Practice and procedure - Security for costs - Order requiring application to be brought by a certain date - Delay in bringing application in breach of order - Whether security should only cover costs going forward - Lack of detailed evidence as to appropriate quantum of security - Turns on own facts

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

Barton v Minister for Foreign Affairs [1984] FCA 89; (1984) 2 FCR 463

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

Bevwizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399

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

Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171

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

Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd [1984] FCA 65; (1984) 1 FCR 311

Darelvale Holdings Australia Pty Ltd v Waterjet Designs Pty Ltd [2003] FCA 863

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

Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105

Hydrocool Pty Ltd v Hepburn (No 2) [2010] FCA 285

Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621

KDL Building Pty Ltd v Mount [2006] NSWSC 474

KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189

Major v Woodside Energy Ltd [No 5] [2009] WASC 357

MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Ltd [2002] FCA 821

Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486

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

SP Hay Pty Ltd v Allcorp Pty Ltd [2004] WASC 77

Trilogy Computer Systems Pty Ltd v CTI Communications Ltd [2001] FCA 1778

1 The defendants in this action apply 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.

2 The defendants' chamber summons, filed 28 June 2010, claims an amount of $250,000 'up to entry for trial'. In a letter addressed to the solicitors for the plaintiff dated 13 May 2010, attached to the affidavit sworn in support of this application, the solicitors for the defendants state that the $250,000 claimed represents 'the first tranche of security, covering the period from the commencement of the proceedings to the date on which the action is entered or listed for trial by the Court'.

3 The plaintiff's claim is, in effect, that the defendants are liable to it by reason of a failure to pay the plaintiff royalties from the mining of certain mineral tenements pursuant to certain contractual arrangements. The plaintiff pleads that the failure to pay the royalties was in breach of contract, and that by being deprived of the royalties, it lost the commercial opportunity to invest the proceeds of the royalties at a profit. The plaintiff's claim is that it should have received the royalties from 4 March 1999, and would have made investments in both listed and unlisted companies from that time, in accordance with specified, particularised criteria, with a weighting in the mining sector.

4 It says, inter alia, that it would have used the royalty proceeds to build up a share portfolio, it would then have sold out in October 2007 and placed the funds on deposit, and then re-entered the market at a lower level in April 2009.

5 It has particularised its opportunity cost in not having and using the royalty moneys for investment purposes at $793 million.

6 The defendants deny the contractual claims and, in the alternative, seek rectification. The case on both liability and quantum is substantial in its scope and complexity.

7 The general principles were not in dispute, and it is unnecessary to set them out here: 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; BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857; Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201; Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497; KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189.

8 The relevant evidence in relation to the threshold issue is as follows:

(a) certain financial statements of the plaintiff for the year ended 30 June 2002 disclose:

(i) operating revenue of under $4,000 in 2002, and under $5,000 in 2001 - in other words, there was no significant revenue from business activities;

(ii) a deficiency of working capital in 2002 and 2001. In 2002, current liabilities exceeded current assets by approximately $35,000, and in 2001, current liabilities exceeded current assets by approximately $200,000;

(iv) accumulated losses of in excess of $60 million;

(b) with regard to assets, in May 2010, searches made with respect to the plaintiff indicate that:

(i) it is not the registered proprietor of any real property in Australia;

(ii) it is not the registered proprietor of any mining tenements in Australia;

(iii) it is not the ultimate holding company of any Australian company;

(iv) it is not within the top 20 members of Australian proprietary companies; and

(c) with regard to liabilities, in the period 5 June 2009 to 11 June 2010, the plaintiff has incurred legal costs in excess of $252,000.

9 These proceedings involve litigation of substantial complexity and magnitude. The plaintiff's claim involves a significant claim for the loss of investment opportunity, particularised at $793 million. The defendants' sworn estimate of costs gives a range of approximately $950,000 to $1.25 million. The plaintiff has already incurred costs of $252,000. It is not possible to make a finding, with any precision, of the likely costs of the defence of the claim, but I accept that costs will undoubtedly be very substantial and, based on current evidence, in the order of at least $500,000 (see [36] below).

10 In all these circumstances, it appears to me, by credible testimony, that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if successful in their defence of the action. I am fortified in drawing that inference, although my finding does not depend on it, by the plaintiff's failure or refusal to disclose its financial position after 2002, following inquiry by the defendants prior to this application: FFE Minerals Australia v Mining Australia [25]; Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 [9], [31].

11 In relation to discretionary considerations, the parties joined issue on the matters referred to below, with particular emphasis on the question of delay. The plaintiff contends that the defendants' delay in making the application should preclude any order in favour of the defendants.

12 A number of the principles relevant to the question of delay were referred to in Major v Woodside Energy Ltd [No 5] [2009] WASC 357 [11]. The issues for consideration in this respect include, in my view, the length of delay, the explanation (if any) for the delay and the question of prejudice to the plaintiff.

13 As regards the length of delay, in my view, it is substantial. The potential application was first raised in April/May 2009, and on 29 May 2009 the defendants were ordered to file and serve any security for costs application by 5 June 2009.

14 As regards the explanation for the delay, remarkably, the partner in the firm of solicitors for the defendants having the carriage of this matter for the defendants, has made no reference in his affidavit in support of the application to the court's order of 29 May 2009.

• refers to correspondence between the parties' solicitors from 9 April to 2 June 2009 in which the defendants' solicitors requested security and the plaintiff's solicitors resisted the giving of security. The correspondence included a letter dated 18 May 2009, by which the plaintiff's solicitors advised the defendants' solicitors that they (the plaintiff's solicitors) had been instructed by the plaintiff that the plaintiff had 'more than adequate funds available to meet any adverse costs order made against it';
• refers to the disclosure of the financial statements by the plaintiff on 21 December 2009;
• refers to the plaintiff's provision of certain particulars of its claim on 23 October 2009;
• refers to the plaintiff's detailed particulars of the loss of opportunity claim on 16 April 2010 disclosing the alleged opportunity cost of $793 million; and
• refers to the (failed) mediation of 28 April 2010.

16 In their submissions, the defendants sought to explain the delay as follows.

17 First, the defendants say that the plaintiff failed to provide financial information to the defendants, despite requests, until the provision of the financial statements on 21 December 2009 following the earlier application for further and better discovery. As to this, I accept that had proper discovery been given earlier, the financial statements would have been available to the defendants at an earlier stage and, had that occurred, those materials would have been available to assist the defendants in making an earlier application.

18 Secondly, the defendants say that the plaintiff's solicitors, in the letter dated 18 May 2009, represented that the plaintiff could meet any adverse costs order. The implication in the submission is that the reason the defendants did not make an application in accordance with the court's order on 29 May 2009 was that they relied on the accuracy of the plaintiff's statement. There was no direct evidence from the defendants to that effect, and I would not draw that inference when direct evidence was not forthcoming.

19 Thirdly, the defendants say that there was a delay in particularising the claim for lost opportunity in that certain, limited, particulars were provided on 23 October 2009 and the detailed particulars of the lost opportunity claim did not emerge until April 2010, shortly before the mediation. As to this, I would note that even before the provision of any particulars, the defendants had raised the question of the provision of security, and had been ordered to make an application by 5 June 2009. Nevertheless, I accept that the particularised lost opportunity claim for $793 million put into sharp focus the magnitude of what was involved in the litigation, which was not necessarily evident prior to then.

20 Fourthly, the defendants say that the application for security was brought promptly after evidence emerged which indicated that there was reason to believe that the plaintiff would not be able to pay the costs of the defendants if unsuccessful at trial. As to this, I do not accept that the defendants acted promptly after the provision of the financial information in December 2009. On the other hand, I recognise that part of the delay occurred in a period in which the parties were preparing for, and attended, a mediation. Mediation was ordered in February 2010 and occurred in April 2010. The application was made relatively promptly after the failed mediation. In considering the significance of delay as a discretionary factor, in my view, some account may be taken of the fact that mediation was an important element in the case management of this litigation, which, had it been successful, would have brought the whole proceedings to a conclusion: Hydrocool Pty Ltd v Hepburn (No 2) [2010] FCA 285 [28].

21 Fifthly, the defendants say that the plaintiff had been forewarned that an application would be made, and the defendants had not stood by and allowed the plaintiff to incur substantial costs which might now be wasted. I do not accept that submission in light of the orders which were made on 29 May 2009. The correspondence to which the defendants refer in this regard occurred prior to the order of 29 May 2009, or during the period in which that order operated.

22 Sixthly, the defendants say that the plaintiff is unlikely to have acted differently had an application for security been made earlier. That point leads to a consideration of the question of prejudice to the plaintiff, to which I refer below.

23 In the end, there is some evidence which is capable of explaining to some extent the delay that has occurred. The absence of an explicit explanation by or on behalf of the defendants in an affidavit for the non-compliance with the court's order of 29 May 2009 is, nevertheless, a serious omission.

24 As to the question of prejudice, the plaintiff, by its managing director, has sworn that the plaintiff has incurred in excess of $252,000 in costs since June 2009. Although the plaintiff has not sought to prove what it would have done had the application been brought earlier, I accept that it would be unreasonable to deny the existence of some prejudice to the plaintiff: Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 [57]. This is particularly so where the timing of the application was expressly the subject of a court order.

25 Nevertheless, the trial is not imminent. The point had been reached where programming orders had been made in May 2010 for witness statements and trial bundles (although those directions are now suspended pending determination of this application), and the parties had been given leave to adduce expert evidence, but no programming orders had been made for the service of expert evidence. Further, the plaintiff is pursuing a substantial lost opportunity claim, and there is no suggestion that the provision of security would stultify the action by the plaintiff.

26 Weighing all the considerations mentioned above in the balance, and bearing in mind that the threshold circumstance is itself an important discretionary matter (BPM v HPM 860; Sent v Jet Corporation 215 - 217), I have concluded that the provision of security is appropriate for future costs, but not for costs incurred prior to the application: Darelvale Holdings Australia Pty Ltd v Waterjet Designs Pty Ltd [2003] FCA 863 [15]; Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd [1984] FCA 65; (1984) 1 FCR 311, 314.

27 The partner in the firm of solicitors having the carriage of the action on behalf of the defendants has deposed, in an affidavit sworn 28 May 2010, that the draft bill of costs attached to his affidavit is a reasonable estimate of the costs that have been, and are likely to be, incurred by the defendants in defending the claim as brought by the plaintiff. He says that the estimate is calculated on a party/party basis, and includes costs up to and including the trial. The total amount claimed in the draft bill is $958,007 to $1,260,507. The draft bill has been prepared on the basis that the defendants obtain a special order for costs to the effect that the maximum amount under the costs determination will not apply. The draft bill also states that the defendants 'reserve their rights to vary this bill for the purposes of applying for further tranches of security for costs and for costs after judgment'.

28 The amount claimed in the summons for security for costs is $250,000 in respect of the defendants' costs up to and including entry for trial. At the hearing, counsel for the defendants was unable to explain how the sum of $250,000 was ascertained by reference to the draft bill. She said that this is a 'conservative estimate'. However, without knowing precisely which costs or portions of costs are intended to be covered by the $250,000 sought as security, the assessment of the appropriate quantum has not been an easy task.

29 In considering the quantum of security for costs in this matter, it is to be noted, as mentioned earlier, that the plaintiff's claim involves a substantial lost opportunity claim, particularised at $793 million. The defendants contend, and I accept, that the principal issues raised by the pleadings are as follows:

(a) the proper construction of various contracts including the March Letter Agreement dated 23 March 1993 (as orally varied) and the GPR Deed dated 28 March 1994, including whether the production royalty applies only to production from within the area of land covered by the Royalty Tenements as at 23 March 1993, or as a result of exploitation of the ownership of the Royalty Tenements earned or derived from the original interest of the defendants in the Royalty Tenements and the definition of 'Tenements' in the GPR Deed;

(b) the commercial context of the agreements, the commercial objectives, and the factual matrix known to the contracting parties at the time of execution of the agreements;

(c) the common intention and the common assumption of the contracting parties at the material time;

(d) the effect of the assignment of Hunter's rights and interests to Technomin in December 1993 and the nature and extent of Technomin's rights as an assignee;

(e) the granting of ML36/371 to the defendants and the circumstances surrounding it, including whether or not ML36/371 was issued in 'substitution' for PL36/371 within the meaning of the GPR Deed;

(f) whether the plaintiff's claim is time barred and if so to what extent;

(g) in the event that the Court finds that the GPR Deed is to be construed in the manner alleged by Technomin, whether it should be rectified;

(h) whether there is a basis for the doctrine of estoppel by convention;

(i) whether it would be unconscionable to allow Hunter Resources and Technomin to resile from the common assumption;

(j) the extent to which Technomin is bound by the estoppel;

(k) whether in the circumstances, there is a legal basis for Technomin to assert a loss of opportunity claim in the manner in which it has been particularised; and

(l) if so, the assessment of damages for loss of that chance including the financial position of the plaintiff, its business operations and investment strategies throughout the relevant time (being at least from 1999 onwards), how the plaintiff would allegedly have invested the royalty payments which it alleges it ought to have received, the prospect of the alleged opportunities being pursued by the plaintiff, whether the market prices for the shares referred to in Schedule B to the further and better particulars are correct, and the accuracy of the currency conversion rates throughout the relevant period.

30 As regards the length of the trial, the solicitor for the defendants deposes that:

(a) the defendants may call some six lay witnesses at the trial of this action, and that additional witnesses may also be called;

(b) as matters presently stand, he anticipates that the defendants may need to call expert evidence in relation to the following matters:

• the proper determination of the amounts of any allegedly unpaid royalties and interest;
• the evaluation of the merits of the plaintiff's loss of opportunity claim; and
• the proper determination of the quantum of the plaintiff's loss of opportunity claim, from a forensic perspective as well as from a stock market perspective; and

(c) he estimates the likely length of the trial as between three and four weeks.

31 The plaintiff, in its submissions, contends that the trial of the plaintiff's claim should only take four to five days, and that the additional period to which the defendants' solicitor refers must arise from the counterclaim for rectification.

32 In response to the claimed quantum, the plaintiff also contends that:

(a) 75% of the claimed costs must be referable to the defendants' counterclaim for rectification and that it would, accordingly, be appropriate to reduce the quantum (if security were ordered) to about 25% of the relevant sums claimed;

(b) in relation to the estimates in the draft bill:

(i) in item 20, a lump sum of $270,000 to $370,000 is claimed for 'getting up' without any attempt to itemise the time involved, and how the time might relate to the plaintiff's claim or the defendants' counterclaim. It is also said that some costs in this item would be incurred after entry for trial. It is said that only a small fraction of this figure should be taken into account when quantifying any amount for security;

(ii) item 21 relates to an estimate of $40,000 to $60,000 for 'possible applications for early return of subpoenas'. It is contended that this is a very high cost, for which no particularity is provided;

(iii) item 22 contains an estimate of $10,000 to $15,000 for a 'possible' application for leave to interrogate, and that there is nothing to indicate why this would be regarded as necessary;

(iv) in item 28, $100,000 is estimated for 'experts' fees' when there is no evidentiary basis for the claimed amount;

(v) also in item 20, insofar as the costs reflect the possibility of the defendants retaining two Queen's Counsel and one junior counsel, the claim is not justifiable; and

(vi) generally, the defendants' evidence is not sufficiently detailed to give the court confidence in the amounts claimed and, to the extent that any credence may be given to the draft bill, where items provide a range, the court should take the minimum, rather than the maximum; and

(c) any order should be confined by reference to the costs going forward and that the defendants are not entitled to security in respect of costs already incurred.

33 As regards the plaintiff's first contention, in my view, the defendants' counterclaim for rectification is, in substance, a defensive one to the plaintiff's claim: KP Cable Investments v Meltglow (198); Bevwizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399 [18] - [21], [33]; cf SP Hay Pty Ltd v Allcorp Pty Ltd [2004] WASC 77 [29]. The plaintiff is suing on a contract for alleged breach of the contract. The defence denies that the contract, properly construed, includes the terms upon which the plaintiff relies for its claim. Alternatively, the defence alleges that if the contract does contain those terms at law, it ought to be rectified in equity. The defence and counterclaim both propound a basis upon which it is said that the plaintiff is not entitled to the royalties claimed. Further, matters likely to be raised as extrinsic circumstances concerning the proper construction of the contract are also likely to provide contextual background to the rectification plea.

34 Accordingly, this is not a case where the quantum of security should be reduced on account of the defendants' counterclaim: cf KDL Building Pty Ltd v Mount [2006] NSWSC 474 [31]; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621, 628.

35 I accept the plaintiff's criticisms referred to in subpars (b) (ii), (iii), and (v) of [32] above. As to subpar (b)(i), I do not accept, for the reasons indicated earlier, that there should be a deduction for the counterclaim. I do accept, however, that a number of the costs in item 20 may be incurred after entry for trial. As to the criticisms in subpars (b)(i), (iv) and (vi) of the lack of detailed evidence, there is some merit in these, but lack of detailed evidence in the draft bill is not necessarily sufficient to deny the making of some order for security: cf Barton v Minister for Foreign Affairs [1984] FCA 89; (1984) 2 FCR 463, 469; MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Ltd [2002] FCA 821 [34] - [35]. Also, in relation to subpar (b)(iv), I think I can take judicial notice that experts' fees are likely to be significant: Trilogy Computer Systems Pty Ltd v CTI Communications Ltd [2001] FCA 1778 [15]. I also note that the plaintiff did not contend that the case would not likely attract some special costs order, at least in relation to item 20.

36 If the bottom of each range in the defendants' draft bill was the starting-point for present purposes, the defendants' costs of the action from commencement to completion of the trial would be approximately $950,000. It is unnecessary for me to come to a precise figure for total costs, but taking into account the criticisms referred to above which I have accepted, I am satisfied, giving some weight to the defendants' sworn draft bill, and having regard to the nature, size and complexity of the litigation, and the fact that the plaintiff has itself expended over $250,000 to date, that the defendants' recoverable costs are likely to be substantial, and at least in the order of $500,000.

37 Finally, in accordance with my conclusion in [26] above, I accept the plaintiff's third contention. There should not be security for the work done by the defendants up to the date of the summons herein, 28 May 2010. The draft bill puts the quantum of this work (ie, items 1 - 18) at approximately $100,000 and estimates that the remaining work prior to entry for trial (ie, items 19 - 23 and 28) will cost at least another $440,000 or thereabouts (adopting the bottom figure of each range where applicable). The total costs estimated to be incurred by the defendants prior to entry for trial are, on this basis, $540,000 (ie, $100,000 plus $440,000). Notwithstanding that the estimated combined total for this period is approximately $540,000, the defendants only claim $250,000 security for costs for work in this period.

38 The percentage which $540,000 (costs prior to entry for trial) bears to $950,000 (total costs on lowest range) is 57%. Applying that percentage to the minimum figure for total costs which I have adopted, $500,000, gives $285,000 as a figure for costs up to entry for trial. From that figure, I would deduct the $100,000 for the defendants' estimate of its costs to date (the figure of $100,000 ought not be reduced in favour of the defendants on account of their own lack of specificity behind the estimate). This gives an estimate of costs from the summons herein to the entry for trial of $185,000.

39 I also bear in mind that the court does not set out to give a complete indemnity to the defendants: Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171, 175. Taking a broad view, and in seeking to do justice to both parties, it seems to me that the sum of $150,000 would be an appropriate sum in all the circumstances in respect of costs between the date of this application and the entry of the matter for trial.

40 For the foregoing reasons, I would order security in the sum of $150,000 on the defendants' chamber summons. I will hear the parties on the manner and form of security if the parties cannot reach agreement in that regard.