LAWLESS -v- MACKENDRICK [No 3] [2011] WASC 298 (31 October 2011)

4 The matter was argued at a special appointment on 19 September 2011. Each side relied upon affidavit materials and written submissions filed earlier for the contested application.

5 The fifth defendant relied upon an affidavit affirmed by his solicitor, Michael James Sims, of 28 July 2011, seeking to establish the plaintiff's likely impecuniosity in the event of his failure at the trial.

6 The fifth defendant grounded his security application upon O 25 r 1 of the Rules of the Supreme Court 1971 (WA) (RSC). It was accepted that merely establishing a plaintiff's likely inability to meet an award of taxed costs made against him post trial, in the event of the plaintiff failing against the fifth defendant at trial, was insufficient. That stance was correct. RSC O 25 r 1 says that likely impecuniosity of a plaintiff will be insufficient to establish the basis for a security for costs order. The overall position is discretionary with the factors mentioned under O 25 r 2 being potentially relevant.

7 The security for costs threshold regarding corporate plaintiffs is less onerous for a defendant to surmount than for natural person plaintiffs (see s 1335 of the Corporations Act).

8 Observations in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, applied by Einstein J in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744, provide some helpful guidance in this area. There Beazley J said (197 198):

Notwithstanding the broad unfettered discretion with which the court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are:

(a) that such application should be brought promptly;

(b) that regard is to be had to the strength and bona fides of the applicant's case;

(c) whether the applicant's impecuniosity was caused by the respondent's conduct [the] subject of the claim;

(d) whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate;

(e) whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security;

(f) whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking;

(g) security will only ordinarily be ordered against a party who is in substance a plaintiff, and orders ought not be made against parties who are defending themselves and thus forced to litigate.

(citations omitted)

9 The fifth defendant did not place reliance upon RSC O 25 r 2(g). There is no unsatisfied costs order outstanding by the plaintiff to the fifth defendant, although that may not be the case for other parties in the action.

10 The fifth defendant's written submissions essentially ground his application for security on the following considerations:

(a) The plaintiff's case against the fifth defendant, even at a most cursory evaluation, can be assessed as so fragile that it is unlikely to be successful.

(b) The fifth defendant is a natural person personally bearing the costs of his defence of an action which involves four other defendants. The action had become protracted since being commenced by the plaintiff in February 2006.

(c) The plaintiff brings the action as assignee of causes of action from the corporation now in liquidation, Curtin Hotels Pty Ltd.

(d) There have been delays in the progression of the action through its interlocutory phases. The action still remains some distance from a trial. It was the plaintiff who has been responsible for most delays. The correlative financial cost burden placed on the fifth defendant over time was now a real concern.

(e) The fifth defendant's application for security is modestly framed in respect of a level of security sought. It was not seeking security for legal costs incurred to date. Security sought related only to the anticipated taxed costs of defending the matter from this point to the trial, for the fifth defendant. Nothing had been affirmatively advanced by the plaintiff against the reasonableness of the security amount as sought by the fifth defendant.

(f) An order for security now sought by the fifth defendant might be enforced, if needed, by a limited stay of the action made only against the fifth defendant. A limited stay would not carry any consequence of thwarting or stultifying the legitimate pursuit by the plaintiff of his other causes of action against the other defendants, in the unique circumstances of this action. Here the fifth defendant is sued for negligent misstatement as an employee of the third defendant with the third defendant concurrently sued. The third defendant is sought to be held liable in the same action, vicariously for the same misstatements alleged to have been made by the fifth defendant as the employee of the third defendant and in breach of asserted common law duties of care.

11 The third defendant is a corporation in liquidation. However, leave was granted to proceed against the third defendant. This was on the basis that there is an insurance policy that was held by the third defendant which responds to the plaintiff's negligence claim, in the event of liability ultimately being established against the third defendant. As to this, Newnes J, as he then was, in Lawless v Mackendrick [No 2] [2008] WASC 15 said at [39] and [55]:

1. It was common ground that the third defendant has a policy of insurance which responds to a claim of the nature the plaintiff seeks to establish and under which the third defendant will be entitled to be indemnified in respect of the plaintiff's claim if that claim is successful. The plaintiff has stated, and his counsel reiterated in the course of argument, that the plaintiff does not seek to participate in any distribution under the terms of the DOCA and accepts that his only recourse for recovery of any sum awarded to him in the action will be from the proceeds of the insurance policy. ...
2. I am satisfied that leave to proceed should be granted. There is an insurance company standing behind the third defendant and the plaintiff does not seek to go beyond the proceeds that will be payable under the insurance policy should his claim be successful. The DOCA contains, in cl 25, specific provisions which enable the plaintiff's claim to be pursued without significantly affecting the steps to be taken under the DOCA and its ultimate termination. The proceedings will not unduly interfere with the DOCA or affect the rights of the other creditors, and it is appropriate that the plaintiff's claim be determined by means of those proceedings.

12 Opposing the application, the plaintiff relied upon a written outline of submissions filed 30 August 2011 and his further affidavit sworn 31 August 2011 (filed on 15 September 2011). By that affidavit the plaintiff described himself as 'unemployed (as at the time of swearing this affidavit)'. However, at par 2 he referred to previous affidavits sworn 22 December 2008 and 21 January 2009 and deposed that, although at the time he swore the affidavit of 21 January 2009, 'I was out of work and living off Centrelink; I have since obtained employment and am earning an income which has enabled me to pay my debts including my legal expenses'.

13 The contradiction was raised during the course of argument. Counsel for the plaintiff indicated that the plaintiff's affidavit of 31 August 2011 had been erroneous in referring to the plaintiff as being unemployed. He sought leave for the plaintiff to swear a further affidavit correcting the error. I granted leave for that purpose on the basis that the plaintiff would also depose as to the precise nature of his present employment in the further affidavit. I proceed on the corrected basis as regards the plaintiff's state of current employment.

14 The position advanced in opposition to security sought by the fifth defendant may be summarised as:

(a) joining issue over whether or not the merits of the case against the fifth defendant are that marginal, with the plaintiff asserting that he holds a respectable case against the fifth defendant;

(b) contending that the application for security by the fifth defendant ought to have been brought earlier and the plaintiff would suffer 'real prejudice' were he now to be ordered to provide the level of security sought to the fifth defendant;

(c) allied to consideration (b) is a further contention that the action against the fifth defendant would be stultified by reason of an inability in the plaintiff to meet a security for costs order of the level now sought by the fifth defendant. The order, he asserts, would impose 'undue hardship on me and [would] stifle my claim' (par 6 plaintiff's affidavit of 31 August 2011).

15 I am, subject to one caveat, in no doubt that if the fifth defendant was (hypothetically) successful in defeating the plaintiff's common law negligent misstatement cause of action at trial, that the fifth defendant would hold only a remote prospect of recouping any award of taxed costs of the trial awarded in his favour against the plaintiff. My caveat would be as to a situation where the plaintiff was successful against the first, second or fourth defendant at the trial and, by that success, able to recover sufficient damages from the unsuccessful defendants to thereby achieve a financial position enabling him to meet a taxed costs of trial exposure to the fifth defendant. It is also theoretically possible, in the event of the plaintiff's success against other defendants, that the court might, as regards costs, be persuaded to issue 'Bullock' or 'Sanderson' type cost orders against the unsuccessful defendants as regards their responsibility for taxed trial costs of the fifth defendant being shifted to them.

16 The likelihood of the caveated eventualities coming to fruition is impossible to presently predict. An assessment would require more than a cursory evaluation of the ultimate merits of the plaintiff's causes of action against all defendants individually. Beyond that, there would be a need for further evaluations as to whether success at trial, then possibly on an appeal or appeals, would be accompanied by a tangible extraction of sufficient funds to satisfy the (assumed) damages award(s) adjudicated against those defendants.

17 For present purposes, I am satisfied the fifth defendant runs a substantial risk of not being able to tangibly recover any award of taxed trial costs made in his favour directly against the plaintiff at the end of the day, if the fifth defendant succeeds at the trial.

18 Next, it is my view that if the present common law negligent misstatement cause of action brought against the fifth defendant were ultimately made good at the trial, then upon the current state of the action, it will also follow correlatively, that the third defendant (the fifth defendant's employer) will as well be held liable to the plaintiff, on the basis of the same asserted conduct of the fifth defendant being attributed to the third defendant.

19 Whilst the third defendant is in liquidation there is the insurance policy which responds to the third defendant's potential liability. The policy will provide indemnification in the event that the plaintiff is successful in showing the third defendant is liable to him on the basis of the same negligent misstatements that are asserted against the fifth defendant. There cannot be a double recovery by the plaintiff as regards his losses.

20 Paragraphs 23 24 of the plaintiff's further reamended substituted statement of claim aver (as they have since 14 August 2009):

1. The fifth defendant ('Mulcahy') was employed by the third defendant at all material times in relation to the selling of commercial and rural properties and in February 2000, the third defendant was one of the estate agents engaged by the first defendants to find a purchaser for the hotel and the business, and was represented by Mulcahy in relation to the sale of the hotel and business.
2. On or about 18 February 2000, Mulcahy on behalf of the third defendant and acting within the scope of his employment as the servant and agent of the third defendant, orally represented to the plaintiff (representing Curtin) that the operators of York, Settlers and Castle hotels in York he showed to the plaintiff were trading profitably and that the hotel and the business were in the best location of all hotels in York.

21 Paragraph 23 is admitted by the third defendant: see par 23 of the third defendant's defence of 16 September 2009.

22 It was argued that the third defendant has joined issue by its pleaded defence, against par 24 of the further reamended substituted statement of claim. The paragraph is denied: see par 24 of the third defendant's defence.

23 But the blanket denial can be read as denying all things raised by par 24. There is no affirmative denial of authority of the fifth defendant in the third defendant's defence. The third defendant's defence, as I assess it, elsewhere accepts the fifth defendant's capacity as its employee, to render the third defendant vicariously liable for the fifth defendant's acts (see for example pars 27.2 and 27.3).

24 During argument, reference was made to pars 22 to 33 of the current iteration of the plaintiff's statement of claim. These contain the argued cause of action that is put against both the third and fifth defendants.

25 It is rarely appropriate (or feasible for that matter), on a security for costs application, to minutely assess the potential merits of a case that must ultimately be determined at a trial by the resolution of conflicting factual evidence. Accepting that conventional wisdom, the fifth defendant nevertheless asked me to quickly view the plaintiff's plea against it and the third defendant, contending that even the most cursory scrutiny reveals that the plaintiff's negligent misstatement case against the fifth defendant is 'fragile'.

26 The fifth defendant says that common law oral negligent misstatements contended against him were allegedly made in midFebruary 2000, now being over some 11 years ago. By itself, that observation would not present to me as an overwhelming consideration. But the fifth defendant proceeded from there to criticise the overall plausibility of the asserted two misstatements (under pars 24 and 25 contended for by the plaintiff), as well as an implied misstatement alleged as to the profitability of the business of the Imperial Tavern, York, by par 26. The peripheral relevance of another asserted misrepresentation as to the profitability of three other hotels at York at the time (i.e. hotels in York other than the Imperial Tavern being assessed for possible purchase by Curtin Hotels Pty Ltd) was highlighted.

27 These surrounding criticisms were made having regard ultimately to the asserted culmination under par 30 of the statement of claim. This contends for falsity in alleged misstatements by the fifth defendant (and thereby against the third defendant), in three respects, namely:

(a) the three other hotels in York referred to in par 24 above were not trading profitably (evidenced inter alia by the failure of all of them in 2000);

(b) the first defendants were and had been since 1997 trading at a substantial loss in the business in the hotel;

(c) the profitability of the business was not secure but on the contrary the business was unprofitable.

28 Further elaboration about par 30(b) and (c) emerges in the plaintiff's answers to particulars, given to the third defendant in June 2010, as regards the misstatement as to annual profit of the Imperial Tavern (at $120,000 per annum) and as to rental that was said to be paid by that business at $700 per week.

29 By answers provided to the third defendant, the plaintiff says of the representations allegedly made to him by the fifth defendant:

1. The plaintiff showed the said letter to the fifth defendant (Mulcahy) and said words to the effect that the first defendant says that he is making or expects to make $120,000 in profit. The plaintiff asked the fifth defendant whether that figure was true or not. The fifth defendant replied with words to the effect that if the Doctor (being the first defendant) says that then it must be true, that doctors don't tell lies or words to that effect. Mulcahy further said words to the effect that if the plaintiff had any doubts then the contract safeguards him against false and misleading representations being made by the sellers.
2. The plaintiff asked the fifth defendant how much rent was being paid. The fifth defendant said words to the effect that he didn't know and that he would find out. The fifth defendant went away for 5 to 10 minutes and came back and said words to the effect that he had just checked, and that it was $700 a week in rental that was being paid. The plaintiff asked if it was $35,000 a year in rent that was being paid or words to that effect, to which the fifth defendant replied yes, thereabouts or words to that effect.

30 The fifth defendant contended that the plaintiff's case ought be assessed as fragile, as it was clear from all this material that the fifth defendant had simply been passing on information to the plaintiff provided to him from other sources. That looks to be the case for the $700 per week rental figure statement, although I note that an ultimate source for the rental payment information provided to the fifth defendant under answer 2, is not stated.

31 However, as regards the profit figure of $120,000 (per annum) complained of, the position is open (as to its source of the information), at least on the present pleaded version of the plaintiff. The source issue will require a final evaluation at a trial. I note that the fifth defendant's defence puts these words the plaintiff attributes to him, at issue, for the purposes of the trial.

32 I detect an arguable 'push' emanating from the fifth defendant for the Tavern's sale, by reference to the pleaded assertion that the fifth defendant allegedly said 'doctors don't tell lies'. Furthermore, it seems that a reference to supposed safeguards in the contract as against the prospect of harm from any misleading representations, if made, by the vendors of the Tavern and business as to profitability seem, at this interlocutory stage, not to have ultimately proven protective to this particular purchaser of the hotel and business (i.e. for Curtin Hotels Pty Ltd).

33 The fifth defendant argued that prior to settlement on the respective acquisitions of the hotel and the business at the end of June 2000, that Curtin Hotels Pty Ltd had been provided with more accounting material from the first defendant for the Imperial Tavern business. This was material inconsistent with the profitability figure of $120,000 per annum. In argument counsel for the plaintiff took issue factually with that causation argument. He contended that the later financial information had not reached the plaintiff until some considerable time after the settlement on the acquisition at 30 June 2000. Again, this just highlights the disputed issue of fact which can only be reliably resolved at the trial.

34 My overview assessment is that presently that whilst not looking to be a strong case, the plaintiff, on paper at least, raises an arguable cause of action against the fifth defendant, and thereby also, against the third defendant on the very same alleged facts. That I assess to be particularly by reference to an element of 'push' to this purchaser concerning an alleged profit estimate of $120,000 per annum for the hotel business that it is asserted the firstnamed first defendant provided in a letter of 7 January 2000. The letter was to the first defendants' agent, Ms Groves. She in turn passed it to the plaintiff (see pars 8 and 9 of the current iteration of the statement of claim).

35 It is a factor against the application that the costs security sought is from an individual plaintiff, who presents as very financially constrained at this time. Furthermore the security is sought in 2011 in an action commenced in February 2006. These considerations as regards this plaintiff need to be weighed with considerable force, lest the plaintiff be denied in practical terms the fair opportunity he is entitled to seek a just resolution of his civil dispute at a trial. The court holds a discretion that must be carefully applied to the particular circumstances of the case at hand as regards any security for costs order. It is plain from O 25 r 1 that if a natural person plaintiff is involved, the proven impecuniosity of that plaintiff still is not of itself sufficient to justify the making of a security order.

36 As regards applicable legal principles, there appeared to be, from the plaintiff's and the fifth defendant's respective submissions, little dispute. I mention again Beazley J's observations in KP Cable Investments referred to earlier in these reasons.

37 In the end, I have reached the view that it is just overall that there be an order for security for costs in favour of the fifth defendant in the amount of $63,500 to be either paid into court or secured by bank guarantee and to be provided within 14 days, otherwise the plaintiff's action against the fifth defendant shall be stayed until security in the amount identified is so provided. My reasons for this are essentially fourfold.

38 First, I am not persuaded that the application is brought so late in the day as to prejudice the plaintiff's position, overall. The fifth defendant described the plaintiff's action as having moved with 'agonising slowness'. That description is apt. I have case managed the matter in the CMC List since March 2009. In that period I have personally witnessed many instances of default by the plaintiff through his solicitors in terms of not meeting courtimposed deadlines, or not complying with orders and directions. Some delays may be explicable as associated with the plaintiff's prior unemployment and hence his strained financial position in that period. But the plaintiff must carry the significant responsibility for the delays, which have blown out the progression of this matter and thereby caused costs over time to accumulate for all sides. Most recently, an expert report commissioned on the plaintiff's behalf, once it ultimately did emerge late, in 2011, carried manifest deficiencies. This gave rise to a successful interlocutory strike out application brought by the fourth defendant on 13 May 2011 against components (par 20A) of the plaintiff's pleaded case.

39 Sadly, the proceedings are still some distance away in my assessment from being ready for a trial. The plaintiff's house as regards the expert report is yet to be put in order.

40 To the extent that the plaintiff simply asserts he would not have incurred costs associated with bringing proceedings against the fifth defendant were an application for security to have been made earlier in a timely fashion (par 3), I do not accept the bare assertion. It seems to me much more likely that given the other causes of action against the vendors to Curtin Hotels Pty Ltd and that corporation's financial adviser or business broker (predominantly the first defendants and the second defendant), that this plaintiff would have proceeded against those defendants in any event once he took his assignment of the action from the purchaser corporation. The causes of action against the third and fifth defendants and the fourth defendant are discrete. However, as I assess the plaintiff's position, it is not possible to say there was an extra component of costs discretely incurred and possibly wasted in his pursuit of the fifth defendant.

41 Whilst I recognise and weigh into my assessment the stage of the litigation at which this application for security is brought by the fifth defendant, I am of the view that, by reason of the action's unacceptably slow progress, the application is not brought so late in the proceedings as to be unfair to the plaintiff. Fairness requires evenhandedness in the treatment of all parties not just to the plaintiff. That is particularly so in light of the next allied consideration.

42 Second, this action presents a unique feature, in that the plaintiff pursues not only a corporate employer of the fifth defendant (the third defendant), but also the fifth defendant, as the third defendant's employee and based essentially on the same underlying conduct. A cumulative personal pursuit of the fifth defendant was sought to be justified during argument upon the basis that the third defendant had denied par 24 of the amended substituted statement of claim, so that ultimately it might be held at a trial that the fifth defendant had acted outside the scope of his employment duties or responsibilities. But I assess that eventuality, by reference to the current state of the pleadings, as more than remote. The plaintiff holds and can viably pursue (because of a responsive insurance policy) the present cause of action against the third defendant (predicated upon the third defendant's alleged responsibility for the conduct of the fifth defendant in the course of his duties as an employee).

43 Assessing the pleadings as currently framed, if the plaintiff does succeed against the fifth defendant, he almost certainly will succeed against the (insured) third defendant and recover. Keeping the fifth defendant as a party in the litigation with the third defendant, the plaintiff seeks to expand his range of targets, as is his right. In concept, the plaintiff's pleadings display an arguable (though not necessarily strong, as I assess it) case against the third and fifth defendants. But, by s 66 of the Insurance Contracts Act 1984 (Cth), the third defendant employer is (in the usual course) prevented from seeking to onclaim any degree of indemnity or contribution from its employee for a vicarious exposure.

44 Here the plaintiff tactically pursues both the insured employer (third defendant) and its employee (fifth defendant) in the same proceedings. That being so, it is not unreasonable in my view to protect the natural person fifth defendant to some reasonable degree against what I assess to be a considerable out of pocket exposure against ultimate recovery of his taxed costs of the trial, in the event that he and the third defendant are mutually successful in defeating the plaintiff's case against them.

45 The plaintiff may still pursue essentially the same grievances against the insured third defendant employer, in the circumstance where the third defendant presents as viably insured against a liability if established at trial. The effect of a security order will not produce a stultification.

46 If the plaintiff wishes to pursue both the fifth defendant (employee) as well as the third defendant (employer) in respect of the same cause of action, arising out of one tranche of asserted representational conduct by the fifth defendant as employee, then a modest level of security for the uninsured fifth defendant's costs (if he wins) is not an unreasonable protection to render, bearing in mind the tactical advantage that is sought by the plaintiff but is not essential.

47 Third, my evaluation as to the appropriateness of a security order in favour of the fifth defendant is influenced by the fact that a stay by way of enforcement of the order will only be a stay of the action as against the fifth defendant. The limited stay will not inhibit the prosecution to trial of the plaintiff's other (assigned) causes of action against the other defendants, including as against the employer third defendant.

48 Fourth, there is a further aspect to the uniqueness of this action. Although the plaintiff is an individual suing in person, it is apparent that he is suing as the assignee of causes of action originally held by the corporation, Curtin Hotels Pty Ltd, now in liquidation. This is a corporation with which the plaintiff was once closely associated as sole director. The plaintiff sues as assignee from the liquidator of Curtin Hotels Pty Ltd (deed of 15 February 2006 - par 21 statement of claim). This is also apparent from pars 21 and 33 of the current iteration of the statement of claim. So the losses and damages now claimed are the losses allegedly first sustained by the corporation, not by this plaintiff personally, even though Mr Lawless appears to have been the moving hand behind the corporation before its liquidation.

49 But the fact that the causes of action pursued first manifest as those of a corporation is of some conceptual significance here. There is a recognised distinction as between the level of exposure of an insolvent corporation to a security for costs order, in contrast to the somewhat (lesser) exposure of an impecunious individual plaintiff (see s 1335 of the Corporations Act).

50 Had the present causes of action now raised against the third and fifth defendants been advanced by the insolvent Curtin Hotels Pty Ltd as plaintiff, it would have been more than probable in my assessment that an order for security would have been made against a corporate plaintiff. That would be the case, on my assessment, even had the corporation's position as plaintiff had been guaranteed by Mr Lawless, his own financial position being highly tenuous. Perfection of the assignment of the causes of action from the impecunious corporation to an impecunious individual ought not, in my evaluation, to insulate the eventual assignee who happens to be a natural person plaintiff, so as to confer an enjoyment of a more protected (lesser) exposure to providing security than the assignor, had the assignor corporation pursued the action.

51 In summary then, in the present case, the position established by the fifth defendant goes beyond making good a case of mere impecuniosity in this plaintiff. It extends to showing that the plaintiff has chosen to pursue the fifth defendant in circumstances where he holds a viable mirror cause of action against the fifth defendant's employer (the third defendant) with an insurance policy responding against any ultimate damages exposure.

52 The fifth defendant is a natural person who faces the concerning prospect of being out of pocket for his costs at the end of the day, in an action that has meandered, in the event that he should successfully defend at trial.

53 By doubling up on defendants in terms of the present attack against both employer and employee, the plaintiff has expanded the moment of the litigation. The effect of doing that renders the proceedings more complicated, expensive and timeconsuming. A convincing rationale for doubling up on the third and fifth defendants in this way has not been satisfactorily explained. In circumstances where this plaintiff has progressed his assigned causes of action at a painfully slow rate and it is still some distance from trial, the modest level of costs security now sought by the fifth defendant is, in all the circumstances, appropriate. That is particularly so where this plaintiff will not be thwarted from viably pursuing the same essential grievance against the fifth defendant's insured employer.

54 In all the circumstances then, I will order that unless within 14 days the plaintiff pays into court or secures by the guarantee of a banking or financial institution acceptable to the fifth defendant, an amount of $63,500 (GST inclusive) as security for the fifth defendant's costs of the trial of this action, the plaintiff's action against the fifth defendant only do be stayed until further order.

55 I am, prima facie, of the view that the success of the fifth defendant on this opposed application should be recognised by an order that the plaintiff pay the fifth defendant's costs of the application, which I would fix in accordance with the Consolidated Practice Directions 4.7.1 (item 2.4) in the amount of $1,782. But I will hear the parties about the final orders by submissions on the papers if necessary (with the plaintiff's submissions to be filed by no later than seven days after publication of these reasons and the fifth defendant seven days thereafter).