The Blue Shop Pty Ltd v Hereweare Pty Ltd

Supreme Court of NSW|2016-11-21|Before: Slattery J

orporation Pty Ltd (Federal Court of Australia, 15 September 1998, unrep) Statewide Developments Realty Pty Ltd v The Owners Corporation, SP 77457 [2013] NSWSC 1750 Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 Szanto v Bainton [2011] NSWSC 985 Category: Procedural and other rulings Parties: The Blue Shop Pty Ltd (Plaintiff/Respondent) Hereweare Holdings Pty Ltd (First Defendant/Applicant) Wendy Priddle (Second Defendant/Applicant) Matthew Priddle (Third Defendant/Applicant) Fiona Rhodes Lomax (Fourth Defendant/Applicant) Representation: Counsel: A Hill/M Daniels (Plaintiff/Respondent) RL Gall (First to Third Defendants/Applicants) Z Hillman (Fourth Defendant/Applicant) Solicitors: Dakin Law (Plaintiff/Respondent) Baker Mannering & Hart (First to Third Defendants/Applicants) Sparke Helmore (Fourth Defendant/Applicant) File Number(s): 2016/195687 Publication restriction: Nil

Judgment

The Court heard two motions for security for costs in these proceedings on 21 November 2016. In the first motion, filed on 3 August 2016 Hereweare Holdings Pty Ltd ("Hereweare"), Ms Wendy Priddle and Mr Matthew Priddle (being the first to third defendants in the main proceedings, (and referred to in these reasons as the "purchasers") seek security for costs in the sum of $111,200. In the second motion, filed on 9 August 2016, Ms Fiona Lomax, the fourth defendant, seeks security for costs in the sum of $93,600.

Background

These proceedings arise out of the negotiations for the sale of a café and takeaway food business operated by The Blue Shop from premises in Alstonville, a town near Ballina, New South Wales, which premises ("the premises") had been leased by The Blue Shop during the period from 1 April 2013 to 31 March 2016.
The Blue Shop claims relief of $180,000 in damages against the purchasers, for their failure to complete an alleged binding contract for the purchasers to acquire the business. Alternatively, The Blue Shop seeks damages against Ms Lomax, the solicitor acting for The Blue Shop on the sale for her alleged negligent failure to advise on secure leasing arrangements.
The Blue Shop pleads a case that may be summarised as follows. On 29 January 2016, Mr Grissell was notified that the lessor of the Alstonville premises had agreed in principle to grant The Blue Shop a new twelve month lease of the premises upon the expiry on 31 March 2016 of the existing lease over the premises. The Blue Shop had an option to renew the existing lease for an additional three years which could have been exercised no later than 31 December 2015. But it had not been exercised within time because in December 2015 The Blue Shop was uncertain whether it would continue trading at the site.
On 11 February 2016, Mr Priddle contacted The Blue Shop on behalf of the purchasers, expressing an interest in purchasing the business. On 26 February 2016, The Blue Shop and the purchasers reached a consensus to be immediately and exclusively bound by certain terms for the sale of the business, including relevantly: "(a) The purchasers agreed to purchase the business for the purchase price of $180,000.00 with stock to be removed from the premises. … (f) The plaintiff and the purchasers agreed that the purchasers would unilaterally negotiate a lease with [sic] directly with the lessor, as had previously been agreed between the lessor and the plaintiff. (g) The plaintiff and the purchaser agreed that the plaintiff would not enter into a new lease with the lessor but would allow the purchasers to negotiate a lease directly with the lessor to take effect in combination with the sale of the business by the plaintiff to the purchasers. (h) The plaintiff and the purchasers agreed that the plaintiff's final trading day would be the 25 March 2016. (i) The plaintiff and the purchasers agreed that a formal contract would be drawn up by their legal advisers incorporating the terms of their agreement prior to the completion of the sale of business wherein further special conditions may be added as agreed. (j) The plaintiff and the purchaser agreed that the completion date for the sale of the business could be brought forward to 23 March 2016."
Based upon this consensus The Blue Shop instructed its solicitor, Ms Lomax, on 26 February 2016 to draw up a formal contract for the sale of the business to the purchasers and to advise it about the lease over the premises. The available documentary evidence shows that the purchasers' solicitors were informed that The Blue Shop would no longer pursue the twelve month lease.
The Blue Shop further pleads as follows: on 24 March 2016, the purchasers advised The Blue Shop they were awaiting Council Development Approval before they could complete the sale; on 31 March 2016, the purchasers entered into a new three year lease with the owner of the premises and Ms Lomax advised Ms Grissell that the sale would be completed on 1 April 2016; but the purchasers declined to settle on 1 April 2016 and on 4 April 2016, they unexpectedly informed Ms Lomax that they would not proceed with the purchase of the business at all.
The Blue Shop contends the legal effect of these events is: that the purchasers breached a binding agreement with The Blue Shop to complete the sale of the business on 1 April 2016; or alternatively, that the purchasers are estopped from departing from their representations to The Blue Shop that they would purchase the business on 1 April 2016.
The Blue Shop's alternative case against Ms Lomax is that she was negligent in giving legal advice in relation to the sale of the business and the leasing of the premises, with the result that it was left without a lease of the premises to sell with the business.

Security for costs

The applicable legal principles and the parties' submissions may be shortly stated. The fundamental purpose of the power to order security for costs is to secure justice between the parties, "primarily by ensuring that unsuccessful proceedings do not occasion injustice to defendants": Szanto v Bainton [2011] NSWSC 985 at [47] (per Ward J).
It was not in dispute that, were it ordered to pay the defendants' costs of the proceedings, The Blue Shop would be unlikely to be able to do so. The "threshold" requirement for an order for security has therefore been met: Uniform Civil Procedure Rules 2005 (UCPR) r 42.21(1)(d); Corporations Act 2001(Cth) s 1335(1).
But The Blue Shop submitted that the Court should decline to order security for costs on three grounds: (1) its impecuniosity was caused by the purchasers and Ms Lomax (UCPR, r 42.21(1A)(d)); (2) its claim has reasonable prospects of success; and (3) an order for security would "stultify" its pursuit of the proceedings (UCPR, r 42.21(1A)(f)).
For the reasons that follow, the Court is satisfied that an order for security for costs should be made against The Blue Shop.

(1) Impecuniosity

The Blue Shop submitted that there is an arguable case that the defendants caused its impecuniosity. In its own words, it advances the following reasons for this contention: "At the time that [the purchasers] failed to exchange contracts and complete the sale of the business the plaintiff had debts totalling approximately $180,000.00. The completion of the sale of the business, as per the agreed contract, would have satisfied the value of the plaintiff's outstanding debts and allowed it to pay off its various creditors. At the time of the failure of [Ms Lomax] in exercising reasonable care and skill in advising the plaintiff, the plaintiff had outstanding debts totalling approximately $180,000.00. Had [Ms Lomax] advised the plaintiff by exercising reasonable care and skill, as obligated by law, and by securing the plaintiff's interest in property by entering into a new lease, the plaintiff would have exchanged contracts and completed the sale of the business with [Hereweare] as agreed."
The purchasers submit in reply that The Blue Shop's impecuniosity is not a significant consideration in the exercise of the discretion to order security for costs, unless there is a material risk that such an order will stifle an arguable claim, and that in any event, The Blue Shop was already in a "perilous financial position" before any conduct on the part of the purchasers intervened. Counsel for Ms Lomax largely adopted the purchaser's submissions, and said that The Blue Shop was "on a knife edge in terms of its financial position before anything else had happened".
The relevance to a security for costs application of whether a plaintiff's impecuniosity is caused by a defendant has been considered in this Division in two recent cases. In Statewide Developments Realty Pty Ltd v The Owners Corporation, SP 77457 [2013] NSWSC 1750, White J stated at [23]: "… I doubt that the allegation, and it is no more than that, that the plaintiff's financial position has been caused by wrongful conduct on the part of the defendants should be a reason for refusing the application for security for costs if it is not shown that to order security would be to frustrate the plaintiff's ability to maintain the proceedings."
In Nonox Australia v Certain Underwriters at Lloyd's Subscribing to Contract No CV0263CGL [2014] NSWSC 221, McDougall J discussed White J's remarks at [17]-[20]: "It has been said that where security for costs is resisted on the ground that it is the conduct of the defendant that has caused the plaintiff's impecuniosity, the apparent strength of the plaintiff's case should be assessed. White J said as much in Statewide Developments Realty Pty Ltd v The Owners, SP 77457 [2013] NSWSC 1750 at [20]. However, his Honour followed this up by observing, at [23], that the real reason for investigating the strength of the plaintiff's case arises only where it was said that, on the particular facts of the case, the grant of security would stultify the proceedings. That was the approach taken by the Full Court of the Supreme Court of Western Australia in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 346 (Anderson J, with whom Kennedy and Ipp JJ agreed). In that case Anderson J observed that the question of the defendant's contribution to the plaintiff's impecuniosity had to be considered in conjunction with the proposition that the effect of an order for security would be to stultify the action. Black J applied that principle in Advance Innovative Solutions Pty Ltd (in liquidation) v X-Dem Group (Aust) Pty Ltd [2012] NSWSC 1112 at, in particular, [19]. There are many cases that have looked at the discretion, and the factors that might bear upon its exercise. What is important, however, is that the factors that have been expounded in decided cases are no more than guides to relevant circumstances, on the facts of each case, which bear upon the exercise of the discretion. There is no verbal formulation of any limit upon the discretion. The only inherent limitation is that it be exercised judicially. That requirement comprehends, I think, that it be exercised rationally on the basis of (and only of) all relevant materials (to the extent the parties put them before the court) and in a way which can be seen, objectively, to give due respect to the purpose underlying the rule and the competing consideration of the desirability that disputes should be litigated where they have reasonable prospects of success."
His Honour continued at [27]: "[I]mpecuniosity of itself is not the relevant consideration. The relevant consideration is whether the effect of that impecuniosity would be that the litigation would be frustrated, or stultified, if security were to be ordered."
The above remarks suggest that, even if the Court were satisfied that it is reasonably arguable that the defendants caused The Blue Shop's impecuniosity, by itself that would not be a sufficient basis upon which to decline an order for security for costs.
What caused The Blue Shop's impecuniosity? The evidence before the Court as to The Blue Shop's financial position was as follows: 1. A list of creditors annexed to the affidavit of Ms Grissell sworn on 2 September 2016 indicated that as at 4 April 2016, The Blue Shop had creditors totalling $180,200. 2. The Blue Shop's Financial Statements for the year ended 30 June 2013, show an operating profit of $14,579, which was distributed to the beneficiaries of the family trust of which it is the trustee and an equity of $100. 3. The Blue Shop's Financial Statements for the year ended 30 June 2014, show an operating loss of $13,205 although after the sale of assets, a net profit of $8,045, which was distributed to beneficiaries and an equity of $100. 4. The Blue Shop's Financial Statements for the year ended 30 June 2015, show an operating profit of $18,611 and net profit of $23,933 distributed to beneficiaries, and an equity of $100.
The trust beneficiary named in The Blue Shop's tax returns for the years ended 30 June 2013, 30 June 2014 and 30 June 2015 was Mr Grissell.
The defendants submitted that The Blue Shop had failed to establish that it was in a sufficiently stable financial state prior to any of the alleged conduct on the part of the purchasers, such that the Court could not be satisfied that the purchasers could have caused The Blue Shop's impecuniosity.
In Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564; [2004] NSWSC 664, Austin J stated at [88]: "… One can imagine a case in which the plaintiff company has been carrying on business for a lengthy time, only to find itself financially ruined after the defendant's conduct has intervened. In such a case the court may be able to conclude that the defendant's wrongdoing caused the plaintiff's financial collapse, without the plaintiff having to prove its previous financial strength in detail. But in a case such as the present one, where the corporate plaintiffs had not been operating in Australia for a sufficiently lengthy period of time to establish a track record, it is correct, in my view, to require them to prove that they were in an adequate financial state, prior to the commencement of their association with the Morningstar interests, to have been able to meet an adverse costs order in the proceeding."
The purchasers submitted that the substantial cause of The Blue Shop's current impecuniosity was debts that predated the sale of the business, not the Purchaser's failure to go ahead with the sale. They submitted that the present case is comparable to the circumstances considered in Statewide Developments Realty Pty Ltd v The Owners Corporation, SP 77457 [2013] NSWSC 1750. In that case, White J stated at [16] that although the defendants' termination of the agreement between the parties (which accounted for over half of the plaintiff's income) impacted "severely on the plaintiff's profitability by reducing its revenue", it did not follow "that the conduct should be seen as being the cause or even necessarily the predominant cause" of the plaintiff's impecuniosity. His Honour gave two reasons for this conclusion in Statewide: (1) some of the plaintiff's revenues had been restored as a result of an injunction granted by the Court; and, (2) there had been "substantial changes to the plaintiff's revenue over the preceding few years" and a related company owing a substantial sum to the plaintiff had gone into administration.
Counsel for Ms Lomax submitted that the present case is also analogous to Hassoun v Wesfarmers General Insurance Limited t/a Lumley General [2015] NSWCA 33, where at [56] the Court of Appeal (Gleeson JA , McColl JA agreeing) held that the plaintiff had failed to demonstrate that he was trading profitably prior to the fire in respect of which the defendant insurer refused to indemnify him.
In my view it is not possible in this case to say that the plaintiff's impecuniosity was caused by the conduct of the defendants or any of them. At first analysis in this case, where a vendor seeks to enforce a purchase contract, impecuniosity might seem to be more easily established, than in most cases.
But that is not so. Before and after the alleged contract was made The Blue Shop had the same debts. Its asset position had arguably declined, because of the loss of leased premises to support an ongoing business. But the cause of that loss is the central point of contention in the proceedings.
There are other causation problems. Which of the defendants caused any impecuniosity? There are many factual scenarios available within The Blue Shop's pleading, in which the first to third defendants may have caused the plaintiff loss but the fourth defendant did not and vice versa. The permutations of possible liability scenarios between these defendants blur the issue of causative responsibility for any one defendant for the plaintiff's loss.

(2) Reasonable prospects of success

The Blue Shop submitted that the Court should favourably assess the relative strength of its case in the course of considering whether to grant an order for security. The Blue Shop relies on the remarks of Hodgson JA on this subject in Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [34]: "In any case where a company or person resisting security for costs relies on the point that the impecuniosity was caused by the other party, it is almost inevitably the case that that is a matter that is in issue in the proceedings. … It will very often be the position that the most that can be said is that it may have been caused and that the company or person against whom security is sought has an arguable case to that effect. In those circumstances it seems to me that, if the company or person resisting an order for security wishes to rely on the question of causation as a significant factor, it is not inappropriate for the court considering whether to grant security [to] have some regard to the apparent strength of the case…"
The Blue Shop further submitted that its claims are reasonably arguable. It says therefore that the merits are therefore at worst only a "neutral" factor, relying on Black J's remarks in In the matter of Felan's Fisheries Pty Limited [2016] NSWSC 1351 at [21]-[23] ("Felan's"). In Felan's his Honour adopted Katzmann J's approach to such an assessment in Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222 at [22], (where her Honour stated that "unless the claim is obviously hopeless, the prospects of success or of failure are of little relevance, especially where the issues are complex").
The purchasers accepted in argument that the merits of the proceedings are usually regarded as a neutral factor. But they submitted that in the present case there are internal inconsistencies in the pleadings that reveal inherent problems in the plaintiff's case. The purchasers identified those inconsistencies as the following: (1) The Blue Shop alleged that there was a binding contract comprised of certain "exclusive" terms, yet it claimed that one of those terms contemplated further special conditions being agreed upon (see term (i) above) suggesting that only a non-binding consensus had been reached; and (2) The Blue Shop alleged that there was a binding contract but on 24 March 2016 the purchasers advised that they were awaiting Development Approval before they could complete the sale, suggesting that Development Approval was a condition proceed to any binding agreement.
Moreover, the purchasers submitted that Hereweare was not incorporated as at 26 February 2016, the date the agreement between the parties was alleged to have been reached. The evidence demonstrates that Hereweare was not registered until 29 February 2016. The Blue Shop may perhaps ultimately allege that the contract was formed with Mr and Ms Priddle with a view to the company being formed.
Ms Lomax submitted that the claims against her were "barely arguable", for several reasons. 1. The further twelve month lease was only a lease "in principle". The Blue Shop at all times considered itself at liberty to execute a binding agreement with the purchasers that would require the purchasers to negotiate their own lease. 2. It is "inconsistent" for the Blue Shop to allege that the purchasers were obliged as at 26 February 2016 to negotiate a new lease with the lessor of the premises whilst also claiming that Ms Lomax was under an obligation to advise The Blue Shop, in breach of that agreement, to negotiate its own lease. 3. There was no evidence that, if The Blue Shop had in fact obtained the further twelve month lease, that the purchasers would have completed the sale; 4. The damages The Blue Shop claimed represented the whole of the purchase price, even though The Blue Shop has not transferred any plant or equipment to the purchasers.
In my view no conclusions can be drawn about reasonable prospects of success in this case. It cannot be said that the plaintiff has either strong or weak prospects. The facts are too uncertain to hazard any such judgment. The security for costs application should be assessed without the benefit of judgment about the plaintiff's prospects of success.

(3) Stultification of the proceedings

The Blue Shop submitted that an order for security for costs would stultify the proceedings. It stated that those that stand behind the company would not provide security on behalf of the plaintiff. The Blue Shop relied upon the remarks of Hodgson JA in Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11, where his Honour stated at [26] that "if it can be shown that those persons are reasonably unwilling, even though possibly able, to provide the security, that may be a factor that would be taken into account" in whether or not to grant security for costs.
The purchasers submitted that The Blue Shop has not demonstrated that its shareholders Mr and Ms Grissell, who might reasonably be expected to fund it, are also without the means to do so. In Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 52 ALR 176 at 179, the Court held that: "[A] court is not justified in declining to order security on the ground 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 security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts."
In Ballard v Brookfield Australia Investments Ltd [2013] NSWCA 82, Ward JA stated at [53] that: "… An important factor informing the exercise of the discretion is the existence of persons who stand behind an impecunious plaintiff who seek to take the benefit of our system of justice (ie share of the proceeds of victory) without the corresponding burden (ie a potential adverse costs order) .. "
The purchasers submitted that there is no evidence that Mr and Ms Grissell are without means; that the evidence supports the conclusion they own at least one property, in which they have some remaining equity; and that if they are unwilling to provide security, they had not established that such a position was reasonable.
There is some force in the purchaser's submissions. Ms Grissell deposes that she and Mr Grissell own a property in Larnook encumbered by a mortgage in the sum of $275,000. A valuation annexed to Ms Grissell's affidavit of 10 August 2016 suggests that the Larnook property could achieve a sale price of $860,000. Ms Grissell states that the couple had applied for an additional $100,000 loan to be secured against the Larnook property, which appears now indeed to have been taken out to pay off The Blue Shop's debts. That still leaves an equity in the Larnock property of approximately $485,000. The purchasers submitted that the proper conclusion to be drawn from this material is that Mr and Ms Grissell were not unable, but rather unreasonably did not wish, to provide security.
Ms Lomax adopted these submissions. She submitted that The Blue Shop's position as a trustee company is also a relevant consideration, to be weighed in favour of granting security due to the difficulties "peculiar to enforcing against a trustee".
Authority supports Ms Lomax's submissions. Marshall J in Seventy Fourth Wreath Pty Ltd v Wilbrow Corporation Pty Ltd (Federal Court of Australia, 15 September 1998, unrep) said: "A factor which, in my opinion, militates strongly in favour of making an order for security for costs, is the applicant's status as a $2 trustee company, in circumstances where those who stand behind the applicant have given no undertaking to meet the respondents' costs. There is no reason to assume that the shareholders and directors of the applicant and/or the beneficiaries of the trust are not likely to benefit from the success of the applicant in the litigation. There is also no realistic basis upon which to consider that such people are not in a position to provide such security. It would have been a simple matter for them to refute such propositions, by way of affidavit, if the contrary was true. …"
Goldberg J made similar remarks in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 at [22] and [24], adopting the earlier remarks of Pincus J in Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634 at 635, of Smithers J in Laundry Coin‑Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40‑584 at 46,729 and of Lehane J in Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 70 - 71.
The Court is not satisfied that an order for security for costs would stultify the proceedings. The evidence indicates that Ms and Mr Grissell own the Larnook property which has a residual equity of up to $485,000. This is sufficient to allow funds to be raised to meet the defendants' various claims for security for costs in this case. Ms and Mr Grissell are unwilling to offer security. They are not unable to provide security. Nothing in the evidence explains why their refusal to offer security should be assessed as reasonable. Their refusal weighs against them.

The Purchasers' Legal Costs

The purchasers' expected legal costs must be quantified to make an order for security. The Court can take a "broad brush" approach to quantum: Re Beechworth Land Estates Pty Ltd (admin apptd) (No 3) (2015) 106 ACSR 495 at [111].
Mr Stephen Hart quantified the purchasers' actual future costs for a full hearing broken down between solicitors and counsel.
The purchasers' solicitors' costs, were identified in summary form on a full indemnity basis as approximately $66,000, allocated as follows: 1. Reviewing the evidence served by The Blue Shop and preparing evidence in response - $13,000 2. Briefing counsel - $2,000 3. Reviewing/drafting pleadings and general case management - $13,000 4. Settlement discussions/mediation - $15,000 5. Preparing for final hearing - $3,500 6. Attending final hearing - $19,500
Counsel's fees for the purchasers were estimated as $44,000 on a full indemnity basis, were broken down as follows: 1. Appearing in directions hearings/other interlocutory motions - $8,000 2. Reviewing/preparing pleadings - $5,000 3. Reviewing evidence - $4,800 4. Advice on evidence and prospects - $5,000 5. Preparation for final hearing - $8,000 6. Attendance at final hearing - $13,200
In accordance with established practice it would not be appropriate at this early stage of the proceedings to order security in respect of the costs of the preparation for and attendance at a final hearing (being matters (e), (f), for solicitors' costs and (k) and (l) for counsel's costs above).
And the Court has decided to order mediation in these proceedings. The mediation can take place on 21 February 2017. For that reason the Court takes the approach at this stage of adopting a reasonably minimalist view of the work required before mediation: putting on only that evidence which is essential to allow the parties to mediate their dispute. For example, the defendants will not be required to put their evidence on before mediation. Ms Gall properly accepted that that items (a) and (i) above could be reduced on this account, as those figures partly cover preparation of the purchasers' evidence in reply and the review of Ms Lomax's evidence).
In respect of items (b) and (g), Ms Gall admitted that the figures cover past costs, but submitted that these costs should be included because the application for security "was on foot prior to some of those direction hearings taking place so they are not past in that sense". This seems reasonable. But Ms Gall accepted that some overall reduction in figures may be appropriate because the figures are "anticipating perhaps other interlocutory applications".
In relation to (d), Ms Gall accepted that the figure of $15,000 "might need to be reduced" to approximately $10,000, as the court-annexed mediation, for which there is no charge for the mediator, will now be available to the parties.
Taking into account the above, the total figure of $66,000 for actual solicitor's costs could be revised to a figure up to the mediation of about $30,000. This is achieved by, reducing (a) to $6,000, allowing (b) at $2,000, allowing (c) at $13,000 and reducing (d) to no more than $9,000 or $10,000. Applying a discount that the parties accepted to achieve a figure for costs on the ordinary basis, 70% of $30,000, leaves a figure of $21,000 for solicitors' costs on the ordinary basis.
A similar exercise can be done for counsel's fees, but without applying a discount of 70% as counsel's fees are in the nature of disbursements. Looking only at (g) to (j) the figure for actual costs of $17,000 is reached by allowing (g) at $8,000, reducing (h) at $4,000, eliminating (i), and allowing (j) at $5,000
Some further reductions were possible so Ms Gall accepted in submissions an overall range of $35,000 to $38,000, comprised of about $21,000 for solicitors' costs on the ordinary basis and $17,000 counsel's fees as the quantum of any order for security for the first to third defendants' costs against the plaintiff. The Court will order security for their costs in the sum of $35,000.

Ms Lomax's costs

Ms Lomax's costs of the proceedings were quantified in an affidavit of Mr John Coorey, the solicitor for Ms Lomax, as $129,000 on an indemnity basis (excluding GST), or between $81,900 and $93,600 (excluding GST) on the ordinary basis. Those costs were broken down into two tranches, separated into "immediate pre-trial work" (tranche 2) and "work which is required prior to that point" (tranche 1).
It is not appropriate to order security for the costs of immediate pre-trial work at this early stage of the proceedings. Accordingly the Court only had regard to the estimates in tranche 1. In summary form, the costs identified in tranche 1 (totalling $73,000) were as follows: 1. Consideration of the Statement of Claim - $5,000 2. Application for security for costs - $7,000 3. Drafting Ms Lomax's defence - $4,000 4. Considering the purchasers' defence - $1,000 5. Attending directions hearings/interlocutory motions - $10,000 6. Review of The Blue Shop's evidence - $6,000 7. Preparation of Ms Lomax's evidence - $8,000 8. Review of the purchasers' evidence - $3,000 9. Settlement discussions/mediation - $12,000 10. General case management - $5,000 11. Liaising and conferring with Ms Lomax - $12,000
Again, the Court indicated to Ms Hillman that it would not be appropriate to order security for costs in respect of a number of the above items in Tranche 1 because security was being tailored at this stage to get the parties to mediation: items (g) and (h) may be excluded, as the defendants will not be required to put their evidence on before mediation; item (i) may be reduced to $10,000 if the fees of a private mediator are excluded, as court-annexed mediation will be available to the parties; and, the estimated costs of any future directions hearings should also be excluded (item (e)), the Court has adjourned the motion to 21 February 2017. Items (j) and (k) can also be substantially reduced at this stage of the proceedings.
These exclusions and reductions indicate an award of security for costs in the range $20,000 - $24,000 is appropriate for Ms Lomax. The Court will therefore order security for Ms Lomax's costs in the sum of $22,000.

Costs of the Motion

Two sub-issues remain. The first sub-issue was whether security for the costs of the application for security may be ordered. Ms Lomax submitted that the remarks of McDougall J in Brad's on Tap Plumbing Pty Ltd v The Owners - Strata Plan No 56443 [2016] NSWSC 512 support the proposition that such costs may be included. In that case, his Honour stated at [56]: "Next, Mr Walker submitted, there was no basis for ordering security for the cost of the application for security for costs. Of course, if I were to dismiss the application, that would be so, because the Owners Corporation would have no entitlement to any such costs, and instead would be ordered to pay the costs incurred by Brad's. But if I order, for example, that there should be some security for costs and that the costs of the application are to be the Owners Corporation's costs in the proceedings, then there is a very obvious basis for including the estimated sum in the amount for which security should be given."
Ms Hillman also submitted that in Samadi Developments Pty Limited v SX Projects Pty Limited [2015] NSWSC 1576, Ball J (at [18]) did not consider the costs of the security for costs application as unreasonable when considering the reasonableness of the itemised costs.
In response The Blue Shop emphasised that McDougall J's suggestion that there was an obvious basis for including the costs of the application, was predicated on the assumption that the cost of the application were the applicant's costs in the proceedings.
Ms Hillman submitted that I should order that Ms Lomax's costs of the application be Ms Lomax's costs in the cause. In support of that submission, Ms Hillman drew attention to the correspondence between the parties' solicitors.
On 6 September 2016, Ms Lomax's solicitors emailed The Blue Shop's solicitors saying: "[W]e would be prepared to resolve Ms Lomax's motion for security on terms whereby the Grissells personally provide security to Ms Lomax - for instance, by way of a bank guarantee or a mortgage over the property referred to in paragraph 49 of Mrs Grissell's affidavit. We would expect, in that case, that Blue Shop will also agree to pay Ms Lomax's costs of and incidental to her motion to date, since we gave you every opportunity to resolve the issue voluntarily before we filed Ms Lomax's motion and were only made aware of Mrs Grissell's interest in the relevant property on 2 September 2016."
In a further email dated 9 September 2016, Ms Lomax's solicitors stated: "[W]e assume that your client has included paragraphs 49 to 53 of Mrs Grissell's affidavit because they consider the financial position of the defendants and/or shareholders of The Blue Shop to be relevant to the security for costs application. Therefore, is it the case that they concede that their personal assets will be able to be called upon in the event of a costs order against The Blue Shop which The Blue Shop cannot meet? If that is the case, we reserve our position about calling for full disclosure of Mr and Mrs Grissell's financial position."
The response to the latter email by The Blue Shop's solicitors on 14 September 2016 stated: "You can make any assumption you like, but again, I confirm the disclosure of personal property ownership was merely a full and frank disclosure about asset holdings of the director and shareholders of the company: Nothing more! There is NO PERSONAL OFFER of the shareholders to secure any form of security for the company client. PLEASE READ paragraph 53 of the affidavit of Mrs Grissell sworn 2 September 2016. That will indicate the purpose of disclosure and is supportive of the client company being impecunious!"
I will order that Ms Lomax's costs of the security for costs application be Ms Lomax's costs in the cause but not the plaintiff's costs in the cause. The above correspondence merits this result: it shows the plaintiff unreasonably rejecting even the exploration of the kind of solution that is close to what the Court has now ordered in this case.
The Court will not make the same order in respect of the purchasers. Between The Blue Shop and the purchasers, the costs of the motion will be the successful party's costs in the cause. The evidence relied upon by the purchasers on the issue of costs was a letter to The Blue Shop's solicitors dated 6 July 2016 estimating the purchasers' costs at $90,000 and requesting security. Negotiations between the purchasers and The Blue Shop did not get as close as they did they did with Ms Lomax to what the Court has ordered.

The Form of Security

The purchasers submitted that security should be provided by payment into Court. They contended there is a lacuna in the evidence whether Mr and Ms Grissell will be able to meet any personal guarantee. Ms Lomax made a similar submission.
Ms Hillman submitted that authority does not support any predisposition of these Courts to order security by way of personal guarantees. She referred to KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (Beazley J, as her Honour then was) at 204: "Once the statements in Mantaray and Gentry are considered in context, it is clear that no more was being said than that the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made. In my opinion, this is the correct approach to take when such an offer has been made. The question which arises in this case is whether the respondents should be deprived of the provision of security such as cash security or a charge over the assets merely because such an offer has been made. In my opinion, there is no reason why they should be so deprived."
The provision of personal guarantees by the directors is sufficient at this stage. There is no evidence that the Grissells will not have the funds to meet personal guarantees of this kind when called upon to do so. Indeed the evidence is to the contrary. The same evidence that shows they hold interests in real estate also demonstrates they probably have funds sufficient to meet personal guarantees.
Simplicity is important at this stage. Only relatively modest orders for security are being made at this time. The parties are all preparing for mediation. Delay associated with raising funds to pay them into Court will slow momentum towards mediation. The provision of personal guarantees will be operative more quickly.
This first tranche of security may be provided by way of personal guarantees. But if the proceedings do not settle at mediation the Court will leave open the question as to whether any future tranches of security should be supplied by the plaintiff raising the funds and paying them into Court, rather than by the provision of a larger personal guarantee.

Conclusion and Orders

The Court makes the following orders and directions: 1. Order that these proceedings be stayed as against all defendants unless within 7 days the plaintiff provides security for costs in the form of a joint and several personal guarantee from each of Susanna Maree Grissell and Jason Grissell (the shareholders of the plaintiff) of the potential costs liability of the plaintiff up to the following amounts that may be ordered for costs incurred up to 21 February 2017, namely: 1. $35,000 with respect to the 1st to 3rd defendants' costs; and 2. $22,000 with respect to the 4th defendant's costs. 1. This Motion is adjourned before me to 9:30am on 21 February 2017 1. when the parties: 1. Will be at liberty to hand up Terms of Settlement if the proceedings are resolved; or 2. Apply for further security and if so advised apply to vary the form in which future security is required to be paid, including by the payment of further money into Court rather than by personal guarantee; and 1. for which adjourned date the parties may issue subpoenas returnable on 14 February 2017. 1. Order that the costs of the 1st to 3rd defendants' motion will be the successful parties' costs in the cause and the costs of the 4th defendant's motion will be the 4th defendant's costs in the cause. 2. Order the plaintiff file and serve an Amended Statement of Claim by 4pm on 28 November 2016. 3. Order the defendants file and serve defences to the Amended Statement of Claim by 4pm on 16 December 2016. 4. Order the plaintiff serve its affidavits and any experts' reports on which it wishes to rely by 3 February 2017. 5. ORDER that these proceedings be referred to mediation pursuant to Civil Procedure Act, s 26. 6. Order the parties serve position papers for the mediation by 15 February 2017. 7. Order the parties attend court annexed mediation at 2pm on 17 February 2017. 8. Grant liberty to apply to vacate Order 9 by 16 December 2016 if a private mediator is agreed. 9. Otherwise grant liberty to apply in respect of the implementation of the orders.

Amendments 01 March 2017 - [29] "(McColl JA" to ", McColl JA" [30] After "first analysis" add "in" [46] Golberg to Goldberg 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: 01 March 2017

Corporations Act 2001(Cth)s 1335(1).

At a glance

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Judgment (13 paragraphs)

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Cases Cited (18)