Samadi Developments Pty Limited v SX Projects Pty Limited

Supreme Court of NSW|2015-10-23|Before: Ball J, Ms J

Introduction

By a notice of motion filed on 4 September 2015, the defendant, SX, seeks a stay of this proceeding until the plaintiff, Samadi, pays SX the sum of $1,402,521.22 plus interest. In the alternative, SX seeks security for its costs of this proceeding in the sum of $495,000 and a stay of the proceeding if security is not provided.

Background

The proceeding arises out of a contract dated 5 September 2013 by which SX undertook to perform design and construction work for Samadi in relation to a residential and commercial development in Elizabeth Street, Surry Hills.
On 16 June 2015, SX obtained a judgment against Samadi in the sum of $1,402,419.63 in respect of progress claims it claimed under the contract based on an adjudication determination it obtained in its favour under the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act).
In this proceeding, commenced on 29 May 2015, Samadi seeks to litigate the underlying contractual issues. In particular, it makes claims for liquidated damages for delays in completion of the work, damages for defects and damages for the cost of completing the work after the work was taken out of SX's hands.
To date, SX has been unsuccessful in seeking to enforce the judgment it obtained. It submits that there are difficulties in commencing winding up proceedings in order to recover the judgment in its favour because, relying on this proceeding, Samadi will maintain that it has an offsetting claim within the meaning of s 459H of the Corporations Act 2001 (Cth).

The application for a stay

It is SX's contention that, unless the proceeding is stayed until Samadi pays the amount the subject of SX's judgment, the policy of the Act will be undermined. The policy of the Act is to provide a quick and efficient means by which contractors are entitled to recover progress payments, without interfering with the parties' rights in relation to the relevant construction contract. If a stay is not granted, the practical effect is that SX will not enjoy the benefits the Act intended to provide because it will have to wait until the underlying contractual issues are determined by the court in this proceeding before it can enforce the judgment it obtained on the basis of the adjudication determination.
I do not accept SX's contention. It is contrary to the decision of Einstein J in Grant Constructions Pty Limited v Claron Constructions Pty Limited [2006] NSWSC 369, which, in my opinion, was correctly decided. There is nothing to prevent SX from enforcing the judgment it has obtained. It is true that SX may be prevented from bringing an application to wind up Samadi on the basis that its judgment has not been satisfied. However, if Samadi were wound up before the current proceeding is determined because the stay is granted and it is unable to pay the judgment debt against it, the result may be to deprive Samadi of the ability to pursue its contractual rights. However, those rights are expressly preserved by s 32(2) of the Act, which provides: Nothing done under or for the purposes of this Part affects any civil proceedings arising under a construction contract, whether under this Part or otherwise, except as provided by subsection (3). Subsection (3) requires the court to take account of any money paid as a result of an adjudication determination in determining what order to make in the proceeding.
SX seeks to distinguish the decision in Grant Constructions on three bases. First, in that case, the application was to stay an arbitration, not court proceedings. Einstein J observed that a court exercised considerable caution in staying arbitration proceedings, particularly where the arbitration arises pursuant to contractual arrangements between the parties. Second, the application in that case was brought under s 23 of the Supreme Court Act 1970 (NSW), not s 67 of the Civil Procedure Act 2005 (NSW), which specifically contemplates a stay. Third, in Grant Constructions Einstein J held that the arbitration proceedings would not frustrate conventional enforcement processes in relation to the judgment. In this case, however, SX is prevented from commencing winding up proceedings because the likelihood is that any statutory demand it serves will be set aside on the basis that Samadi has an offsetting claim.
In my opinion, none of these matters serves to distinguish the decision in Grant Constructions from the present case. It is plain that Einstein J's principal reason for refusing a stay was not because he was concerned with arbitral proceedings, but because the application "flies in the face of section 32 [and in particular with subsection 2] of the Act" (at [8]). Both s 23 of the Supreme Court Act and s 67 of the Civil Procedure Act give the court power to grant a stay. The fact that the latter provision is more explicit cannot affect the circumstances in which a stay should be granted. As to the third point, the service of a statutory demand is not an "enforcement process": Dynamics Co Pty Limited v G and M Nicholas Pty Limited [2012] NSWSC 206 at [23]. Moreover, the point does not serve to distinguish Grant Constructions from the present case. The question whether there is an offsetting claim is the same whether that claim is pursued in court or arbitration proceedings. In each case, the existence of that offsetting claim would prevent service of a valid statutory demand.

Security for costs

It is not disputed that SX is entitled to security for costs. The only issue is quantum.
In support of its claim for security of $495,000 SX relies on an affidavit from its solicitor, Mr Crennan, sworn on 3 September 2015. In that affidavit, Mr Crennan states that SX has incurred legal costs to date of approximately $28,000 and he estimates SX's total future legal costs will be $594,332.50. In arriving at that estimate, he assumes that it will be necessary for SX to obtain at least two substantial witness statements and three expert reports including reports concerned with programming, building quality and quantity surveying. He estimates the time that a partner, senior associate and junior counsel will be involved in preparing that evidence and identifies the rates at which that time will be charged. Mr Crennan sets out other work that it will be necessary to undertake including attendance at the directions hearing, attendance at a mediation and attendance at the hearing, which he assumes will be 10 days.
Mr Ashhurst SC, who appeared for the plaintiff, takes issue with that affidavit on the ground that it fails to satisfy the requirements set out in Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705. In particular, he submits that Mr Crennan does not explain how he arrives at his estimates of the time that it will take to perform particular work.
Samadi also relies on an affidavit of its solicitor, Mr Ziv Ben-Arie affirmed on 9 October 2015. Mr Ashhurst accepts that that affidavit suffers from similar flaws as Mr Crennan's affidavit. However, in his submission, to the extent that the court has regard to Mr Crennan's affidavit, it should also have regard to the affidavit of Mr Ben-Arie who estimates that total costs will be approximately $118,000 (excluding the costs of a mediation).
There is some force in Mr Ashhurst's criticism of Mr Crennan's affidavit and for that reason limited weight can be placed on it. However, in an application for security for costs, the court is often in a position to make its own assessment of at least some of the elements that go up to making an estimate of expected costs. Moreover, in the present case, proceedings have only recently been commenced. Necessarily, any estimate of future costs at such an early stage of the proceedings is likely to involve a degree of guess work based on general experience, since the issues have not crystallised and the precise work involved is difficult to estimate. Mr Crennan's estimates need to be understood in that context.
I accept SX's submission that it is reasonable to assume that it will be necessary to call evidence from two lay witnesses and three expert witnesses. It is apparent from the Technology and Construction List Statement and Response that there are a substantial number of issues in the case which are likely to involve a significant amount of court time and a significant amount of preparation. Taking those matters into account, in my opinion, Mr Ben-Aries estimate of SX's solicitor/client costs is unrealistically low.
On the other hand, without further explanation, a number of Mr Crennan's estimates appear to be too high.
Mr Crennan estimates that SX's future costs will be as follows: Solicitor Counsel Expert Security for Cost Application $11,445.00 $5,000.00 Evidence preparation $98,605.00 $22,840.00 $90,000.00 Directions hearings (3) $3,817.50 $1,770.00 Mediation $12,615.00 $9,860.00 $2,000.00 (Mediator) Expert Conferences $15,000.00 Hearing (including preparation of court books) $161,530.00 $147,900.00 $9,000.00

In my opinion, it is not reasonable to include the costs of the mediation. Without some further explanation of precisely what issues the experts will need to address, it seems to me that the allowance both for solicitor costs for evidence preparation and expert fees for the preparation of reports is excessive and needs to be reduced substantially. Similarly, in the absence of further evidence concerning the nature of the issues that it is expected will be raised at the hearing, I am not prepared to accept that the hearing will last two weeks. Many issues may be resolved by the experts and unless there are particular reasons for assuming extensive oral evidence will be necessary, I think it is reasonable to assume that the hearing will last one week. Making deductions in respect of those amounts, I have concluded that it is reasonable at this stage to assume that SX's future costs on a solicitor/client basis will be in the order of $285,000. To that needs to be added costs incurred to date of $28,000 to reach a total figure of $313,000. That figure needs to be discounted to arrive at an estimate of SX's party/party costs. In my opinion, approximately 20 percent on the total cost is a reasonable discount. On that basis, Samadi should provide security in the sum of $250,000.
SX also seeks an order that it have liberty to apply on three days' notice to vary the amount of security. I do not think it is appropriate to grant that liberty. SX has chosen to bring the application on the basis of the evidence it filed. It should not be given an opportunity to make further applications for security simply because the security it has obtained proves to be inadequate. The order for security is an interlocutory order. It can be varied if the appropriate conditions are satisfied: Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44. SX should not have a broader right to make an application for further security.

Orders and costs

SX failed on its application for a stay of the proceedings, but succeeded on its application for security for costs. In those circumstances, I think it should recover half of its costs of the motion.
The orders of the court, therefore, are: 1. the plaintiff give security for the defendant's costs of and incidental to the proceeding in the sum of $250,000 within 28 days; 2. the proceeding be stayed if security is not provided in accordance with order (1); 3. the plaintiff pay half the defendant's costs of and incidental to the defendant's motion filed on 4 September 2015.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 October 2015

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