By a Notice of Motion filed on 7 December 2017 the plaintiffs seek security for costs against the defendant and also seek to strike out certain paragraphs in the defendant's cross-claim.
The application for security for costs is brought under both Uniform Civil Procedure Rule 42.21 and s 1335 of the Corporations Act 2001 (Cth).
On the defendant's cross-claim, the defendant is in the position of a plaintiff and the plaintiffs are in the position of a defendant. Rule 42.21(1)(d) provides that if it appears to the court on the application of a defendant that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and may order that the proceedings be stayed until the security is given. Section 1335 is to similar effect.
Rule 42.21(1A) contains a non-exhaustive list of factors to which the court may have regard in deciding whether it is appropriate to order security for costs.
Rule 14.28 of the Uniform Civil Procedure Rules 2005 provides that the court may order that any part of a pleading be struck out if the pleading:
1. discloses no reasonable cause of action… or
2. has a tendency to cause prejudice, embarrassment or delay in the proceedings, or
3. is otherwise an abuse of the process of the court.
[3]
The Pleadings
The plaintiffs' claim is set out in the Amended Statement of Claim filed on 29 March 2017. It alleges that the plaintiffs agreed to provide radio advertising to the defendant and agreed to provide it on credit. The agreements were in writing. The services were provided and invoices were issued.
The first plaintiff claimed judgment in the sum of $52,233.44. The second plaintiff claimed judgment in the sum of $42,237.65. The third plaintiff claimed judgment in the sum of $51,605.38.
The defence to that pleading is contained in the Amended Defence filed on 3 May 2017. The defendant alleged that a representation was made that the plaintiffs' advertising campaign would increase the defendant's sales by approximately 30%. The defendant alleged that it suffered damages as a result of misleading or deceptive conduct in the making of the representation. In the alternative, it was pleaded that the representation was a collateral contract.
On 4 December 2017 the defendant filed a cross-claim against the three plaintiffs, as cross-defendants. This basically recited the matters in the defence regarding a representation, and claimed damages for misleading or deceptive conduct and/or breach of contract. The damages were alleged to be firstly, payments to the plaintiffs on invoices rendered of $280,933.36, and secondly, damages for failure to increase the sales of the cross-claimant by the promised 30%.
[4]
Security for Costs - Plaintiffs' Evidence
The plaintiffs relied upon two affidavits by their solicitor Mr Taylor dated 7 December 2017 and 8 March 2018. The first affidavit showed that the defendant had a paid up share capital of $100 and owned no real property in New South Wales. The evidence also showed that the defendant was subject to a judgment debt in favour of an unassociated third party and had made application to pay that judgment debt by instalments.
Mr Taylor gave evidence, based upon his training and experience, about the likely amount of costs involved in defending the defendant's cross-claim. He estimated the plaintiffs' total past and future costs of the cross-claim at $77,200. Security was sought in the amount of $50,000.
The judgment obtained by the unassociated third party against the defendant was put into evidence. It was a judgment for $209,033.88 given on 7 September 2017.
[5]
Security for Costs - Defendant's Evidence
The defendant relied upon an affidavit by Mr Mark Hanna dated 21 March 2018. Mr Hanna is a director of the defendant.
He annexed Business Activity Statement documentation to show the following:
PERIOD TOTAL SALES REFUND FROM TAX OFFICE
1/7/16 - 30/9/16 $1,314,635 $46,925
1/10/16 - 31/12/16 $1,692,542 $82,862
1/1/17 - 31/3/17 $1,206,666 $57,112
1/4/17 - 30/6/17 $1,377,549 $77,569
1/7/17 - 30/9/17 $1,575,646 $91,314
1/10/17 - 31/12/17 $1,021,164 $72,590
[6]
Mr Hanna also annexed a Profit and Loss Statement for the 18 months between July 2016 and December 2017. Total sales were $8,633,553.42. Cost of sales was $5,144,358.95, leaving a gross profit of $3,491,801.97. Expenses of $3,304,083.60 were then deducted, leaving nett income for that period of 18 months of $187,718.37.
A balance sheet as at 31 December 2017 was also annexed. It showed a nett credit in bank accounts of only $6,046.01. However, total accounts receivable were $1,439,497.83. After taking into account work in progress and other inventory assets, total current assets were $2,496,802.90. Total current liabilities were $2,429,280.15. Thus there was only a slight balance of current assets less current liabilities.
Mr Hanna also annexed a bank statement from a Westpac Business Cash Reserve account which showed a balance as at 28 February 2018 of $165,770.08. Mr Hanna said that this was a term deposit account in which there had been more than $160,000 since 1 July 2017. He said that the defendant had readily accessible funds from this account, as well as from other trading accounts and facilities.
Mr Hanna was not cross-examined on his affidavit.
[7]
Security for Costs - Consideration
Counsel for the plaintiffs submitted that I should not accept the evidence of Mr Hanna as there were some features of his evidence which appeared to be inconsistent with the balance sheet of the company. That submission may have had some force if Mr Hanna was cross-examined about what were submitted to be inconsistencies. However, in the absence of cross-examination, there is no reason not to accept his evidence.
The defendant company appears to be a viable going concern which is generating significant sales. It appears to be profitable and to have liquid assets from which it could satisfy any costs order, if one were made against the defendant on its cross-claim.
I am not satisfied on the facts that the defendant/cross-claimant, being a corporation, will be unable to pay the costs of the plaintiffs/cross-defendants if ordered to do so. For that reason I will dismiss that part of the motion.
[8]
Strike Out Application
The written submissions for the plaintiffs point out that the written agreements between the parties provided that they constituted the entire agreement between the parties in relation to supply of both advertising services and credit.
In Hoyt's Pty Limited v Spencer 27 CLR 133 at 139 Chief Justice Knox said:
"A distinct collateral agreement, whether oral or in writing, and whether prior to or contemporaneous with the main agreement, is valid and enforceable even though the main agreement be in writing, provided the two may consistently stand together so that the provisions of the main agreement remain in full force and effect notwithstanding the collateral agreement."
In Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26 at [242], the following was said:
"For a statement to form the basis of a collateral contract, the statement must be 'promissory and not merely representational'. The statement will be promissory if it was 'reasonably considered' by the person to whom it was made as 'intended' to be a contractual promise… The relevant 'intention' of the parties is to be judged objectively, that is, 'deduced from the totality of the evidence' by reference to what a reasonable person in the position of the parties would have understood."
Paragraph 15 of the Cross-Claim pleads that the representation that the marketing campaign would increase the sales of the cross-claimant by 30%, was made in oral conversations between the parties. Paragraph 5 pleads that the cross-claimant, after the making of that representation, engaged the cross-defendants to supply an advertising campaign. Paragraph 15 of the Cross-Claim pleads that the representation was a material term of the advertising campaign. Paragraph 5 of the Cross-Claim pleads that the advertising campaign was constituted by the written credit agreement and the written advertising agreement.
There are thus problems in understanding how the oral representation could form a material term of the two written agreements, given that those agreements recite that the entire agreements are in writing.
However, the Amended Defence pleads the effect of the oral representation in a different way. Paragraph 7(i) of the Amended Defence pleads that the representation was a collateral contract.
It is unfortunate that the pleaded legal effect of the representation differs between the Amended Defence and the Cross-Claim. However, since the allegation of collateral contract has been raised in the Amended Defence, I do not think that the defendant/cross-claimant should be shut out from pleading a contractual claim based upon the representation. It may well be that it cannot succeed as a matter of law in arguing that the representation was a material term of the written agreements. However, when the defendant has also pleaded that the representation formed a collateral contract, that does not seem to infringe the rule in Hoyt's Pty Limited v Spencer.
While that part of the motion which seeks to strike out paragraphs 15-17 of the Cross-Claim has some force, I decline to order a strike out, as the defendant/cross-claimant clearly has an alternative legal argument based upon the representation, to the effect that it formed a collateral contract rather than a term of the main contract.
The defendant/cross-claimant might reflect upon whether it would be prudent to seek leave to amend the cross-claim to bring it into line with the way in which the contractual effect of the representation is pleaded in the Amended Defence.
[9]
Costs
If the material annexed to the affidavit of Mr Hanna had been provided earlier to the plaintiffs, they could well have made a different decision as to whether to apply for security for costs.
Further, the inconsistency between the way in which the effect of the representation was pleaded in the Amended Defence, as opposed to the Cross-Claim, has meant that the plaintiffs had an arguable case for a strikeout of part of the cross-claim.
I have come to the view that the plaintiffs should not be penalised, both because the defendant did not supply evidence about its financial position earlier, and further because the defendant has filed a cross-claim which differs from the way in which its claim was put in the Amended Defence.
For those reasons, I find that the appropriate costs order is that the costs of the motion are to be costs in the cause.
[10]
Orders:
My orders are:
1. Plaintiffs' Notice of Motion filed on 7 December 2017 is dismissed.
2. Order that the costs of the Notice of Motion are to be costs in the cause.
[11]
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Decision last updated: 03 April 2018