Liprini v Thirdi William Street Pty Ltd

Background

1. The Developer, the Builder and the Hydraulics Consultant claim that their total recoverable costs in the proceedings are in the order of $1,162,000. That amount is disputed by Ms Liprini. Attached (94528, pdf) to this judgment are three tables showing the principal differences between the parties. It will be necessary to say something more about the tables later in this judgment. It is sufficient for present purposes to observe that according to those tables the defendants' recoverable costs are estimated to range between approximately $465,000 and $1,162,000.
2. Ms Liprini's principal asset is a 99 percent share of lot 5 in the development. The remaining one percent is held by her partner, Mr James Clancy. Ms Liprini estimates her current equity in the property is about $634,000. She and Mr Clancy have also entered into a funding agreement with fifteen of the other lot owners who together own ten lots in the development. Under the terms of the funding agreement, the owners of each lot, including Ms Liprini and Mr Clancy (who are each jointly referred to as a "Funding Party") agreed to contribute to the cost of the proceedings in proportion to the number of Funding Parties. No Funding Party may withdraw from the agreement except with the unanimous consent of all Funding Parties (including Ms Liprini and Mr Clancy). Under cll 10.1 and 10.2, each Funding Party agree to pay their share of any costs orders against any of them. Under cl 10.3, each Funding Party agrees to contribute their share to any order for security for costs.

Relevant legal principles

1. Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 42.21(1) permits the Court to award security against an individual, but only where: (a) … a plaintiff is ordinarily resident outside Australia, or (b) … the address of a plaintiff is not stated or is mis-stated in his or her originating process, and there is reason to believe that the failure to state an address or the mis-statement of the address was made with intention to deceive, or (c) … after the commencement of the proceedings, a plaintiff has changed his or her address, and there is reason to believe that the change was made by the plaintiff with a view to avoiding the consequences of the proceedings, or (d) … (e) … a plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so, or (f) there is reason to believe that the plaintiff has divested assets with the intention of avoiding the consequences of the proceedings,
2. This rule reflects the general policy of an order for security that the real person for whose benefit the proceedings are brought ought not be entitled to take the benefit of the proceedings without having to bear the consequences if the proceedings are unsuccessful, but ought generally be permitted to pursue a claim if he or she is willing to bear those consequences.
3. If the requirements of UCPR r 42.21(1) are satisfied, the Court may take into account a broad range of matters in determining whether to order security. Those matters include, the merits and genuineness of the proceedings, the impecuniosity of the plaintiff and whether it is attributable to the defendant's conduct, whether an order for security would stifle the proceedings, the costs of the proceedings and whether there has been delay in making the application: see UCPR r 42.21(1A).
4. The Court may also order security in the exercise of its inherent power or, in the case of representative proceedings, in the exercise of the general power conferred by s 183 of the Civil Procedure Act 2005 (NSW) (CPA), which gives the Court power to "make any order that the Court thinks appropriate or necessary to ensure that justice is done in the proceedings". But those powers should not be used to undermine or circumvent the principles that apply to an order for security under UCPR r 42.21: see Mitchell v Roads and Maritime Services (now known as Transport for NSW) [2022] NSWSC 500 at [10] per Ball J, in relation to s 67.
5. It is common ground that none of the threshold requirements set out in UCPR r 42.21(1) is satisfied in this case and that any order for security must be made in exercise of the court's inherent power or under s 183 of the CPA.
6. Representative proceedings brought by an individual raise a particular problem so far as the policy behind an order for security for costs is concerned, since they are brought both for the benefit of the representative party who will generally have to bear the consequences of an adverse costs order and for the benefit of group members who will not.
7. Where the proceedings are funded by a litigation funder, a court will often be prepared to make an order for security on the basis that the proceedings, at least in part, are brought for the benefit of the funder and the funder should not be in a position where it obtains the benefit of the proceedings without itself being exposed to costs orders in the defendant's favour: see Mitchell v Roads and Maritime Services (now known as Transport for NSW) [2022] NSWSC 500. Even if the litigation funder has agreed to indemnify the representative party against adverse costs orders, an order for security will often be appropriate given that the defendant will generally have no right to recover costs directly from the litigation funder and it is to be expected in cases of that type that the adverse costs order will be met by the litigation funder and not the plaintiff.
8. In the case of unfunded representative proceedings, the position is less clear. There is some authority to suggest that the Court should not order security in those cases: see, for example, Turner v Tesa Mining (NSW) Pty Ltd (2019) 290 IR 388; [2019] FCA 1644 at [71] per Lee J. However, that approach has not been followed in other cases. For example, in Its Eco Pty Ltd v BPS Financial Ltd [2022] FCA 842, Derrington J ordered the provision of security where one of the representative parties was an individual. Of particular significance in that case was the fact that another of the representative parties was a corporation, that those who stood behind it were unwilling to expose their assets to an adverse costs order and they had not been shown to be without resources (at [61]). But his Honour also relied on a number of other discretionary factors which in New South Wales are encapsulated in UCPR r 42.21(1A) for ordering security including the fact that there had been no delay in making the application, there was no suggestion that the impecuniosity of the representative parties was caused by the respondents' conduct, the applicant's case was not strong and there was no evidence that an order for security would stifle the litigation.
9. In St Mary's Hog's Pty Ltd v HBCA Pty Ltd [2022] FCA 52, the first applicant was a corporate franchisee and the second and third applicants were its directors who had given personal guarantees in respect of the first applicant's obligations under a franchise agreement. The proceedings were not funded by litigation funders. Markovic J concluded that it was appropriate to order the applicants to provide security. In reaching that conclusion, her Honour pointed out that the corporate applicant did not have the funds to meet a costs order against it. Although the directors were personally liable for costs, the evidence was that they too were impecunious. There was no evidence concerning the financial position of other group members.
10. Markovic J accepted that in some cases the fact that the directors had personally undertaken to be responsible for costs may be a powerful reason for refusing security, but that each case must depend on its own circumstances: at [117]. In reaching that conclusion, her Honour cited with apparent approval the following passage from the judgment of Beazley JA in Prynew Pty Ltd v Nemeth [2010] NSWCA 94, where her Honour said: [45] … A defendant is a captive audience to a plaintiff's claim. In my opinion, the purpose of the security for costs jurisdiction would be rendered ineffective if a defendant sued by an impecunious company was denied security because, persons themselves impecunious, were prepared to offer to be responsible for the costs of the litigation. Correspondingly, if the principles that relate to exercise of the discretion where there is an impecunious co-plaintiff, also apply where an impecunious person agrees to be responsible for the costs of the litigation, the corporate plaintiff would be unfairly advantaged. Indeed, it would expose the captive defendant to a form of double jeopardy. [46] In short, I do not consider the position of an individual co-plaintiff to be analogous to the position of an impecunious shareholder, or other person interested in the litigation, who agrees to be responsible for the costs of the litigation.
11. Applying these principles, Markovic J thought that it was appropriate to order security in that case. It appeared that the applicants were impecunious. The group members were not prepared to agree to be liable for costs. Indeed, there was evidence that a number of them had indicated that they could not afford to do so. On the other hand, the evidence did not establish that the claim would be stifled if an order for security were made.

Consideration

1. In my opinion, the decisions in It's Eco Pty Ltd and St Mary's Hog's Pty Ltd are distinguishable from the present case. On balance, I am not satisfied that an order for security in this case should be made. Unlike the decisions in It's Eco Pty Ltd and St Mary's Hog's Pty Ltd, the only plaintiff is an individual. Ms Liprini owns real property in which she has significant equity. It is clear, therefore, that she will be personally liable for the consequences of an adverse costs order.
2. A significant proportion of the group members have also agreed to bear their share of an adverse costs order. All but one of them is an individual and each owns a lot in the development. It is true that the defendants could not recover from them directly. And it is also true that the financial position of each group member is unknown. But Ms Liprini and, if she were made bankrupt, her trustee in bankruptcy would be entitled to enforce her rights under the funding agreement. Each of the other Funding Parties at least stands to lose the townhouses they own in the development if they fail to pay their contribution to the defendants' costs. Therefore, in a real sense, they are at risk of losing substantial personal assets if they fail to meet an adverse costs order. An order for security in those circumstances is not consistent with the policy behind such an order.
3. In my opinion, it is also relevant that Ms Liprini has an apparently strong case against the Developer and the Builder. She has served the evidence on which she relies including expert evidence. That evidence strongly suggests that there are defects in the development and with the electrical distribution system in particular. If those defects exist, the Builder and the Developer are likely to be liable for them. It is true that the Builder and Developer have not yet served their list responses and evidence and their evidence may disclose that the claim is not strong as it appears. They may also have technical defences arising from the nature of Ms Liprini's rights. Even so, as things stand, the evidence suggests that Ms Liprini has a strong arguable case. That is one matter that the Court can take into account in ordering security under UCPR r 42.21(1A)(a). It is a matter properly taken into account on the current application.
4. The position is less clear in the case of the Hydraulics Consultant, since any claim against it involves establishing negligence. However, for the reasons I have given, I do not think it is in a sufficiently different position to justify an order for security in its favour.

Quantum of security

1. Having regard to the conclusions I have reached, it is not necessary to deal with the quantum of security. I should, however, say something about it in the event that I am wrong on the question whether security should be ordered.
2. As the annexure to this judgment indicates, the parties differ substantially on the applicants' expected costs of the proceedings. Sensibly, they suggested that, following the approach adopted by Barrett J in Fodare Pty Ltd v Shearn [2009] NSWSC 1140, the Court should split the disputed costs roughly down the middle.
3. However, as is apparent from the schedule, Ms Liprini submits that some costs should not be allowed at all. Those costs relate to lay evidence, expert evidence, a small amount for discovery and subpoenas and, in the case of the Hydraulics Consultant, the costs of preparing the Court book.
4. According to Ms Liprini, it would be possible for the Builder and the Developer to share the costs of experts, since they have a common interest in relation to whether the work was defective. Ms Liprini also submits that it should be unnecessary for any of the three defendants to call lay evidence. Similarly, Ms Liprini submits that it should be unnecessary for the defendants to incur costs in relation to discovery and for the Hydraulics Consultant to prepare a court book.
5. In general, I accept Ms Liprini's submissions in relation to expert evidence and the preparation of the court book. I do not accept the other submissions.
6. It is unclear to me why the Builder and the Developer could not share experts. It was submitted that the Builder may have a defence under s 18F of the HBA which is not available to the Developer. That section relevantly provides: (1) In proceedings for a breach of a statutory warranty, it is a defence for the defendant to prove that the deficiencies of which the plaintiff complains arise from - (a) instructions given by the person for whom the work was contracted to be done contrary to the advice of the defendant or person who did the work, being advice given in writing before the work was done, or (b) reasonable reliance by the defendant on instructions given by a person who is a relevant professional acting for the person for whom the work was contracted to be done and who is independent of the defendant, being instructions given in writing before the work was done or confirmed in writing after the work was done. However, there is no material before the Court that suggests that this defence may be available to the Builder, and such a defence seems unlikely when the relevant contract was a design and construct contract.
7. It is also unclear why the Hydraulics Consultant would need to prepare a court book and any involvement it may have in the preparation of the Court book is likely to be minimal. An allowance has already been made for briefing counsel. Consequently, the sum of $29,750 should be deducted from the amount claimed by the Hydraulics Consultant, with the result that its claim should be reduced to $315,114.
8. On the other hand, I do not think that it is possible at this stage in the proceedings to say that the Developer and Builder will not want to call any lay evidence or that there will be no discovery. Consequently, it is appropriate to make some allowance for those categories of cost.
9. Accordingly, in relation to the Developer's costs, as a starting point I would have deleted the items relating to the preparation of expert evidence to arrive at a figure of $228,100 and an adjusted figure for party/party costs of $171,075 and then taken the mid-point between the Developer's position and Ms Liprini's position to arrive at a rounded amount of $144,000.
10. In relation to the Builder's costs, I would have taken the mid-point of the two estimates and rounded the result to arrive at a figure of $330,000.
11. I would, however, have made two further adjustments to these figures. The likelihood is that the costs of the experts would be shared between the Developer and the Builder. An order for security should reflect that fact. Secondly, the amount allowed for expert fees, particularly when they are reduced by 75 percent and averaged, seem low to me.
12. Taking account of those matters, I would have attributed half the amount allowed for experts engaged by the Builder after averaging to the Developer, which would have the effect of increasing the award of security to the Developer by approximately $70,000 and decreasing the amount allowed to the Builder by a corresponding amount. I would then have added $20,000 to each of those totals. As a result, I would have concluded that the Developer was entitled to security of $234,000 and the Builder was entitled to security of $280,000.
13. In relation to the Hydraulics Consultants costs, I would have performed a similar calculation after deleting the item "Brief Counsel and prepare Court books" of $29,750 to arrive at a rounded figure of $226,000.

Orders

1. It follows from what I have said that the notices of motion filed on 13 October 2022, 20 October 2022 and 21 October 2022 should each be dismissed with costs.

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