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[2013] NSWSC 457
Supreme Court of NSW
2013-04-22
Stevenson J
Original judgment source is linked above.
th John Chapman (ninth defendant) Anthony Frederick Dormer (tenth defendant) Representation: Counsel: J P Durack SC with H Pintos-Lopez (plaintiffs) D J Fagan SC with E A J Hyde 4 & 5 April and Mr Hyde alone on 22 April (fourth, fifth, sixth, ninth and tenth defendants) Solicitors: Marque Lawyers (plaintiffs) Norton Rose Australia (fourth, fifth, sixth, ninth and tenth defendants) File Number(s): SC 2011/76919 Publication restriction: Nil
Introduction 1This is an application that the plaintiffs provide further security for costs ($600,000 in security having already been provided). 2The plaintiffs, Armstrong Strategic Management and Marketing Pty Ltd ("ASMM"), Armstrong Consulting Pty Ltd ("AC") and Mr Kenneth Alan Armstrong, commenced these proceedings in April 2011 seeking a transfer to this Court of proceedings then pending in the District Court of New South Wales. 3There are now 10 defendants to the proceedings. The plaintiffs seek damages arising from the entry into and performance of agreements by which the parties established an insurance expense reduction consulting business in Australia in 2004, and a similar global business in the United Kingdom in 2007, and the termination of those agreements in 2009. 4Five of the defendants are corporations. Three of those corporations (the first, second and third defendants) are Australian corporations and are defending the proceedings, albeit on a limited basis. The other two corporate defendants are United Kingdom corporations. They have not appeared in these proceedings. 5The application for security is brought by the remaining defendants, Mr Stuart Michael (the fourth defendant), Mr Ronald Clucas (the fifth defendant), Mr Charles Marfleet (the sixth defendant), Mr Keith Chapman (the ninth defendant) and Mr Anthony Dormer (the tenth defendant) (together "the Individual Defendants"). 6The application for security is brought on two bases. First, the Individual Defendants seek specific performance of an agreement allegedly made between them and the plaintiffs that the plaintiffs provide security "on the terms recorded in the undertaking of Michael Bradley dated 25 September 2012." 7Alternatively, the Individual Defendants seek security on a conventional basis pursuant to Pt 42, r 21 of the Uniform Civil Procedure Rules 2005 or under s 1335 of the Corporations Act 2001 (Cth).
Decision 8The plaintiffs are to provide security in the sum of $100,000.
Satellite litigation 9This is the third significant interlocutory skirmish in these proceedings. 10On 7 July 2011, Ball J heard an application by the Individual Defendants to strike out a number of the claims made by the plaintiffs. On 8 July 2011, Ball J struck out the claims then made by the plaintiffs against the Individual Defendants for conspiracy, but otherwise dismissed the strike out application (Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd [2011] NSWSC 704). 11On 1, 23 and 28 March 2012, Bergin CJ in Eq heard a motion brought by the Individual Defendants in which they contended that privileged documents had been inadvertently produced on discovery. In a judgment given on 26 April 2012, Bergin CJ in Eq granted the relief sought by the Individual Defendants concerning some, but not all, of those documents (Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd [2012] NSWSC 393). 12On 18 December 2012, the Court of Appeal (Campbell and Macfarlan JJA and Sackville AJA) set aside the orders made in favour of the Individual Defendants (Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd; Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd [2012] NSWCA 430). 13An application by the Individual Defendants for special leave to appeal to the High Court from that judgment will be heard in May or June 2013.
The stage reached in the litigation 14Pleadings have closed. The plaintiffs have served all their evidence. Depending on the outcome of the pending special leave application in the High Court, the plaintiffs may seek to adduce further evidence and may seek to amend their claims to reinstate the conspiracy claim struck out by Ball J on 8 July 2011. The defendants have not yet served evidence. 15Discovery and inspection have taken place. However, in November 2012, the Individual Defendants' solicitors, Norton Rose, notified the plaintiffs' solicitors, Marque Lawyers, that their attention had been drawn to further documents ("the Additional Documents") that, consistently with the Individual Defendants' obligation to give continuing discovery, would be disclosed. 16A mediation is scheduled for 6 May 2013. 17In early April 2013 the parties agreed that: - (a)no further work should be done by the Individual Defendants in relation to the Additional Documents until the mediation; (b)if the mediation is unsuccessful, the parties will discuss means by which discovery of the Additional Documents might be limited; and (c)any further discovery of the Additional Documents will be deferred until after service of the Individual Defendants' evidence.
The Australian joint venture 18The following is derived primarily from the plaintiffs' outline of submissions. 19Prior to 2004, the Expense Reduction Analysts group of companies ("the ERA Group"), through franchisees, provided outsourced costs reduction advice and services to corporations. Mr Armstrong contends that in 2004 he introduced to the Australian arm of the ERA Group an opportunity to extend the costs reduction business to the costs of insurance. 20Initially, the insurance side of the costs reduction business was carried out in the Australian market. This aspect of the business was structured through a joint venture company, ERA Insurance Services Pty Ltd ("ERAIS") (the second defendant), and was the subject of a Shareholder Agreement made on 1 August 2004 between the Australian arm of the ERA Group, Expense Reduction Analysts Group Pty Ltd ("ERAG") (the first defendant), Mr Armstrong and ASMM. 21Under the Shareholder Agreement, ERAG acquired 50.1 per cent of the shares in ERAIS and ASMM 49.9 per cent of the shares. Both ASMM and Mr Armstrong were parties to that agreement. Mr Armstrong was obliged to contribute to the management of ERAIS. He was to be its initial Managing Director for which he was to be paid a salary. The salary was to be $120,000 for the year ended 30 June 2005, $180,000 for the year ended 30 June 2006, and $240,000 for the year ended 30 June 2007 and thereafter. ASMM was to be paid a management fee. That fee was to be $240,000 for the year ended 30 June 2005, $180,000 for the year ended 30 June 2006, and $120,000 for the year ended 30 June 2007 and thereafter. 22The joint venture company operated in conjunction with a franchise granted by ERAG to AC pursuant to a Licence Agreement made on 1 March 2004. 23By December 2007, ERAIS had retained earnings of $235,000 available for payment to the shareholders as dividends of which ASMM's share was $117,300. 24Thus, the structure of the business between 2004 and 2007 was as depicted below: -
Global expansion of the business 25Mr Armstrong alleges that in 2007 he began discussions with the ERA group about a global expansion of the ERAIS business. 26The idea was that a new joint venture company was to be established in the United Kingdom that would control the global business. That company was Eragics Limited ("ERAGICS") (the seventh defendant). 27In February 2008, as result of these discussions, Mr Armstrong: - (a)entered into a Consultancy Agreement with ERAGICS under which ASMM was to make Mr Armstrong available to provide consulting services to ERAGICS for four years in return for a fee payable to Mr Armstrong of $360,000 per annum; (b)entered into a Cooperation Deed in relation to ERAGICS, ERAG and Expense Reduction Analysts International Limited ("ERAI"), the eighth defendant, under which: - (i)Mr Armstrong was to be allotted shares in ERAGICS equal to 25 per cent of the share capital of that company and, subsequently, another 10 per cent of the share capital depending on the financial performance of ERAGICS; and (ii)ASMM was to sell out its shareholding in ERAIS shortly after the first anniversary of the Cooperation Deed. 28In late February 2009, ASMM transferred its shareholding in ERAIS to ERAI. The Licence Agreement of 1 March 2004 between ERAG and AC continued. 29Thus the structure of the business at [24] was, from 2008, as depicted below: - 30Although ASMM transferred its shareholding in ERAIS to ERAI: - (a)no shares were allotted to Mr Armstrong in ERAGICS (although, on the Individual Defendants' case, resolutions were passed to allot shares; however no scrip was issued and the allotment of shares was not registered); (b)no share of the retained earnings of ERAIS were paid to ASMM; and (c)in October and November 2009 (and in the following sequence): - (i)ERAG purported to terminate the Licence Agreement with AC on the basis of alleged misconduct of Mr Armstrong; (ii)ERAGICS purported to terminate the Consultancy Agreement with Mr Armstrong for the same alleged misconduct of Mr Armstrong; and (iii)the relevant members of ERA group purportedly terminated the Cooperation Deed on the basis of the earlier termination by ERAGICS of the Consultancy Agreement. 31The plaintiffs contend that, as a result of these actions by or on behalf of the ERA group of companies, by the end of November 2009, the plaintiffs no longer held any economic interest in the insurance reduction business of the ERA Group in Australia or overseas. 32Mr Armstrong, ASMM and AC seek to recover the loss they claim to have suffered on two bases.
First basis: inducement to give up interest in Australian business for global business; rights/lost value of such interests; the "no transaction" case 33Each of Mr Armstrong and ASMM claim to have been induced to give up their interest in the Australian joint venture company, ERAIS, in return for the rights that they were to receive in the global business, under the Consultancy Agreement and the Cooperation Deed. 34Mr Armstrong and ASMM allege that they were misled by wrongful conduct (advanced both as a contravention of s 52 of the former Trade Practices Act 1974 (Cth) and as a breach of fiduciary duty) consisting of a combination of: - (a)an alleged failure to correct statements made to Mr Armstrong about the role he would have in the global business; and (b)statements allegedly made concerning the funding of the global expansion by ERAI and the returns to be paid to ERAGICS by the global operating companies. 35The plaintiffs contend that, but for the wrongful conduct complained of, they would not have entered into the transactions referred to at [27] and depicted in Diagram 2. Thus, the plaintiffs advance a "no transaction" case. Second basis: lost value of contractual performance 36The second claim, which is brought as an alternative to the first, is for compensation for the lost value of the contractual promises made to them in the agreements depicted in Diagrams 1 and 2 in respect of both the Australian and global businesses. Relief is sought against both the contracting party and those who allegedly induced or assisted the relevant breach (particularly the Individual Defendants). An issue will arise at the hearing as to which of these claims is maintainable if the plaintiffs establish the "no transaction" case outlined above. 37Four kinds of loss are sought to be recovered: - (1)the value to Mr Armstrong of his unallotted shareholding in ERAGICS; (2)the value to Mr Armstrong of performance by ERAGICS of the Consultancy Agreement; (3)the value to AC of performance by ERAG of the Licence Agreement; and (4)ASMM's share of the retained earnings of ERAIS. 38The plaintiffs contend that the facts in issue concerning AC's claim as set out in subparagraph (3) are not additional to the facts which will arise resulting from Mr Armstrong's claims referred to in subparagraphs (1) and (2). This is said to be so because the termination of the Licence Agreement was the first in a sequence of steps taken by the defendants leading to a severing of the relationship with Mr Armstrong and his companies. It is said that the factual matters relied upon by the defendants to justify termination of the various agreements is the same in each case. 39As to the fourth claim, the amount claimed is relatively small (in the order of $117,000) and the factual matters relied upon by the plaintiffs are said to be of small compass. 40There is controversy between the parties as to the matters in [38] and [39].
ASMM 41ASMM is the registered proprietor of a property in Mount Eliza, Victoria, which is the Armstrong family home. 42According to a real estate agent in the local area, the property market in the Mount Eliza area has "dropped considerably since 2010" with the result that the sale of the property "would only achieve around $1.6 - $1.8 mil in today's market". 43The property is encumbered by a mortgage to Macquarie Bank Limited under which an amount of $1.5 million is owing. 44Mr Armstrong has sworn that: - "In light of the current depression of the property market, I believe the property could obtain between $2.3 and $2.5 million in a private sale in the event that the property was on the market of a period for at least 12 months." 45Although Mr Armstrong was not challenged in relation to that evidence (he was not cross-examined), he has not explained why, in light of his real estate agent's view of "current market conditions", there is any basis to believe that such a price could be obtainable, even if the property were left on the market for a lengthy period. 46Otherwise, ASMM has no assets, debts or liabilities. 47ASMM receives $50,000 per year rental income from Mr Armstrong, his wife and their son and daughter.
AC 48AC has no assets, income or shareholder funds.
Mr Armstrong 49Mr Armstrong gave evidence that his assets are as follows: - (a)$100,000 in cash, $50,000 of which is held by Marque Lawyers "for the payment of future legal fees"; (b)three motor vehicles as follows: - (i)Mercedes Benz - $35,000; (ii)Land Cruiser - $12,000; (iii)Mazda - $2500; Total: $49,500; (c)A boat - $40,000. Mrs Maria Armstrong 50Mrs Armstrong, although not a party, holds 98 per cent of the shares in ASMM. 51Mr Armstrong has given evidence that Mrs Armstrong owns no assets other than those owned jointly with Mr Armstrong and that her financial position does not differ from his.
Ms Amanda Kelly 52Mr and Mrs Armstrong's daughter, Ms Amanda Kelly, is not a party to the proceedings but holds the remaining 2 per cent shareholding in ASMM. 53Ms Kelly is currently on maternity leave. She owns a property with her husband (also at Mount Eliza) valued at $785,000 but subject to a registered mortgage of $550,000. 54Ms Kelly also owns 10 per cent of the shares in The Lion Partnership Pty Ltd and may receive a dividend of $15,000 for the year ended 30 June 2013. I will deal further with The Lion Partnership later in these reasons. 55Ms Kelly and her husband own cars worth approximately $40,000 and have furniture and personal belongings that have a replacement value for insurance purposes in the order of $100,000. 56Ms Kelly and her husband will have a combined total income for the year ended 30 June 2013 in the order of $160,000. 57The defendants claim that their likely total costs of the proceedings will be something in the order of $2.5 million. 58Clearly neither the plaintiffs, nor those who stand behind the plaintiffs (Mrs Armstrong and Ms Kelly), have the capacity to pay anything like that amount.
Plaintiffs' ability to provide further security 59So far as concerns the plaintiffs' ability to provide further security, Mr Armstrong gave the following evidence: - "30 My expected income for the year 2013 is $30,000. Further, the expected income of my wife for the year 2013 is also $30,000. 31 My wife and I spend approximately $4,000 in living expenses each month. 32 After paying all living expenses and funding the conduct of this litigation, I do not have surplus funds available from my income. 33 Although there is equity remaining in the ASMM Property [at Mt Eliza], neither ASMM nor my wife and I are in a position to service the repayments on an additional mortgage and as such it is my understanding that the bank would not advance any further funds. 34 Further, although there is equity remaining in my daughter's property in Mt Eliza, I believe that my daughter is not in a position to service the repayments on an additional mortgage. 35 In the event that the Court is not satisfied that my daughter is not a position to provide additional security, in circumstances where my daughter has recently given birth and is raising two small children and her interest in this litigation is minimal at best, it would be unreasonable to expect that she should bear the risk of this litigation by providing the Individual Defendants with further security. 36 Based on the information above, and having regard to the overall financial position of the Plaintiffs, in the event that any additional security is ordered beyond that which has already been provided, I anticipate that the Plaintiffs will be unable to raise any further funds to meet the order and will therefore be unable to continue with the litigation." 60Mr Armstrong deposed: - "Based on the information above, and having regard to the overall financial position of the Plaintiffs, in the event that any additional security is ordered beyond that which has already been provided, I anticipate that the Plaintiffs will be unable to raise any further funds to meet the order and will therefore be unable to continue with the litigation". 61My attention was drawn to the fact that Mr and Mrs Armstrong are shareholders in Sans Regis Pty Ltd which owns 30 per cent of the shares in The Lion Partnership. As mentioned at [54], Mr Armstrong's daughter, Ms Kelly, owns 10 per cent of the shares in that company. Mr Armstrong's son, Mr Matthew Armstrong, owns a fraction over a further 10 per cent of the shares in that company. Thus, in substance, the Armstrong family has a fraction over 50 per cent of the shareholding in The Lion Partnership. 62The material on The Lion Partnership's website indicates that Mr Armstrong is, or was, the "Managing Partner" of The Lion Partnership (although he is more recently described as its "Non-Executive Chairman"). 63The website describes The Lion Partnership as follows: - "The Lion Partnership had its origins with the formation of Armstrong Strategic Management and Marketing Pty Ltd (ASMM) which has been providing assurance and risk management consulting services to global clients and major affinity groups since its formation in 1980. To further serve its clients in the complex global insurance market place, ASMM brought together the combined talents of its specialists to form The Lion Partnership in 2010." 64There is in evidence The Lion Partnership's profit and loss account to 30 June 2012 showing a profit of $364,161.13. 65On 18 December 2012, solicitors acting on behalf of The Lion Partnership wrote to the Individual Defendants' solicitors, Norton Rose: - "Ken Armstrong does not provide any services to [The Lion Partnership] for which he is remunerated or receives a commission. We have already informed the Court that Mr Armstrong has received no dividends or any other form of remuneration from [The Lion Partnership]. While it is unusual for a Managing Partner not to receive remuneration it is less so in the context that Mr Armstrong is assisting his children." 66Mr Armstrong was not cross-examined about any of this evidence. As I have said, he was not cross-examined at all. 67In those circumstances, I must exercise care before coming to any conclusions adverse to Mr Armstrong in relation to his interest in The Lion Partnership. However, the statement at [63] does suggest that it is now the entity through which Mr Armstrong is carrying on the business originally conducted by ASMM. It also appears that the business is trading profitably, that Mr Armstrong is receiving no remuneration from it and that he is "assisting his children" (who are shareholders). It may be that Mr Armstrong is providing services to The Lion Partnership of a kind for which remuneration or commission would normally be payable. It may be that he is not taking any remuneration so that he can "assist his children". However, in the absence of cross-examination of Mr Armstrong, I do not consider that I can draw any firm conclusions either way. What can be said is that he has an indirect interest in the company which appears to be carrying on a business similar to that formerly carried on by ASMM; and that he did not disclose that interest in his affidavit.
The claim for specific performance 68The Individual Defendants contend that there is a legally binding agreement between them and the plaintiffs that the plaintiffs provide security on a retrospective basis, for 65 per cent of the costs and 100 per cent of the disbursements actually incurred by the Individual Defendants in the proceedings. 69The Individual Defendants contend that the plaintiffs have repudiated the alleged agreement and seek specific performance of it. The Individual Defendants have elected not to seek damages for breach of the alleged agreement for obvious reasons; proving damage would involve, in effect, bringing a conventional application for security - the very exercise the Individual Defendants contend the alleged agreement was intended to avoid. 70The question arises as to whether it is appropriate that the Court deal with this contention in the context of an application for security for costs. It involves the Court determining, without pleadings (including as to any discretionary defences), and on an interlocutory basis, whether, on the basis of the review of a large number of documents: - (a)there is an agreement between the parties; (b)the parties intended that agreement have a legally binding contractual effect; (c)the Individual Defendants gave consideration for that agreement; and (d)assuming there is a binding agreement, it should be specifically performed which question requires consideration of such matters as the availability of discretionary defences (such as impossibility of performance). 71Examination of this issue involves the Court engaging in a trial within a trial. I also have in mind the obligation of the Court, and the parties, to facilitate the just, quick and cheap resolution of the real issues in dispute (s 56 of the Civil Procedure Act 2005) and the requirement that, for the purpose of furthering that object, cases be managed having regard to, amongst other things, the efficient disposal of the business of the Court and the efficient use of available judicial resources (s 57 of the Civil Procedure Act). 72The Individual Defendants' application was heard over three days (including two full hearing days). As I have mentioned, this is not the first time that a considerable amount of the Court's resources (and, of course, those of the parties) have been devoted to resolution of interlocutory disputes between the parties. 73I accept that there is some precedent for a court giving affect to an inter partes agreement in relation to the provision of security for costs, albeit in a very different context: see Anderson Formrite Pty Ltd v Baulderstone Hornibrook Pty Ltd (No 3) [2009] FCA 273 and Anderson Formrite Pty Ltd v Baulderstone Hornibrook Pty Ltd (No 4) [2009] FCA 365. However, my searches, and those of counsel, have not revealed any case where an alleged agreement of the kind under consideration here has sought to be specifically enforced. 74Despite having substantial misgivings about the matter, bearing in mind the detailed submissions addressed to me, I have concluded that I must deal with the issue, and in some detail.
Was there a contract? - The facts 75The alleged agreement is said to arise from correspondence passing between the solicitors for the plaintiffs (Marque Lawyers) and the solicitors for the Individual Defendants (Norton Rose). 76On 5 July 2010, proceedings brought by ASMM were pending in the District Court of New South Wales against one of the Individual Defendants, Mr Michael. 77On 5 July 2010, Norton Rose wrote to Marque Lawyers: - "Our client has considered the further information that your client has provided and remains concerned that your client will be unable to satisfy a costs order made against it. Accordingly, we are instructed that our client seeks the provision of security in the amount of $100,000 within the next 7 days. Should security not be provided in an appropriate form within this time, our client reserves his right to make an application to the Court for security." 78On 12 July 2010, Marque Lawyers replied: - "Our client, ASMM, does not agree to provide a lump sum of $100,000 of security. ASMM does not concede that it is obliged to provide security at all. Solely in the interest of avoiding the time and expense of a motion, ASMM is prepared to provide security on the following basis. 1. ASMM will provide an initial tranche of $20,000 by way of security. 2. ASMM will provide further tranches of $20,000 as and when your client's accrued costs on an estimated party/party basis exceed the existing amount of security. 3. The security monies will be held in Marque Lawyers' controlled monies account. 4. The security monies will be held subject to an undertaking that the monies be released only by agreement between the parties or by order of the court." 79On 16 July 2010, Norton Rose replied: - "Our client will accept your client's offer that security be provided in tranches, however proposes the following amendments to the regime: 1. ASMM will provide an initial tranche of $30,000 by way of security. 2. ASMM will provide further tranches of $20,000 as and when the fourth defendant's accrued costs on the estimated party/party basis exceed the existing amount of security. 3. A letter of notification from us that the fourth defendant's accrued costs on an estimated party/party basis exceed the existing amount of security will be conclusive evidence of the fact. 4. The security monies will be held in Marque Lawyers' controlled monies account. 5. Each tranche of security will be paid into Marque Lawyers' controlled monies account within 7 days of notification being provided by us in accordance with paragraph 3. 6. The security monies will be held subject to an undertaking given by you that the security monies will not be used for any other purpose. 7. ASMM undertakes, in the event that it is ordered or agrees to pay our client's costs, to release the security monies to our client once an agreement as to quantum has been reached between the parties or a certificate as to quantum has been given by a costs assessor." 80On 2 August 2010, Marque Lawyers replied agreeing, in substance, to Norton Rose's proposal of 16 July 2010 but stating, in regard to Norton Rose's point 3: - "Our client reserves the right to dispute your estimate of the party/party costs if it appears unreasonable." 81On 16 August 2010, Norton Rose replied and, in reference to the passage just quoted from Marque Lawyers' letter of 2 August 2010, said: - "In response to ... your letter, our client agrees to provide details of his actual and estimated recoverable legal costs on notifying you of those costs for the purposes of the proposed agreement. However, with respect, any agreed security arrangement will be unworkable if your client can dispute the estimates on an ongoing basis, and our client does not agree to any security arrangement in which your client has the ability to despite his costs. The time to object to our client's costs is at the time of assessment of our client's costs following a costs order made by the court. In order to placate your client's concerns, though, we propose that, for the purposes only of the proposed security arrangement, our client's party/party costs be set of 65% of his actual fees and 100% of his disbursements. So, when the sum of 65% of our client's actual fees and 100% of his disbursements approaches the deposited amount, we will notify you accordingly and provide you with the details of his actual fees and disbursements." (emphasis added) 82On 19 August 2010, Marque Lawyers replied saying that ASMM would provide security on the basis proposed. 83On 20 August 2010, Norton Rose replied with a summary of what had been agreed to at that point: - "We confirm that your client, Armstrong Strategic Management and Marketing Pty Limited (ASMM) has agreed to provide security for costs to the fourth defendant on the following terms: 1. ASMM to provide an initial tranche of $30,000 by way of security. 2. Subsequent tranches will be in the amount of $20,000, and will be provided as and when the sum of 65% of the fourth defendant's actual fees and 100% of his disbursements approaches the deposited amount (the Agreed Party/Party Costs). 3. We will notify you accordingly with details of our client's actual costs and Agreed Party/Party Costs when the Agreed Party/Party Costs approach the deposited amount; 4. A letter of notification from us regarding the fourth defendant's actual and Agreed Party/Party Costs is conclusive evidence of that fact; 5. The security monies will be held in Marque Lawyers' controlled monies account; 6. Each subsequent tranche of security monies will be deposited within 14 days of notification of our client's actual and Agreed Party/Party Costs being provided in accordance with paragraph 3; 7. The security monies will be held subject to an undertaking given by you that that security monies will not be used for any other purpose; 8. ASMM undertakes, in the event that it is ordered or agrees to pay our client's costs, to release the security monies to our client once an agreement as to quantum has been reached between the parties or a certificate as to quantum has been given by a costs assessor." (emphasis added) 84There the matter rested until early in 2011. 85On 9 March 2011, the plaintiffs filed a summons in these proceedings seeking to have the District Court proceedings transferred to this Court. On 15 April 2011, Hammerschlag J made an order for transfer. 86Some time between August 2010 and April 2011, a settlement was achieved between ASMM and Mr Michael. Nonetheless, Mr Michael was joined as one of the 10 defendants in the proceedings commenced in this Court. 87In those circumstances, on 29 April 2011, Norton Rose wrote to Marque Lawyers as follows: - "We refer to our letter dated 20 August 2010 confirming our agreement regarding security for costs (the agreement). We enclose a copy of the letter for your convenience. As you will recall, upon settlement of this matter it was no longer necessary for your client to make the first payment under the agreement ... As our client has now been brought back into proceedings, our client now requires that the obligations under the agreement be performed. Please let us know when the first instalment will be paid into the controlled monies account." (emphasis added) 88On 5 May 2011, Marque Lawyers replied: - "Our client has provided the initial tranche of security in the amount of $30,000 in accordance with the security for costs agreement. This has been placed in a controlled monies account. A copy of Michael Bradley's undertaking in relation to the initial tranche of security is attached." (emphasis added) 89The undertaking Mr Bradley referred to ("the First Undertaking") was dated 5 May 2011 and was in the following terms: - "SECURITY FOR COSTS On 3 and 4 May 2011, [Mr Armstrong] provided to Marque Lawyers monies the total sum of which is $30,000 as a first tranche of security for [Mr Michael's] costs in these proceedings (Security). UNDERTAKING I, Michael Bradley, solicitor, undertake to the Court: 1. within 7 days of the date of this undertaking, to place the Security into an interest bearing account of an Australian owned bank (as recognised by the Australian Prudential Regulation Authority) (Account), under the control of Marque Lawyers, to be renewed annually pending resolution of the proceedings and any appeal; 2. not to withdraw the Security from the Account without first obtaining the written consent of [Mr Michael] or unless the Court expressly authorises the withdrawal of the Security; 3. to ensure the release by Marque Lawyers to [Mr Michael] of the amount to which [Mr Michael] is entitled under a costs order made by the Court in these proceedings, within 7 days of the amount of those costs being determined (pursuant to either agreement or assessment). 90Although the First Undertaking (and all of the subsequent small undertakings) were expressed to be made "to the Court", they were not lodged with the Court. 91On 6 July 2011, Norton Rose proposed that the arrangements in place for Mr Michael be extended to all of the Individual Defendants. They wrote: - "In relation to the proceeding generally, as you know we now act for all of the director defendants, namely, the fourth, fifth, sixth, ninth and tenth defendants. As in the case of the fourth defendant, Mr Michael, Messrs Clucas, Marfleet, Chapman and Dormer are concerned that the plaintiffs will not be able to satisfy a costs order if they are unsuccessful at final hearing. We propose that the terms of the accommodation reached between Mr Michael and your clients (as set out in our letter of 20 August 2010) be increased and extended to each of Messrs Clucas, Marfleet, Chapman and Dormer. In the absence of an agreement on a suitable security regime being reached with your clients, we will apply to the Court for security for costs." (emphasis added) 92On 29 July 2011, Mr Bradley provided a further undertaking ("the Second Undertaking") which was in the same terms as the First Undertaking save that the opening paragraph read: - "On 18 July 2011, [Mr Armstrong] provided to Marque Lawyers monies the total sum of which is $20,000 as a second tranche of security for [Mr Michael's] costs in these proceedings." 93In the meantime, Marque Lawyers had asked Norton Rose to specify how, as suggested in their letter of 6 July 2011, the arrangements in place concerning Mr Michael were to be extended to the other Individual Defendants. On 18 August 2011, Norton Rose wrote: - "We propose that the existing security for costs regime in favour of Mr Michael (as recorded in our letter dated 20 August 2010 (Security for Costs Agreement)) be extended to Messrs Clucas (the fifth defendant), Marfleet (the sixth defendant), Chapman (the ninth defendant) and Dormer (the tenth defendant) such that it applies to each of the director defendants. We note that the allegations against our clients in the Amended Commercial List Statement are made not only by Armstrong Strategic Management and Marketing Pty Limited (ASMM) but also by Armstrong Consulting Pty Ltd (AC) and Mr Armstrong. Accordingly, the Security for Costs Agreement ought to apply to any costs orders made against any one or more of ASMM, AC and Mr Armstrong in favour of any one or more of our clients. Please advise whether ASMM agrees that the terms of the Security for Costs Agreement by which it agreed to provide security for costs to Mr Michael be varied so as to now also apply for the benefit of Messrs Clucas, Marfleet, Chapman and Dormer and in respect of costs orders made against any one or more of ASMM, AC and Mr Armstrong." (emphasis added). 94On 2 September 2011, Marque Lawyers replied: - "ASMM agrees, without admitting any obligation to do so, to increase and extend the terms in place in relation to security for Mr Michael's costs to apply to each of Messrs Clucas, Marfleet, Chapman and Dormer and in respect of costs orders made against the plaintiffs. We will prepare and file at the next directions hearing revised undertakings in favour of each of the defendant directors for each of the tranches provided to date." 95On 12 October 2011, Mr Bradley provided a further undertaking ("the Third Undertaking"). The Third Undertaking recited: - "SECURITY FOR COSTS On 3 and 4 May 2011, the third plaintiff provided to Marque Lawyers monies the total sum of which is $30,000 as a first tranche of security for the fourth defendant's costs in these proceedings. On 5 May 2011 Michael Bradley gave an Undertaking in relation to the first tranche of security for the fourth defendant's costs. The parties agreed to extend the security for costs arrangement in place for the fourth defendant's costs to include the costs of the fifth, sixth, ninth and tenth defendants in these proceedings. Accordingly the parties have agreed to substitute the Undertaking of Michael Bradley dated 5 May 2011 with the revised undertaking below for the first tranche of security for the fourth, fifth, sixth, ninth and tenth defendants' costs in these proceedings (Security)." 96Otherwise, the terms of the Third Undertaking were the same as those of the First and Second Undertakings (save that par 3 referred to each of the Individual Defendants, and not just Mr Michael). 97Also on 12 October 2011, Mr Bradley provided a further undertaking ("the Fourth Undertaking") which was in the same terms as the Third Undertaking but referred to the 18 July 2011 second tranche of security of $20,000, rather than the first tranche of security of $30,000. 98On 27 October and 7 November 2011, Norton Rose provided Marque Lawyers with details of the further costs incurred by the Individual Defendants and sought a further four tranches of $20,000 each (or a further single tranche of $80,000) by way of security. 99On 14 November 2011, Marque Lawyers wrote: - "The agreement requires that our clients provide tranches of $20,000 as and when 65% of the fourth, fifth, sixth, ninth and tenth defendant's actual fees and 100% of their disbursements approaches the deposited amount. This agreement does not provide for multiple tranches of $20,000 at any one time. In circumstances where your clients have requested four further tranches of $20,000 each (or a further single tranche of $80,000), our clients propose to provide four tranches of $20,000 over the course of the next four weeks." (emphasis added) 100Mr Armstrong provided the further four tranches of $20,000. On 14 December 2011, Mr Bradley signed a further undertaking ("the Fifth Undertaking") which recited the making of those further four tranches of security and was otherwise in the same terms as the earlier undertakings. 101The matter proceeded on this basis for some time, during which period Mr Bradley made a further undertaking ("the Sixth Undertaking") on 24 February 2012 (in the same terms as those earlier) in respect of a further tranche of security provided in the sum of $20,000. 102On 23 July 2012, Marque Lawyers wrote to Norton Rose as follows: - "Since February this year your clients have sought $160,000 by way of security for costs. In the circumstances, and given your clients are likely to incur additional expenses over the next couple of months given the time will be spent preparing your clients' evidence, our clients propose to offer a bank guarantee of $400,000 by way of security in replacement of the $250,000 currently held in our controlled monies account. Assuming your clients agree, the funds currently held in our controlled monies account will be released to our clients." 103On 25 July 2012, Norton Rose replied: - "We are currently considering this proposal but we note that if security was to be provided by your clients by way of bank guarantee it would need to be on the condition that in the event that 65% of our client's fees and 100% of our client's disbursements were to reach the amount of that bank guarantee, a new guarantee would be provided. That is, our clients would not be willing accept a cap on the amount of security to be provided by way of bank guarantee." (emphasis added) 104The next day, 26 July 2012, Marque Lawyers wrote to Norton Rose: - "Our clients' proposal to offer a bank guarantee of $400,000 in replacement of the $250,000 currently held in our controlled monies account is based on the same agreement as set out in your letter of 20 August 2010 and our letter of 2 September 2011 extending the security for costs agreement to each of Messrs Clucas, Marfleet, Chapman and Dormer in addition to Michael. Our clients acknowledge that the provision of a bank guarantee of $400,000 does not constitute a cap on the amount of security to be provided by way of bank guarantee. Our clients propose to increase the bank guarantee by tranches of $100,000 as and when 65% of your clients' fees and 100% of their disbursements reach the amount of the bank guarantee Please let us know if your clients accept this proposal in which case our clients will make arrangements for the bank guarantee to be issued." (emphasis added) 105On 6 August 2012, Norton Rose replied: - "We are instructed that our clients accept the proposed regime subject to our clients being satisfied with the terms of the bank guarantee. Please will you provide us with the proposed terms of the bank guarantee by 5pm Friday 10 August 2012." (emphasis added) 106There followed negotiations between Marque Lawyers and Norton Rose as to the terms of the proposed bank guarantee and a revised undertaking to be given by Mr Bradley to reflect the provision of security by way of bank guarantee. 107On 20 September 2012, Norton Rose proposed a revised form of Mr Bradley's undertaking which, in addition to setting out the terms of the undertaking to be given by Mr Bradley, set out under the heading "Security for Costs" what "has been agreed" between the parties. 108There were negotiations as to the form of the undertaking. However, its structure did not change in any way relevant to the issues before me and, in particular, Norton Rose's proposed cl 1(d) (set out below) remained in the form of the undertaking ultimately agreed and executed by Mr Bradley. 109On 23 September 2012, the Commonwealth Bank of Australia executed a guarantee in the sum of $400,000 addressed to the Individual Defendants. 110 On 29 September 2012, Mr Bradley executed the revised form of undertaking ("the Seventh Undertaking") which stated: - "1. It has been agreed between the plaintiffs and the fourth, fifth, sixth, ninth and tenth defendants (Individual Defendants) that: (a) the plaintiffs have offered a bank guarantee issued by the Commonwealth Bank of Australia (Bank) in the amount of $400,000 (Bank Guarantee Amount) by way of security for the Individual Defendants' costs in these proceedings (Security for Costs) in replacement of the monies currently held in Marque Lawyers' Trust Account (Bank Guarantee); (b) within 14 days of receipt of a request in writing from Norton Rose Australia (NRA) (such request being made whenever the sum of 65% of the Individual Defendants' actual fees and 100% of their disbursements reaches the total amount provided by the plaintiffs by way of Security for Costs), the plaintiffs will provide additional bank guarantee(s) in increments of $100,000 by way of Security for Costs so that the Bank Guarantee Amount will increase from time to time as the Individual Defendants' costs increase; (c) the terms of the Bank Guarantee will provide (and it is anticipated that the terms of any subsequent bank guarantee(s) by way of Security for Costs will provide) that the Bank may at any time, without being required to do so, pay into Marque Lawyers' Trust Account the Bank Guarantee Amount (as at that time), less any amount it may have already paid (Security Amount), and thereupon the Bank's liability under any bank guarantee issued by it by way of Security for Costs will immediately cease; and (d) in the event that the Bank discharges its liability in accordance with paragraph 1(c) above and the Bank pays into Marque Lawyers' Trust Account the Security Amount (Discharge and Payment) the plaintiffs and the Individual Defendants will revert to their agreement as to Security for Costs recorded in NRA's letter of 20 August 2010 as amended by Marque Lawyers' letter of 2 September 2011 (except that the Security for Costs is to be increased by tranches of $100,000 instead of $20,000 to be paid into the Account referred to below, so that the Security Amount will increase from time to time) until such time as the court orders otherwise or the proceedings are otherwise resolved." (emphasis added) 111The Seventh Undertaking concluded with an undertaking to similar effect to those given earlier. 112In my opinion, if there is a legally binding agreement between the parties, it is now constituted by the Seventh Undertaking. That is the contention of the Individual Defendants. 113On 27 September 2012, Marque Lawyers forwarded to Norton Rose the Bank Guarantee (for $400,000) called for by cl 1(a) of the Seventh Undertaking. 114On the same day, Norton Rose asked Marque Lawyers "when we can expect to receive from you a bank guarantee in the amount of $200,000 by way of security for costs". This request was, evidently, made pursuant to cl 1(b) of the Seventh Undertaking. 115Marque Lawyers replied the same day "[o]ur clients are currently arranging for the additional bank guarantee in the amount of $200,000 to be issued. We will let you know once we have a clear timeframe on this". 116On 9 October 2012, Marque lawyers wrote to Norton Rose "[w]e are instructed that the additional bank guarantee will be finalised before the end of October". 117On 1 November 2012, Norton Rose notified Marque Lawyers of the Individual Defendants' current costs and proposed that "[s]ince your clients have not yet provided the [bank guarantee for $200,000], we propose that they provide a bank guarantee in the amount of $300,000 by way of security for costs as soon as possible to avoid any unnecessary inconvenience". 118Thereafter, Mr Armstrong appears to have had a change of heart. 119On 19 November 2012, Marque Lawyers wrote to Norton Rose: - "We have been instructed by our clients that they will no longer be proceeding with the bank guarantee in the amount of $200,000.00 as agreed in our email of 24 September 2012. We are instructed that our client will instead be depositing the amount of $200,000.00 into our controlled monies account to be held on account of security for costs. We expect those monies to be in our account by Thursday, 22 November 2012." (emphasis added) 120That change of heart was emphasised in Marque Lawyers' letter of 13 December 2012: - "Request for further security Our clients have provided the total sum of $600,000.00 on account of security for your clients' costs in these proceedings to date. Our clients had agreed to provide further security for costs to your client by way of tranches with respect to costs incurred by your client in relation to the proceedings that are recoverable on a party/party basis. However for the reasons set out below, we are instructed that our clients do not agree to provide any further tranches of security for costs to your clients. 1. Our clients have already provided security for costs in the amount of $600,000 which is a considerable amount of security for costs. Within only a short period of time in which our client agreed to provide the additional $200,000, your clients requested a further tranche of $100,000 on the basis that your clients' costs on a party/party basis had already exceeded the amount of security for costs already provided by our clients. This further amount of security was requested by your clients at a stage of the proceedings when we do not expect that your clients would be incurring significant legal costs. Given the large amount of security already provided and your additional request for a further tranche of $100,000.00, our clients believe your clients' costs to be excessive. 2. The security for costs regime has allowed your clients to request further tranches of security for costs without providing any explanation or breakdown of the costs actually incurred by your clients. Our clients have in accordance with that regime, now provided a substantial sum of security for costs without having had the opportunity to inspect the costs claimed by your clients. Our client should not be expected to continue to provide further tranches of security for costs in the absence of a detailed breakdown of the costs actually incurred by your clients in the proceedings. 3. There are three plaintiffs in the proceedings against your clients, one of whom is Mr Ken Armstrong. An individual plaintiff does not originally have to provide security for costs to a defendant or defendants. As such, Mr Armstrong is not required to provide security for costs to your clients with respect to that part of the proceedings which relate to Mr Armstrong and not the corporate plaintiffs. As you are aware a substantial portion of the proceedings relate to claims made by Mr Armstrong against your clients only, and are not claims made by the corporate plaintiffs. As such your clients are only entitled to claim security for costs from the corporate plaintiffs for your clients' costs incurred in connection with the corporate plaintiffs' claim. Despite this, the corporate plaintiffs have already provided $600,000.00 in security to your clients. We consider that the amount of security provided to date already exceeds your clients reasonable costs incurred on a party/party basis and costs into the future in so far as they relate to the corporate plaintiffs' claims against your clients. 4. It is the plaintiffs' case that the corporate plaintiffs are unable to earn any income by reason of your clients' conduct. Therefore any impecuniosity of the corporate plaintiffs has been caused by your clients and is directly linked to your clients' conduct which is the very conduct the subject of these proceedings. This is a relevant discretionary factor to determining whether security for costs should be awarded. For the reasons set out above, the amount currently held as security for your clients' costs is more than adequate and we consider that your client will not be entitled to any further security for costs." (emphasis added) 121The plaintiffs have offered no explanation for their decision to adopt the position set forth in Marque Lawyers' letters of 19 November 2012 and 13 December 2012. Mr Armstrong made no mention of it in an affidavit he swore on 3 April 2013 in connection with this application. As I have said, he was not cross-examined. It is clear, however, that if there was a binding agreement between the parties, it was repudiated by the plaintiffs at this point.
Intention to create contractual relations? 122In Sneddon, Bigwood and Ellinghaus, Cheshire and Fifoot Law of Contract, 10th Aust ed (2012) at [5.1], it is stated: - "The law...does not necessarily hold that there is a contract merely because of the presence of mutual promises. Agreements are made every day in domestic and social life and even in commercial dealings, where the parties do not intend to sue if they are not honoured. The definition of contract is a legally enforceable agreement." (emphasis in orginal) 123In The State of South Australia v The Commonwealth of Australia (1962) 108 CLR 130 at 154 Windeyer J said: - "An agreement deliberately entered into and by which both parties intend themselves to be bound may yet not be an agreement that the courts will enforce. The circumstances may show that they did not intend, or cannot be regarded as having intended, to subject their agreement to the adjudication of the courts. The status of the parties, their relationship to one another, the topics with which the agreement deals, the extent to which it is expressed to be finally definitive of their concurrence, the way in which it came into existence, these, or any one or more of them taken in the circumstances, may put the matter outside the realm of contract law." 124There is no doubt, and it was not disputed, that in this case there was "an agreement deliberately entered into". The question is, did the parties intend that if the plaintiffs did not comply with the agreement, the Individual Defendants could compel them to do so by way of specific performance of the agreement. The test is objective. What the parties are taken to have intended is to be ascertained having regard to all the circumstances, including the words that they used.
Language used by the parties suggestive of a legally binding agreement 125Mr Durack SC, who appeared with Mr Pintos-Lopez for the plaintiffs, submitted that although the parties used the word "agreement" in their correspondence, that word was only adopted as a conventional expression in the nature of a shorthand, and that they otherwise used less formal language (such as "accommodation" or "arrangement" or "regime") pointing to the conclusion that there was no intention to commit the parties to a legally binding agreement. 126It is correct that, from time to time, the parties used such words (rather than "agreement"). However, overall the language used by the parties is that of contract. The language was, of course, that of the parties' legal representatives. 127Thus: - (a)Norton Rose's letter to Marque Lawyers of 20 August 2010 (see [83] above) confirmed that ASMM "has agreed" to provide security on a particular basis; (b)on 29 April 2011, Norton Rose referred to that letter and confirmed "our agreement regarding security for costs" and stated that "our client now requires that the obligations under the agreement be performed" (see [87]); (c)on 5 May 2011, Marque Lawyers referred to "the security for costs agreement" (see [88]); (d)on 14 November 2011, Marque Lawyers referred to "the agreement" requiring tranches of security "as and when 65% of the [Individual Defendants'] actual fees and 100% of [the Individual Defendants'] disbursements approaches the deposited amount" (see [99]); (e)on 26 July 2012, Marque Lawyers wrote to Norton Rose proposing a variation "based on the same agreement" as set out in Norton Rose's letter of 20 August 2010 and Marque Lawyers' letter of 2 September 2011 (see [104]); (f)in the critical undertaking of 29 September 2012 (see [110]), which I have described as the Seventh Undertaking, it was recited that "it had been agreed" between the parties that the relevant security be given; and (g)in Marque Lawyers' letter of 13 December 2012 (see [120]), in which they stated that the plaintiffs "do not agree to provide any further tranches of security for costs", they stated, in the immediately preceding paragraph, that "our clients had agreed" to provide such security. 128Thus, on the face of it, there is an agreement between the parties to provide security on the basis contended for by the Individual Defendants. The agreement evolved from time to time. Originally it only involved ASMM and Mr Michael. Later it became to be between all the parties. Originally it involved providing tranches of funds to Marque Lawyers' controlled monies account. Ultimately, it involved the provision of bank guarantees. Nonetheless, it was at all times, in my opinion, more than an informal "arrangement" or "regime". It was an agreement. 129Further, and contrary to Mr Durack's submissions, it is plain that the Individual Defendants gave consideration for the agreement; namely to forego making a conventional application for security (see Norton Rose's letter of 5 July 2010 at [77] above). 130The critical question is whether, in all the circumstances, I should hold that the parties intended the agreement to have contractual effect.
Factors said to indicate no intention to create legally binding relations 131Mr Durack submitted that there were a number of factors that pointed to the conclusion that, despite the language used by the parties, they did not intend that their agreement concerning the provision of security have legally binding effect. 132I will deal with those contentions in turn.
Improbability of parties reaching a legally binding agreement with such far-reaching consequences 133First, Mr Durack submitted that it was improbable that the parties intended to enter an agreement which provided that, no matter what course the litigation took, the plaintiffs would be obliged to provide security equal to 65 per cent of the costs and 100 per cent of the disbursements actually incurred by the defendants. 134I do not accept this submission. It may be that the plaintiffs did not contemplate that possibility, or, at least, appreciate its significance. However, it appears to me that this is precisely the effect that the defendants intended the agreement to have.
Agreement made "without admissions" 135Next Mr Durack pointed to the fact that the plaintiffs entered into the agreement on a "without admissions" basis (see for example Marque Lawyers' letter of 2 September 2011 at [94] above). Mr Durack submitted that, in this particular interlocutory context, there would be no point in the plaintiffs specifying that they entered the agreement "without admissions" if the "agreement was intended to endure to judgment". 136I do not accept this submission. I see no inconsistency between the plaintiffs committing themselves to a binding agreement on the one hand, and not admitting any obligation to do so on the other. It is commonplace for parties to litigation to enter into final, binding agreements without admitting an obligation to do so; for example, consenting to judgment on a "without prejudice and without admissions" basis. I see no distinction between that kind of circumstance, and that before me.
Absence of any commitment by Individual Defendants to not apply for security 137Next, Mr Durack submitted that although it was clear from the correspondence that the Individual Defendants' position was that, absent an agreement as to security, they would apply to the Court for security in the usual way, there was no commitment by the Individual Defendants to not approach the Court if agreement was reached as to the provision of security. 138I do not find this point decisive. It was probably an implied term of the agreement reached that the Individual Defendants would not apply for security in the usual way if the plaintiffs adhered to the agreement. However that may be, I do not see the absence of any commitment by the Individual Defendants to not approach the Court if (as happened) agreement was reached, to cast any light on whether the parties intended legally binding relations.
Absence of any provision as to consequences of security not being supplied 139Mr Durack pointed to the fact that there was no agreement, in the correspondence, as to the entitlement of the Individual Defendants in the event that, as has happened, the plaintiffs refused to comply with the agreement. Mr Durack pointed to the fact that there was no agreement that, for example, the proceedings would be stayed or dismissed in that event. 140In my opinion, this factor casts no light on the relevant question. Many legally binding agreements do not provide, in terms, for the consequence of breach. The fact that the parties made no express provision that the proceedings be stayed or dismissed in the event of failure of performance by the plaintiffs shows no more than that the parties intended that the usual consequences would flow from a breach; namely that the Individual Defendants would be put on their election to either accept the breach, rescind the contract and sue for damages, or (as has happened) not accept the breach and seek to have the agreement specifically performed.
Absence of any provision for resolution of disputes about reasonableness of costs incurred 141Mr Durack submitted that a further factor indicating an absence of intention to create legally binding relations was the absence of any provision in the agreement for resolution of any disputes about the reasonableness of the costs incurred by the Individual Defendants. 142I do not accept this submission. The correspondence shows that the parties addressed this issue in terms. Thus, in their letter of 2 August 2010 (see [80] above), Marque Lawyers stated that the plaintiffs wished to reserve their right to dispute the Individual Defendants' estimate of costs if they appeared unreasonable. The proposition was rejected, in terms, by Norton Rose in their letter of 16 August 2010 (see [81] above) in which they stated that: - "[A]ny agreed security arrangement will be unworkable if your client can dispute the estimates on an ongoing basis...The time to object to our client's is at the time of assessment of our client's costs following a costs order made by the court." 143It was in that context Norton Rose proposed that the Individual Defendants' party/party costs be set at 65 per cent of actual fees. Marque Lawyers accepted that proposal in their letter of 19 August 2010.
Absence of provision for costs orders made in interlocutory applications or adverse costs orders 144Next, Mr Durack pointed to the fact that the alleged agreement makes no provision for the impact on the security for costs regime contemplated by the agreement for costs orders made in interlocutory applications or any other adverse costs orders. 145I do not accept this submission. The alleged agreement does make such provision. The concluding words of cl 1(d) of the agreement set out in the Seventh Undertaking (which Mr Durack relied on for a different reason; see below) are that the arrangements there contemplated shall endure "until such time as the court orders otherwise". 146Even if there were no such provision, I would not consider this decisive. If (as has happened when the Court of Appeal set aside the orders of Bergin CJ in Eq on 18 December 2012; see [12] above) a costs order is made on an interlocutory basis in favour of the plaintiffs against the Individual Defendants, it would "go without saying" that the costs incurred by the Individual Defendants in relation to the relevant aspect of the matter would not be caught by the agreement.
Mr Bradley's subjective intention 147Mr Michael Bradley is the partner at Marque Lawyers acting for the plaintiffs in the proceedings and the person who gave the various undertakings to which I have referred. 148Mr Bradley gave evidence, over objection, that his "intention and understanding" of the arrangement was that it was a "mechanism to facilitate the provision of security for costs" and to operate: - "...until such time as ASMM no longer agreed to provide further tranches of security for costs and on the understanding that ASMM could refuse to provide further tranches of security for costs." 149Mr Bradley said he had at no time received instructions from ASMM to provide unlimited amounts of security for costs. 150Mr Durack submitted that Mr Bradley's subjective intention was capable of relevance and referred to the observations of Mahoney JA in Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 330 - 331. In that passage his Honour, after stating that, generally, the law looks to "what the parties have done" to determine whether a contract has resulted (that is the objective theory of contract) continued: - "But this does not mean that actual subjective intention qua contract may not be relevant." 151However, as is made clear in the following passages, his Honour was referring to a circumstance where one party did not intend there to be a binding contract, and where the other party knew of that subjective intention. 152That is not this case. 153There is no suggestion in the evidence that Norton Rose, or the Individual Defendants, could have known of Mr Bradley's state of mind. Accordingly, in my opinion, it is irrelevant.
Parties' contemplation that the agreement could be overruled by court order 154Mr Durack pointed to the concluding words of Mr Bradley's Seventh Undertaking of 29 September 2012 (see [110] above) which stated that the security amount would increase from time to time: - "...until such time as the court orders otherwise or the proceedings are otherwise resolved." 155Mr Durack submitted that these words showed that the parties contemplated that their agreement was not to be finally determinative of the arrangements between them for provision of security. 156The words upon which Mr Durack relies are in cl 1(d) of the Seventh Undertaking. That subclause would only be enlivened if the bank providing the bank guarantee contemplated by the Seventh Undertaking discharged its liability in accordance with cl 1(c) of the Seventh Undertaking. In that event, cl 1(d) provides that the parties will "revert to their agreement" as evidenced in Norton Rose's letter of 20 August 2010 (see [83] above) as amended by Marque Lawyers' letter of 2 September 2011 (see [94] above). 157I do not read that passage as bespeaking contemplation by the parties that, for example, in the event of a failure by the plaintiffs to provide security in accordance with the agreement, the Individual Defendants' only remedy would be to agitate the Court for an order for security on a conventional basis. Rather, the words suggest to me no more than that the parties contemplated that the Court might make an order inconsistent with the provision by the plaintiffs of security in accordance with the agreement; for example, in interlocutory proceedings in which an order was made that the Individual Defendants pay the plaintiffs' costs. As I have mentioned, this has happened (see [146] above).
Bringing of an alternate claim for security 158Mr Durack submitted that the fact that the Individual Defendants had, in the alternative to their claim for specific performance, sought security on a conventional basis was fatal to their contention that there was an agreement capable of specific performance. 159Mr Durack submitted that "under contract principles, you have to take one choice or the other". I do not accept this submission. I do not consider that the Individual Defendants have, by bringing an alternative claim for security, made some kind of election which forecloses their reliance on the agreement for which they contend.
Lack of "clarity" concerning parties 160As an alternative to the above submissions, Mr Durack submitted that, on the proper construction of the Seventh Undertaking, that undertaking was given only by ASMM and AC and not by Mr Armstrong. The basis for that submission was that the Seventh Undertaking was prepared using a Court heading and was stated to be "prepared for" only ASMM and AC. 161I do not accept this submission. The same title page reveals that the number of plaintiffs is "3" (which must include Mr Armstrong). The Seventh Undertaking itself recites an agreement between the Individual Defendants and "the plaintiffs". 162In any event, the antecedent documents make quite clear that the agreement reached was between the Individual Defendants and all of the plaintiffs (including Mr Armstrong).
Consideration 163Mr Durack also submitted that any agreement between the parties was not supported by consideration moving from the Individual Defendants. 164As I have mentioned, I do not accept this submission. Norton Rose made clear from the outset (for example, in their letter of 5 July 2010 (see [77] above) that the position of the Individual Defendants was that if agreement could not be reached as to the provision of security, the Individual Defendants would apply to the Court. The consideration given by the Individual Defendants for the promises made by the plaintiffs in the agreement is, quite plainly, foregoing that right.
Conclusion as to agreement 165In all those circumstances, my opinion is that there is a binding agreement between the parties constituted by the Seventh Undertaking. 166That agreement was that the plaintiffs would, from time to time, provide security, on a retrospective basis, for 65 per cent of the costs and 100 per cent of the disbursements actually incurred by the Individual Defendants in the proceedings. 167The parties intended that agreement to have legally binding effect.
Inferred or Implied Term? 168Mr Durack submitted that, assuming that there was such a binding agreement, there was an inferred or implied term that the Individual Defendants would not make a conventional application for security:- (a)if the plaintiffs complied with the agreement; (b)but would be free to do so if the plaintiffs did not comply with the agreement. 169Thus, it was contended that it was an inferred or implied term of the agreement that, in the event of default by the plaintiffs, the Individual Defendants remedy was not specific enforcement of the agreement, but the making of a conventional application for security for costs. 170Mr Durack submitted that the term was to be inferred or implied in order to give business efficacy to the agreement. 171I do not accept this submission. The inferring, or implication, of such a term would render the agreement nugatory. It would have the effect that the Individual Defendants could not enforce the agreement otherwise than by making an application which they were, in any event, entitled to make.
Common mistake 172Mr Durack submitted that the parties laboured under a common mistake such as would justify the setting aside of an agreement between the parties. 173The common mistake was said to be in respect of the volume of documents discoverable by the Individual Defendants and the costs associated with the disclosure of the Additional Documents (see [15] above). 174As I have mentioned, in November 2012, the Individual Defendants notified the plaintiffs that the Additional Documents would be disclosed. These are documents arising from material found on Mr Michael's laptop. 175Mr Durack submitted: - "The evidence points to a mutual mistake. At the time of the [Seventh Undertaking], both parties were mistaken in the belief that discovery was complete..." 176I do not accept this submission. It may well be that, at the time of the Seventh Undertaking, both parties thought that discovery had been complete. However, the fact appears to be that, shortly after that date, it became apparent to those advising the Individual Defendants that there was material on Mr Michael's laptop that included material which, consistently with the Individual Defendants' obligation to give continuing disclosure, should be disclosed. 177These circumstances do not suggest that the parties entered the agreement labouring under any relevant mistake such as to provide any basis to set aside the agreement, or to resist specific performance of it.
Impossibility 178A court will not grant equitable relief where to do so would require a party to do something that is impossible: Spry, The Principles of Equitable Remedies, 8th ed (2009) at 128; Young, Croft and Smith, On Equity, (2009) at [17.410]. 179In the context of an application for specific performance of an agreement to give security for costs, an allied concept is that a "powerful factor" in favour of the exercise of the Court's discretion against making an order for security is if the making of the order would stultify the proceedings (for example, Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545 per Clarke J; KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197 per Beazley J). 180The Individual Defendants seek to have the agreement specifically enforced by compelling the plaintiffs to pay $500,000 by way of security. 181It is plain, on the evidence, that the plaintiffs could not comply with such an order. AC has no assets. ASMM owns the property at Mount Eliza that, on the evidence, is fully encumbered. 182Mr Armstrong has some cash ($50,000 in addition to that now in Marque Lawyers' trust account), a number of motor vehicles and a boat. Even if Mr Armstrong were to sell all the motor vehicles and the boat, the amount realised would fall far short of $500,000. 183Mr Armstrong does have, indirectly, an interest in The Lion Partnership. In the absence of any cross-examination of Mr Armstrong about his ability to derive, from that interest, funds in order to meet the orders sought by the Individual Defendants, I am not able to reach any firm conclusion about the matter. 184Mr Hyde, who, on the third day of proceedings, appeared for the Individual Defendants, pointed to the fact that, somehow, the plaintiffs have been able to fund their costs of these proceedings to date, as well as provide $600,000 security for the costs of the Individual Defendants. However, there is no evidence before me of the plaintiffs' financial position (and particularly that of Mr Armstrong) prior to 3 April 2013 (on which date Mr Armstrong swore his relevant affidavit). Mr Armstrong was not cross-examined as to how, in light of his present financial position, he, and the corporate plaintiffs, have been able to fund proceedings to date. 185Mr Hyde also drew attention to the fact that the plaintiffs raised no question of impossibility or stultification until immediately before the hearing of the Individual Defendants' motion for security; and then only after the Individual Defendants had pointed out, in their submissions, that, to that point, no such assertion had been made on behalf of the plaintiffs. So much may be accepted. However, in the absence of any cross-examination of Mr Armstrong as to that aspect of the matter, I do not consider that I can draw any inferences adverse to the plaintiffs from it. 186Neither party suggested that I had any discretion to order "part specific performance" (by, for example, ordering the plaintiffs to pay such part of the $500,000 sought by the Individual Defendants as they are able). 187Indeed, it was common ground that the only manner in which I could exercise the Court's discretion was to order specific performance of the agreement as a whole; or not: see Ryan v Mutual Tontine Westminster Chambers Association [1893] 1 Ch 116 at 124 per Lord Esher. 188The evidence shows quite clearly that the plaintiffs could not comply with the order for specific performance sought by the Individual Defendants. 189The parties have spent considerable time putting submissions on this question. I have been obliged to give detailed consideration to those submissions. 190However, and as I pointed to counsel several times during the three days this case took to hear this application, resolution of the Individual Defendants' claim for specific performance of the agreement comes down to this: there is no point making an order for specific performance; the plaintiffs could not comply with any such order; it would be an exercise in futility to make the order. 191In those circumstances, I exercise my discretion to refuse specific performance. 192Closer and earlier attention by the parties to this critical aspect of the case would have likely resulted in this application being dealt with in hours, rather than days.
Conclusion as to specific performance 193I find that the agreement for which the Individual Defendants contend was reached between the parties, and that the parties intended that agreement to be legally binding. I also find that the plaintiffs have evinced an intention not to be bound by, and have thus repudiated, that agreement. 194I am not, however, persuaded that I should exercise the Court's discretion to grant specific performance of the agreement because, to do so, would be to require the plaintiffs to do something that they simply cannot do. 195The Individual Defendants seek no other relief in relation to the plaintiffs' repudiation of the agreement. 196In those circumstances, I must now turn to the Individual Defendants' alternative claim for an order for security for costs on the conventional basis.
On the face of it, security required of the corporate plaintiffs 197As I have discussed, it is plain that ASMM and AC could not meet an order for costs. 198If the property market in Mount Eliza improved, it may be that ASMM would be in a better position to do so in the future (see [42] - [45] above). It is, however, a matter of speculation as to whether this will occur. 199Mr Armstrong has agreed to be responsible for any costs orders made against ASMM or AC. 200The fact that Mr Armstrong is prepared to put his assets into play is a factor I must take into account. However, the authorities make clear that this is not a decisive, or necessarily critical, factor. The weight to be attached to this factor depends, in large part, on what resources Mr Armstrong has to make good the undertaking: see, for example, the observations of Winneke P and Phillips JA in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at [23] - [24]; cited with approval in Jazabas Pty Ltd v Haddad [2007] NSWCA 291at [2] per Mason P and at [79] per McClellan CJ at CL.
Mr Armstrong as a plaintiff 201The Individual Defendants accept that it is unusual for security for costs to be ordered against an individual. 202The correct principle is that "[m]ere impecuniosity is not an absolute barrier to ordering security for costs against a natural person, although it is a factor against doing so": Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75 at 118 [91] per Heydon J; see also Hoxton Park Residents Action Group Inc v Liverpool City Council [2012] NSWSC 1026 at [85] per Ward J (as her Honour then was) and Bagnato v Bagnato [2011] NSWSC 1035 at [23] per Pembroke J. 203Thus, to the extent that the Individual Defendants' costs are likely to be incurred by reason of claims brought by Mr Armstrong personally, either because those claims are separate from the claims made by ASMM and AC, or because they mirror such claims, that is a factor weighing against giving security.
To what extent are the plaintiff companies' claims coextensive with those of Mr Armstrong? 204There was extensive debate before me as to the extent to which the claims brought by Mr Armstrong in his personal capacity were coextensive with the claims brought by ASMM and by AC. 205In Prynew Pty Ltd v Nemeth [2010] NSWCA 94 Beazley JA said: - "...in a particular case, it may be relevant to have regard to the extent to which the claims made by [individual and corporate plaintiffs] are co-extensive. If the claims of each are co-extensive, that may provide a strong basis for not ordering security. If the claims are not co-extensive at all, that factor may point to the exercise of the court's discretion in the opposite manner. There are then a multitude of intermediate positions which may need to be considered in a particular case." (at [56]) 206Mr Bradley estimated that only 25 per cent of the costs of the Individual Defendants was likely to be attributable solely to the claims made by ASMM and AC and that 75 per cent of the costs was likely to be incurred in responding to the claims brought by Mr Armstrong personally. 207On the other hand, Mr Klotz, the partner dealing with the matter at Norton Rose, estimated that 80 per cent of the costs likely to be incurred by the Individual Defendants would be attributable to the claims brought by ASMM and AC, rather than Mr Armstrong personally. 208Neither Mr Bradley nor Mr Klotz was cross-examined. 209The predictions made by both Mr Bradley and Mr Klotz involved a degree of conjecture. I am not in a position to say which of the predictions is likely to be more accurate. 210What is clear is that a significant proportion of the costs to be incurred by the Individual Defendants, perhaps in excess of 50 per cent, is likely to be attributable to the claims brought by the corporate plaintiffs.
Quantum of Individual Defendants' likely costs 211Mr Klotz estimated that the Individual Defendants will incur costs in these proceedings in the order of $2.5 million. 212That figure included Mr Koltz's estimate of the costs that the Individual Defendants will incur in making the further disclosure of the Additional Documents. Mr Klotz's estimate also assumed that the hearing of these proceedings would take 25 days. 213It was submitted on behalf of the plaintiffs that the Individual Defendants were unlikely to incur all of the costs forecast by Mr Koltz in regard to discovery of the Additional Documents because, amongst other reasons, the proposed discussions referred to at [17(b)] above might reduce or eliminate the need for further disclosure. 214It was also submitted on behalf of the plaintiffs that the 25 day trial estimate is unduly pessimistic. I am not in any position to make a prediction as to how long the trial of these proceedings is likely to take. The parties have, so far, spent eight hearing days on interlocutory disputes (one day on the strike-out application, four days, so far, on the inadvertent disclosure of privileged documents issue and three days before me on this application). That does not augur well for the further time likely to be taken resolving the disputes between these parties. 215It may be that the Individual Defendants will incur total costs less than the figure of $2.5 million predicted by Mr Klotz. In view of the plaintiffs' financial position, it is not necessary for me to form any final view about the likely figure. On any view of the matter, the costs that the Individual Defendants will incur will be significantly more than the security for costs thus far provided, and any further amount the plaintiffs could provide.
Stultification 216Just as I found impossibility of performance to be the decisive factor relevant to my consideration of the Individual Defendants' claim for specific performance of the agreement to provide security, I find the issue of stultification to be decisive in relation to the Individual Defendants' application for security for costs on the conventional basis. The difference is that, dealing with the matter on the conventional basis, the Court is able to make whatever order for security is appropriate, short of stultifying the proceedings. 217The plain fact of the matter is that the plaintiffs' ability to provide any further security is very limited. 218Were I to assume that the Individual Defendants' likely total costs of the proceedings was to be $1.25 million (that is, half the sum predicted by Mr Klotz), take 65 per cent of that amount ($812,500) and order the plaintiffs to provide security for the difference between that amount, and the $600,000 already provided for security, the figure of $212,500 results. 219If I were to assume that 50 per cent of that amount was attributable to the claims brought by the corporate plaintiffs, the result is $106,250. 220On Mr Armstrong's evidence, the only means available to the plaintiffs to provide security is the cash available and referred to at [49(a)] above ($50,000), the proceeds of sale of one or more of the three motor vehicles referred to at [49(b)] (a little under $50,000), and the proceeds of sale of the boat referred to at [49(c)] (a further $40,000). This gives a grand total in the order of $140,000. 221Mr Armstrong's indirect interest in The Lion Partnership (see [61] above) suggest the possibility (but no more) that Mr Armstrong has a source of income available to him which he could access, were it necessary to do so.
Conclusion 222Taking all these matters into consideration, the conclusion to which I have come is that the plaintiffs should provide some further security, but not so much as will, in effect, bring these proceedings to an end. 223I propose to order that the plaintiffs provide further security in the sum of $100,000. This is not an amount sufficient to protect the Individual Defendants from the likely consequences to them of a costs order in their favour. However, to order further security would, in my opinion, very likely bring these proceedings to an end. 224I invite the parties to bring in short minutes to give effect to these reasons.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 May 2013
Armstrong Strategic Management and Marketing Pty Ltd
Expense Reduction Analysts Group Pty Ltd
(1985) 2 NSWLR 309
(1995) 56 FCR 189
(1962) 108 CLR 130
(2009) 239 CLR 75