Corporations - Procedure - Costs - Security for costs - Discretion of court - Merits of plaintiff's case - Relevance of counterclaim - Whether it would canvass same issues - Turns on own facts

Corporations Act 2001 (Cth), s 1335(1)

Trade Practices Act 1974 (Cth), s 74, s 82, s 87

Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 78 ALR 634

Ausbulk Ltd t/a Ausbulk Grain Storage & Handling v Ewing International Ltd Partnership [2009] SASC 202

BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81

BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857

Brian E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497

Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (Administrator Appointed) [1999] NSWCA 16

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241

Focus Nominees Pty Ltd v Third Durrace Pty Ltd [2001] WASCA 432

Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238

Porzelack KG v Porzelack (UK) Ltd [1987] 1 WLR 420

Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201

Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289

Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1

Yici Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27

1 The defendant in this action applies for security for costs under s 1335(1) of the Corporations Act 2001 (Cth). Section 1335(1) provides:

Costs

(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

It is common ground between the parties that jurisdiction under s 1335(1) is established. The plaintiff is a proprietary company with paid-up capital of $1. Mr Julian Coyne is its sole shareholder and director. The evidence discloses that the plaintiff does not own any property in Western Australia. Mr Coyne, in his affidavit in opposition to the application, has sworn:

1. I use the plaintiff as the corporate vehicle to conduct a business of the design, development, installation and support of computer software programs and systems (Business).
2. The Business has been in operation since 2002.
3. The plaintiff does not retain profits made under contracts carried out by it, but distributes at my direction.
4. The plaintiff does not have funds from which it could pay the defendant's costs, should its defence succeed, and is not able to provide any security for the defendant's costs of defending the claim.

2 The plaintiff pleads that it conducts the business of the design, development, installation and support of computer systems. It says that it entered into a written contract with the defendant for the 'supply, implementation and maintenance of an integrated client relationship and case management system' in September 2008. It pleads a number of alleged terms of the contract, including alleged implied terms, and says, in effect, that under the contract prior to its variation, it carried out work to the value of approximately $60,000 for which it has not been paid. It says that the plaintiff commenced work under the contract in May 2008. It also says that there was an oral variation of the contract on 26 February 2009, in which it was agreed that the plaintiff would carry out 'additional work' at a sum to be agreed at a later date. The plaintiff says that there arose a contractual obligation to pay a reasonable sum or, alternatively, that it has a claim on a quantum meruit, in relation to the 'additional work'. It says that it is entitled to approximately $440,000 for the 'additional work'. The plaintiff also says that the defendant repudiated the contract in about June 2009 and the plaintiff accepted the repudiation in July 2009. The plaintiff claims, in addition, damages in consequence of the alleged repudiation and says that had the contract continued, the plaintiff would have earned profits of approximately $1.7 million.

3 The defendant admits that there was a written contract which it says was for a fixed price. It disputes a number of the express and implied terms of the contract alleged by the plaintiff, and says that there was a waiver of the performance of certain terms. The defendant also says that work under the contract commenced after the date of its execution, and not four months before then, as the plaintiff alleges. It denies that there was any variation to the contract on 26 February 2009 as alleged, and says that there was no other arrangement for the plaintiff to carry out the alleged 'additional work'. The defendant also says that it terminated the contract orally on 17 June 2009 in accordance with rights conferred by law, or in writing on 26 June 2009, in accordance with its rights at law, or on the basis of a contractual right to terminate. It relies on various alleged breaches of express terms and alleged breaches of terms said to be implied under s 74 of the Trade Practices Act 1974 (Cth) (TPA). The defendant also denies the plaintiff's claim to damages and says, inter alia, that even if it did not terminate the contract as alleged, the defendant would have terminated in any event under a termination 'for convenience' clause. The defendant also alleged misleading and deceptive conduct based on silence in circumstances where it says there was an obligation on the plaintiff to inform.

4 The defendant says that in reliance on the alleged misleading and deceptive conduct, it paid the plaintiff approximately $37,000 and incurred other expenditure. By its counterclaim, the defendant seeks, inter alia, damages for breach of contract, and/or an order under s 87 of the TPA setting aside the contract, and/or damages under s 82 of the TPA.

5 The relevant principles are not in dispute. See generally FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241; BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81.

6 Where jurisdiction to award security is made out, ie, where the court is satisfied that there is reason to believe that the plaintiff will be unable to pay the defendant's costs if its action is ultimately unsuccessful, this in itself provides a substantial factor in the exercise of discretion in favour of the applicant: BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857, 860; Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201, 215 - 217.

7 The defendant, prior to this application, raised with the plaintiff whether Mr Coyne would be prepared personally to provide security for the defendant's costs. Mr Coyne is the registered proprietor of two properties in Western Australia. Mr Coyne, by his solicitors, said in effect that he would not.

8 The observations of Lee J in Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1, 5 are pertinent in this context:

Section 1335 recognises the injustice that may result if a corporation is able to commence litigation against a respondent who has no choice whether to be involved in the litigation and finds at the conclusion of the proceeding that the corporation is worthless and that its shareholders are able to shelter behind a statutory limitation of their liability. To avoid such a consequence, courts have been given an unfettered discretion to make such orders as will be appropriate to balance the interests of parties to litigation commenced by an impecunious corporation. (emphasis added)

9 In substance in this application, the parties joined issue on two discretionary considerations emphasised by the plaintiff, referred to below.

The bases upon which the plaintiff resists security

10 The plaintiff resisted the provision of security on two principal bases. First, it said that the plaintiff's claim had 'clear merits' and that the defendant's prospects of establishing a defence were 'poor'. Secondly, it said that substantially the same matters were, in any event, likely to be canvassed in the determination of the defendant's counterclaim, and for that reason also, security should not be provided.

11 In support of its claim in this application, the plaintiff, by Mr Coyne, has sworn an affidavit, in effect, verifying the pleading and deposing to certain matters in support of its pleaded claims. The plaintiff's pleadings run to well in excess of 100 pages. The affidavit, with annexures, runs to 382 pages. The defendant has not filed any answering affidavits on the merits. The plaintiff, on this point, refers to Focus Nominees Pty Ltd v Third Durrace Pty Ltd [2001] WASCA 432.

12 Focus Nominees v Third Durrace was a case where the Full Court upheld a decision of Master Sanderson in declining to order security for costs against an impecunious plaintiff, having regard to the strength of the plaintiff's claim. The case there was a straightforward one. The defendant in that case had agreed to act as a settlement agent for both the plaintiff in that case (as purchaser) and the vendor, of the sale of a business. Having agreed to act for two masters, the settlement agent conspicuously failed to discharge his duty to the plaintiff. The judgment of the Full Court at [14] records Master Sanderson as saying:

From that brief outline of facts it is somewhat difficult to see what defence the first defendant has to the plaintiff's claim.

13 The nature of this case, and the facts and issues in these proceedings, are very different from those in Focus Nominees v Third Durrace. This is a complex case about, inter alia, the performance of a contract in relation to the supply of a computer system. I would, with respect, endorse Pullin J's observations referred to below, and would add that I see very little advantage to be gained, and much to be lost by way of costs and delays, in parties putting on lengthy affidavits in this type of application with a view to seeking to demonstrate the rectitude of their respective claims, in cases of any complexity and involving significant issues of disputed fact. Moreover in this case, the pleaded events span a period of nearly two years and the parties intend to lead expert evidence on the issues.

14 Pullin J (as his Honour then was), with whom Murray J agreed, in Focus Nominees v Third Durrace [18] said:

I should add by way of comment that this case is not a signal for parties to go into great detail on the merits of the case on an application for security for costs. Indeed, lengthy affidavits on the merits should be discouraged. In this case, however, it so happens that the strength of the respondent's case was obvious from the pleadings and the short affidavit material before the Court.

15 Moreover, it is generally unnecessary for a plaintiff to swear an affidavit to establish an arguable case. In Brian E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497, 513 - 514, French J (as his Honour then was) said:

The bona fides of the claim and its merits may be considered in the exercise of the discretion [citing Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609 at 626 and other cases].

...

It is consistent with authority and the existence of a broadly based discretion that the bona fides and merits of the claim be taken into account where there is material from which some assessment can be made.

Where there is a claim prima facie regular and disclosing a cause of action, I see no reason why the court would, in the absence of evidence, proceed on the basis that the claim was other than bona fide with a reasonable prospect of success.

16 Earlier in that decision, his Honour said (502), with reference to whether a conclusion would be drawn that a party's claim is not bona fide or has no reasonable prospects of success:

No such conclusion should be drawn except upon evidence of the clearest kind.

17 The same observation is applicable, in my view, to a contention by the plaintiff that the defence lacks bona fides or has no reasonable prospects of success. See also in this context Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 78 ALR 634; Porzelack KG v Porzelack (UK) Ltd [1987] 1 WLR 420.

18 In relation to the merits, the plaintiff's first point is that the defendant's prospects of establishing any of the (pleaded) defences are poor.

19 In this case the defendant has pleaded what it alleges to be substantial breaches in the performance of the contract by the plaintiff. In my view, the strength or otherwise of the defendant's case cannot properly be assessed, even in a preliminary way, on this type of application. I am unable to conclude that the defendant's prospects of proving the alleged breaches by the plaintiff are 'poor', or, if they are proved, that the defendant's prospects of establishing that they were sufficiently serious to justify termination of the contract, are 'poor'. I am not assisted in the resolution of this issue by Mr Coyne's affidavit in which he responds to, and denies in conclusionary terms, the allegations of breach pleaded by the defendant. Although this case concerns a contract for services rather than a contract for the sale of goods, I would adopt the observations of the Chief Justice in a recent application for security for costs in a sale of goods case, where defects were alleged. In Yici Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27 [7], the Chief Justice said:

However, the fact that the application is brought at a relatively early stage in the proceedings makes it difficult to make any meaningful assessment of the relative strengths and weaknesses of the cases of the parties. The plaintiff's claim is for the price of goods sold and delivered ... The defendant resists the claim on the basis that the goods delivered were defective. It seems likely that the case will ultimately turn upon the findings made with respect to the condition and quality of the goods at the time they were delivered to the defendant. It is neither possible nor appropriate to make any meaningful assessment of that disputed factual issue on the basis of the limited affidavit evidence before me. Accordingly, in this case, the relative strengths and weaknesses of the positions of the parties is not a factor which assists in the exercise of the discretion to order security for costs.

20 The plaintiff next says that there was no oral termination of the contract, as alleged by the defendant, at the meeting on 17 June 2009. The meeting of 17 June 2009 occupies several pages of the plaintiff's pleading and several pages of the defendant's pleading. I was asked by counsel for the plaintiff to examine the pleadings and conclude that the matters pleaded by the defendant, properly construed, could not support an allegation of an oral termination on that day. I have considered the matters raised by counsel for the plaintiff, but am unable to conclude that the matters pleaded are incapable of supporting the allegation that, on the defendant's case, there was an oral termination on that occasion.

21 Next, the plaintiff says that the defendant's plea, in the alternative, that there was a termination by letter dated 26 June 2009, is untenable. At trial, the letter would need, of course, to be construed as a whole and in the context of the circumstances in which it was written. The letter includes the sentence: 'We are instructed to reiterate our client's position stated to you on 17 June 2009 that the Contract is at an end.' That sentence is, in my view, at least arguably capable of constituting a statement by the defendant to the plaintiff that the defendant was again providing notice of termination. Certainly in the absence of detailed debate and in the absence of a consideration of the letter in the context of all the circumstances in which it was written, I am unable to conclude that the allegation in the defence that the contract was terminated by the letter is 'untenable'.

22 The plaintiff next contends that the defendant's plea that it could and would have terminated the contract under cl 29.2 of the contract is 'weak'. Clause 29.2 of the contract is a substantial clause, which would need to be read in the context of the written contract as a whole which, with appendices, is at least 160 pages in length. The proper construction of the clause is in dispute. Again, I am not in a position to conclude, in this application, that the defendant's plea based on termination under cl 29.2 of the contract is 'weak'.

23 The plaintiff also contends that the defendant's allegations of misleading and deceptive conduct, are 'weak'. In this case (like many others), questions of whether representations by conduct including silence were made and, if so, whether the representee was induced to act upon them are, by their nature, difficult, if not impossible, to assess at an interlocutory level. A consideration of all the relevant circumstances at trial is, at least generally, required. I see no proper basis, in this case, for regarding the defendant's claims as inherently weak.

24 In summary, whilst I accept that the plaintiff's claim is bona fide and reasonably arguable, I am unable to accept, for the purposes of this application, that its merits are so compelling, and the defendant's defence is so weak, that this matter is a consideration of any real weight in the determination of this application.

25 The second discretionary consideration upon which the plaintiff placed emphasis is that substantially the same facts are likely, in any event, to be canvassed in determining the counterclaim. The plaintiff referred to Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238, where Master Newnes (as his Honour then was) said at [39] - [41]:

In Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289, Smart J said (at 300) that a relevant factor in the exercise of the discretion to award security for costs was:

'[w]hether substantially the same facts are likely to be canvassed in determining the action and the cross-action. The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action covering substantially the same factual area proceeds.'

That statement was referred to with approval by Rolfe J in Dalma Formwork Pty Ltd (Administrator Appointed) v Concrete Constructions Pty Ltd and on appeal Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (Administrator Appointed) [1999] NSWCA 16 at [24].

It is true that, in this case, the issues raised in the counterclaim itself are limited and discrete. However, as the pleadings stand, the determination of the counterclaim will involve canvassing substantially the same factual issues as those raised in the plaintiff's claim. Accordingly, if the action were stayed because of the plaintiff's inability to provide security, the same factual issues would nevertheless have to be canvassed in order to determine the counterclaim. In my view, a Court should be slow to allow that situation to come about. I do not consider there is anything in the circumstances of this case that would justify the prospect of such a result.

26 The following observations of Bleby J in Ausbulk Ltd t/a Ausbulk Grain Storage & Handling v Ewing International Ltd Partnership [2009] SASC 202 are, in my view, also relevant regarding the Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289 decision. His Honour said, inter alia, at [24] and [25]:

A number of observations need to be made about [Smart J's dictum in Sydmar] ... that observation needs to be read in the context of the facts of that case. Of the cross-claim in that case the Judge later observed:

By reason of the complexity of the matters raised in the cross-claim, the time it will take to hear them and the amount claimed, the cross-claim is now the dominant part of the proceedings. The plaintiff's claim, while important to it, is, in the overall picture of the hearing time and the amount claimed, of minor importance.

... [Also], one of the relevant factors against ordering security for costs is where a plaintiff is, in reality, a defendant. Ausbulk, in this case, is a defendant in the arbitration. Although it has a cross-claim, it was open to the Judge below to conclude that it was effectively a cross-claim by way of defence only, being based on Ewing's alleged breach of contract, the very substance of Ausbulk's defence to Ewing's claim. Such a defensive counterclaim does not preclude a defendant from obtaining an order for security.

27 It is unnecessary to come to a concluded view on whether the counterclaim is in substance by way of defence only here. That is because the defendant, in any event, undertakes that it would not proceed with its counterclaim if there were a stay pending the provision of security. In light of that concession, there is no prospect that the counterclaim will proceed to canvass the issues in the case which would otherwise have been canvassed by the plaintiff in its statement of claim: Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (Administrator Appointed) [1999] NSWCA 16 [15], [16], [24]. Accordingly, this point also carries no real weight in the proper determination of this application.

28 The application was not fought on any other issues. In all the circumstances as I have outlined them, I am satisfied that security for costs should be ordered. The defendant seeks security in the sum of $76,945, up to entry for trial, with liberty to apply for further security if necessary. It has annexed a draft bill of costs to its supporting affidavit. There has been no dispute as to quantum. Security will be ordered in terms of pars 1 and 2 of the defendant's chamber summons, upon the undertaking from the defendant that it will not pursue its counterclaim during the pendency of any consequential stay.