Supreme Court of WA|1999-05-21|Before: Murray J

Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd [1999] WASC 36 (21 May 1999)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : EASTERN METROPOLITAN REGIONAL COUNCIL -v- FOUR SEASONS CONSTRUCTION PTY LTD [1999] WASC 36

BETWEEN : EASTERN METROPOLITAN REGIONAL COUNCIL

Corporations law - Application for security for costs of arbitration - Order likely to stultify action - Respondent's impoverished position said to be due to actions of applicant - Security ordered in stages

Ariss v Express Interiors Pty Ltd [1995] VICSC 192; (1995) 13 ACLC 1585

Aspindale Pastoral Co Pty Ltd v W J Drever Pty Ltd [1983] 7 ACLR 937

Bridge Pump Co Pty Ltd v Fazio, unreported; SCt of WA (Murray J); Library No 980591; 2 October 1998

Bryant v Commonwealth Bank of Australia (1996) ALJR 306

De L v Director-General, NSW Department of Community Services [1996] HCA 9; (1996) 70 ALJR 532

Doran v Cottam, unreported; FCA; No WAG 83 of 1994; Fed No 439/95; 27 June 1995

Hartur v R E Anthony Ariad Australia Limited [1983] 8 ACLR 539

Federal Commissioner of Taxation v Myer Emporium Limited (No 1) [1986] HCA 13; (1986) 160 CLR 220

Heyman v Darwins Limited [1942] AC 356

Jennings Construction Ltd v Burgundy Royale Investments Pty Ltd (No 1) [1986] HCA 84; (1986) 161 CLR 681

Malubel Pty Ltd v Elder (1999) 73 ALJR 135

Newtrend Pty Ltd v Oceanic Life Limited (1989) 7 ACLC 656

Paparone v Konstruct Holdings Pty Ltd , unreported; FCt SCt of WA; Library No 970248; 19 May 1997

1 MASTER SANDERSON: This is the return of an application by the Eastern Metropolitan Regional Council ("EMRC") for an order that Four Seasons Constructions Pty Ltd ("Four Seasons") provide security for costs in an arbitration initiated by Four Seasons. The application is brought under s 1335 of the Corporations Law. That section reads as follows:

"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 Although the proceedings in which the security is sought are an arbitration, it was not in contest that this Court has jurisdiction in relation to security for costs. It was also not in issue that, if EMRC is successful in defending the arbitration, Four Seasons will be unable to pay EMRC's costs. On the basis then that the court has a discretion as to whether or not to order security for costs the argument between the parties was whether, in the circumstances of this case, that discretion should be exercised to order that security be provided. This matter has something of a history and I should briefly recount that history before dealing with the relevant factors to the exercise of discretion.

3 These two parties are involved in a related action, being CIV 2292 of 1998. In those proceedings EMRC, as plaintiff, sought a declaration against Four Seasons, as defendant, as to whether or not a contractual relationship between the parties had come to an end. Immediately after the issue of the writ Four Seasons sought to have the action stayed. In essence, it was argued that as the dispute had been referred to arbitration that was the proper forum for determination as to whether the contract between the parties had been terminated. I heard argument on this question and on 10 February 1999 made orders that EMRC's action be stayed: see Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd, unreported; SCt of WA; Library No 990052; 10 February 1999. In the course of those reasons I summarised the facts in the following terms:

"The plaintiff is a body corporate constituted under the Local Government Act. It has responsibility for a waste disposal site at Redhill to the east of Perth. The defendants are a firm of builders. By written contract ("the Contract") dated

2 December 1997 the plaintiff engaged the defendant to carry out certain earthworks and drainage works ("the works") at the Redhill site for a sum of $222,222. The date for the completion of the works was 20 April 1998. This completion date was extended to 11 May 1998 by written notice from the plaintiff to the defendant on 8 April 1998. None of these facts are controversial, although there is an issue as to what is the proper date for completion of the works.

On 6 April 1998 the plaintiff served a notice on the defendant purporting to revise the design of the works and to reduce the material to be excavated from 130 cubic metres to 121,020 cubic metres. The plaintiff then pleads that as at 9 July 1998 the defendant was in breach of the Contract, essentially because significant parts of the works were incomplete. The plaintiff says that this was a breach of the Contract which, under the terms of the agreement, allowed the plaintiff to terminate the Contract. There are two further alternative claims made against the defendant by the plaintiff. First, it is said that as at 9 July 1998 there were certain defects in the way the defendant had carried out the works which amounted to a breach of the terms of the Contract. Secondly, it is said that between 9 June 1998 and 17 June 1998 the defendant suspended the works without written approval of the plaintiff and that this, too, was a breach of the terms of the Contract. It is then pleaded that on 9 July a notice was served by the plaintiff on the defendant specifying the alleged breaches of the Contract and requiring remedy of the default. The alleged defaults were not remedied and the plaintiff purported to terminate the Contract on 23 July 1998 by written notice. The defendant responded by advising the plaintiff that it did not accept the plaintiff was entitled to terminate the Contract and that, in purporting to do so, the plaintiff had repudiated the Contract. The defendant accepted that repudiation.

This last point is of some significance. It would appear, whatever else is in issue between the parties, there is no doubt that the Contract is at an end. The plaintiff says the Contract came to an end because it followed the appropriate procedure set down by the terms of the contract and that the notice of termination was good and proper. In fact, it seeks a declaration to that effect in the prayer for relief in the statement of claim. The defendant, by its correspondence, clearly does not accept

that the plaintiff was entitled to terminate the Contract. Nonetheless, in treating the plaintiff's conduct as a repudiation of the Contract and accepting that repudiation, it has brought the Contract to an end. During the course of submissions very little attention was directed to this issue. I did raise it with counsel and neither resiled from the view that one way or another the Contract was at an end. In my view, this is a point of some significance."

4 From that decision EMRC has appealed. However, the arbitration has progressed. It has progressed in a somewhat desultory manner and there is some dispute between the parties as to just how far advanced the arbitration is. But whatever the position of the arbitration, EMRC now wants to bring it to a halt until and unless it is secured for its costs of the arbitration proceedings. Meanwhile, of course, the appeal against the decision to grant the stay will proceed.

5 Four Seasons opposed the making of the order for security for costs on four separate, but interrelated grounds. First, it was said that the delay in bringing the application was sufficient reason for refusing the order. One of the grounds upon which EMRC opposed the stay order in the proceedings it initiated was on the basis that the arbitration was not properly on foot. It was Four Seasons' position that the arbitration had been properly initiated and that it had commenced sometime after 19 August 1998. It is a little difficult to work out precisely what date the arbitration did commence. The first meeting of the parties with the Arbitrator occurred on 19 August 1998. However, subsequent to that meeting, the Arbitrator wrote to both parties indicating that he had not entered on the reference. It is clear from conduct subsequent to that date that the Arbitrator has entered on the reference but it is not entirely clear on what date he did so. Be that as it may, it has always been EMRC's position that Four Seasons had not complied with the requirements of the contract to initiate the arbitration. It was only upon delivery of my reasons on 10 February 1999 that this issue was settled.

6 The application for security for costs was issued on 23 March 1999. Effectively, then, there was a delay of something less than six weeks between the delivery of reasons and the application for security for costs. To my mind this period is not inordinate. In the circumstances, I think the correct approach is, if any order for security is made, only costs incurred after 23 March 1999 be secured.

7 The second ground upon which the application was resisted was that it was said the application was oppressive and may stultify the arbitration. This submission was closely linked with Four Seasons third submission that its impecuniosity was caused by actions of EMRC. It is convenient to deal with these two submissions together. Four Seasons relied upon what was said by Clarke J in Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542. His Honour put the position as follows (at 545):

"The principles which should guide me in resolving the present dispute are not in doubt. The Court is vested with an unfettered discretion as to whether an order is made and, if so, upon what terms. The fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the Court's discretion in the plaintiff's favour."

8 Four Seasons also submitted that, on the evidence, its present impecuniosity was directly caused by the actions of EMRC. After all, it was EMRC who terminated the contract and denied Four Seasons the chance to complete the contract and obtain payment for its services. If EMRC had not engaged in wrongful conduct and terminated the contract, so it was argued, Four Seasons would have been in a position where it could pay all of its outstanding creditors and it could provide security for costs of the arbitration. These factors, it was submitted, were a powerful argument against the discretion being exercised in favour of an order for security for costs.

9 It is perhaps worthy of note that counsel for the respondent did not attempt to argue that the strength of the respondent's case in the arbitration was such that an order for security for costs was inappropriate. In the circumstances, the omission is understandable. The issues between the parties are complex and leaving to one side the legal question of whether or not the contract was terminate or repudiated, the issues are technical. It would be difficult for me to reach any conclusion one way or the other as to the strength of the respondent's case. All that can be said in the circumstances is that I have reached the conclusion that the arbitration is properly on foot and that it is the proper forum for resolution of the dispute between the parties.

10 In response to the submissions made on behalf of Four Seasons, counsel for EMRC relied upon the decision of the Full Court of this Court in BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857. This was an appeal from a decision of a Master of this Court dismissing an application for security for costs. The learned Master had concluded that to order security would be to stultify the action and that the impecuniosity of the respondent was due to the actions of the applicant. The decision of the Court was given by Anderson J who set out the approach that is to be adopted in applications such as this. His Honour said (at 861 - 862):

"The Master came to the conclusion that if he were to order the plaintiff to give security for costs on the usual terms that the action be stayed until it was provided, it would stop the litigation. The question of the likely effect of an order for security on the prosecution of the claim, as to whether it will be stultified by the order sought, raises the question whether there are people standing behind the plaintiff with the means to provide adequate security. ... The mere fact that there are creditors with the means to assist the company to give adequate security will not always be a decisive factor. The wealthy creditors may be few and the debts owed to them relatively small. The question is not simply whether there is a person who will derive some benefit from the action should it be successful and who can put up security. It is also relevant to consider whether it is reasonable that he should do so.

... I think it would be necessary to know the situation of the various creditors before it could be determined that an order for security should not be made on the ground that to make the order would frustrate the case ie on the ground that there is no creditor with a sufficient interest in the successful outcome of the litigation to whom it would be reasonable to look to provide the security to assist the company to continue it.

It is well settled that the onus lies on the plaintiff, who resists giving security on grounds that to do so will effectively stultify the action, to establish that ' ... those who stand behind it and who will benefit from the litigation if it is successful ... are also without means'. See Bell Wholesale Co Pty Ltd v Gates Export Corporation ... On no view of the evidence was that established, with the consequence that a conclusion could not properly be reached that the effect of the order would be to frustrate the plaintiff's claim."

11 In this case there is limited evidence as to the number of creditors of the company and the extent of its indebtedness to them. The application for security for costs is supported by an affidavit of Gavin Kenneth Watters, sworn 23 March 1999. In his affidavit Watters identifies two creditors of Four Seasons. One is Simto Pty Ltd who are said to be owed the sum of $9,462.50. This debt has been the subject of a statutory demand. The other debt is an amount of $21,306.18 owed by Four Seasons to ATA Constructions Pty Ltd. In opposition to the application, Four Seasons filed an affidavit of Peter Mavlian, sworn 7 May 1999. In that affidavit no mention is made of the debts referred to by Watters in his affidavit and there appeared to be no dispute about these debts. Mavlian does not identify any other creditors, nor does he provide any evidence at all as to whether or not he has discussed with any or all of the creditors the prospect of funding the arbitration. Mavlian does say that on behalf of Four Seasons he has borrowed from an unidentified third party the $4000 required by the Arbitrator as security for his costs. It is not clear whether this third party would commit any further funds to the arbitration. While it seems unlikely that either of the two identified creditors would be likely to allow EMRC's costs to be secured in the event that an order was made, there is simply not sufficient evidence to allow me to reach any firm conclusion on this point. In the circumstances, I could not exercise my discretion in favour of Four Seasons.

12 Returning then to the BPM decision, his Honour dealt with the question of the approach to be adopted when it was submitted that the applicant was responsible for the respondent's financial plight. His Honour put the position as follows (at 862):

"The other matter which influenced the Master's decision not to order security in favour of the first defendant was his opinion that the first defendant had caused the plaintiff's financial plight. The argument goes that, having by its actionable conduct impoverished the plaintiff and thereby disabled the plaintiff from providing security, it would be unjust to nevertheless order security to be provided. The trouble with this is that there is little or no evidence from which it clearly emerges what the position of the plaintiff was before the conduct complained of. ...

... the Master considered the onus was on the defendants applying for security to show that their conduct did not bring about the plaintiff's financial plight and that in the absence of such evidence he should accept at face value the pleaded case. I do not think this is how the question of onus should be approached in this kind of application. In all fairness it must be accepted that the plaintiff's financial condition before and after the transaction is peculiarly within the plaintiff's own knowledge. If the plaintiff wishes to resist an application for security because the defendant's wrongful actions have brought about its lack of means it must surely be for the plaintiff to establish this. ... I do not mean to say that this is anything but an evidentiary onus. It is enough to say for the purposes of this appeal that if there is no evidence to show that the defendant was to blame for the plaintiff's lack of means, the plaintiff cannot say the application should be refused on that ground."

13 Just what evidence a respondent will need to produce to satisfy the court that its impoverished position is due to the unlawful act of the applicant will vary from case to case. But in this case, Four Seasons has provided no evidence at all on the point. Having completely failed to discharge its evidentiary onus, there is no basis at all upon which I could conclude that my discretion should be exercised in favour of Four Seasons on this issue.

14 Finally, it was submitted by Four Seasons that this application was an abuse of process. It was submitted that EMRC had been using a range of tactics to frustrate the arbitration and this application was mounted for that collateral purpose. With respect, there seems to me to be no evidence of any improper purpose on the part of EMRC. It is the case that EMRC take the view that no arbitration is properly on foot and they are therefore unwilling participants in the arbitration proceedings. It is also the case that they have from time to time failed to meet milestones set by the Arbitrator. On the evidence as it stands, I am unable to conclude that such failures have been occasioned by wilful neglect or form part of a plan to undermine the arbitration. What is more, the progress of the arbitration is under the control of the Arbitrator. He has certain powers to ensure that the arbitration progresses in a timely manner. In the absence of any finding by the Arbitrator that the EMRC is abusing the process of arbitration, it would be very difficult for me to conclude otherwise. In my view, there is no substance in this aspect of the submissions by Four Seasons.

15 In all the circumstances, then, it is appropriate that I order security for costs. Furthermore, there is another overriding factor which seems to me to support EMRC's application. As I have mentioned on a number of occasions, EMRC has issued proceedings in this Court seeking to have determined the question of whether or not the contract between the parties was properly terminated. Four Seasons, as they were entitled to do, sought to stay those proceedings. Pending the outcome of EMRC's appeal, those proceedings are stayed. But they are stayed at the behest of Four Seasons. If Four Seasons withdraws its objection to proceedings in this Court the fundamental issue between the parties will be litigated. In the proceedings in this Court EMRC, as plaintiff, cannot obtain an order for security for costs against Four Seasons as defendant. To that extent, any argument that the arbitration proceedings will be stultified falls away. Were it the case that the question as to the termination of the contract were decided in favour of Four Seasons in this Court, it would be most unlikely that any security for costs would be ordered in any resumed arbitration proceeding. After all, Four Seasons would have won on the fundamental point and would have a very strong argument for resisting a security of costs application. In the unusual circumstances of this case Four Seasons' fate is very much in its own hands.

16 The amount of the security for costs is not really of great significance. Four Seasons has made it plain that it is in no position to meet any order for security, nor is its sole director Mavlian. EMRC seeks just over $40,000 to secure its position. Given the delay in making the application, it is not appropriate that I order security for work that has been undertaken to date. What is more, it always seems to me that staging security for costs is a fairer way to deal with such an application than requiring the full costs to be deposited early in the proceedings. On that basis I would order that within 14 days Four Seasons provide $10,000 by way of security. The form the security should take, I will leave for discussion between the parties. If agreement cannot be reached there will be liberty to apply. I will also allow EMRC to make application for further security once a date for the arbitration is fixed. If the security is not provided within 14 days the action will be stayed until further order of the court.

17 The parties should bring in a minute of proposed orders reflecting the conclusions I have reached. Subject to hearing argument from the parties, it seems to me proper that the costs of this application be costs in the arbitration.

Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd [1999] WASC 36

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Judgment (48 paragraphs)

Eastern Metropolitan Regional Council v Four Seasons Construction Pty Ltd [1999] WASC 36 (21 May 1999)

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Cases Cited (4)