Wollongong City Council v FPM Constructions Pty Limited

Supreme Court of NSW|2004-06-10|Before: Einstein J

CITATION : Wollongong City Council v FPM Constructions Pty Limited (formerly Fyntray Project Management Pty Limited) [2004] NSWSC 523 HEARING DATE(S) : 10/06/04 JUDGMENT DATE : 10 June 2004

JURISDICTION: Equity Division Technology and Construction List JUDGMENT OF : Einstein J DECISION : Security ordered.

CATCHWORDS : Security for costs of arbitration Commercial Arbitration Act (1984) (NSW) LEGISLATION CITED : Corporations Act 2001(Cth) Supreme Court Rules 1970 (NSW) Bell Wholesale Co Pty Ltd v Gates Export Corp & Ors (No 2) 1984) 2 FCR 1 Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 Cameron's Unit Services Pty Ltd & Anor v Kevin R Whelpton and Associates (Australia) Pty Ltd & Anor (1986) 13 FCR 46 Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 8 ACLR 818 Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 Cordukes Limited v DS Parklane Development Pty Limited [2001] NSWSC 480 FFE Minerals Australia Pty Limited v Mining Australia Pty Limited [2000] 156 FLR 116 Fitzpatrick v Waterstreet (1995) 18 ACSR 694 FPM Constructions Pty Limited v The Council of the City of Blue Mountains [2003] NSWSC 201 FPM Constructions Pty Limited v Australian Recreation Systems Pty Limited [2003] NSWSC 768 Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405 Grant v The Banque Franco-Egyptienne (1876) 1 CPD 143 Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLC 492 Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744 Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 KP Cable Investments Pty Ltd v Meltglow Pty Ltd & Ors (1995) 56 FCR 189 CASES CITED : Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 M A Productions Pty Ltd v Austarama Television Pty Ltd and Anor (1982) 7 ACLR 97 Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 Murex Diagnostics Australia Pty Limited v Chiron Corporation & Ortho Diagnostic Systems Inc (1995) 128 ALR 525 Oshlack v Richmond River Council (1998) 193 CLR 72 Owners Strata Plan No. 50530 v Walter Construction Group Limited [2001] NSWSC 820 PS Chellaram & Co Ltd v Chine Ocean Shipping Co & Anor (1991) 65 ALJR 642 Rajski and Another v Computer Manufacture & Design Pty Ltd and Others [1982] 2 NSWLR 443 Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 Sent & Petres & Collier v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 Smail v Burton [1975] VR 776 Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 Spiel v Commodity Brokers Australia Pty Limited (in liq) (1983) 8 ACLR 410 Stanley-Hill v Kool [1982] 1 NSWLR 460 Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480 Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52 Tulloch Ltd v Walker (unreported, FCA, 8 December 1976) Unione Stearinerie Lanza & Weiner, Re [1917] 2 KB 558 Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 PARTIES : Wollongong City Council (Plaintiff) FPM Constructions Pty Limited (formerly Fyntray Project Management Pty Limited) (Defendant) FILE NUMBER(S) : SC 55020/04 COUNSEL : Mr S Kerr (Plaintiff) Mr G McVay (Defendant) SOLICITORS : Clayton Utz (Plaintiff) James A Moustacas & Co (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST

Thursday 10 June 2004 ex tempore Revised 17 June 2004

55020/04 Wollongong City Council v FPM Constructions Pty Limited (formerly Fyntray Project Management Pty Ltd) JUDGMENT 1 There is before the court a summons by which the plaintiff [the "Council" or "WCC"] seeks security for its costs in defending the claim by the defendant ["the builder" or "FPM"] in an arbitration. The summons seeks an order that the arbitration be stayed until such time as the builder has provided security for the council's costs. 2 The arbitration arises out of a deed made between WCC and Fyntray Constructions Pty Limited dated 1998, pursuant to which Fyntray Constructions agreed to carry out works to develop the Port Kembla pool. All Fyntray's rights and interests in and obligations under the deed were assigned to FPM in a document entitled "Deed of assignment", dated 19 July 2002. In the arbitration, FPM seeks an award that under that: · WCC pay FPM the sum of $179,979.65, being the amount of the performance guarantee retained by WCC. · FPM is not required to carry out the works contained in WCC's letter dated 21 May 2003. · FPM is not required to pay WCC liquidated damages in the sum of $90,000 or any other sum to WCC. The performance guarantee proceedings 3 A performance guarantee dated 28 September 1998 in the sum of $179,979.65 had been provided by MMI General Insurance limited to the council at the request of the builder in respect of the deed. 4 On or about 21 May 2003, WCC made a demand for the whole amount of the performance guarantee and shortly thereafter received the proceeds of the performance guarantee. 5 On 16 June 2003 FPM commenced proceedings 3310 of 2003 in the Supreme Court of New South Wales (the "performance guarantee proceedings"). The amended summons in the performance guarantee proceedings sought a declaration that WCC had breached the deed by making demand on the performance guarantee, an order that WCC repay the proceeds of the performance guarantee and an order restraining WCC from making a further demand on the performance guarantee pending the resolution of dispute set out in a notice of dispute dated 29 May 2003 delivered by FPM. 6 The performance guarantee proceedings were heard before Justice Windeyer on 5 September 2003. His Honour's extempore judgment delivered on the same day dismissed the summons with costs. The arbitration 7 GC45 of the deed provides for a process for notification of disputes arising out of the deed or concerning the performance or the non-performance of obligations under the deed and their resolution by arbitration. 8 On 6 November 2003, FPM served two notices and on 24 November 2003 a third notice stating that it required certain disputes to be referred to arbitration pursuant to GC45. 9 On 9 February 2004, the Hon. Mr Fitzgerald, AC, QC, was formally appointed the arbitrator in the arbitration in relation to those disputes. 10 On 9 February and 1 March 2004 preliminary conferences took place between WCC and FPM relating to the timetable for delivery of pleadings in the arbitration. 11 A letter dated 18 December 2003 had been written by the council seeking security for costs. 12 Points of claim were delivered by the builder dated 13 February 2004. 13 On 18 March 2004, the council delivered its points of defence and points of cross-claim, and on 22 April 2004 it delivered amended points of defence and points of cross-claim. 14 On 19 March 2004, the parties agreed that no steps would be taken in the arbitration pending the outcome of these proceedings. 15 A convenient summary of the stances taken by each party in the arbitration has been set out in paragraphs 31 to 35 of the affidavit of Mr Francis Peter Bannon of 22 April 2004:

" FPM/Applicant's Claims in the Arbitration · A summary of FPM's claim in paragraphs 3 to 14 of the Points of Claim is set out below: (a) a letter dated 8 June 2001 from WCC to FPM constituted a Final Certificate as contemplated by GC42.6 and GC42.7;

(b) on 30 April 2003 FPM provided a release as contemplated by GC42.7;

(c) by reason of GC42.7, WCC was obliged to return to FPM the performance guarantee, but failed to do so. · A summary of FPM's claim in paragraphs 15 to 18 of the Points of Claim is set out below:

(a) WCC by letter to FPM dated 21 May 2003 directed FPM to carry out rectification works to the pool tiling and concourse works;

(b) FPM completed all the works under the Deed finally and satisfactorily;

(c) FPM is not obliged to comply with the directions contained in WCC's letter dated 21 May 2003. · A summary of FPM's claim in paragraphs 19 to 24 of the Points of Claim is set out below: (a) there was an oral agreement made in or about January 2000 whereby WCC agreed not to apply for liquidated damages against FPM in consideration of FPM foregoing its right to arbitrate disputes concerning FPM's margin on the nominated subcontractor and the contract period;

(c) FPM has fulfilled its obligations to WCC under the Deed including any obligation to pay liquidated damages. · FPM claims: (a) An award that WCC pay FPM the sum of $179,979.65;

(b) An award that FPM is not required to carry out the works contained in the WCC's letter dated 21 May 2003;

(c) An award that FPM is not required to pay liquidated damages in the sum of $90,000 or any other sum to WCC. WCC/Respondent's Defence in the Arbitration · In its defence WCC asserts: (a) the works were incomplete and contained defects as at 8 June 2001 and remain incomplete and defective (paragraph 17 of the Points of Defence);

(b) the letter issued by WCC on 8 June 2001 did not constitute a final certificate, and WCC was therefore not obliged to return the performance guarantee to FPM (paragraphs 6 to 11 and paragraph 13 of the Points of Defence);

(c) FPM is estopped from asserting in the Arbitration that the letter dated 8 June 2001 constitutes a final certificate pursuant to GC42.7 as a consequence of the Performance Guarantee Proceedings (paragraph 12 of the Points of Defence);

(d) FPM is estopped from asserting that the works were complete as at 8 June 2001 due to a recital in the Deed of Assignment to the effect that Fyntray had not yet completed its obligations under the Deed (paragraph 17 of the Points of Defence);

(e) FPM failed to carry out rectification works in accordance with directions by WCC and WCC has incurred and will in the future incur rectification costs, which will exceed the amount claimed by FPM in the Arbitration, and which it was and is entitled to deduct from any amounts otherwise payable to FPM, including from the performance guarantee (paragraphs 15, 18, 25 to 36 of the Points of Defence);

(f) By force of GC35.5, FPM became indebted to WCC for liquidated damages totalling $90,000 (paragraph 19 of the Points of Defence);

(g) WCC denies that it agreed not to pursue its entitlements to liquidated damages and says that there can be no variation or waiver of the Deed except by executed deed (paragraph 20(a) and (b) of the Points of Defence);

(h) FPM is estopped from asserting in the Arbitration that FPM did not become indebted to WCC in the sum of $90,000 in respect of liquidated damages as a consequence of the Performance Guarantee Proceedings (paragraph 20(c) of the Points of Defence);

(i) further and alternatively, in the event that the letter dated 8 June 2001 is a final certificate pursuant to GC42.7 and that on receipt of the release dated 30 April 2003 WCC was obliged to pay FPM amounts then payable (which is denied), no monies were as at 8 June 2001, 30 April 2003 or are now payable to FPM due to the following amounts payable by FPM to WCC, which WCC was and is entitled to deduct from amounts otherwise due to FPM including the performance guarantee pursuant to GC46: · the $30,000 debt relating to the repairs carried out by Indent Tiles on behalf of FPM and WCC in 2000 and 2003 (paragraph 37(d) (i) of the Points of Defence); · the $90,000 liquidated damages debt owed by FPM to WCC pursuant to GC35.5 (paragraph 37(d)(ii) of the Points of Defence); · the cost of rectifying defects and omissions which would not have been disclosed by reasonable inspection at the time of issue of the final certificate pursuant to GC42.5(b) and GC46 with estimated costs of rectification of these defects and omissions being in excess of $950,000 (paragraph 37(d)(iii) of the Points of Defence); · further and alternatively the cost of rectifying defects and omissions which would have been disclosed by reasonable inspection as at 8 June 2001 and liquidated damages of $90,000, as they were accidentally and erroneously not taken into account in the computation of the figure contained in WCC's letter dated 8 June 2001 pursuant to GC42.5(c) and GC46 (paragraph 37(d)(iv) of the Points of Defence)."

The court's power to order security 16 The application for security for costs seeks security pursuant to part 53, rule 2(1)(e) of the Supreme Court Rules and, alternatively, section 1335(1) of the Corporations Act 2001(Cth). Pursuant to part 53, rule 2(1)(e), where there is reason to believe a plaintiff (FPM in the arbitration) being a body corporate will be unable to pay all costs of the defendant (WCC in the arbitration) if ordered to do so, the court may order the plaintiff to give such security as the court thinks fit. 17 Section 47 of the Commercial Arbitration Act (1984) (NSW) expressly confers upon the court power to make interlocutory orders in relation to an arbitration in an application such as the present. 18 In Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744, the court at paragraphs 16 to 23 dealt with the sources of the court's power to order security for costs:

"Sources of the Court's power to order security for costs

The Supreme Court derives power to order a plaintiff to provide security for the defendant's costs of the proceedings from the following 3 sources: a) The Court has an inherent power to require security for costs;

b) The Court may order security for costs under s1335 of the Corporations Act 2001.

c) The Court may order security for costs under Part 53 of the Supreme Court Rules 1970 (NSW);

The Supreme Court has inherent jurisdiction to make an order for security for costs in addition to its specific statutory jurisdiction. Its power is therefore broad enough to authorise the making of orders in cases other than those listed in the rules: Rajski and Another v Computer Manufacture & Design Pty Ltd and Others [1982] 2 NSWLR 443; Lehane J, "Security for Costs" Law Society Journal 37(4) May 1999 54-56.

Division 1 of Part 53 of the Rules does not affect the provisions of any Act under which the Court may require security of costs to be given: Part 53 Rule 5. The tests enunciated within Rule 2(1)(e) and s1335(1) of the Corporations Act are similar: Fitzpatrick v Waterstreet (1995) 18 ACSR 694.

Section 1335 of the Corporations Act states: "(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. (2) The costs of any proceeding before a court under this Act is to be borne by such party to the proceeding as the court, in its discretion, directs."

The Court must first consider the threshold question of whether credible testimony can establish that there is reason to believe that the corporation will be unable to pay the costs of the defendant if the latter is successful in its defence: Weily's Quarries v Devine Shipping (1994) 14 ACSR 186. If this question is answered in the affirmative, the second question arises as to whether, in the exercise of the Court's discretion, the relief sought should be granted: Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114.

Part 53 of the Supreme Court Rules provides: "(1) Where, in any proceedings, it appears to the Court on the application of a defendant: (a) that a plaintiff is ordinarily resident outside the State;

(b) that a plaintiff is suing, not for his own benefit, but for the benefit of some other person and there is reason to believe that that plaintiff will be unable to pay the costs of the defendant if ordered to do so; (c) subject to subrule (2), that the address of a plaintiff is not stated or is mis-stated in his originating process;

(d) that a plaintiff has changed his address after the commencement of the proceedings with a view to avoiding the consequences of the proceedings; or

(e) that there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so, the Court may order that plaintiff to give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given. (2) The Court shall not order a plaintiff to give security by reason only of subrule (1) (c) if it appears to the Court that the failure to state his address or the mis-statement of his address was made without intention to deceive."

References to "plaintiff" extend to "any person who makes a claim for relief in any proceedings". References to "defendant" extend to "any person against whom a claim for relief is made in any proceedings": Rule 53 Part 1. Reference to "plaintiff" is not to be given a restricted or technical meaning: Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 306.

Where a plaintiff fails to comply with an order for security for costs, the Court may order that proceedings on any claims by the plaintiff for relief in the proceedings be dismissed: Part 53 Rule 4." 19 Also in Idoport the general nature of the discretion and factors to be taken into account in the exercise of it were dealt with in paragraphs 47 to 52:

"47. It is clear that the discretion to award security for costs requires to take into account all of the relevant facts matters and circumstances and is a judicial discretion to be exercised following the adducing of all evidence by each party to an application seeking to have such an award made. As Giles J (as His Honour then was) made plain in Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470, in exercising the discretion as to whether or not to make an order for costs, the Court must have a concern to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings [cf Street CJ in Buckley v Bennell (1974) 1 ACLR 301 at 304]. Giles J referred to the debate over whether the discretion should be exercised with some predisposition in favour of the defendant and expressed the view with which I agree, that the debate is largely semantic. The principle which his Honour identified at 470 was that: "the discretion must be exercised having regard to all the circumstances of the case, but the inability of the plaintiff to meet the costs of the successful defendant, being the occasion for invoking the exercise of the discretion, is likely to play an important if not decisive role". 48. Because the discretion to be exercised by the Court is a wide one which should remain unfettered, the circumstances in which the discretion should be exercised in favour of making the order cannot and should not be stated exhaustively: Spiel v Commodity Brokers Australia Pty Ltd (in liq) at 415. In Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405, Cooper J stated: "(i)t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: PS Chellaram & Co Ltd v Chine Ocean Shipping Co & Anor (1991) 65 ALJR 642 at 643." (at 415) 49. Notwithstanding the unfettered nature of the discretion, Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd & Ors (1995) 56 FCR 189 set out 7 guidelines which the Court is said to typically take into account when determining such an application: "1. That such applications should be brought promptly. This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne (1876) 1 CPD 143; see also Smail v Burton [1975] VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 8 ACLR 818 at 820; Bryan E. Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514… 2. That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations: see M A Productions Pty Ltd v Austarama Television Pty Ltd and Anor (1982) 7 ACLR 97 at 100; Bryan E. Fencott Pty Ltd at 514. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. ( Bryan E. Fencott at 514). 3. Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim: see M A Productions Pty Ltd v Austarama Television Pty Ltd at 100. 4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E. Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms: '(t)he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.' This factor is related to the next, namely: 5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364; Sent & Petres & Collier v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 at 123; Bryan E. Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows: '...a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors)...Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.' 6. An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton and Associates (Aust) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325. 7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLC 492; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 where Zeeman J stated at 189: '(t)he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order...(see) Sydmar Pty Ltd v Statewise Developments (supra) and Interwest Ltd v Tricontinental (supra)." (at para 39) 50. Clearly as Beazley J recognised, the possibility of stultification is a "powerful" factor to be taken into account by the Court in exercising its discretion as to whether an order is appropriate: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. However, Clarke J in Yandil observed that the fact that a plaintiff is financially unable to provide security does not lead to the inevitable conclusion that the making of the order will stultify the plaintiff's claim nor does it lead to the automatic refusal of an order. He went on to cite a line of authorities (see Tulloch Ltd v Walker , Yeldham J , unreported, FCA, 8 December 1976; Bell Wholesale Co Pty Ltd v Gates Export Corp & Ors (No 2) (1984) 8 ACLR 588) in support of the view that it is generally inappropriate to refuse an order for security where: "the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security." (at 545) In other words, without fettering the Court's discretion, it was said to be unlikely that a plaintiff could successfully resist a security order on the grounds of their own impecuniosity in the absence of evidence of the financial status of those who stand behind it (see Yandil at 545). 51. McHugh J in Oshlack v Richmond River Council (1998) 193 CLR 72 also made plain at 97 that: "[T]he jurisdiction to award security for costs should thus be seen as protecting the efficacy of the exercise of the jurisdiction to award costs. The discretion should be exercised with the same rationales in mind, namely that, to the extent it can be avoided, the court should not permit a situation to arise where a party's success is pyrrhic." 52. The purpose of a security for costs order is therefore a protective jurisdiction to ensure that the primary purposes for having costs orders themselves, can be achieved. A defendant is protected against the risk that a costs order obtained at the end of the day may turn out to be of no value by reason of the impecuniosity of the plaintiff. The jurisdiction therefore assists both the compensation purpose as well as the public interest objective." Likelihood that the builder would be unable to pay the costs of the council 20 The applicant is required to establish no more than that the quality of the evidence objectively gives rise to a reason to believe that the plaintiff (FPM in the arbitration) will be unable to pay the defendant's costs (WCC in the arbitration), if ordered to do so: Bergin J in Owners Strata Plan No. 50530 v Walter Construction Group Limited [2001] NSWSC 820, citing FFE Minerals Australia Pty Limited v Mining Australia Pty Limited, [2000] 156 FLR 116, at 122. 21 There is detailed evidence before the court concerning the financial position of the builder such as it is able to be gleaned in terms of the extensive notice to produce served upon the builder by the council. That information has its source in a number of documents, it being unnecessary to chronicle those documents. It is appropriate to make clear that the notice to produce became exhibit P1. The annexures to the notice to produce are principal parameters of those materials. 22 The evidence is that since 30 September 2003 FPM's bank account balance has been progressively declining. FPM's most recent bank account statement, dated 30 April 2004, indicates that the balance in FPM's bank account is $628.20. 23 Notwithstanding that the notice to produce sought, inter alia, "all documents which disclose, record or refer to the funds, assets or indemnities which are or would be available to the plaintiff in order to meet any costs orders in these proceedings", the documents forming part of exhibit P1 do not include any documents which record any such funds, assets or indemnities [otherwise than the credit balance of $628.20]. It has to be said that the income tax returns which form part of exhibit P1 are now out of date, the most recent being the 2002 return, recorded a loss of $32,235. 24 In FPM Constructions Pty Limited v The Council of the City of Blue Mountains, [2003] NSWSC 201, at paragraph 11, Bryson J said:

"It was clear from evidence read for the Contractor that the declaratory relief sought was urgent because the Contractor was faced with severe financial difficulty, to the point where it was not in a position to continue with the work and retain its subcontractors, but would lose them in the fairly near future…" 25 Likewise the passage from Justice Campbell in FPM Constructions Pty Limited v Australian Recreation Systems Pty Limited [2003] NSWSC 768:

"[5] Fyntray Constructions had carried out the building of the centre under a sub-contract from ARS. On 30 July 2002 Mr Yazbek asked Mr Nicholas to consent, on behalf of ARS, to an assignment of the construction contract to a company called Fyntray Project Management Pty Ltd. Mr Nicholas signed and returned a document giving that consent. Fyntray Project Management Pty Ltd ("FPM") has since changed its name to FPM Constructions Pty Ltd. It is the first plaintiff in these proceedings.

[6] There is some evidence that by August 2002 Fyntray Constructions ("FC") had gone into voluntary administration. Eventually, on 27 March 2003 Fyntray Construction was ordered by the Court to be wound up. It went into liquidation owing large sums of money to sub-contractors and suppliers connected with the Mount Annan Leisure Centre job.

[78] So far as the value of any indemnity given by the plaintiffs are concerned, he says, in para33 of his affidavit, that he took the view that ARS could have no confidence in any indemnity given to it by the plaintiffs, because of their conduct in seeking to keep the benefit of any award away from the creditors of Fyntray Constructions. In my view, this is a matter which Mr Bushby could reasonably take into account, even though the circumstance of the assignment of the benefit of the contract by Fyntray Constructions to FPM had occurred months before, and Mr Nicholas had been party to it. It was open to Mr Bushby to take into account the fact that Mr Yazbek was prepared to engage in this sort of financial evasive action, and that Mr Yazbek effectively controlled FPM, in deciding whether his client was adequately protected by a personal covenant to pay from Mr Yazbeck and FPM. Further, it would be reasonable for Mr Bushby to conclude that it was not in the interests of his client to have an indemnity from a possibly reluctant payer, even if the indemnifier might, at the end of the day, have enough assets to meet the indemnity. However, the failure to consider whether the bond of approximately $191,000 might possibly be inadequate has the consequence, it seems to me, that the mere fact that there would be larger costs than had been envisaged at the time the Deed was executed, if the plaintiffs were to lose the arbitration, is not a sufficient reason for Mr Bushby to reasonably conclude that the prospect of there being such increased costs made continuation of the arbitration not in his clients interests.

[86] The financial failure of Fyntray Constructions, in circumstances where it owed creditors large sums, was known at the time of execution of the Deed. The only basis which there appears to be for the allegation that Fyntray Constructions "has apparently deliberately organised its affairs so that any benefit which may flow to the Fyntray Group from the proceeding will be kept out of the hands of those creditors" is the assignment of the benefit of the sub-contract to FPM." 26 I am satisfied that the builder not only would not be able to satisfy an adverse costs order made against it if the council, in or about the sum of $300,000, was to be successful in the arbitration, but am further satisfied that the financial position of the builder appears to be clearly one of high suspect. The builder has not seen fit to come forward with materials to assist the court in that regard. Stultification of the ability of the builder to pursue the proceedings 27 This factor was considered, inter alia, in MA Productions Pty Limited v Austarama Television Pty Limited (1982) 7 ACLR 97, Spiel v Commodity Brokers Australia Pty Limited (in liq) (1983) 8 ACLR 410 and Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52; (1977) 30 FLR 343. 28 No affidavits have been filed by FPM to suggest that an order for security for costs would stultify the arbitration. 29 This is somewhat surprising in terms of the apparent financial position of that entity. In the decision of the Full Court of the Federal Court in Bell Wholesale Co Pty Limited v Gates Export Corporation (No 2) (1984) 2 FCR 1, the Court stated:

"In our opinion, 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 benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under the trust) are also without means. It is not for the parties 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 grant of security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary fact." Delay by the council in pursuing the application for security 30 This factor was considered in, inter alia, Cordukes Limited v DS Parklane Development Pty Limited [2001] NSWSC 480 [BC 200103020]. 31 There has been no undue delay by WCC in pursuing its application, which was made before the filing of a defence. 32 The arbitration was commenced by three notices of dispute, two dated 6 November 2003 and a third dated 24 November 2003. The arbitrator was formally appointed on 9 February 2004, and I have already said that FPM delivered its points of claim in the arbitration on 13 February 2004. 33 By letter dated 18 December 2003 the applicant/respondent in the arbitration requested security for costs. 34 There was correspondence between the solicitors for the parties on 22 January 2004, 29 January 2004, 30 January 2004, 5 February 2004, 10 February 2004, 16 February 2004 and 20 February 2004 on the issue of security for costs. 35 On 27 February 2004, the summons in these proceedings was filed, as had been foreshadowed by WCC in the correspondence on security. Quantum 36 The council has adduced detailed evidence of its estimated party-party costs in terms of the arbitration. The evidence is to be found in the affidavit of Mr Bannon [at 36 to 40] and in the affidavit of 22 April 2004 by Ms Vine-Hall, solicitor and legal costs consultant. That evidence is to the effect that the total amount of costs likely to be recovered by the council from the date of the issue of the notices of dispute by the builder to completion of the arbitration if costs were to be awarded in favour of the council is in excess of $316,400. 37 I will return to that parameter in a moment but make the point that, to my observation, that evidence should be regarded as entirely out of perspective with the realities of the amounts which likely are to be ultimately party-party costs in the arbitration, depending upon a number of contingencies. The stance taken by the builder 38 The builder advanced three propositions in its written submissions. The first was that the arbitrator has the authority of the parties under the arbitration agreement to determine any dispute about security for costs. The proposition was that the council should be held to its agreement to bring the instant application before the arbitrator and that the application should be dismissed in the exercise of the court's discretion for this reason. 39 There is no substance in the submission. It is too late, it seems to me, for the builder to take this stance now. In any event, and notwithstanding the previous forensic position which may have been taken, the parties are before the court, and having mobilised the evidentiary materials now before the court, the overriding-purpose rule of the Supreme Court mandates, as it seems to me, that the court should now proceed to determine the matter. 40 The second proposition was that for the court to order security for costs would be contrary to the contract entered into by the parties. The submission was that the parties in the agreement made express provision for the builder to give to the council an irrevocable bank guarantee as security for the satisfaction of the obligations of the builder under the contract and that this bank guarantee is available to satisfy any award for costs that might be made in the builder's claim against the council. The contention further was that the council, having called up the guarantee, was presently holding approximately $90,000 of what was thumbnail sketched as "the builder's money" and that the builder in that regard relied upon clauses 5 and 46 of the agreement. 41 There is authority in relation to whether or not the making of an order for security for costs requires or does not require express provision in that regard in the relevant agreement. In Holman v Dynabuild Pty Limited, Slattery J, September 18, 1975, Slattery J held that an arbitrator under a submission out of court pursuant to a building agreement, had no power to make an order for security for costs in the absence of express provisions therefore in the agreement, citing Re Unione Stearinerie Lanza & Weiner [1917] 2 KB 558. 42 The court in this regard has been taken to particular provisions of the subject contract, there being an issue at the bar table as to whether or not the particular contract presently before the court in its terms, and in particular in the terms provided for in clause 45, has conferred upon the arbitrator power to make an order for security for costs. I do not need, it seems to me, to determine that question. To my mind, the fact is that the court clearly has a statutory discretion to participate in this endeavour, I am certainly not satisfied, or sufficiently satisfied, as to the question of principle to be in a position to now hold, as the builder submits, that there is no power in the court to make an order for security for costs. Naturally, of course, the agreement and the particular provisions with respect to the provision of a bank guarantee and the events which have occurred in relation to the calling up of that guarantee are material considerations to be taken into account on the subject application. 43 The third proposition put forward by the defendant which does require very careful consideration is grounded upon the fact that the council has cross-claimed in the arbitration in an amount which is said to be out of all proportion to the amount claimed by the builder, hence, the proposition that, in substance, the council is a plaintiff in respect of the issues on the cross-claim. Here the builder places reliance upon the proposition that security for costs will not be ordered in favour of a party who is in substance a plaintiff: Sydmar Pty Ltd v Statewise Developments Pty Limited (1987) 73 ALR 289; Murex Diagnostics Australia Pty Limited v Chiron Corporation & Ortho Diagnostic Systems Inc (1995) 128 ALR 525; Stanley-Hill v Kool [1982] 1 NSWLR 460. 44 The matter was dealt with in Idoport at paragraph 49. In subparagraph 7 at the foot of page 27 of the judgment:

"7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLC 492; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 where Zeeman J stated at 189: '(t)he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order...(see) Sydmar Pty Ltd v Statewise Developments (supra) and Interwest Ltd v Tricontinental (supra)." (at para 39)" Other considerations 45 There are a number of very curious parameters of the instant litigation which it is important to take into account in the exercise of the court's discretion. 46 The first is this. There appears to be a very real question, and it may be, as it seems to me, possibly a threshold question which would be determinative, or likely determinative, of the proceedings. The threshold question is whether or not the final decision by Justice Windeyer, to which I have referred, binds both parties in terms of a res judicata such that issues 3 to 14 in the points of claim in the arbitration [and, arguably, the issues sought to be raised thereafter in paragraphs 15 to 20] would be accordingly determined [if the res judicata question was determined in favour of the council]. 47 At the court's instance, some time today was taken in a careful discussion of the position of both parties in terms of the possibility that the arbitrator might be approached by the parties consensually to direct that a separate question order ought to be made so that the arbitration would first and foremost deal with this question of res judicata. I should not have imagined that that sort of separate question would take more than possibly a day for hearing. Ultimately, the parties were not able to reach an accommodation in that regard. 48 The second matter which is of real significance, as it seems to me in terms of the instant application, is this. The amount of the cross-claim is for far more than $179,000. In real terms, the amount of the cross-claim is close to a claim for in the order of $1 million. As I have said, the question does arise as to whether or not in a case such as this the council should be regarded, notwithstanding that it is a respondent to the arbitration, as being an effective substantive moving party. It has been put to the court that even absent the terms of the cross-claim, it would always be open to the council, in terms of its defence to the builder's claim, to raise the defective works in every parameter. It has squarely put to the court, by Mr Kerr of counsel for the council, that this cannot be said to be an example of a case where a moving party is itself seeking security. 49 To my mind, that proposition does require to be approached in a very guarded fashion. Standing back from all of the issues, the court is entitled to infer that a principal purpose of this massive cross-claim is effectively to raise the stakes out of sight, as it were, as compared to that which had been the subject of the builder's claim. 50 In any event, the court in exercising its discretion to order security for costs will always stand back from the precise amounts claimed and from the precise assessments of costs to consider every case on its own particular facts and if an order is to be made at all, make such order as is just and reasonable in the circumstances. 51 In the present case, to my mind, the matter should be approached on a stepped basis. A plaintiff is always entitled to return to the court seeking additional security depending upon the circumstances. In my view, the appropriate orders to be made on the instant application will require the defendant within the next four weeks to pay the sum of $60,000. That sum of $60,000 is intended to include $10,000 booked as against the total professional costs and disbursements incurred to date likely to be recovered on a party-party basis, which were identified as $18,350 [that is to say $10,000 against that item]. An additional $50,000 is to cover future costs. 52 That is the only order which I propose presently to make in terms of the application for a security for costs order, and the reason is this. The hearing which has occurred today has thrown up, as I have understood it, at least some real possibility that the parties following this hearing may go back to their drawing boards. There may well be an application to the arbitrator to separate out the res judicata question as a preliminary question. Should such an application be made and should such an application be successful, then the whole of the security for costs application which has been pursued presently will require to be revisited. What one will then have will be nothing remotely like a two-week case and nothing remotely like a case in which the current claim for security for costs, which it should be recalled is for $316,400, will be even the subject of consideration. 53 Should it be that no such application is made in the next four weeks, then the plaintiff has liberty to return this application for security for costs to the court and to apply for such further or other security for costs order as may be appropriate in the then circumstances. Although the question of the court's discretion will remain unfettered and the application will be determined upon its then merits, that if the evidence remains as it was today, the council may well succeed in an entirely different order of security for costs to that which has been the subject of the orders made today. 54 Finally, in terms of the overriding-purpose rule, which, of course, binds parties to proceedings before this court, it does seem to me that where there is the ethical and general obligation of parties and of counsel and solicitors to carry out their best endeavours in any civil litigation to achieve a just, quick and cheap resolution of the proceedings, the parties, even though they are not strictly bound, or may not be, by that rule where there is an arbitration on foot, should pay very careful attention to the possibilities of cutting down in a sensible way, what seems to be a very huge expense to both parties. As the transcript of argument today will disclose, at least an offer had come forward from the council that if the parties could agree on the preliminary separate question being the subject of the arbitration and on particular parameters which Mr Kerr indicated from the bar table and if the council succeeded on the res judicata issue, Mr Kerr's instructions were that the otherwise claims in the cross-claim would not be pursued. 55 Those instructions, given albeit at short notice and in a circumstance in which close questioning of the parties about the real issues came from the court, strongly suggests to me a rethinking to achieve some approach short of the full-blooded hearing, the subject of the case as presently pleaded. I certify that paragraphs 1 - 55 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 10 June 2004 ex tempore and revised 17 June 2004

      Susan Piggott
      Associate
      17 June 2004

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