Plaintiff v Defendant

1 The defendants seek an order that the plaintiffs provide security for the defendants' costs of the proceeding.[1]

2 In support of the application, the defendants have filed two affidavits of their solicitor, Mr Gregory Tye, sworn 20 May and 20 June 2014. In answer to the application, the plaintiffs have filed the affidavit of Mr Ronald Neil Harrop sworn 19 June 2014.

3 The Writ, with statement of claim endorsed, was issued on 7 March 2014 and served on 25 March 2014. The defendants entered an appearance and, on 8 May 2014, filed their defence. A Reply has recently been filed, although it had not, at the time of the hearing, found its way to the file.

4 The plaintiffs' claim relates to the sale by the plaintiffs to the defendants of certain businesses pursuant to Sale and Purchase Agreements entered into on 5 December 2008. The plaintiffs seek rectification of one of the Agreements and payment of monies alleged to be outstanding under both Agreements, predominantly in respect of adjustments concerning stock and other matters.

5 In their defence the defendants deny the breaches of the Sale and Purchase Agreements and deny the plaintiffs are entitled to further monies or damages under those agreements. Significantly, the defendants' response to the rectification claim, which turns on an arithmetical error in the addition of sums payable pursuant to one of the Agreements, is an admission of the error in the addition, and otherwise a denial of the existence of a mistake (mutual or unilateral) and the claimed right to rectification.

6 I have in recent decisions set out many (although not all) of the legal principles and factors relevant to applications for security for costs made under r 62.02 of the Supreme Court (General Civil Procedure) Rules 2005 and under s 1335 of the Corporations Act 2001 (Cth): see for example Colmax Glass Pty Ltd v Polytrade Pty Ltd,[2] and US Realty Investments LLC (No.1) v Need.[3]

7 It is not in dispute that there is credible testimony for reason to believe that the plaintiffs will be unable to pay the costs of the defendants if they are successful in the defence of the proceeding. Thus, the jurisdiction to award security for costs is enlivened. But the very facts which enliven the jurisdiction also provide a factor, and in this case a significant factor, against ordering security for the defendants' costs.

8 The factors that are relevant to the determination of this application are -

(a) There is no general disposition in favour of making an order for security once the jurisdictional threshold is passed. However, the impecuniosity of the plaintiffs is itself a discretionary factor and often the most significant factor: Arris v Express Interiors Pty Ltd (In Liq);[4]

(b) The burden rests on the defendants to persuade the Court that an order for security should be made; Livingspring Pty Ltd v Kliger Partners;[5]

(c) Whether the plaintiffs' claim is made bona fide and has reasonable prospects of success is a factor relevant to the exercise of the discretion. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the Court should proceed on the basis that the claim is both bona fide and has reasonable prospects: KP Cable Investments Pty Ltd v Meltglow Pty Ltd.[6] The Court should not go into the merits of the claim in detail unless it can be demonstrated that there is a high degree of probability of success or failure: Porzelack KB v Porzelack (UK) Ltd;[7]

(d) That the defendants have engaged in voluntary contractual relationships with the plaintiffs and that it was those contracts which give rise to the proceedings. At the time the defendants entered into the Sale and Purchase Agreements it considered it was financially prudent and worthwhile to do business with the plaintiffs. The substance of this factor is that the defendants have voluntarily assumed the risk that they will be sued by impecunious plaintiffs (assumption of risk factor);[8] and

(e) In exercising the discretion the Court must carry out a balancing exercise. It must weigh the injustice to the plaintiff if it is prevented from pursuing a proper claim by an order for security against the injustice to the defendants if no security is ordered and, at trial, the plaintiffs' claims fail and the defendants are unable to recover their costs: Tradestock Pty Ltd v TNT (Management) Pty Ltd.[9]

9 Other relevant factors, such as that an order for security would impose such a financial burden on the plaintiffs as to stultify or frustrate the litigation are not advanced by the plaintiffs in answer to this application.

10 In Mr Tye's first affidavit[10] he swears, on information and belief, as to the following matters:

(a) That as at October 2008 (that is before the entry into the Sale and Purchase Agreements) each of the plaintiffs were in financial difficulty and had sought further funding from the Commonwealth Bank as their financier to allow a continuation of trade. After a review of the operations of the plaintiffs, the Commonwealth Bank declined to provide any further finance;

(b) Information acquired by the defendants during the sale process showed that each of the plaintiffs traded unprofitably in or about December 2008 and that it was very likely the plaintiffs would not have been able to continue to trade on a solvent basis had the defendants not purchased the businesses, the subject of the claims in this proceeding;

(c) Importantly, the net proceeds of sale paid by the defendants to the plaintiffs under the Sale and Purchase Agreements were sufficient only to extinguish the debts of the plaintiffs as at December 2008 and no surplus funds have been paid to the plaintiffs; and

(d) So far as the defendants are aware, the only assets that were owned by the plaintiffs are the business assets which have been sold and, accordingly, the plaintiffs currently have no assets and carry on no business activities.

11 The factor which is most significant in this case is the assumption of risk factor, identified by McDonald J in Letore Pty Ltd v Associated International Finance Pty Ltd (Letore),[11] and followed in a number of cases since, including Denward Lane Pre-cast Panels Pty Ltd v Cornerstone Constructions Australia Pty Ltd (Denward Lane),[12] Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd (Industrial Conveying),[13] and Coca-Cola Amatil Victoria Ltd v PAA Enterprises Pty Ltd (Coca-Cola Amatil).[14]

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.[15]

14 In Industrial Conveying Robson J took this factor into account in refusing to grant security for costs.[16]

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.[17]

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.[18]

17 In addition to this factor there are other matters referred to by the plaintiffs which are, together, significant factors in the balancing exercise I must undertake.

18 The first is that there is a better than reasonable prospect that the plaintiffs' claim to rectification of the Sale and Purchase Agreements will succeed. That is because, in this case, the pleaded mistake is a simple error of addition of amounts comprising the purchase price, leading to an error of some $99,000. The essence of the response to that claimed mistake is a denial. If there was an answer in fact to support the denial it should have been set out in the defence. That it was not so set out weakens the answer to that aspect of the claim and leads me to conclude that, at this stage, the plaintiffs have a greater likelihood of succeeding in that rectification claim than the defendants have in resisting it. This has the consequence that there is at present a good prospect (pleadings have closed) that the plaintiffs will succeed on the rectification claim, with consequent costs being awarded, at least in part, in their favour.

19 The second matter that is relevant is that the principal of the plaintiffs' businesses before they were sold (Mr Harrop) was, under a written letter of employment, engaged by the defendants in the position of managing director of Harrop Engineering on a full time basis from the date of the Sale and Purchase Agreements, that is 5 December 2008. He continued to be employed in that capacity until 28 May 2013. Under the employment agreement he was subject to a restraint throughout Australia and New Zealand for a period of 12 months after termination of his employment (alternatively cascading periods of 9 months, 6 months or 3 months) from carrying on, advising, providing services to or being engaged, concerned, or interested in any business activity competitive with the business carried on by the company.

20 The significance of the restraint on the ability of Mr Harrop to engage in any business competitive with that of the defendants is that its effect is to prevent the plaintiffs either establishing or carrying on any business. Thus, the fact that they do not carry business is itself a consequence of the Agreements entered into which provide the basis for the claims.

21 The factor of significance in favour of ordering the plaintiffs to provide security for costs is their evident impecuniosity. There is no other factor of significance in favour of the grant of security.

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.

23 The last matter that is weighed in the scales against the ordering of security is the prospects of the plaintiffs succeeding in the rectification claim. I do not put great weight on this factor. But it is relevant and I take it into account.

24 The result is that the balance is weighed in favour of the plaintiffs and against the grant of an order for security for the defendants' costs. The onus is on the defendants and, in my view, they have failed to discharge that onus in this case.

25 For these reasons I conclude that this is not an appropriate case to order that the plaintiffs provide security for the defendants' costs of the proceeding.

ACN 006 577 162 PTY LTD (formerly HARROP ENGINEERING AUSTRALIA PTY LTD) as trustee for THE HARROP FAMILY TRUST

[2] [2013] VSC 311, at [14]-[22].

[3] [2013] VSC 590, at [18]-[38].

[5] [2008] VSCA 93; (2008) 20 VR 377, at [21].

[6] [1995] FCA 76; (1995) 56 FCR 189, 197.

[7] [1987] 1 All ER 1074 at 1077.

[8] See further below at 11.

[9] [1977] FCA 1; (1977) 14 ALR 52, at 56.

[11] Unreported, Supreme Court of Victoria, McDonald J, 28 May 1993, BC9303883.

[12] [2008] VSC 144, at [26].

[13] [2012] VSC 588, at [140]-[145].

[14] [2013] VSCA 135, at [6]-[9].

[15] [2008] VSC 144, [26].

[16] [2012] VSC 588, [145].

[17] [2013] VSCA 135, [6].