CT Money Pty Ltd & Ors v GJ & SG Thompson Pty Limited & Anor

Judgment (ex tempore) 1The plaintiffs operated a mortgage origination business, and in 2005 granted franchises to the first defendant GJ and SG Thompson Pty Limited ('Thompson') and the second defendant Darranda Pty Ltd ('Darranda'). In February 2008, Thompson and Darranda executed a deed of termination, pursuant to which Thompson purchased Darranda's franchise. Following a notice from one of the plaintiffs' funders, demanding repurchase of a loan which was in default, the plaintiffs, on 22 January 2009, commenced proceedings in the District Court against Darranda, complaining that it had breached a duty of care owed to the plaintiffs in connection with the preparation of the subject loan application and also in reliance on an indemnity contained in Darranda's franchise agreement. Darranda denied those allegations. The proceedings as between the plaintiffs and Darranda have been compromised and discontinued. 2As against Thompson, the plaintiffs alleged that Thompson had assumed Darranda's obligation to indemnify the plaintiffs in respect of the subject loan. That claim remains on foot. On 27 March 2009, Thompson filed a second cross-claim against Darranda, claiming indemnity in respect of any liability that Thompson might have to the plaintiffs in reliance on a contractual indemnity given by Darranda in the deed of termination. Another cause of action for damages was subsequently added and formed part of the second cross-claim, at least until it was indicated in court today that it would not be pressed, to the intent that Thompson would rely only on the indemnity in the deed. 3While the proceedings were still in the District Court, on 2 September 2011, on Darranda's motion the District Court made an order that Thompson provide security for Darranda's costs in respect of the second cross-claim, in the form of an unconditional bank guarantee acceptable to Darranda, in the amount of $85,185, pursuant to (NSW) Uniform Civil Procedure Rules, (2005), r 42.21, and (CTH) Corporations Act, 2001, s 1335(1). In accordance with the usual practice when making orders for security for costs, and as provided for by UCPR, r 42.21(1), the court also ordered that proceedings on the second cross-claim be stayed until the security was provided. Thompson was also ordered to pay Darranda's costs of the motion. 4On 17 September 2011, this Court made an order that the proceedings be transferred from the District Court to this Court, where they are listed for hearing for four days commencing on 6 February 2011. 5Thompson has not provided the security ordered. Darranda's solicitors have twice - on 28 September and 12 October - pointed out to Thompson's solicitors that the security had not been provided in accordance with the order, and that if it were not provided by 14 October 2011, instructions would be sought to file a motion seeking an order dismissing the second cross-claim. Such a motion was filed on 17 October. 6UCPR, r 42.21(3), provides that if the plaintiff fails to comply with an order made under the rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed. It is well established that, for present purposes, a cross-claimant in a cross-claim is regarded as a plaintiff. This is the result of (NSW) Civil Procedure Act, s 3, which provides that plaintiff 'includes a person by whom a cross-claim is made'. UCPR, r 42.21(1), when read with s 3, has the effect that a court can make an order for security against a defendant who is a cross-claimant. 7Factors relevant to an application for dismissal of proceedings where a plaintiff had failed to comply with an order for security include: first, the time that had passed since security was ordered; secondly, the plaintiff's likely ability to provide security; thirdly, the extent to which the plaintiff has been on notice of the dismissal application; fourthly, the likelihood of prejudice to the defendant as a result of continuing the stay as opposed to dismissing the proceedings; fifthly, the impact on the court of continuing the stay; sixthly, the ability of the plaintiff to commence new proceedings; and seventhly, prejudice to the plaintiff, for example, as a result of the expiry of a relevant limitation period [ Idoport Pty Ltd v National Australia Bank and Others [2002] NSWSC 18; Porter v Gordian Runoff Ltd (No 3) [2005] NSWCA 377; Battenberg v Union Club [2007] NSWSC 265]. 8Although only two months have elapsed since the order for security was made, that has to be seen in the context that the trial has been set down for early next year and that if Darranda is to prepare for that trial, it must begin to do so soon. 9No evidence has been placed before me to demonstrate that Thompson is unable to provide the security or that such individuals as may stand behind Thompson are unable to do so, but the court has been informed, and I shall accept for present purposes, that Thompson is unable to give the security order. The consequence of that seems to me to be that Thompson will never be able to do so. Its position can only deteriorate, if it is unsuccessful in the substantive proceedings. Of course, if it is successful in those proceedings, then a cross-claim for indemnity becomes irrelevant. 10As I have mentioned, Thompson's solicitors have twice been notified of the intention to make the application for dismissal. 11So far as prejudice to Darranda is concerned, there are three significant aspects. First, although it might be said that, because of the stay, the second cross-claim would not go to trial, the reality is that Darranda has an interest in the outcome of the principal proceedings because if they fail, then there will be no occasion for Thompson to call on any indemnity that Darranda may have given. Accordingly, even if the second cross-claim is stayed, Darranda has a legitimate interest in preparing for and being represented at the trial of the substantive proceedings. Secondly, so long as the possibility remains that the stay may be lifted, by security being provided from some source or another, there is potential that at relatively short notice the second cross-claim might be revived, to be heard at the forthcoming hearing. While in such circumstances Darranda might have a strong claim for an adjournment, the difficulty with that course is, again, that the cross-claim is dependent on and, to that extent, intertwined with the substantive proceedings. Accordingly, there is prejudice to Darranda in being left in doubt as to whether the second cross-claim may or may not proceed in conjunction with the main proceedings. Thirdly, there is the circumstance that in the meantime the financial position of Thompson is likely to further deteriorate. 12The argument that the proceedings should not be dismissed, but the stay left on foot, depends primarily on the view that it would occasion injustice to Thompson to suffer dismissal of a viable claim for indemnity. If this argument was to be maintained - it being essentially a "stultification" argument - the time and place for running it was on the application for security for costs. No application has been made for leave to appeal from the order for security, and there has been no application for the court to reconsider it at first instance, or set it aside. The order remains on foot. The present type of application is not an occasion to reconsider the merits of the security order. 13Nor is it correct to characterise a security order merely as an order that security be provided or the proceedings be stayed. The order is one that security be provided; the stay until security is provided is a mechanism to prevent further (potentially irrecoverable) costs being incurred in the meantime. 14The circumstances in which the court might decline to make an order dismissing proceedings for failure to comply with a security order would typically be those in which there was both some prospect that the security might eventually be provided, and that prejudice would not be occasioned by allowing some further time for that to happen. That is not this case. The prospects are that security will never be provided. There is no evidence of any ability to provide it, nor of any proposal to do so at any future stage. To the contrary, the respondents oppose the relief sought on the basis that they wish to be able to proceed with the second cross-claim without giving the security that has been ordered, albeit narrowing the basis of their claim. 15In those circumstances, I regret that the court has only one real course open to it, and that is to dismiss the proceedings. 16I order pursuant to UCPR, r 42.21(3), that the second cross-claim be dismissed with costs. 17I order that the second cross-claimant pay the second cross-defendant's costs of the motion filed 17 October 2011.