The defendant (Gennie) in a Notice of Motion filed on 16 December 2020 seeks an order for security for costs against the plaintiff (Hercules).
Hercules, in its capacity as the cross-defendant to the First Cross-Claim, in a Notice of Motion filed on 8 February 2021, seeks an order for security for its costs of the cross-claim against Gennie.
The proceedings are listed for hearing on 7 June 2021 with a 4-day estimate.
[2]
The dispute
On 25 October 2016 Hercules and Gennie entered into a written contract for the supply of a bespoke car stacking system (the system) for a property at 21 Steel Street, Newcastle West (the site). The contract price of the system was $572,000 plus GST.
The contract provided for progress payments to be made at various intervals. It was an express term of the contract that at the time of the payment of the "second deposit" (an amount of 50% of the contract price) by Gennie, Hercules would provide a bank guarantee in that amount as security for its performance of its obligations.
It was also an express term of the contract that if the "components" of the system were not delivered to the site by 31 March 2017 that Gennie could rescind the contract and receive a refund of all money paid to Hercules (clause 24).
On 26 October 2016, Gennie paid the sum of $60,170, referred to in the contract as the "initial deposit", being 10% of the contract price.
In or about early December 2016, Gennie requested that the specification of the system be amended.
On 21 December 2016 the parties executed an addendum to the contract. The addendum provided that Hercules would supply additional equipment as part of the system and that Gennie would pay an additional $55,000, adopting the same payment structure as provided for by the contract. The amended contract price was $627,000 plus GST. The addendum contained no terms relating to the amendment of the installation schedule.
On 23 December 2016 Gennie requested that Hercules provide an amended installation schedule. Later that day, Hercules advised that it could not do so until it received advice from the manufacturer, but indicated that there would be some delay.
On 9 January 2017 Gennie paid the second deposit in the sum of $350,900.
On 24 January 2017, Gennie requested that Hercules provide an amended installation schedule.
On 1 February 2017, Hercules advised Gennie that installation would occur in the second week of May 2017.
On 3 February 2017 Gennie advised Hercules that in its view, taking into account the revised dates of the commencement of fabrication of the system, that the installation could start on 15 April 2017.
On 24 February 2017 the parties had discussions to the effect that based on the amendment to the specification, that the amended manufacture date for the system was 18 April 2017 and that the amended arrival date for the system was 18 May 2017.
On 27 February 2017 Hercules provided Gennie with a bank guarantee in the sum of $319,000.
On 11 April 2017 Gennie purported to rescind the contract pursuant to clause 24 on the basis that the system was not delivered to site by 31 March 2017.
On 12 April 2017 Hercules advised Gennie that its purported rescission was a repudiation of its obligations under the contract and that Hercules elected to terminate the contract.
On 18 April 2017, Gennie called on the bank guarantee and was paid $319,000.
Hercules claims the sum of $342,087 is made up of:
1. 65% of the contract price in accordance with the cancellation liability provided for by the contract;
2. storage fees in the amount of $26,607; and
3. repayment of the amount of the bank guarantee in the sum of $319,000; less
4. $411,070 being the initial and the second deposit paid by Gennie.
Hercules puts its case on the following bases:
1. that clause 24 was amended by implication at the time the parties executed the addendum;
2. that Gennie is estopped from relying on clause 24 because it would be unconscionable for it to do so;
3. Gennie has engaged in misleading or deceptive conduct by making representations as to the installation schedule for the system.
In its cross-claim, Gennie claims the sum of $57,200 which is the amount it says it is owed to receive a full refund in accordance with clause 24 of the contract.
[3]
Relevant background
In or about August 2019 the defendant filed a Notice of Motion seeking security for costs. On 4 October 2019 Consent Orders were entered by the Court providing that the plaintiff pay into Court the amount of $50,000 as security for the defendant's costs and that the plaintiff pay the defendant's costs of the motion, as agreed or assessed.
[4]
The evidence on the Notices of Motion
The plaintiff relied on the following affidavits, which were read without objection:
1. Affidavit of John Philip Dawson dated 8 February 2021;
2. Affidavit of John Philip Dawson dated 10 February 2021;
3. Affidavit of Terence Smith dated 22 February 2021;
4. Affidavit of Terence Smith dated 24 February 2021.
The defendant relied on the following affidavits which were read without objection:
1. Affidavit of Michael William Joseph dated 15 December 2020;
2. Affidavit of Michael William Joseph dated 26 February 2021.
[5]
The relevant law
Rule 42.21 of the Uniform Civil Procedure Rules 2005 provides a power to award security for costs where, relevantly, there is reason to believe that a plaintiff corporation will be unable to pay the costs if ordered to do so. In determining whether it is appropriate to make an order for security for costs the court may have regard to relevant matters including those specified in rule 42.21(1A) as follows:
1. the prospects of success or merits of the proceedings,
2. the genuineness of the proceedings,
3. the impecuniosity of the plaintiff,
4. whether the plaintiff's impecuniosity is attributable to the defendant's conduct,
5. whether the plaintiff is effectively in the position of a defendant,
6. whether an order for security for costs would stifle the proceedings,
7. whether the proceedings involves a matter of public importance,
8. whether there has been an admission or payment in court,
9. whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant,
10. the costs of the proceedings,
11. whether the security sought is proportionate to the importance and complexity of the subject matter in dispute,
12. the timing of the application for security for costs,
13. whether an order for costs made against the plaintiff would be enforceable within Australia,
14. the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff.
Section 1335 Corporations Act 2001 (Cth) provides for a similar power, if it is established on credible testimony that there is reason to believe that a plaintiff corporation will be unable to pay the costs of the defendant if successful in the defence.
An applicant for security for costs is required to prove that there is reason to believe that the plaintiff will be unable to meet an adverse costs order and it is not enough to merely point to a real or sensible risk: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [15-[17].
It is only if the applicant proves the threshold question, that the Court is required to consider the discretionary factors set out in r 42.21(1A) UCPR: Modakboard Australia Pty Ltd v Brady [2018] NSWSC 399 at [246].
The power to order security is discretionary and not automatic: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [20], [56]-[57] and [60]-[62]. The discretion is to be exercised judicially on the facts of the case: Oshlack v Richmond River Council (1998) 193 CLR 72 and Merribee Pastoral Industries v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502.
The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: Acohs Pty Ltd v Ucorp Pty Ltd (2006) 236 ALR 143 at [12].
[6]
Hercules' financial position
The evidence of Mr Smith discloses that Hercules operates three bank accounts with the Commonwealth Bank. Mr Smith provided the balance of those accounts in the period 30 June 2019 to the present on three specific dates. The most up to date balances for each account are:
1. $140,000 as at 31 January 2021;
2. $180,020.86 as at 31 December 2020; and
3. $50,584.77 as at 31 January 2021.
The draft financial accounts for Hercules as at 30 June 2020 demonstrate that Hercules:
1. had a turnover of approximately $5.7 million and returned a gross profit of approximately $2.1 million;
2. recorded a net profit of approximately $52,000;
3. has a net asset position of in excess of $1 million;
4. had as at 30 June 2019 and 30 June 2020 substantially more cash in the Bank than it held as at the times referred to in the preceding paragraph.
Gennie estimates that its costs of the proceedings for all past and future work will amount to approximately $220,000 inclusive of GST. It should be noted that Gennie is unlikely to obtain an order for security in this amount because it does not take into account the sum of $50,000 already provided by way of security, and it would be unusual to make an order in favour of an applicant for all of its estimated costs.
Put simply, Hercules currently has sufficient funds in the bank to meet the entirety of Gennie's costs if it was successful at trial.
I am not satisfied on the balance of probabilities that Gennie has proved that there is reason to believe that Hercules will be unable to meet an adverse costs order.
[7]
Discretionary matters
If I am wrong on the finding in the preceding paragraph, I would not exercise my discretion to make an order for security for costs for the reasons that follow.
First, an application for security for costs must be brought at the earliest available opportunity and there has been delay in Gennie seeking further security for costs. Gennie contended that the delay was the result of amendments to Hercules' claim, which had the effect of substantially altering the case that Gennie thought it was required to meet. I do not accept that submission. Whilst there have been some amendments to Hercules' claim, these are partially responsive to the filing of Gennie's cross-claim. The issues as they are now identified between the parties should have come as no surprise by reference to the authorities.
Second, the costs claimed by Gennie seem disproportionate to the amount that is in dispute. Gennie has estimated that its total legal costs will be in the vicinity of $220,000 to defend a claim against it that at its highest, equates to $342,000 plus interest and costs.
Third, the proceedings are at an advanced stage of preparation with the hearing listed in June 2021. An order for security at this late stage has the potential to stifle the proceedings.
Fourth, Gennie exercised self-help in calling on the bank guarantee, which Hercules' contends was in breach of the contract. In this way, Gennie is partially responsible for any impecuniosity of Hercules.
Fifth, Hercules has already provided $50,000 by way of security for costs.
[8]
Gennie's financial position
The evidence discloses that Gennie is the registered proprietor of a strata title building with a value of approximately $25 million, which is unencumbered. This position became clear after an exchange of correspondence between the parties as to the security held by the bank over this property. The later correspondence demonstrated that the security over the property had been released.
Hercules accepts that Gennie has this unencumbered asset but complains that Gennie has not disclosed its net financial position. Hercules contends that the Court should infer that Gennie has not exposed its net financial position because that would not have assisted its case: In the Matter of Metal Storm Limited (in liquidation) [2018] NSWSC 900 at [10].
In the circumstances, Metal Storm can be distinguished. On 8 February 2021, Hercules requested Gennie to provide it with "any evidence" of its ability to meet an adverse costs order. Gennie responded by establishing that it had an asset of substantial value as a way of demonstrating its solvency. In later correspondence, Hercules did not request that Gennie provide evidence of its net position. I do not think it would be fair to proceed on the basis that Gennie should have disclosed a matter that it was not asked to provide.
The extent of security sought by Hercules relating to the cross-claim was relatively modest, at $26,567.
I am not satisfied on the balance of probabilities that Hercules has proved that there is reason to believe that Gennie will be unable to meet an adverse costs order.
[9]
Discretionary matters
If I am wrong on the finding in the preceding paragraph, I would not exercise my discretion to make an order for security for costs for the reasons that follow.
First, the cross-claim is defensive in nature. In this case, the fact that there has been a significant proportion of the contract price that has been paid by instalments may necessitate an order for some refund to be made to Gennie. The cross-claim does no more than formalise Gennie's position.
Second, the cross-claim was commenced in May 2020 and as such, there has been a delay in Hercules' making an application for security.
[10]
Orders
The orders I make are as follows:
1. The defendant's Notice of Motion filed 15 December 2020 is dismissed.
2. The plaintiff's Notice of Motion filed 8 February 2021 is dismissed.
3. The costs of the Notices of Motion are costs in the cause.
[11]
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Decision last updated: 08 March 2021