Appellant v First Respondent

2 The hearing of the appeal has a somewhat unfortunate history. It was originally heard by Bongiorno JA on 10 August 2017. However his Honour, who was sitting as a reserve judge, was unable to deliver his judgment prior to his commission expiring.

3 Accordingly, I heard the appeal on 28 September 2017, and consistent with the provisions of section 9 of the Civil Procedure Act 2010 (Vic), I utilised the transcribed oral submissions made by the parties before his Honour. At the hearing, I permitted the cross-examination by counsel for Bodycorp of a costs consultant, Jennifer Young. I then heard short oral submissions of both parties, supplementing those made to Bongiorno JA.

4 I have concluded that the appeal should be dismissed, essentially for the reasons advanced by the Judicial Registrar,[1] who held that:

(a) it was appropriate to order security for costs; and

6 In May 2015, the lawyers commenced a proceeding (the costs claim) in the Magistrates' Court against Bodycorp and Antonio Murdaca for the payment of unpaid legal fees plus interest on the unpaid fees, claiming the amount of $81,688.29. Bodycorp and Mr Murdaca, the sole director and shareholder of Bodycorp, filed defences and then sought to file a counterclaim seeking $160,000 for breach of retainer. Ultimately the costs claim was uplifted and transferred, on their application, to this Court in January 2017.

7 In this proceeding, which commenced on 20 October 2016, Bodycorp claimed damages from the lawyers as a result of their alleged negligence and breach of contract.

8 Bodycorp had retained the lawyers in or about mid-September 2013 after its claims against Michael Maisano and AAMI were dismissed in the trial division of this Court.[2] The lawyers provided legal services in connection with an appeal against that decision. It is alleged, inter alia, that the lawyers terminated the retainer without just cause and/or with insufficient notice; that they were negligent in their conduct of the appeal; that they should have been aware Bodycorp had no reasonable prospects of success in the appeal and/or that the appeal was doomed to fail; and that their advice in respect of an offer made to Bodycorp by the respondents to the appeal was negligent.

9 A defence was filed by the lawyers on 12 December 2016.

10 In February 2017 the lawyers instructed a costs consultant, Jennifer Young, to prepare a report in relation to the likely costs to be incurred by them in defending this proceeding up to mediation. She subsequently provided an estimate of $181,000.

11 This application by the lawyers for security for costs was issued on 15 February 2017 and heard by the Judicial Registrar on 16 March 2017.

12 On 19 April 2017, the Judicial Registrar ordered that Bodycorp pay the sum of $90,800 into Court as security for the lawyers' costs.[3]

The case before the Judicial Registrar and her decision

13 Affidavits were sworn by Mr Murdaca,[4] and by Christien Corns,[5] the solicitor acting for the lawyers. Mr Corns' affidavit exhibited the report of Ms Young.

14 The lawyers sought orders of security for costs, arguing that:

(a) Bodycorp was impecunious and would hence be unable to satisfy an order for the lawyers' costs in the proceeding, with paid up capital of only $100. It was not registered as the proprietor of any real estate in Australia;

(b) Bodycorp had recently been ordered to pay security for costs by the Court of Appeal on three separate occasions, and had not subsequently demonstrated any improvement in its financial position; and

(c) the proceeding was not defensive in nature, as Bodycorp sought relief based on allegations of professional negligence.

15 Ms Young estimated the lawyers' costs as $181,090.43, being costs up to and including mediation, including a loading of 12% on solicitors' fees for care and skill and counsel's fees based on the GST exclusive rate of $440 per hour/$4,400 per day. A summary of the costs estimate is as follows:

(b) the security for costs application, totalling $29,783.43;

(c) further and better particulars, totalling $8,252.74;

(e) the first directions hearing, totalling $3,120.88;

(f) an additional directions hearing, totalling $8,006,51;

(g) an interlocutory application (discovery), totalling $26,857.39; and

(a) its claim was bona fide with reasonable prospects of success, as there was no evidence to the contrary;

(b) the lawyers' application for security for costs was thus being used to stifle Bodycorp's claim, as it did not have the means to pay the amount of security sought;

(c) its claim was in substance defensive, as it raised matters subject to an equitable set off in the Magistrates' Court;

(d) its lack of means was partly due to the conduct of the defendants;

(e) the quantum of security for costs sought was excessive, as significant duplication would occur due to the Magistrates' Court proceeding being managed with this proceeding; and

(f) Mr Murdaca had given a personal undertaking to pay any adverse costs order.

17 Bodycorp did not challenge the expertise of Ms Young or provide any contradictory evidence as to what amount of costs should be ordered.

(a) Bodycorp had provided no evidence as to its financial position and, by contending that security should not be ordered on the ground that the lawyers were in part responsible for its lack of means, had conceded its impecuniosity;

(b) Bodycorp had submitted no evidence in support of the assertion that the lawyers had caused or contributed to its impecuniosity;

(c) Bodycorp had not met the burden of establishing the facts in support of its assertion that security for costs would stultify its claim;

(d) Bodycorp's claim could not be characterised as defensive, as it made allegations of negligence which had no bearing on the debt claim advanced by the lawyers in the Magistrates' Court. Such allegations were of a scale and complexity sufficient to constitute the overwhelming substance of costs associated with this proceeding;

(e) the serious nature of the allegations of professional negligence in this proceeding justified the lawyers' engagement of external counsel in contradistinction to their self-representation in the Magistrates' Court proceeding;

(f) as no order had been made to consolidate this proceeding with the Magistrates' Court proceeding, no assumption could be made as to the duplication of work; and

(g) Mr Murdaca's deposition that he was willing to provide a personal undertaking to pay any costs order was inadequate, as no evidence had been provided as to his financial position, nor any detail given as to the form of the undertaking. The appropriate form of security would be by way of payment of the amount into Court or by way of a bank guarantee from an Australian bank.

(a) Bodycorp was sufficiently impecunious as to warrant an order of security for costs and thus the jurisdiction was enlivened;

(b) Bodycorp had not been able to establish that the lawyers had caused or contributed to its impecuniosity;

(c) an order of security for costs would not stultify Bodycorp's 'arguable case legitimately instituted';

(d) the lawyers' claims were not defensive in character; and

(e) the potential duplication of work between the proceeding commenced by the lawyers and Bodycorp's claim was not a sufficient basis upon which to deny an order of security for costs.

20 The Judicial Registrar then determined the amount for security payable for the lawyers' costs up to and including mediation, discounting Ms Young's estimate on the following grounds:

(a) Ms Young applied a 12% loading on solicitors' fees for care and skill, which was not justified on standard or routine items, or those with significant involvement from counsel;

(b) the prospect of duplication of work between the costs claim and this proceeding, most notably pertaining to discovery and mediation;

(c) the lawyers were not in a purely defensive position in this proceeding; and

(d) the likelihood that some of the figures would be taxed off at a taxation.

21 Consequently, the Judicial Registrar fixed the sum of $90,800 as security, comprising the following:

(b) the security for costs application, totalling $18,773.65;

(c) further and better particulars, totalling $7,509.95;

(e) the first directions hearing, totalling $3,120.88;

(f) an additional directions hearing, totalling $3,810.05;

(g) an interlocutory application (discovery), totalling $20,046.88; and

22 As no evidence was provided as to the financial position of Mr Murdaca, the Judicial Registrar accepted the lawyers' submission that she should ignore his offer of a personal undertaking.

23 The affidavits deployed in the hearing before the Judicial Registrar were relied upon by the parties on this appeal. In addition, I permitted Ms Young to be cross-examined and a letter relevant to her retainer to be tendered. Bodycorp also tendered the affidavit of documents filed by the lawyers in the costs claim.

24 Under r 84.05(1) and (3) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (SCR), an appeal from a determination made by a Judicial Registrar is conducted by way of a hearing de novo before a Judge of the Trial Division of this Court.

25 I adopt the statements of the Judicial Registrar taken from a number of decisions of this Court and in particular that of US Realty Investments LLC #1 & Ors v Need[6] - which were not in issue on this appeal.

26 The Court first determines whether the jurisdiction to grant security for costs has been enlivened: under either r 62.02 of the SCR or by s 1335 of the Corporations Act 2001 (Cth). Here, the relevant ground, pursuant to s 1335 of the Corporations Act 2001 (Cth), is Bodycorp's financial position: if it appears by credible testimony that there is reason to believe that Bodycorp will be unable to pay the lawyers' costs if they are successful in their defence of its claim, then the Court may order that security for those costs be given.

27 Once the jurisdiction is enlivened, it is then a matter for the Court's discretion as to whether security ought to be awarded. The lawyers carry the overall burden of persuasion as to the making of the order. The discretionary factors relevant to this application are well established,[7] and include:

(a) the degree of risk that an order for costs may not be satisfied;[8]

(b) whether Bodycorp's lack of funds has been caused by or contributed to by the conduct of the lawyers in relation to the subject of the claim;[9]

(c) whether the granting of security for costs would unduly stultify Bodycorp's ability to pursue an arguable case legitimately instituted;[10] and

(d) whether the costs claim and counterclaim are likely to canvass substantially the same facts as in this proceeding; or is this proceeding properly categorised as defensive.[11]

28 In exercising its discretion the Court carries out a balancing exercise between the injustice to Bodycorp if the grant of security prevents it from pursuing a proper claim, as against the injustice to the lawyers if no security is ordered and they are ultimately successful but unable to recover their costs from Bodycorp.[12]

29 Finally, if the Court decides to make an order for security for costs then determination of the appropriate quantum is also discretionary, and requires a 'broad-brush' assessment having regard to the information before the court. The Court is required to balance the interests of the party seeking security in ensuring it has adequate and fair protection, whilst avoiding injustice to the other party.

30 The financial position of Bodycorp is uncontested and was set out by Mr Corns in his first affidavit:

(b) it is not the registered proprietor of any real estate in Australia;

(c) it is the subject of three orders to pay security for costs, and was most recently ordered to pay security for costs by the Court of Appeal on 3 March 2017;

(d) no evidence has been adduced by it to establish that its financial position has improved since the orders of 3 March 2017; and

(e) no evidence has been adduced as to its financial position - in particular to demonstrate that it has assets which could be utilized to meet an adverse costs order.

31 In Livingspring, Maxwell P and Buchanan JA stated that the:

phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more .... The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? .... A risk assessment is, of necessity, imprecise. The section calls for a practical, common sense approach to the examination of the corporation's financial affairs.[13]

32 I agree with the Judicial Registrar's conclusion that the lawyers have shown that there is a real, not fanciful, risk of Bodycorp being unable to pay any substantive order (or indeed, any order) for costs.[14] This conclusion 'enlivens the jurisdiction'. Next is consideration of the relevant discretionary matters.

Has conduct on the part of lawyers led to the financial predicament of Bodycorp?

33 In Colmax, Derham AsJ summarised the principles relevant to this consideration:

(a) the plaintiff carries the burden of persuasion on the question whether the conduct of the defendant was the cause of the plaintiff's financial difficulties;

(b) there must be a solid foundation for that conclusion;

(c) the plaintiff carries the onus of satisfying the court on the basis of admissible evidence. [15]

34 Whilst there may be an allegation in the statement of claim that the lawyers failed to give advice as to an offer of settlement, there is a complete absence of evidence that the lawyers' conduct has played a role in the apparent financial plight of Bodycorp. They did not act for Bodycorp in the trial nor on the hearing of the appeal. There is no material available establishing a link between the lawyers' conduct of the appeal and any loss sustained by Bodycorp.

Does Bodycorp have a bona fide claim with reasonable prospects of success?

35 This cannot be determined. No evidence was led either way.

36 In my view, this proceeding is not a defensive claim or so bound up with the costs claim as to negate an order for security being made.

37 The costs claim is for a sum of about $80,000 for costs incurred by the lawyers in preparing the appeal until their retainer was terminated shortly prior to the hearing of the appeal from the trial judge.[16] The counterclaim in the costs claim relates to additional costs incurred as a result of alleged wrongful termination of the retainer.

38 The claim in this proceeding is far more expansive - it is not an argument about whether costs were or were not properly incurred. Rather, it is a full-blown professional negligence claim alleging, inter alia, that advice should have been given in relation to offers made to settle the case and that substantial losses (around $2 million) have been incurred by Bodycorp as a result of the breach of duty on the part of the lawyers. There is nothing defensive about this case; rather it is the opening up of a second front. This argument can be put to one side.

Will an order for security stultify Bodycorp's claim?

39 Bodycorp carries the burden of proof in establishing that their claim might be stultified by an order for security of costs.[17] As I have already mentioned, both on the appeal and before the Judicial Registrar, there has been no evidence as to the financial position of Bodycorp. Mr Murdaca says nothing in his affidavit about its financial position. The Judicial Registrar rejected this argument. It would have been open to Bodycorp on this appeal to seek leave to adduce further evidence on this issue. It did not do so.

40 Accordingly, I am not satisfied that Bodycorp's pursuit of this litigation would be stultified. While not determinative of this application, it is relevant to note that (as observed by the Court of Appeal earlier this year) a number of previous orders for security for costs against Bodycorp, in other proceedings, have not appeared to prevent it from prosecuting claims.[18]

Dual representation in both the costs claim and this proceeding

41 In this proceeding, the lawyers are represented by their solicitors, K & L Gates; in the costs claim, the lawyers (being a firm of solicitors) act on their own behalf. Bodycorp argues that if the lawyers wish to be represented by two firms of solicitors, they should pay for them.

42 Given the application is for security up to and including mediation, I agree with the Judicial Registrar that the costs for which the lawyers seek security at this stage are not likely to be significantly affected by whether the defendants have 'two sets of lawyers at the bar table'.

43 I do, however, accept the point made in the cross-examination of Ms Young by counsel for Bodycorp and in his submissions: that there is a potential overlap between discovery in the costs claim and in this proceeding. This, I think, is a relevant matter to be taken into account when determining whether the allowance made by the Judicial Registrar for the security of costs is reasonable - but it does not go as far as precluding the exercise of discretion in favour of the lawyers. Of note, this was the approach taken by the Court of Appeal in Bodycorp Repairers Pty Ltd v Maisano.[19]

Risk of the inability of Bodycorp to pay the lawyers' costs

44 Finally, and significantly, there is the financial position of Bodycorp which I have set out at [30]. It is, at least on what has been disclosed in this application, parlous and there is a substantial risk that the lawyers will be out of pocket should the claim fail.

45 In the result, I am satisfied that it is appropriate to make an order for security of costs in favour of the lawyers. So the remaining question is - in what amount?

46 The usual approach, which was adopted by the Judicial Registrar, is that where security is ordered, it is for the period up to and including mediation, with it then being open to a defendant to seek further security for the remainder of the proceeding if it has not been resolved at mediation.[20] I accept that this method should be applied.

47 The principles applicable to the amount of security and the approach to be taken by the Court are well established.[21] These can be summarised as:

(a) the amount of security is within the Court's discretion;

(b) the amount is that which the Court thinks just, having regard to all of the circumstances;

(c) in ordering security, the Court does not set out to give the defendants a complete and certain indemnity for costs; and

(d) the Court's task is not akin to a taxation of the defendants' probable costs and involves a broad brush approach.[22]

48 The foundation of the lawyer's claim is the report of Ms Young, which was attacked by counsel for Bodycorp. The basis for the calculations and the specific calculated amounts were challenged and, included the following:

(a) Ms Young made her calculations on assumptions of facts contained in a letter of instruction, when she could have examined actual work performed on the file in the past to gauge what would be required in the future;

(b) the amounts allocated by Ms Young for counsel's attendance at and preparation for directions hearing; and

49 In addition, Bodycorp argued that if this proceeding had been dealt with in the Magistrates' Court a lower quantum of security for costs would have been required. It was contended that the lawyers could have consented to the matter being heard in that court.

50 The basis for the Judicial Registrar's allowance of just under $91,000, is set out at [21] above. In effect this represented a discount of Ms Young's estimate by almost 50 per cent.

51 Given that this exercise is necessarily broad-brush, it suffices to say that I regard such a reduction as detailed by the Judicial Registrar as being appropriate and adopt that figure. Indeed, it may well be that it was not necessary for there to be a break up of each of the items as calculated by the Judicial Registrar.

52 As to Bodycorp's contentions: Ms Young was entitled to give her opinion based on an estimate of the prospective costs utilising her considerable experience in the area. It was not necessary for her to have access to the file, which in itself would have created problems of privilege. Moreover, the manner in which Ms Young went about the task, it has to be remembered, was unchallenged - at least in terms of a contradictory estimate of quantum.

53 The argument about the case being heard in the Magistrates' Court can be put to one side given that Bodycorp's claim is for nearly $2 million.

54 I also note that the specific allowance for discovery made by the Judicial Registrar is less than half than that allowed by Ms Young; this in my opinion readily takes into account the prospect of duplication of effort and potential reduction in the costs of discovery in this proceeding given that discovery has occurred in the costs claim.

55 All that said, it is not the task of this Court to engage in a minute dissection of each aspect of the prospective costing of the defence of Bodycorp's claim as its counsel appeared to contend. Rather, it is to determine whether, in broad terms, an appropriate amount can give the lawyers effective security. It seems to me that the sum allowed by the Judicial Registrar represents a fair and reasonable estimate of the very lower end of the range of costs likely to be incurred and still gives Bodycorp the opportunity to litigate the claim.

56 In my opinion, the willingness of Mr Murdaca to provide a personal undertaking to meet its lawyers' costs does not alter the position. To be of utility, such an undertaking must be 'effective alternative security'.[23] There is no evidence, despite requests, of Mr Murdaca's financial position. There is no basis upon which to assume that the undertaking would 'address the risk to the respondent which security for costs is intended to ameliorate'.[24]

57 The end result is that it is appropriate for security for costs to be ordered to be paid by Bodycorp in the sum of $90,800.

[1] Bodycorp Repairers Pty Ltd v GDG Legal Pty Ltd & Anor [2017] VSC 200 (Reasons).

[2] Bodycorp Repairers Pty Ltd v Maisano (No 8) [2013] VSC 472.

[5] Two affidavits sworn, 15 February and 10 March 2017.

[6] [2013] VSC 590 (US Realty) [18]-[38].

[7] See Bodycorp Repairers Pty Ltd v Maisano [2017] VSCA 39 [23].

1. [8] Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 (Livingspring), 383 [21] and [22] (Maxwell P and Buchanan JA).
2. [9] Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 (Colmax) [20(b)], citing Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609 (Lord Denning MR).
3. [10] Colmax [20(d)], citing MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97; Drumdurno Pty Ltd v Braham [1982] FCA 161; (1982) 42 ALR 563; Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 (Ariss); Excelsior Run Pty Ltd (in liq) v Nelius Pty Ltd [2001] VSC 161.
4. [11] See Colmax [20(c)] for a summary.
5. [12] US Realty [22], citing Tradestock Pty Ltd v TNT (Management) Pty Ltd [1977] FCA 1; (1977) 14 ALR 52, 56 (Smithers J).

[16] Bodycorp Repairers Pty Ltd v AAMI & Martin [2015] VSCA 73.

[18] Bodycorp Repairers Pty Ltd v Maisano [2017] VSCA 39 [15].

[19] [2017] VSCA 39 [24]-[25].

[21] Oswal v Australia and New Zealand Banking Group Ltd (Security for costs - Stage 2) [2016] VSC 119 [7]-[13].

[23] Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Baradale Pty Ltd [1999] VSCA 43; (1999) 2 VR 191, 198 [24].

[24] Bodycorp Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd (No.3) [2016] VSCA 185 [23].