Whether IEPL assumed the risk of Mecrus' poor financial position
68 Where it may be said that a defendant voluntarily assumed the risk of a corporate plaintiff's financial position it may be unfair to order security for costs: see Letore Pty Ltd v Associated International Finance Pty Ltd (Unreported, Supreme Court of Victoria, McDonald J, 28 May 1993, BC9303883); Denward Lane Pre-Cast Panels Pty Ltd v Cornerstone Constructions Australia Pty Ltd [2008] VSC 144 at [26] per Hansen J; Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd [2012] VSC 588 at [140]-[145] per Robson J; Coca-Cola Amatil Victoria Ltd v PAA Enterprises Pty Ltd [2003] VSCA 135 at [6]-[9] per Buchanan JA; Harrop Engineering at [11]-[16], [22] per Derham AsJ.
69 In Harrop Engineering at [12]-[16] Derham AsJ reviewed the authorities and explained:
[12] In Letore, McDonald J considered it a relevant consideration that the defendant had engaged in a voluntary contractual relationship with the plaintiff and that it was that contract which gave rise to the proceedings. His Honour considered it reasonable to assume that at the time the defendant entered into the contract it considered it was financially prudent and worthwhile to do business with the plaintiff. This factor weighed against an order for security for costs.
[13] In Denward Lane, Hansen J identified this factor in the following terms (although it appears not to have been given much weight in the circumstances of that case):
It may be assumed that the defendant considered the plaintiff to be an appropriate company to engage for these purposes, which must have included an assessment of the plaintiff's financial and managerial ability to perform the agreement. Having done so it is relevant that it is under the very agreement thus entered into that this litigation arises.
[14] In Industrial Conveying Robson J took this factor into account in refusing to grant security for costs.
[15] In Coca-Cola Amatil, the plaintiff (below) had submitted that as Coca-Cola Amatil had chosen to deal with a company, it should be limited to the resources of the company to satisfy any order for costs it might obtain. The judge who heard the application accepted this ground, saying:
Now, that falls fairly and squarely within the principle of what Justice McDonald was talking about in the Letore case. It seems to me that the defendant voluntarily entered into a commercial arrangement with a corporation. Well, here even more so. Not only did they enter into this arrangement, they induced this arrangement. But for this arrangement they would have been dealing with a natural person because the exact same services were being provided as I understand it by Mr Andrew through the corporate structure. And if it weren't for that and there had been a similar contractual arrangement for these sorts of services and there had been an alleged breach, it would be Mr Andrew alone who would now be the plaintiff and there wouldn't be an opportunity for the defendant to seek security for costs.
[16] The Court of Appeal (Callaway, Buchanan and Eames JJA) concluded that a refusal by the primary judge to order security for the defendant's costs on the basis that included this factor did not disclose any error of principle in the exercise of the judge's discretion.
(Citations omitted.)
70 Derham AsJ concluded at [22]:
On the other hand, the assumption of risk factor weighs against the ordering of security, and weighs, in my view, heavily. It weighs heavily because when the defendants entered into the Sale and Purchase Agreements they knew of the impecuniosity of the plaintiffs and should be taken to have assumed the risk that if proceedings were commenced by the plaintiffs to enforce the Agreements, the defendants would be sued by impecunious plaintiffs. It is also relevant because it is out of the very Agreements under which the businesses were acquired that the plaintiffs sue the defendants, and do so in circumstances where they, the defendants, have effectively restrained the principal of the plaintiffs from conducting business through the plaintiffs.
71 The respondents did not argue against the principle underpinning this line of authority only that arguing it does not apply on the facts of the present case. I accept that the facts in Harrop Engineering (and those of the cases referred to) are different to the facts in the present case. In Harrop Engineering the defendant was aware of the plaintiff's financial difficulties prior to entry into the relevant contract, and the defendant's conduct and the nature of the transaction meant that the plaintiff was completely unable to continue its business as a going concern. In comparison, as the respondents contend, Mecrus was established in or around 1999 and until 2004 it operated a steam plant and bottling operation. Mecrus does not suggest that it was in financial difficulty at the commencement of the Agreement, and in 2004 it had other business interests which were not related to or dependent on the IEPL parties. Mecrus still has other business interests and Mr Richards deposes that it continues to be profitable, although its revenue is only 30% of what it was when the Agreement was on foot.
72 Against this, I note that the IEPL parties are substantial and Mecrus is a much smaller company. The Agreement, which has some features of a joint-venture, involved Mecrus taking a sub-lease of the Briquette Plant for the limited term of the Agreement, rebuilding the Plant at a cost of $3 million to the ultimate benefit of the IEPL parties, and then manufacturing briquettes for IEPL for the fixed term of the Agreement. It is significant that throughout the relevant period, including at the time of negotiation of the Agreement, Gordon Carter was a director of Mecrus and each of the IEPL parties.
73 I infer that the IEPL parties knew Mecrus' financial position, including that it was required to borrow approximately $3 million to rebuild the Briquette Plant and that 60 to 70% of Mecrus' revenue and profit would come from its operation of the plant. They must have known that once the Agreement came to an end Mecrus would be unable to manufacture briquettes, and that it would lose in the order of 70% of its revenue at the same time as it would be forced to pay substantial redundancy payments. The respondents submit that they had good grounds to believe that Mecrus was a diversified and financially stable corporation with substantial financial backing, but in my view they sought to overstate Mecrus' financial position at the time. It is likely that they understood some of the difficulties that Mecrus would face at the end of the Agreement.
74 I assume that when the respondents entered into the Agreement with Mecrus they considered it was financially prudent and worthwhile to do so. The claims in the proceeding arise directly out of the Agreement and a relevant factor to be taken into account is the IEPL parties' assumption of a risk that if Mecrus commenced proceedings to enforce the Agreement it might have difficulties in meeting an adverse costs order. While in all the circumstances I do not see this as a strong factor, it points away from an order for security for costs.