Plaintiff v Defendants

Supreme Court of Victoria|2014-12-18|Before: DIXON J

PRACTICE AND PROCEDURE - Amendment of pleading - Leave sought to amend statement of claim - Plaintiff claims reputational damage from conduct of defendants that was misleading or deceptive - Statements posted on product review website by defendants - Whether conduct in trade or commerce - Whether adequate cause of loss and damage from conduct pleaded.

PRACTICE AND PROCEDURE - Security for costs - Plaintiff a corporate trustee of a unit trust - Enforcement of any right of indemnity against trust assets uncertain - Risk that plaintiff unable to pay costs on demand - Whether persons standing behind plaintiff taking benefit of proceeding should put up security - No risk of stultification - Merits of claim - Delay - Security ordered for future costs only - s 1335(1) (Cth), R 62.02

1 The plaintiff sought leave to amend its statement of claim. It sought to plead two new causes of action against the first defendant arising from two publications by the first defendant on the website www.productreview.com.au that occurred on 2 June 2011 and 11 December 2011. The plaintiff alleged that the first defendant contravened s 18 of the Australian Consumer Law by engaging in misleading or deceptive conduct in trade or commerce by those publications. The first defendant contended that the allegation that the publication was in trade or commerce was untenable and no arguable cause of action was disclosed.

2 The publications were in the nature of a critical review of the services provided by the plaintiff. The publication of 2 June 2011 read:

We have had to deal with these builders for two years to get our house built to lock up. We are still waiting for works to be completed so the house is totally sealed up. They have had so many staff resign and we are on the 4th supervisor, we don't even know who to communicate with anymore. The sales person sells the dream and the office administrators kill it. Responses are always in their favour and their office staff are rude and abrupt. We tried to cancel our contract prior to works beginning and was flatly refused. We have spent thousands of dollars outside of the money we have paid Clarks to fix problems they have left behind and now we need to spend thousands more because they have tricked us into signing an amended plan that leaves yet more work for us to do for them! We would not recommend these builders to anyone we like. They not only rip off and stress out their clients, they must treat their sub-contractors the same way because they don't seem to hang around either.

3 The second publication on 11 December 2011 was similar in nature. It read:

We have had to deal with these builders for nearly three years to get our house to lock up! The works are completed so the house is totally sealed up and we can do the fit out - mostly, anyway. We have a leaky roof and gutters and we have probably spent around $25000.00 on fixing the framework and floor levels amongst many other things. They have had so many staff resign over this period, it's ridiculous. The only time you hear from them, and consistently hear from them, is when they want money. We are never advised when the tradespeople are coming or going, for that fact. Our lives have been put under so much stress dealing with these careless people.

4 The first defendant contended that the alleged conduct was 'in respect of trade or commerce' rather than 'in trade or commerce'. She relied on an oft-quoted passage from Concrete Constructions (NSW) Pty Ltd v Nelson:[1]

It is plain that s 52 was not intended to extend to all conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purposes of, its overall trading or commercial business. ... The reference to conduct 'in trade or commerce' in s 52 can be construed as referring only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character.

5 The first defendant submitted that she was not involved in any trading or commercial business and was a domestic homeowner who had previously been involved with the plaintiff in respect of the plaintiff's trade or commerce. She submitted, relying on Hearn v O'Rourke[2] that the correct approach was to determine whether or not the relevant conduct could, according to ordinary usage, be described as having occurred in the course of dealings which, of their nature, were of a trading or commercial character. Not only was the first defendant not engaged in any commercial activity, but the posting on the internet of a statement was not conduct in the course of dealings which of their nature bore a trading or commercial character; it simply represented ex post facto complaints by a consumer about the plaintiff's services.

6 The plaintiff submitted that the fact that statements were made by a person who was not herself engaged in trade or commerce was not determinative. In Fasold v Roberts,[3] Sackville J held that public statements made by a person not engaged in trade or commerce himself or herself, may be made in trade or commerce if designed to encourage others to invest, or continue investment in a particular trading corporation.[4] Sackville J's statement was approved by the High Court in Houghton v Arms.[5] The High Court stated:

Statements made by a person not engaged in trade or commerce may answer the statutory expression if, for example, they are designed to encourage others to invest, or to continue investment, in a particular trading entity.

7 More recently, in Seafolly Pty Ltd v Madden[6] the respondent considered that the applicant had copied her swimwear designs and, in response, posted comments and photographs on her Facebook page. She was mistaken. The applicant sued for damages for a contravention of s 52. Tracey J upheld the claim stating:

... the making of statements which are intended to have an impact on trading or commercial activities, even if made by a person not engaged in the relevant industry, may bear the necessary trading or commercial character.[7]

On appeal, the Full Federal Court held that there was no error in this finding.[8]

8 Seafolly is distinguishable from the present circumstances. There, the parties to the proceeding were commercial competitors and the subject matter of the publications concerned ownership of intellectual property. Here, the critical feature of the publications on which the plaintiff relies is whether, broadly, the statements made by the first defendant were designed to encourage others not to transact with the plaintiff by engaging it as a builder.

9 The plaintiff contended that the design or intention of the first defendant was focused, not on any of her own activities that might be the expression of her private opinions, but on the plaintiff's commercial activities and that the focus of her conduct was arguably within the character of an aspect or element of trading or commercial activities or transactions.

10 The High Court has recently restated in Google Inc v Australian Competition and Consumer Commission[9] that s 18 of the Australian Consumer Law is not confined to conduct which is intended to mislead or deceive. In any event, in that context the first defendant's design or intention is not relevant. In Google, Hayne J cautioned against melding these two issues of conduct and characterisation, stressing that describing the offending conduct as 'making a misrepresentation' is distracting and confusing. Hayne J expressed this caution because neither knowledge of contravention nor intention to contravene is an element of misleading or deceptive conduct. Hayne J also emphasised that any case concerning misleading or deceptive conduct is concerned with the application of a statutory text, expressed in general terms, to particular facts and each case must be understood by reference to the statutory text and the particular facts that were identified as relevant to the application of that text. Hayne J said:[10]

The generality with which s 52 was expressed should not obscure one fundamental point. The section prohibited engaging in conduct that is misleading or deceptive or is likely to mislead or deceive. It is, therefore, always necessary to begin consideration of the application of the section by identifying the conduct that is said to meet the statutory description 'misleading or deceptive or ... likely to mislead or deceive'. The first question for consideration is always: 'What did the alleged contravener do (or not do)?' It is only after identifying the conduct that is impugned that one can go on to consider separately whether that conduct is misleading or deceptive or likely to be so.

11 There are two relevant issues, one, what was the conduct that was alleged by the plaintiff and two, how was it to be characterised?

12 The plaintiff alleged that the first publication conveyed five representations, each expressed as a representation of an existing fact, and that as it was published on the product review website the representations were designed to discourage others from entering into relations, which I take for the purposes of this application to mean entering into building contracts (commercial transactions), with the plaintiff. In addressing the first question of what the alleged contravener did, the question might be whether the first defendant expressed genuinely held opinions or misrepresented existing facts. The distinction is relevant but this issue was not addressed in argument and I say no more. What was alleged is that the first defendant's conduct was constituted by making five misrepresentations of fact.

13 The questions of whether the publication bore the meanings pleaded by the plaintiff, and whether the first defendant's conduct, in publishing those misrepresentations, was designed to discourage others from entering into relations with the plaintiff are questions of fact to be determined at trial by the tribunal of fact. Findings in favour of the plaintiff on these questions might enable a court on the evidence at trial to conclude that the conduct of the first defendant was conduct in trade or commerce. The critical question on this application is whether the publications, assuming they were reasonably capable of being understood in the eyes of the ordinary, reasonable reader to have conveyed the pleaded representations, were reasonably capable of being considered, by the tribunal of fact, to be designed to discourage others from entering into relations with the plaintiff. There is a further question that I will note but defer until later in these reasons. Were the pleaded representations reasonably capable of being considered, by the tribunal of fact, to be defamatory of the plaintiff?

14 The first defendant's contentions that the conduct could not be in trade or commerce, if successful, could deprive the plaintiff of the right to have its claim tried by a court. In those circumstances, I ought only accede to that submission if it is particularly clear that a tribunal of fact could not reasonably conclude that the publication was designed to discourage others from entering into relations with the plaintiff.[11]

15 Given that the plaintiff's misleading and deceptive conduct claim is analogous to a claim in defamation, whether the publication conveyed the misrepresentations that were defamatory of the plaintiff as alleged may be approached in the same way as the questions of whether a publication bore the meanings alleged by a plaintiff, and whether the publication, by those imputations, was defamatory of the plaintiff. The question is how the publications would have been understood by the ordinary, reasonable reader.

16 In Mooney v The Age Company Ltd,[12] Kaye J described the character of the ordinary, reasonable reader:

The attributes ascribed by the law to the 'ordinary reasonable' reader (or listener) are well known, and are not in dispute. Such an hypothetical person is described as someone who is not 'avid for scandal', and who is neither 'unusually suspicious nor unusually naive'. Equally, the hypothetical 'ordinary reasonable' reader has been described as an ordinary person, who does not live in an ivory tower, and who reads between the lines in light of his or her general knowledge and experience of worldly affairs. Thus the ordinary reasonable reader does engage in a degree of loose thinking. In this respect, it is important to bear in mind that the ordinary reasonable reader is a lay person, and not a lawyer, and such a person has a much greater capacity for implication than a lawyer. Similarly, the ordinary reasonable reader will 'read casually and not expecting a high degree of accuracy'. On the other hand, it is necessary to bear in mind the distinction between the reader's understanding of what the article is stating, and a judgment or conclusion, which the reader may reach as a result of his or her own beliefs and prejudices, after reading the article; the defamatory quality of the article is to be determined by the former, and not the latter, proposition.

17 The publications in question were made on a product review website, which, for present purposes I assume is, or is likely to be, read by potential consumers of services of companies that may include the plaintiff. On the one hand, the purposes of such websites may be to enable and encourage consumers to let off steam and to express opinions. On the other hand, their purpose may be to inform and educate consumers with a view to influencing any decision to enter into commercial relations (contract with) a supplier. The evidence that may be led at trial concerning the website and whether that evidence informed the question of the first defendant's design or intent will inform the tribunal of fact in its determination. Thus, these questions are for a trial. Further, it is a question for the tribunal of fact to interpret the statements made by the first defendant and draw such inferences as properly may be drawn from them in the context of the evidence adduced at trial about the nature of the first defendant's conduct, her design or intention and whether the statements caused reputational damage.

18 Although the form of the pleading may not have teased out the true nature of the conduct alleged, it will be open to the tribunal of fact to apply the ordinary reasonable reader test to the publication to determine whether the publication conveyed the misrepresentations alleged. I am not persuaded that, as presently informed, it is open to me to say that it is not open to the ordinary reasonable reader to reach the conclusion that the first defendant's conduct was designed to discourage others from entering into relations with the plaintiff. I would not refuse leave to the plaintiff to amend its statement of claim on this basis.

19 The second basis for the first defendant's challenge to the amendment was that no causal connection has been pleaded between conduct in trade or commerce, and loss and damage suffered by the plaintiff. In this case, the plaintiff must allege a connection between a lost or damaged trading reputation (for that, counsel informed me, was the loss suffered) and the defendants' conduct. As noted above, a key issue for the tribunal of fact at trial that must be properly pleaded is whether the pleaded representations are reasonably capable of being considered to be defamatory of the plaintiff. Although the plaintiff alleged elsewhere in its statement of claim that it has been severely injured in its reputation and standing and has thereby suffered loss and damage, that allegation has not been made in connection with the proposed causes of action under s 18 of the Australian Consumer Law. In respect of those causes of action, the plaintiff did no more than allege that it has suffered loss and damage with no particulars provided.

20 It is well settled that a plaintiff must allege and prove that the loss or damage claimed to have been suffered (whatever that might be) was caused by conduct in breach of the Act.[13] Commonly, in a misleading and deceptive conduct action the nexus between conduct and damage is established by proof of reliance. No nexus of any sort is here pleaded.

21 In reply, the plaintiff submitted that the pleading could be amended by adding the words 'damage to reputation' or something similar to the paragraphs alleging loss and damage suffered by the plaintiff. The plaintiff's suggestion is inadequate to address the first defendant's objection. The defendants' alleged misrepresentations are not directed at the plaintiff's capabilities to conduct a domestic construction business, but could be thought of as critical of the plaintiff's business practices in connection with its domestic construction business. However there is no pleaded connection between the misrepresentations alleged and any loss or damage, and simply adding the words 'damage to reputation' or something similar to the paragraphs alleging loss and damage could not make that connection.

22 Leave to amend the statement of claim in the form proposed is refused.

23 The remaining question is whether I should permit the plaintiff a further attempt at properly pleading the claim it seeks to make. Although the first defendant put some cogent submissions about the delay she has endured while the plaintiff seeks to plead its claim, I will grant the plaintiff one further opportunity to plead a tenable claim in misleading and deceptive conduct. The plaintiff's application for leave to amend will be dismissed with costs but without prejudice to the plaintiff serving on the defendants, should it be advised to do so, by no later than 9 February 2015, a proposed further amended statement of claim. I will adjourn the proceeding for directions on 27 February 2015 and direct that the defendants communicate in writing by 23 February 2015 whether they oppose the proposed further amended pleading. If leave to amend is still opposed, I will direct that the parties exchange and file submissions by 27 February 2015. Depending on the time estimate for the application and the convenience of the court having regard to business in the directions list that day, the application may be heard on 27 February 2015 or further directions for its disposition may be given.

24 By summons filed 24 September 2014, the defendants sought security for their costs, following on a demand in July 2014. The court's power to require the plaintiff to provide security is not in doubt.[14] The court may order security if it appears by credible testimony that there is reason to believe that a corporate plaintiff will be unable to pay the costs of the defendants if successful in their defence, or if there is reason to believe that the plaintiff has insufficient assets in Victoria to pay those costs.[15] The guiding principle in the exercise of the discretion to require security for costs is to achieve a balance between ensuring that the defendant is adequately and fairly protected from prejudice arising from the limited liability character of the plaintiff, and the risk of unnecessarily shutting out from relief a plaintiff whose case, if litigated, may obtain that relief.[16] A successful litigant is entitled to expect that a costs order will be paid on demand.

25 The relevant parts of Order 62.02 of the Supreme Court (General Civil Procedure) Rules 2005 provide that security for costs may be ordered in the following circumstances:

(1) Where:

(a) ...;

(b) the plaintiff is a corporation ... and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so;

...

(f) under any Act the Court may require security for costs-

the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against the defendant be stayed until the security is given.

26 Section 1335(1) of the Corporations Act 2001 (Cth) provides as follows:

Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

In determining this application, the relevant principles of law apply equally to the rule of court and the statutory provision.

27 Those principles were set out by the Court of Appeal in Livingspring Pty Ltd v Kliger Partners.[17] The jurisdiction to grant security is enlivened by the inability of the plaintiff to pay the defendant's costs if unsuccessful at trial. Once that is established, the Court may then exercise its discretion as to whether to order security and, if so, in what amount. The discretion to order security for costs is unfettered and must be exercised judicially having regard to the particular circumstances of the case.

28 In Ariss v Express Interiors Pty Ltd,[18] Phillips JA said:

Although of course, like any discretion conferred upon a court, it must be exercised judicially, the discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.

29 Subsequently, in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd,[19] Winneke P and Phillips JA stated that:

The authorities tend to suggest that the discretion given to the court by s 1335 to make an order for security against an impecunious company is 'open ended' and not to be fettered by rigid guidelines or principles ...

30 Thus the court's task is to decide which of any number of discretionary factors should be taken into account in determining whether to exercise the discretion and to weight them according to the particular circumstances of the case.[20] In Trility Pty Ltd v Ancon Drilling Pty Ltd,[21] Croft J noted seven factors that emerge from the authorities[22] as most commonly considered, when relevant in the particular circumstances, by a court in exercising a discretion whether to grant security for costs. Those factors are:

(b) whether the orders being sought would frustrate the claim,

(c) whether the defendant was the cause of the plaintiff's impecuniosity, and

(d) whether there was delay on the part of the applicant,

(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 the 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, and

(g) whether the company is in substance a plaintiff, as an order ought not be made against parties who are defending themselves and thus forced to litigate.

31 The list of discretionary factors relevant when deciding whether to exercise the discretion that can be discerned from the cases should not be seen as exhaustive. The circumstances of each case are to be evaluated without any predisposition in favour of ordering that security be provided.

32 Before any discretion in the court to order security arises, the defendants must, by credible testimony, establish that there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendants if ordered to do so. The burden rests on the defendants, from first to last, to persuade the court that the order for security for costs should be made.[23] At the first stage, there are two considerations; the threshold costs liability faced by the company and its financial position.

33 First, the question of when, and in what sum, the unsuccessful plaintiff might be called on to pay a costs order is central to the threshold inquiry, and it is usual that an estimate of the defendants' likely standard costs on completion of the proceeding be provided. In this case, the evidence was complicated because the defendant's solicitor, Mr Wood, had combined into his estimate the costs of another proceeding (the Goude proceeding) that was likely to be heard at the same time as this proceeding. Mr Wood did so as, although no order has been made, the issue of a common trial, with the evidence in one proceeding being evidence in the other, had been raised as a case management issue to be considered when the pleadings have settled. Mr Wood estimated past costs incurred before the proceeding was transferred from the County Court at $75,558 plus counsels fees of $25,960. Mr Caldwell, the plaintiff's solicitor, estimated its costs for a like period at $72,307.

34 Mr Wood's estimate of the anticipated costs in the proceeding for three defendants (i.e. including Goude), including counsel's fees is $496,715. The difficulty with this assessment is that the defendants do not seek, and would not in any event be entitled to, security for costs in the Goude proceeding in which the sole plaintiff is Mr Clark. This assessment of future costs was faintly challenged by the plaintiff. Mr Caldwell, the plaintiff's solicitor, expressed his belief that Mr Wood's estimate was excessive. Mr Caldwell estimated the future costs, on an indemnity basis, that the plaintiff will pay him to be up to $40,000 to the end of a mediation and a further $150,000 to the conclusion of the trial.

35 I pause to observe that neither of these opinions has been properly reasoned by persons who have identified a relevant expertise to express opinions and, for that and other reasons, would not be admissible in evidence under the exception in s 79 of the Evidence Act 2008 (Vic). However, no objection was taken to any part of any affidavit.

36 Dealing only with future costs, Mr Wood then rounded his assessment down to $400,000, although he did not clearly explain his reasons for doing so. Possibly the exclusion of Goude's costs was his reason, and a 25% reduction in the estimate for that reason might be thought sensible. However Counsel's fees for senior and junior counsel at more than $275,000 for preparation and a 10 day trial appear excessive and, overall, Mr Wood's future costs estimate must be trimmed. On the other hand, Mr Caldwell's estimate is opaque and while, at best, it might support a proposition that the costs to conclusion of a mediation could be in the vicinity of 25% of the future costs that might be awarded at trial, I am not assisted by it.

37 For the purposes of this application, I find that the defendant's costs at the conclusion of a trial should they succeed in their defences will be about $375,000, of which $75,000 were incurred by July 2014 when the defendants first sought security.

38 The question that followed was whether the court could be satisfied there was reason to believe the plaintiff may be unable to pay an order for costs of about $375,000 in about a year's time. As the Court of Appeal stated in Livingspring:

The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a 'real risk'). A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk.

39 Mr Wood's affidavit revealed that the plaintiff owned no real estate whatsoever. There were no annual returns capable of being searched on the ASIC register and as at 1 July 2014 there were 68 registered charges affecting the plaintiff. Mr Clark was the sole director and secretary of the plaintiff, which had a paid up capital of $200, with all shares beneficially owned by Mr Clark. The plaintiff was accused of having been reticent in providing its taxation returns, taxation assessments, profit and loss statements, and balance sheets for the past five years. The plaintiff's taxation position could not be clearly identified.

40 The plaintiff's affidavits disclosed that the plaintiff traded as a trustee for the Harmonious Blend Building Corporation Unit Trust, which traded as Clark New Homes. The plaintiff had not provided a copy of the trust deed and all of the financial information disclosed on the application explained the financial position of the trust, not that of the plaintiff. The bulk of the trust's assets appeared to be an unsecured loan to Mr Leighton Clark. There was no evidence about distributions to unit holders. The plaintiff's financial position, consistent with the results of the defendant's searches, was that it would be unable to pay the defendant's costs unless such costs were paid out of the assets of the trust.

41 The defendants submitted that there was no evidence enabling a proper assessment of the trustee's entitlement to be indemnified from the assets of the trust nor evidence that the trustee's activities in connection with the events the subject of the litigation and the litigation itself were authorised activities of the trust. The defendants submitted that, although the court might be persuaded that the assets of the trust were sufficient to pay any costs that the plaintiff was ordered to pay on conclusion of the proceeding, there was no evidence of the plaintiff's uncontestable right to funds from the trust sufficient to make that payment.

42 The plaintiff submitted that it had sufficient assets to meet any costs order made in favour of the defendants at trial and the discretion was not enlivened. The plaintiff accepted that this submission could not be made good other than by recourse to the right of indemnity out of trust assets which, it contended, were more than sufficient for that indemnity.

43 The plaintiff invited the court to infer that it had operated the domestic construction business as a trustee for the unit trust for 30 years and that it brought the case in its capacity as trustee. The latter contention might be put beyond doubt had that fact been pleaded by the plaintiff but it was not. Mr Leighton Clark was willing to provide an undertaking that if costs were ordered against the plaintiff in the proceeding they would be paid from funds available within the trust. Without a copy of the trust deed and financial statements approved by the trustee, neither I nor the defendants were able to evaluate whether such an undertaking would be properly enforceable against the assets of the trust. Those problems might have been avoided had Mr Clark given a personal undertaking to accept responsibility for costs but he has not done so. There were other possibilities. It was for the plaintiff as proposer of an undertaking for its benefit as a basis for the court not to exercise its discretion to award security, to demonstrate to the court's satisfaction that an undertaking would be proper and adequate security for the defendants.

44 I accept that the trust traded well and has been trading for 30 years. The evidence included a list of unconditional contracts that the plaintiff is yet to complete that it expects will generate net profits of more than $2.8 million. The plaintiff also has an overdraft facility available to it. It appeared to achieve a net income of more than $500,000 in the last financial year. The trust's net assets at 30 September 2014 were approximately $2.9 million, including the loan to Mr Clark of $2.14 million. The plaintiff contended that there were other loan accounts to which Mr Clark was a party and that, following set-off, the net asset position of the trust was more than $1.3 million. An allowance needs to be made for another business of the trust, an agricultural business, the figures for which are included in the financial statements in evidence. These figures were not challenged by the defendants. I am not persuaded that it is appropriate on the basis of unauthenticated accounts and submissions from counsel to determine what constitutes a true and fair statement of the trust's trading position, but for present purposes, I am satisfied that the trust is solvent and I am not satisfied that there is reason to believe the trust assets may be insuficient to pay an order for costs of about $375,000 in about a year's time, were it legally obligated to do so. The difficulty with the plaintiff's contention is that the trust would not become legally obligated to pay costs by any order made in the proceeding.

45 I am unable to reach the same conclusion about the solvency of the plaintiff as the trustee in the like circumstance. I am not persuaded that the trustee has an incontestable right to summarily enforce its right of indemnity against trust assets in order to permit a timely discharge, without recourse to further litigation, of a liability to pay costs. Without an indemnity, I am persuaded there is reason to believe that the plaintiff would be unable to pay the costs of the defendants if successful in their defence. The plaintiff's contentions invite the defendants to seek comfort in the financial position of the trust, including its future trading prospects, combined with the undertaking proposed by Mr Clark, who controls the trustee, that the plaintiff could draw on the assets of the trust.

46 On a practical, commonsense approach to the evidence, were the plaintiff to be removed as trustee of the trust following a judgment against it at trial and replaced with a trustee controlled other than by Mr Clark, examination of the evidence about its financial affairs shows the risk of the plaintiff's impecuniosity. The unit holders might replace the trustee in order to ensure that Mr Clark could not cause the plaintiff to draw on the assets of the trust to pay costs. The plaintiff would be entirely dependent on the strength of its right to enforce its indemnity against trust assets when independently exercised against a possibly hostile or uncooperative new trustee. The likelihood of successfully enforcing indemnity in the future to enable a timely discharge of a costs liability cannot, on the evidence, be evaluated. The prospect of further expensive and protracted litigation cannot not be discounted.

47 Turning to discretionary considerations, counsel emphasised three factors in submissions. The first relevant consideration was whether there are persons other than the plaintiff standing to benefit from the litigation. The defendants submitted that the beneficiaries are the unit holders in the Harmonious Blend Building Corporation Unit Trust whose identity and financial circumstances have not been disclosed. I infer from his affidavit that Mr Clark was in a position to have identified those unit holders and, probably, to have explained their financial capacity to provide security for the defendants' costs. He has not chosen to do so.[24] Mr Clark did, however, identify that the trust has sufficient assets to post security on behalf of the plaintiff to enable it to assert its rights without any stultification of the proceeding. The financial accounts of the trust included substantial amounts paid for legal costs. I infer that such payments included legal costs associated with the proceedings. That inference permits the conclusion either that the unit holders in the trust seek the benefit of a judgment in the proceeding and are prepared to finance the plaintiff's legal costs or that the unit holders acquiesced in Mr Clark's decision to finance the legal proceedings out of trust assets.

48 In Bell Wholesale Co Pty Ltd v Gates Export Corporation[25], Sheppard, Morling and Neaves JJ said:

In our opinion a court is not justified in declining to order security on the grounds that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

49 In Crypta Fuels Pty Ltd & Anor v Svelte Corporation Pty Ltd & Ors,[26] Lehane J observed in an ex tempore ruling:

In any event, I must say that I can see no reason why authorities which hold that security for costs may, as a discretionary matter, be awarded where an impecunious corporate applicant or plaintiff has substantial parties standing behind it, whether they be shareholders or creditors as in the recent decision of Finn J in Pasdale Pty Ltd v Concrete Constructions [1995] FCA 1471; (1995) 131 ALR 268 should not apply equally to a situation where a trustee company has standing behind it, and in a position to benefit from any decision in its favour, substantial beneficiaries of a trust. For reasons which will appear, however, there is no need for me now to come to a definite conclusion on that matter.

50 In Fiduciary v Morningstar Research Pty Ltd[27], Austin J said:

It would be unrealistic for the court to decline to order security on the ground that to do so would stultify the litigation, if it took into account only the financial ability of the plaintiff, and disregarded the financial ability of those who would benefit from the plaintiff's success and who would therefore have an economic incentive to bear the burden of a security order. More broadly, it is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails. That notion appealed to Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 at [5], where his Honour observed that where a plaintiff contracts to have the litigation funded by a third party, in return for the third party receiving a share of the verdict, 'it is appropriate that the third party bear part of the risk'. (My emphasis)

51 There being no basis to fear stultification of the plaintiff's claim, and none was suggested in argument, this is a strong consideration in favour of requiring the plaintiff to provide security.

52 As a general rule where a claim discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with reasonable prospects of success.[28] Assessing the plaintiff's prospects of success is not practicable in any case of reasonable complexity.[29] I am not obliged to consider at length the merits of the claim and to do so, would ordinarily be a waste of resources.[30] The plaintiff's claims are not particularly complex. The plaintiff submitted that its claim was serious as the publications have impacted on its construction business. Given the size of the average building contract, any loss of a contract would be substantial. Thus, the plaintiff submitted that its claims were bona fide with reasonable prospects of success. A significant part of the plaintiff's claims turn on publications that were only displayed on the website for a matter of days. I do not propose to discuss the merits of the unusual defences raised, including estoppel and possible reliance on similar fact evidence, which can await the trial. However, as I have already observed, the plaintiff is experiencing difficulty in pleading its claim and as it is presently pleaded, its prospects of success cannot be easily estimated.

53 Mr Clark has not suggested that a substantial contract was lost, or that Clark New Homes had underutilised construction capacity. At first blush and unaided by submissions, the quantum of the plaintiff's damages would seem to be modest and well short of the costs that may be incurred on either side. The plaintiff's case theory on causation of its loss was not identified. Further, it was difficult to reconcile the financial affairs of the trust and its trading position into the future, as disclosed for the purposes of the security for costs application, with the allegation that it has suffered significant reputational damage. I incline to the view that a cursory review of the merits of the plaintiff's case weakly favours requiring the plaintiff to provide security for costs.

54 The plaintiff submits that there has been delay that works against an order in favour of the defendants. The plaintiff submitted that the defendants' delay should be a significant factor in the exercise of my discretion. The proceedings were issued in July 2013 and substantial steps have been taken in the litigation. The plaintiff submitted that the defendants have delayed in seeking security for costs since August 2013. The proceeding was listed for trial in the County Court, although it was then transferred to this court. The defendants have responded that the plaintiff has not been able to articulate its claim and they have been waiting for it to do so.

55 In Christou v Stanton Partners Australasia Pty Ltd,[31] Newnes JA said:

It is, however, incumbent upon a defendant who wishes to obtain security for its costs to apply promptly for that relief once it is, or ought reasonably be, aware that the plaintiff would be unable to meet an order for costs. Security for costs is not a card that a defendant an keep up its sleeve and play at its convenience. Delay is an important consideration in the determination of an application for a security for costs because it is capable of causing prejudice or unfairness to the plaintiff. A plaintiff is entitled to know at the earliest opportunity, before it has committed substantial disruption or distraction in the conduct of the plaintiff's case, and if the plaintiff is unable to provide security, the greater the costs that will have been wasted.

56 Croft J observed in Trility Pty Ltd v Ancon Drilling Pty Ltd,[32] that the closer is the proximity of the hearing of the substantive proceeding to the time at which any application for security for costs is made, the more weight is likely to be given to the delay factor. Toohey J said in James v Australia and New Zealand Banking Group Ltd:[33]

In my view the compelling reason why an order for security for costs should not be made against Yallambee Pty Ltd, a reason which is equally applicable to the other applicants if for any reason that well-established principle to which I have referred is inappropriate, is that the hearing is to begin on 4 November, a hearing date that was fixed in August this year. The substantive application was lodged on 13 November 1984 yet this motion for security for costs was not filed until 2 October 1985 ... It is well established that an application for security for costs should be made promptly ... The matter is now so close to a hearing and so much time and costs have been expended that it would be a grave injustice to the applicants if they were ordered to provide security for costs when it is apparent that they cannot comply with such an order.

57 The basis for delay as a disentitling factor is that it can be unfair if a plaintiff has continued to prosecute a claim when it would not have done so if security had been ordered at an earlier date. I am not persuaded that the plaintiff would not have continued to prosecute its claim or would have approached the litigation in a different way to save costs if the defendants had promptly sought security. So much seems clear from the extent to which the trust has supported the litigation to date. The defendants have not, so far as I can see on the evidence, encouraged the plaintiff to continue to expend the trust's resources on legal fees in the belief that no application for security for costs was to be made.

58 That said the defendants do not offer an adequate explanation of when they first became aware that the plaintiff might not be able to pay costs and why their application was not made promptly. However, a trial date is still some way off and significant progress is still to be achieved in interlocutory steps. In the circumstances, I consider that this factor is adequately balanced by limiting any security to future costs.

59 When balancing the mix of discretionary factors that are raised on this application, I consider that influential weight is to be given to the presence of the trust standing behind the plaintiff intending to take the benefit of the litigation and capable of, at best, delaying and, at worst, avoiding the payment by the plaintiff of any order for costs. In considering this factor I have found the form of the undertaking offered by Mr Clark, as a person standing behind the plaintiff, to be inadequate. The submission that the plaintiff's claims have apparent strength is not a countervailing consideration for the reasons I have given and the factor of delay can be accommodated as I have suggested.

60 On this basis, I do not need to explore other discretionary factors in any detail or reach a concluded view as to whether other discretionary factors are satisfactorily established or as to their significance. To the extent any other factor may be thought to favour refusing the application for security it is outweighed, for the reasons I have given, by the absence of a risk of stultification when requiring persons standing behind the plaintiff and taking the benefit of the litigation to provide security for the defendants' costs.

61 The court in exercising its discretion is not required to give the party seeking the security full protection for its estimated party and party costs.[34] The process does not envisage a full assessment of costs but by its nature requires a 'broad brush' assessment having regard to the information before the court.[35]

62 I will order that the plaintiff provide security for the defendants' costs in the proceeding from July 2014 in the sum of $275,000, either by a bank guarantee or in a alternate form acceptable to the Prothonotary. Security is to be provided in two tranches. The plaintiff shall provide security of $75,000 by 2 February 2015 for the defendants' costs from July 2014 until the completion of mediation, provided mediation is not unreasonably delayed. The plaintiff shall provide the balance of the security required, $200,000, no later than 14 days after the date fixed by court order for the completion of a mediation, unless the proceeding shall have then been compromised, such security ($275,000) to stand as security for the defendants' costs in the proceeding from July 2014.

63 I will hear counsel as to the precise form of the orders to be made and in respect of the costs of the applications.

[4] Citing Meadow Gem Pty Ltd v ANZ Executors and Trustees Co Ltd [1994] ATPR 53,626.

[8] Madden v Seafolly Pty Ltd [2014] FCAFC 30.

[11] Lyons v Fowler [2014] VSC 627 [20].

[12] [2009] VSC 473, [17], see also Farquhar v Bottom [1980] 2 NSWLR 380, 385-6 (Hunt J); Gant v The Age Company Ltd [2011] VSC 169, [38]-[39] (Beach J) and Lyons v Fowler [2014] VSC 627, [21] (Kaye J).

[13] Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514, 525.

[15] See, generally, Interwest Ltd v Tricontinental Corp Ltd (1991) 5 ACSR 621; Livingspring Pty Ltd v Kliger Partners (2008) 66 ACSR 455; [2008] VSCA 93; (2008) 20 VR 377.

[16] Tradestock Pty Ltd v TNT (Management) Pty Ltd & Ors [1977] FCA 1; (1977) 14 ALR 52.

[20] Trility Pty Ltd v Ancon Drilling Pty Ltd [2013] VSC 577, [14].

[22] Citing Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497, 505-512, and KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, 197-198. See also Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289, 299-300.

[23] Livingspring Pty Ltd v Kliger Parters [2008] VSCA 93; (2008) 20 VR 377, [21].

[24] See Trility Pty Ltd v Ancon Drilling Pty Ltd [2013] VSC 577, [22]-[24].

[25] [1984] FCA 34; (1984) 52 ALR 176, 179. See also Dagenham Nominees Pty Ltd trading as Banwell Marine Service v Gary Shanks [2011] SASC 163; (2011) 110 SASR 577, 582.

[28] Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd; [1987] FCA 102; (1987) 16 FCR 497; KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189; 13 ACLC 437, 439.

[29] Interwest Ltd v Tricontinental Corp Ltd (1991) 5 ACSR 621; 9 ACLC 1218.

[30] Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440.

[34] St Gobain IF Pty Ltd v Max Spa Corporation Pty Ltd [2004] VSC 335, [71] (Habersberger J); Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171, 175 (Fullagar J).

[35] Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (1995) ALR 187, 201 (Lindgren J), Reinsurance Australia Corp Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803.

Court (General Civil Procedure) Rules 2005

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Judgment (121 paragraphs)

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Legislation Cited (2)

Cases Cited (15)