Federal Court of Australia Act 1976 - s 56

Trade Practices Act 1974 - s 52

Bryan E. Fencott and Associates Pty Limited v Eretta Pty Limited and Ors [1987] FCA 102; (1987) 16 FCR 497

Ilat Nominees Pty Limited v Murragong Nominees Pty Limited [1980] FCA 162; (1980) 48 FLR 385

Appleglen Pty Limited v Mainzeal Corporation Pty Limited and Anor (1988) 79 ALR 634

Hughes and Anor v Canon Australia Pty Limited and Anor [1990] FCA 27; (1990) 8 ACLC 209

Lucas v Yorke and Anor (1983) 50 ALR 228

Courtney and Fairbairn v Tolani Brothers (1975) 1 WLR 297

Biotechnology Australia Pty Limited v Pace (1988) 15 NSWLR 130

Sijehama Pty Limited and Anor v The Colecliff Collieries Pty Limited and Anor unreported 10 August 1987, Supreme Court of New South Wales, Commercial Division

with Mr M. Dempsey

Instructed by: Bruce and Stewart Turton

1. That further security for costs be provided by the applicants in the sum of $10,000.

2. That the costs of this application be costs in the cause.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

This is an application for security for costs brought by the respondents in these proceedings. I shall refer to them as the respondents, and to the other parties as the applicants. The application was heard on 13, 14 and 18 March 1991. Some considerable time was spent in considering the case presented by the applicants on affidavit. There was cross-examination of the main deponents in the applicants' case, that cross-examination being limited, so far as possible, to issues arising in the application, being issues appropriate for consideration on the question of security for costs. In the upshot, not inconsiderable time was spent in considering the facts relied upon by the applicants to establish their case.

2. There was no consideration of any sworn material put forward by the respondents. There was not, apparently, in existence any order directing the respondents to furnish affidavits as to the facts relied upon them in opposition to the applicants' claim. There was, however, in existence a direction requiring the parties to set out their allegations as to essential facts in the form of a Scott Schedule. This direction had been given on 12 September 1990. It was to be complied with by the applicants by 12 October 1990 and responded to by the respondents by 23 November 1990. In the event, the applicants complied belatedly with this direction. The respondents have not complied at all.

3. It also appears that a prior order for security for costs in the amount of $5,000 had been made in favour of the respondents, which order had been complied with.

4. In general terms, it seems that the proceedings were commenced on 23 February 1990. It would appear that it was not until September 1990, after some three directions hearings had taken place, that the respondents gave any indication of seeking security for costs. The present application appears to be made on the basis that the respondents seek security for costs of the whole of the hearing. A figure of some $96,000 was mentioned at the bar table, but no evidence has been placed before the Court as to the actual amount sought or as to the basis of its computation. During the course of the hearing, an open offer was made on behalf of the second applicant to provide a further $10,000 by way of security. This offer was rejected.

5. I am unable to determine, by reference to the file or to material placed before me in the hearing, whether the proceedings are ready for hearing or whether significant interlocutory steps remain to be completed. In so far as it appears that it was contemplated that documents in the nature of Scott Schedules would be filed I assume that these were to be used as the basis for a final hearing. However, as there has been lack of compliance in this regard by the respondents, I infer that the matter is not yet ready to be disposed of. I also note that the respondents intend to amend the filed defence to allege a compromise as to part of the applicants' claim and also the expiry of a relevant limitation period.

6. In all these circumstances, I have come to the view that it would be inappropriate to make any order for security for costs on the basis that provision should be made for a final hearing. It may be appropriate, however, to make a further interim award of the nature already made.

7. It was not disputed that the Court had jurisdiction to make the order sought. It is clear, in my view, that apart from powers given by s 56 of the Federal Court of Australia Act 1976 and Order 28 of the Federal Court Rules, the application was properly based on s 533 of the Companies (NSW) Code (see generally per French J in Bryan E. Fencott and Associates Pty Limited v Eretta Pty Limited and Ors [1987] FCA 102; (1987) 16 FCR 497 at pp 502-504). In this regard, it was conceded that the applicant companies were each insolvent and unable to pay any costs order that might be awarded against them in these proceedings. This being so, the following observations of Smithers J in Ilat Nominees Pty Limited v Murragong Nominees Pty Limited [1980] FCA 162; (1980) 48 FLR 385 at 386 are in point. His Honour said:

"Putting the case at its highest for the

respondent, who is the applicant on this motion,

the situation would be that, once impecuniosity

of the company is shown, there might be in the

absence of further material a predisposition

towards the protection of the respondent from

being sued by the impecunious company. But it

is also very clear that once the court enters

upon considerations relevant to the particular

case the ultimate decision must depend upon the

balance of justice and common sense."

8. In this case, evidence has been placed before me, which I accept, which tends to show fairly strongly that the shareholders who would stand to gain if the applicant companies are successful in the litigation, are themselves in impecunious or very straightened financial circumstances. It is submitted on behalf of the applicants that the ordering of any substantial sum as security for costs would have the result of stifling the litigation. The principles relevant to such circumstances were considered in great depth by French J in Fencott. At the conclusion of a comprehensive consideration of the authorities his Honour expressed himself thus (at p 513):

"The effect of the authorities is, in my

opinion, that the probability or certainty that

an order for security for costs will frustrate

the plaintiff's claim will not automatically

lead to such order being withheld. It is,

however, a factor relevant to the granting of an

order and will weigh against it where there is

no party standing behind the company who is in a

position to provide a necessary security."

I respectfully agree with and adopt this statement of the law.

9. I accordingly turn to consider the various factors submitted by the respondents as requiring a security order, even though the persons standing behind the applicant companies are not, prima facie, able to meet any substantial costs order.

10. It is, of course, a matter of general acceptance that the Court cannot in an application of this kind conduct any significant investigation of the facts or investigate the prospects of success of the applicants' claims (Appleglen Pty Limited v Mainzeal Corporation Pty Limited and Anor (1988) 79 ALR 634; Hughes and Anor v Canon Australia Pty Limited and Anor [1990] FCA 27; (1990) 8 ACLC 209). This is particularly so in the present case as, at this point of time, the respondents have put forward no evidence or any significant indication of what their case on the facts will be.

11. It has been necessary, however, to give some consideration to the merits of the applicants' claim as it has been submitted on behalf of the respondents that the material put forward by the applicants itself indicates that the claims are very weak, are unlikely on their very face to succeed and will, inevitably, occupy considerable hearing time. It seems that, at least in a general way, a court may consider the bona fides of a claim and its apparent merits in determining whether its discretion should be exercised in favour of the ordering of security for costs (see per French J in Fencott at p 513 and the cases there referred to). I agree, with respect, with French J's statement of the position (Fencott p 514) that "it is consistent with authority and the existence of a broadly based discretion that the bona fides and merits of the claim be taken into account where there is material from which some assessment can be made".

12. It is clear, of course, that, in circumstances where necessarily the whole of the evidence is not before the Court, such an assessment can be made only on the basis of broad impression and with the exercise of considerable caution.

13. It is also a relevant consideration that the impecuniosity of the applicant companies and of those who stand behind them, is due to the alleged breaches by the respondents (see Fencott p 514 and cases there cited; Lucas v Yorke and Anor (1983) 50 ALR 228). Again, it is clearly impossible for a court at an early interlocutory stage of proceedings to reach any firm conclusion on this topic. If a bona fide claim appears to be made and is not manifestly lacking in substance as to the connection between impecuniosity and breach then, in my view, this is a factor militating against the making of the relevant order or, at least, indicating that it should be in a reduced amount.

14. I do not propose to make any extensive reference to the facts of the matter as they are currently put before the Court. The second and third applicants, Traikmain Pty Limited and Tyole Pty Limited, own the shares in the first applicant which owns and, at relevant times, was operating a mill for the crushing of cotton seed for the purpose of extracting oil and producing edible cotton meal as a by-product. In 1985, another company, Bio-Energy (Australia) Pty Limited, had been a shareholder with the second applicant in the first applicant. This company, however, incurred fatal financial problems as a result of which it went into liquidation. Its interests in the first applicant and the crushing mill were acquired in 1986 by the third applicant. I have already referred to the fact that the persons standing behind the second applicant, who are Messrs Noss and Orr, and the person standing behind the third applicant, Mr Myers, have established that they, like the companies themselves, are relevantly in straightened financial circumstances. Mr Orr is, in fact, bankrupt.

15. Before Bio-Energy (Australia) Pty Limited went into liquidation, it was party to an agreement dated 27 May 1985 between it and the second applicant on one side and the first respondent on the other side. This agreement was referred to in the proceedings as the "Supply Agreement". The first respondent and the second and third respondents, as a result of changes of ownership of shareholdings, which it is not material to set out, owned and controlled, at relevant times, substantial cotton growing fields and ginning facilities at Bourke. The first applicant's crushing mill was established on an area of land sublet to it by the first respondent under an agreement referred to in the proceedings as the "sublease". The first respondent was in a position to supply cotton seed to the first applicant from its gin which was situated only about 200m from the crushing mill. At least in the early stages of the relationship between the parties, it was clearly convenient that the first respondent's cotton seed be supplied to the first applicant, there being no difficulties of transporting of the seed, as it could be merely blown across from the gin to the crushing mill by means of a connecting pipe. The supply of seed in this fashion was sought to be governed by the Supply Agreement.

16. When Bio-Energy (Australia) Pty Limited went into liquidation, problems necessarily arose in relation to the Supply Agreement. The first respondent terminated it on the grounds of the liquidation. Efforts were then made by the second applicant, through Mr Noss, to save the situation. The mill at the end of 1985 and early 1986 had operated satisfactorily, but only in a pilot stage, it being contemplated that it would be extended and its capacity increased to commercial levels. Mr Myers, who had expertise in the field of seed crushing and oil extraction, was interested in taking over the interests of the company in liquidation and also in providing capital for the acquisition of additional equipment for the expansion of the crushing and extraction facilities. He acquired the liquidator's interests and put further capital into the first applicant through the medium of his private company, the third applicant. These arrangements were finalised late in 1986, but all relevant parties knew that they were in train throughout that year.

17. The evidence so far indicates that the viability of the operations of the first applicant in Bourke depended upon the supply in quantity of cotton seed from the first respondent's gin. It therefore became a matter of importance to the applicants that the Supply Agreement which had, as I have already indicated, been terminated by the first respondent, be reinstated. This was seen as being a form of guarantee of continuity of supply of seed. The evidence indicates that 10,000 tons of the seed were required for crushing purposes each year if the mill was to operate even marginally profitably. There is also evidence to indicate, prima facie, that there were considerable commercial difficulties in obtaining a supply of cotton seed other than from the first respondent's gin in Bourke.

18. The applicants' case is, in effect, that there was a culpable failure on the part of the respondents to reinstate the Supply Agreement with resultant failure on the part of the applicants to obtain adequate seed for crushing purposes in 1987, 1988 and 1989, with consequent financial damage to them and with the end result that the mill went out of operation altogether.

19. The case, as pleaded, falls into three separate parts. The first is described as "the 1986 contract and representations". In this aspect of the claim, the applicants allege that a binding contract was entered into between them and the first respondent where in consideration of the payment of $20,000 to the respondent and of the liquidator's interest in the first applicant being acquired by the second and third applicants, the Supply Agreement and sublease would be reinstated. Secondly, and alternatively, the case, in this aspect, is that representations to the same effect were made in trade and commerce by the first respondent which were false and misleading and which were relied upon by the applicants. The agreement was never in fact reinstated, although negotiations took place thereafter in relation to its amendment. It appears to be the applicants case that, either as a result of contract or clear representations made and acted upon, they became entitled to receive a fresh Supply Agreement in substantially the same form as the previous Supply Agreement, subject only to such amendments as would accommodate the fact that there were new parties and with such others as they might agree upon, there being no obligation, however, for them to do so.

20. It is asserted that from time to time, on occasions referred to in the evidence, which I do not propose to mention in detail, the subject of a reinstatement of the Supply Agreement would be raised in the context of discussions as to moneys that were being expended and work that was being done in 1986 in relation to the construction and enlargement of the mill. It is said that on such occasions the representatives of the applicants would receive from the appropriate representatives of the respondents assurances that there would be no problem about the reinstatement of the Supply Agreement and that the appropriate documentation was in the hands of their solicitors.

21. It is clear that the contract relied upon is denied. It is unclear, because of the absence at this stage of evidence from the respondents, whether the representations are denied in whole or in part. It is, of course, a necessary part of the applicants' case, if it be ultimately accepted that the representations were made, that, additionally, they were made in circumstances where there was no intention on the part of the representors to fulfil them or that they were made recklessly.

22. In 1987, it appears that cotton seed was supplied to the applicants by the respondents. In the event there was only 4,000 tons supplied from an amount originally promised of 8,000. The supply was not made pursuant to the reinstated Supply Agreement or any similar agreement. It was made as the result of an ad hoc arrangement, insisted upon by the representatives of the respondents, pursuant to which payment for the cotton seed should in effect be guaranteed by its being supplied by the respondents in the first instance to Elders Grain Pty Limited, on the basis that that company would pay the respondents for the seed and then onsell it, by a second contract, to the applicants. This arrangement was not commercially advantageous to the applicants and it is their case that the requirement on the part of the respondents that they should enter into it was, in fact, a breach of the contract in relation to the reinstatement of the Supply Agreement, which had previously been entered into, and was a departure from the firm representations that had been made earlier as to its reinstatement. The agreement for 8,000 tons was itself an unacceptable variation of arrangements for the supply of 10,000 tons.

23. In the event, because of a shortfall in the amount of seed produced at the gin, the lesser amount of 4,000 was supplied, which was inadequate for the applicants' needs and caused further loss. It also involved the applicants in failure to honour a contract for the supply of meal which would have resulted from the crushing of the full amount of the cotton seed. This shortfall in supply led to disputes between the respondents and Elders Grain Pty Limited and the applicants.

24. It is the contention of the respondents that these disputes were compromised. This contention has not in fact, as yet, been pleaded. There is, in any event, doubt as to whether the compromise that did in fact take place was such as to affect the broader claims made by the applicants as to the whole of the arrangements made in 1987 being in breach of the 1986 agreement or contrary to representations then made and accepted and acted upon.

25. The third area of claim relates to Part IV of the Trade Practices Act 1974. It alleges that the respondents made improper use of their market power, in relation to the provision of cotton seed at Bourke, to render the applicants' operation commercially unviable. The details of this claim are set out in the amended statement of claim and I shall not repeat them here. There is some evidence, as yet unanswered, to the effect that the respondents had in mind that upon the business failure of the applicants, the mill facilities could be acquired by the respondents at little cost.

26. In the absence of evidence from the respondents or any indication by way of the completion of a Scott Schedule of what that evidence might be, the respondents, nevertheless, make criticisms of the applicant's case, based upon problems said to be apparent from the applicants material as presented and as appearing from answers given in cross-examination of the applicants' witnesses in these interlocutory proceedings.

27. It is put first that the reinstatement of the Supply Agreement would have been of no practical benefit to the applicants in any event. This was because the Supply Agreement, by its terms, provided for the provision of a fixed amount of seed in 1985, but thereafter it amounted merely to an agreement to agree. The relevant paragraph of the original Supply Agreement provides as follows:-

2.8 In the 1986 ginning season and subsequent

seasons during the currency of the sub-lease and

for so long as the processors shall duly observe

their obligations hereunder D.R.C. shall

negotiate in good faith with the processors for

the supply of the processors' requirements of

cotton seed at current market prices and

otherwise on such terms and conditions as made

from time to time and mutually agreed."

(The processors were Bio-Energy (Australia) Pty Limited and the second applicant. D.R.C. was the first respondent).

28. The respondents relied upon Courtney and Fairbairn v Tolani Brothers (1975) 1 WLR 297 and Biotechnology Australia Pty Limited v Pace (1988) 15 NSWLR 130 at 133. It was put that the promise to negotiate in good faith was too uncertain to give rise to any contractual obligation and that, therefore, the Supply Agreement, even if reinstated, would have afforded no worthwhile rights to the applicants.

29. It is to be noted, however, that the clause is to be found in an agreement which undoubtedly contains binding terms. The opening paragraph of the section in which the quoted paragraph is to be found provides that "...D.R.C. shall be obliged to provide cotton seed and the processor shall be obligated to purchase cotton seed from D.R.C. in the terms set out in this clause". Those terms included the provisions set out in the quoted paragraph. It is difficult to see that there would not be some commercial advantage to the applicants in their having an obligation owed to them by the first respondent to enter into bona fide negotiation for the supply to them of the whole of their seed requirements in 1986 and subsequent years. Given that the obligation existed there would appear to be an issue as to whether the negotiations that in fact took place in 1986 and thereafter were bona fide.

30. A somewhat analogous case was considered by Clark J in Sijehama Pty Limited and Anor v The Colecliff Collieries Pty Limited and Anor (unreported 10 August 1987, Supreme Court of New South Wales, Commercial Division). His Honour did not feel constrained in that case by the authorities relied upon by the respondents in this case to hold that the expression "will forthwith proceed in good faith to consult together upon the formulation of a more comprehensive and detailed joint venture agreement", in a document which contained other binding obligations, could be of no contractual force.

31. It is not appropriate that this question of law be decided at this interlocutory stage of the proceedings. Suffice it to say that I am not satisfied that the reinstatement of the Supply Agreement would necessarily have been valueless to the applicants in terms of their ability thereafter to obtain from the respondents appropriate supplies of seed for crushing purposes.

32. It was next put that, in effect, it could not be established by the applicants that their losses were suffered as a result of breach of contract or the making of false and misleading representations by the respondents. It was submitted that the facts inevitably pointed to the applicants having made their major financial commitments in relation to the cotton crushing enterprise before any promises or representations as to the reinstatement of the Supply Agreement were made by the respondents. It appears to be correct that both the second and third applicants made their major financial commitments, by borrowing and entering into indemnity agreements, before the alleged conversations of June 1986. Before that time the second applicant had determined on a course of preserving the seed crushing enterprise from the effects of the financial collapse of Bio-Energy (Australia) Pty Limited by seeking another partner to take the place of that company. It had made its major borrowings for its capital contribution to the scheme and made no further borrowings on the faith of what was allegedly said by the respondents' representatives in June. The third applicant, through Mr Myers, had made payments for the new equipment to be used in the enlargement of the mill and had entered into indemnity agreements in relation to the outstanding indebtedness of the first applicant.

33. These are, in my view, fairly substantial difficulties in the applicants' case. It is to be noted, however, that after the alleged conversation and alleged assurances as to the reinstatement of the Supply Agreement, the applicants proceeded throughout 1986 with the construction of the additions to the mill and continued, on their case, in the anticipation that there would be cotton seed provided at a bona fide negotiated market price by the respondents. It appears to be also part of their case that the very existence of the reinstated Supply Agreement would have provided them with a basis upon which to seek further financial accommodation or perhaps other equity partners.

34. Also, there is the assertion in the evidence of the applicants that prior to the June conversation relied upon, there were prior conversations in which representatives of the first respondent were advised that Mr Noss and the second applicant were seeking some person or corporation to take the place of Bio-Energy (Australia) Pty Limited and in which the concession was obtained that there would be no objection to Mr Myers and the third applicant being substituted. It appears that there will be dispute as to these alleged conversations resulting in issues which can only be determined at trial.

35. It is also submitted by the respondents that, in effect, the applicants' claim that their damage was caused by breaches on the part of the respondents is really unarguable. It is asserted that an examination of the financial position of the applicant companies, as revealed in these interlocutory proceedings, indicates that the seed crushing enterprise was doomed to financial failure from the outset. It was submitted that there never was at any stage sufficient working capital. The money that was borrowed and put as capital into the enterprise was used for the repayment of outstanding debts or for the purchase and installation of equipment. There was nothing of any size left which could go towards the purchase of seed for crushing.

36. It was also submitted that the mill required 10,000 tons of cotton seed annually to reach a financial break-even point in its operation. There was never any certainty that such an amount would become available in the Bourke area, even if the respondents were obliged to provide to the applicants the whole of their output from their ginning operations. It was asserted that at all stages the mill would have required other seed, such as rape seed, for crushing and that this would have to have been obtained from areas outside Bourke. There was a fundamental error made in setting up the mill in the Bourke area having regard to these supply problems. As against this, it is put on behalf of the applicants, inter alia, that had the security of a reinstated Supply Agreement been provided, further capital could have been obtained and that with the mill fully operational a substantial income could have been achieved upon which a solid commercial base could have been established.

37. It was also contended on behalf of the respondents that the only reasonable way to view the transactions between the parties in 1986, 87 and 88 was to regard them as being, in effect, bona fide negotiations of the type envisaged by the relevant clause of the agreement. It was at all time reasonable that the respondents should seek satisfactory credit arrangements with the applicants, having regard to the financial history of the enterprise and the present financial circumstances of the companies involved. Their insistence on, as it were, guarantees of payment, was perfectly reasonable within the context of any requirement of bona fide negotiation. As against this, the applicants contend that the negotiations that took place were not bona fide and were conducted with a hidden motive of forcing their enterprise into insolvency.

38. The issue is also raised as to whether the claims made under s 52 of the Trade Practices Act 1974, which involved the representations to which I have made reference, are not statute barred having regard to the time when the proceedings were commenced. There is clearly an issue as to when damage was first suffered which, in my view, cannot be resolved at this stage.

39. One must resolutely keep in mind that it is not the function of the Court, at this interlocutory stage, to enter upon any definitive consideration of the facts. I have sought to do no more in what I have said so far than to indicate some of the main issues which had been agitated in these proceedings. The broad impression with which I am left, after the consideration of the material that has been put before me, is that it cannot be said that the applicants' case is hopeless or doomed to failure but that it is proper to regard it only as having an average prospect of success. The difficulties that have been raised are serious ones and must be taken into account. As against this, however, I am comfortably satisfied that this is not a case where those standing behind the impecunious companies are in a financial position to meet any cost order which might be made against those companies if unsuccessful in the litigation. The ordering of substantial security for costs would, I am satisfied, result in the stifling of the litigation.

40. In light of the principles to which I made reference at the outset of these reasons, I must come to a conclusion as to what the justice of the situation seems to require. Applying those principles, I have reached the decision that it is appropriate that some additional order for security for costs be made at this stage, subject to the situation being reviewed in the future, if circumstances should so warrant. I have referred to the amount of $10,000 which was offered in the course of the proceedings, although this offer was, apparently, on a final basis. I think it appropriate, however, that that sum be now paid as further security for costs, but on the basis that the question may be subject to further review in the future as the litigation progresses.

41. I am of the view that the appropriate order to be made in respect of the costs of this application is that they be costs in the cause.

1. that further security for costs be provided by the

applicants in the sum of $10,000;

2. that the costs of this application be costs in the cause.