in Cosdean. Indeed, as Mansfield J there observed, security had on other occasions been ordered where it was reasonable that two major and arms length creditors be expected to contribute to the security ordered, citing Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 1 FCR 311 at 314 per Toohey J. This is not to say that in every case where stifling is said to be the result of an order for security that the position of those benefitted by the litigation needs to be proved by an applicant. Each case depends on its own facts and an assessment of what is reasonable in the circumstances: cf. Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507 at 515 per Phillips JA.” (emphasis added)
- No cogent reason has been advanced as to why those who stand behind this particular plaintiff company ought not assume responsibility for the defendant’s costs if the plaintiff is unsuccessful. No evidence has been led to prove that any of those who stand behind the company do not have the financial capacity to assume that responsibility. Accordingly, I consider that the fact that those who stand behind this plaintiff company and stand to benefit from success in the litigation have not come forward to share the risk of an unsuccessful outcome is a highly relevant consideration going to the exercise of the discretion to grant an order for security for costs.
The cause of the plaintiff’s impecuniosity
- It was submitted for the plaintiff that a “further and compelling factor against an order for security [is] that [the plaintiff’s] financial position was caused, wholly or substantially, by [the defendant’s] repudiatory conduct”.[12] No evidence was led by the plaintiff to support that assertion.
- The defendant relied on an affidavit by a forensic accountant, Mr Lytras, who had investigated the plaintiff’s accounts. His evidence was, in short, that over the period 29 October 1999 to 30 June 2011, with the exception of the 2006 and 2009 financial years when the plaintiff generated minor net profits, the plaintiff had not traded profitably. His analysis also indicated that in the period from 29 October 1999 to 30 June 2011 the plaintiff had accumulated losses (before tax) totalling $861,953. No evidence was led by the plaintiff to contradict these calculations by Mr Lytras.
- The onus clearly rested on the plaintiff to persuade the Court that its impecuniosity was caused by the defendant’s conduct.[13] The plaintiff in this case has not discharged that onus, and accordingly I do not accept this submission advanced on its behalf. In any event, the plaintiff’s claim consists principally of a claim for damages for being deprived of the opportunity to earn profits. There is nothing in the material to suggest that anything done or omitted to be done by the defendant caused the plaintiff’s pre-existing impecuniosity. In Sharjade v Darwinia Estate[14] McDougall J adopted, as I also respectfully do, the following statement by Needham J in MA Productions Pty Ltd v Austarama Television Pty Ltd[15]:
“There is no evidence that the financial stringency of the plaintiff’s position has been caused by any act of the defendant. The plaintiff clearly has always been in an impecunious position. It may be that if the defendant operating Channel 10 had agreed to purchase the concept which the plaintiffs say that they have created, the plaintiff would be in a financial position superior to that which it now finds itself. However, there is nothing which the defendant has done which has caused the impecunious state of the plaintiff.”
- Accordingly, I do not accept the plaintiff’s arguments on this point.
Exercise of the discretion
- As appears from the foregoing, I have rejected the plaintiff’s arguments concerning delay, oppression, and the cause of the plaintiff’s impecuniosity. In circumstances otherwise where the plaintiff is admittedly impecunious and those who stand to benefit from any success by the plaintiff in the litigation are not prepared to share the risk burden of the litigation, and have not put on any evidence to demonstrate that they are not capable of bearing that burden, it is appropriate to exercise the discretion in favour of ordering security for costs.
Quantum of security to be provided
- The defendant initially sought security for costs of the whole trial. I made it clear in the course of the hearing that I would not be prepared to entertain such an approach, but would proceed on the conventional basis of considering an order for security up to the commencement of trial.
- The defendant led evidence from Mr Graham Robinson, a barrister with extensive experience in the area of the law of costs. Mr Robinson estimated that the defendant’s standard costs up to, but excluding, the first day of trial would be some $630,000. Mr Robinson was cross-examined, and properly conceded a lack of personal experience in running lengthy commercial trials such as this as a barrister. He also confirmed under cross-examination that a significant part of the information on which his cost estimates were based was derived from instructions given to him by the defendant’s solicitors with respect to matters such as the ambit of disclosure. Be that as it may, the propriety of Mr Robinson’s estimate was not challenged in any way, nor did the plaintiff lead any evidence with respect to its assessment of the defendant’s anticipated costs to trial.
- It is appropriate to recall, as I have done previously[16] the following observations by French J (as he then was) in Bryan E Fencott and Assoc Pty Ltd v Eretta Pty Ltd[17]:
“In fixing the amount of the security the court must look first at the whole case and take into account, inter alia, the chance of it collapsing without coming to trial. It is not bound to give the amount of security which a defendant says will be the amount of his costs: Dominion Brewery Ltd v Foster (1897) 77 LT 507.
The court may in such a case, order somewhat less than if there seems to be every prospect that the action will be fought to a finish: T Sloyan & Sons (Builders) Ltd v Brothers of Christian Instruction (supra) at 720.
The court does not set out to give a complete and certain indemnity to a defendant: Menhaden v Citibank NA (1984) 1 FCR 542 at 547 per Toohey J.
The process of estimation embodies to a considerable extent, necessary reliance on the ‘feel’ of the case after considering relevant factors: Pearson v Naydler (supra) at 907.”
- The costs estimate made by Mr Robinson is not, I think, excessive in the context of a significant piece of commercial litigation such as the present. By way of comparison, I note that the plaintiff’s solicitor has deposed that between the date of service of the claim and statement of claim and the filing of the security for costs application, the plaintiff incurred some $213,685 in its own costs and disbursements. (I was informed in the course of the hearing that whilst the plaintiff had incurred a liability for these costs, they had not been paid.)
- Having regard to the principles to which I have just referred and allowing what, in the circumstances, seems to me to be an appropriate discount on Mr Robinson’s estimate, I am of the view that the appropriate amount to be ordered by way of security for the defendant’s costs up to and including the first day of trial is $400,000.
- Finally, this application has been comprehensively, but unsuccessfully, resisted by the plaintiff. There seems to me to be no reason why costs of this application ought not follow the event.
- Accordingly, there will be the following orders:
- Within 28 days, the plaintiff shall provide, in a form satisfactory to the Registrar, security for the defendant’s costs up to and including the first day of trial in the amount of $400,000.
- The plaintiff shall pay the defendant’s costs, including any reserved costs, of and incidental to the application for security for costs.
Footnotes
[1] [1984] 2 Qd R 523 at 530.
[2] Plaintiff’s submissions, para 5.
[3] (1987) 16 FCR 497 at 514.
[4] [2007] QSC 262 at 25.
[5] The amended statement of claim, which had been served on 16 December 2011, had inadvertently omitted a number of annexures.
[6] Telford Property Ltd v Ackama Investments Pty Ltd (unreported QSC No 896/86, 24 October 1986, de Jersey J).
[7] (2007) 65 ACSR 276.
[8] (1986) 4 ACLC 167.
[9] See the discussion by Muir JA in Specialized Explosives Blasting & Training Pty Ltd v Huddy’s Plant Hire Pty Ltd [2010] 2 Qd R 85 at 25– 39.
[10] (1984) 52 ALR 176 at 179-180.
[11] [2012] FCAFC 57.
[12] Plaintiff’s submissions, para 23.
[13] Base 1 Projects Pty Ltd v Islamic College of Brisbane Ltd [2012] QCA 114, per Wilson AJA at 26.
[14] [2008] NSWSC 569.
[15] (1982) 7 ACLR 97 at 100.
[16] Aqua Blue (Noosa) Pty Ltd v Soil Surveys Engineering Pty Ltd [2010] QSC 176 at 41.
[17] Supra at 515.