Sydney Construction Co Pty Ltd v Pasupati

LEGISLATION CITED: Uniform Civil Procedure Rules: r 42.21 (1) (d)

Amalgated Mining Services Pty Ltd v Warman International Ltd 88 ALR 63 Bell Wholesale Co Pty Limited v Gates Export Corporation (1984) 2 FCR 1; 52 ALR 176 Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 Commonwealth of Australia v Cable Water Skiing (Australia) Ltd (1994) ACSR 760 Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 Drumdorno Pty Ltd v Braham 42 ALR 563 Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 Estates Property Investment Corporation Ltd v Pooley (1975) 3 ACLR 256. CASES CITED: Fiduciary Ltd v Morningstar Research [2004] NSWSC 664 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 Jeffcott Holdings Limited v Paior (1996) 15 ACLC 28 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 MA Productions Pty Ltd v Austarama Television Pty Ltd 7 ACLR 97 Merribee Pastoral Industries Pty Ltd v ANZ Banking Group Ltd (1998) 193 CLR 502 Morris v Hanley [2001] NSWCA 374 Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643 Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 Tradestock Pty Ltd v TNT (Management) Pty Ltd (No 2) (1977) 14 ALR 52;

PARTIES: Sydney Construction Co Pty Ltd (Plaintiff) Kumaresh Pasupati (Defendant)

COUNSEL: Mr M Sneddon (Plaintiff) Mr G Carolan (Defendant)

1. Prior to being transferred to this court, these proceedings were in the Consumer, Trade and Tenancy Tribunal (CTTT).
2. An Amended Statement of Claim was filed in this Court on 4 April 2006, but as yet there are no other pleadings.

3. On 13 March 2006 the defendant filed a Notice of Motion seeking, amongst other orders, an order that the plaintiff pay $70,000.00 into court as security for the defendant's costs in the proceedings.
4. Various affidavits have been filed and tendered in relation to the motion.

5. It is necessary to relate to some extent the history of the substantive proceedings in the CTTT and the circumstances under which the proceedings came to be transferred to this court.
6. The background to the proceedings between the parties is a construction contract under which various disputes arose. The contract was a fixed price contract, with a stipulated completion date. The plaintiff builder did not complete the works and the contract was ultimately terminated. The defendant then engaged another builder who completed the works. The plaintiff claimed progress payments for work performed under the contract and other amounts.

The plaintiff originally commenced these proceedings in the CTTT, on 16 July 2004, claiming $87,273.73. However due to the insufficient particularity of the claim, the defendant was not required to plead to it until proper Points of Claim had been filed.

It was not until July 2005 that the plaintiff's claim was sufficiently pleaded such that the defendant was informed of the case he was required to meet.

The defendant responded promptly by filing Points of Defence, a Cross-Claim for an amount in excess of $500,000, the jurisdictional limit of the CTTT, and an Application for Transfer of the proceedings out of the CTTT into the District Court.

It was not until about this time that the defendant became aware of the plaintiff's parlous financial position. In a fax dated 1 June 2005 (Annexure I at page 52 of the affidavit of Mr Stevens sworn 24 March 206), the plaintiff's solicitor wrote:

"The Applicant Company's (the Plaintiff) trading position is critical in that bankruptcy proceedings against the company appear to be imminent and the prospect of liquidation of the Applicant company will adversely affect, if not prevent, the company from maintaining its case in these proceedings as well as prevent the Applicant company from being able to trade out of its financial difficulties…".

The defendant's solicitors wrote to the plaintiff's solicitors by letter dated 28 July 2005, serving an expert's report in support of the cross- claim and putting the plaintiff on notice that "we have issued an application to the CTTT for this matter to be transferred to the District Court. We also put you on notice that we will be making an application for security of costs at this time".

A directions hearing took place in the CTTT on 24 August 2005, but the defendant's application for transfer was opposed, and therefore adjourned for the filing of affidavit evidence. Once it was listed again before the CTTT, an order was made transferring the proceedings to the District Court.

The proceedings first came before the District Court at a directions hearing on 2 February 2006 when the plaintiff was ordered to file a Statement of Claim by 16 February 2006. It failed to do so.

This motion was then filed on 13 March 2006, seeking to dismiss the plaintiff's claim. In the meantime the plaintiff attended to the filing of its Statement of Claim and the defendant now seeks only an order for security for costs.

The defendant has not yet pleaded in this court, and is yet to file a Defence or Cross-Claim, pending the outcome of the present application.

The defendant seeks security for costs under r 42.21 (1) (d) of the Uniform Civil Procedure Rules, on the grounds that there is reason to believe the plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so at the conclusion of the substantive proceedings.

The first issue for consideration was whether the plaintiff corporation is impecunious. 18. This issue was in effect conceded at the hearing. The evidence was that the plaintiff has liabilities significantly in excess of its assets, and it is perfectly apparent that it will be unable to pay the defendant's costs of the substantive proceedings if it loses. 19. That being the case, the evidentiary onus shifted to the plaintiff to show why the court's discretion should be excised in its favour by refusing to order security, or by ordering security in a lower amount than the $70,000.00 sought: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [62] and [65]; Fiduciary Ltd v Morningstar Research [2004] NSWSC 664 at [35] - [36]. 20. There are a number of factors relevant to the exercise of the discretion whether or not to order security of costs. These have been categorised in various cases: Morris v Hanley [2001] NSWCA 374 at [10]; KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Tradestock Pty Ltd v TNT (Management) Pty Ltd (No 2) (1977) 14 ALR 52; MA Productions Pty Ltd v Austarama Television Pty Ltd 7 ACLR 97; and Drumdorno Pty Ltd v Braham 42 ALR 563.

21. The plaintiff sought to rely on two of those factors. Firstly it relied on delay by the defendant in bringing this application. Second, it relied on what has been described as the causation factor, where the plaintiff's lack of funds has been caused or contributed to by the conduct of the defendant: Amalgated Mining Services Pty Ltd v Warman International Ltd 88 ALR 63.

22. Delay by a defendant in bringing an application for security is a relevant factor in the exercise of the discretion: Morris v Hanley [2001] NSWCA 374 at [30], and the application should be brought promptly: Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [68]. A corporate plaintiff is entitled to know its position "at the outset", and before it embarks to any real extent on its litigation: Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 309. However, evidence of delay does not render an application fatal of itself: Idoport at [70]; Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643 at [26].
23. The passage of time is but a factor to be taken into account in the balancing exercise: Commonwealth of Australia v Cable Water Skiing (Australia) Ltd (1994) ACSR 760 at 762 3. Delay will weigh less significantly if, for example, the hearing is not imminent or there has been some forewarning in correspondence foreshadowing an application: Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71.
24. I am not satisfied that the plaintiff has made out this ground. To the extent that there have been any significant delays, they have been occasioned by the plaintiff's conduct of the proceedings.
25. The defendant first became aware of the plaintiff's impecuniosity in June 2005. It was not in a position to plead to a properly particularised claim by the plaintiff in the CTTT until July 2005. Thereafter he took steps to transfer the proceedings to this court, which did not occur till late 2005.

26. The plaintiff says the defendant could have sought security in the CTTT. This is true, but not before June or July 2005. The defendant took the view that it would be preferable to make the application in this court, as the proceedings were to be transferred here. To my mind that was a reasonable course of conduct. But he also took the precaution of placing the plaintiff on notice of an intention to seek security for his costs.

27. The letter of 28 July 2005 may have been indelicately phrased, but it was in my view sufficient to put the plaintiff on notice that security for costs would be sought. Thereafter the plaintiff took upon itself any risk of incurring further costs.

28. Ultimately, I am not satisfied that the passage of time in this case is a sufficient factor to be taken into account in the balancing exercise to refuse an order security for costs on the basis of the delay factor. It is, however, relevant to the amount of security that should be ordered, and I will come to this issue in due course.

The causation factor 29. It is a relevant consideration that an order for security will effectively shut out a party from relief in circumstances where that party's impecuniosity is itself a matter which the litigation may help to cure: Merribee Pastoral Industries Pty Ltd v ANZ Banking Group Ltd (1998) 193 CLR 502. 30. The conduct alleged which the plaintiff relies on, is said to have occurred in the course of the works under the building contract, during which the defendant sought constant and extensive variations, causing the agreed period of construction (40weeks) to expire well before completion of the works. As a result the plaintiff ran out of money.

However, the evidence does not establish that any of these alterations or variations was other than a variation which was contemplated by the contract, or to which the plaintiff voluntarily agreed.

To the extent that any additional works caused the completion of the works to extend beyond the period of the contract, this cannot be attributed to any wrongful conduct on the defendant's part in the causative sense required.

Furthermore, the evidence does not support the plaintiff's contention that the defendant's conduct caused its inability to complete the works. The fact is that the plaintiff's licence was suspended as a consequence of it having insufficient assets to meet the requirements for continuing insurance.

I decline, therefore, to exercise my discretion to refuse security for costs based on the so-called causation factor.

The court is entitled to take into account relevant factors particular to the circumstances of the subject proceedings: Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 50,631 (40-972). 36. I was troubled by the consideration that an order for security may stultify the plaintiff's claim in circumstances where the defendant has a substantial cross-claim.

37. However, as the defendant has pointed out in submissions, the cross-claim has not yet been filed in this court. In my view, therefore, it is premature to consider this issue. It may be, for example, that the defendant will not pursue it's cross-claim if the plaintiff is in fact insolvent and unable to satisfy a judgment in any event

38. Furthermore, the plaintiff has not led any evidence that an order for security for costs will necessarily preclude it from pressing its claim against the defendant even if the cross-claim is pursued. In this regard the plaintiff has failed to address the question of whether there is no real prospect of obtaining funds to meet an order for security, from someone else: Jeffcott Holdings Limited v Paior (1996) 15 ACLC 28 at 32.

39. In this regard there is an evidentiary onus to establish what the assets are of those who will benefit from the plaintiff's claim, such as shareholders or creditors: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744; Fiduciary Ltd v Morningstar Research (2004) 208 ALR 564 at [74] and [83]; Bell Wholesale Co Pty Limited v Gates Export Corporation (1984) 2 FCR 1; 52 ALR 176.

40. The defendant sought security in an amount of $70,000.00. He relied on the affidavit of Mr Stevens, his solicitor, sworn on 24 March 2006.
41. Fixing the amount to be provided by way of security is part of the exercise of the court's discretion: Fiduciary [2004] NSWSC 664 at [132].

42. The amount of security must be "sufficient": Idoport [2001] NSWSC 744 at [38], but not a complete indemnity: Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 at 175. The court will determine the extent of security required having regard to what is a just sum having regard to the circumstances of the case: Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 18) (1995) 134 ALR 187 at 197.
43. The security may take such form as the court considers will provide adequate protection to the defendant. This might include, in addition to traditional payment into court, guarantees, charges or the provision of a bank bond: Estates Property Investment Corporation Ltd v Pooley (1975) 3 ACLR 256. See generally Dal Pont GE, Law of Costs (LexisNexis Butterworths, 2003) at [28.43]
44. The first issue in relation to what is an appropriate amount for security for the defendant's costs is whether it should include past costs, that is, costs which the defendant has already incurred.
45. It is clear that the court has the power to include such past costs: Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 122-123. Whether the court should do so is a matter of discretion.

In my view, the security for costs to be ordered in this case should not include any past costs. As part of the balancing exercise referred to above in the context of delay, it seems to me that the defendant, in electing to wait till the arrival of the proceedings in the District Court, also took upon itself the risk of not recovering any costs incurred once it was on notice of the plaintiff's impecuniosity.

There were a number of other problems with the quantification, by Mr Stevens, of the probable recoverable costs that the defendant will incur in defending the plaintiff's claim. Firstly, the calculations included the costs of this motion. Second, the calculations included costs associated with the prosecution of the defendant's cross-claim. Third, there were allowances for the gathering of expert evidence that were not sustainable. Fourth, there were other allowances that, under cross-examination, it was conceded were excessive. For example, the claim for disbursements, including photocopying, was clearly excessive.

It would not be productive for me to go into a detailed analysis of the figures, and it is sufficient if I take a global approach to the issue of what is a sufficient amount for security, having regard to the evidence, in particular the cross-examination, and my own knowledge and experience in the area of costs.

In my view, looking at the pleadings and likely length and course of any hearing, an amount of $35,000.00 is a proper sum to allow as security for the defendant's probable recoverable costs of defending the plaintiff's claim, in the event that he is successful in so doing.

In determining this amount I am mindful that in the course of litigation circumstances change. In that regard it is not uncommon for there to be a subsequent application for an increase in the amount of security provided: Fiduciary Ltd v Morningstar Research [2004] NSWSC 664 at [125] - [126] and Asia Strategic Investment Alliances v HIH Casualty and General Ltd [199] NSWSC 601 at [63] - [64].

Orders 51. I therefore propose to make orders requiring the plaintiff to provide security for the defendant's costs of defending these proceedings by paying into court the sum of $35,000.00 or by otherwise providing security for that amount in a manner satisfactory to the defendant. Until that security is provided, there will be a stay of the proceedings brought by the plaintiff.

52. The security required is to be provided before 23 June 2006, on which date the matter is to be listed before the court for consequential orders, including any appropriate orders in the event that the security has not been provided, such as dismissal of the proceedings under r 42.21(3).

53. I reserve the costs of the motion for submissions.

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