Zakka v George Elias t/as Cadmus Lawyers

Judgment 1HIS HONOUR: This is an application by two respondents for orders that the appellant provide security for their costs of the appeal. The respondents are legal practitioners who were sued in the District Court for damages for professional negligence. The second respondent was employed by the first respondent at the time of the events giving rise to the proceedings. 2The appellant is an unemployed disability pensioner. He mortgaged his home to secure two loans from which he received no benefit. The second loan was used to repay the first loan and to on-lend to a company of no worth. His home was sold by a mortgagee for less than the amount owing to it. 3The primary judge, Balla DCJ, found that the appellant retained the second respondent to provide legal services in connection with the loans and that the second respondent breached that retainer in respect of the first, but not the second, loan. Her Honour also found that the appellant did not retain the first respondent to provide legal services and that the second respondent's conduct did not occur in the course of her employment by the first respondent so as to render the first respondent vicariously liable to the appellant for her conduct. 4It is common ground that the appellant is impecunious and has no assets with which he could comply with an order for provision of security for the respondents' costs of the appeal. Prima facie, it therefore appears that the appeal will be stultified if an order for security is made. However, the respondents contend that any success of the appellant on the appeal will be for the benefit of his creditors who should ensure that the respondents' costs will not go unpaid if the appeal fails. The respondents point to the fact that the appellant's creditors recently agreed to annulment of a bankruptcy of the appellant, without which the appellant could not pursue his appeal, upon the basis that any recovery by the appellant on appeal would, after payment of the appellant's costs of the proceedings, be applied first in discharge of the debts owing to the creditors. The respondents submitted that by this means the creditors had facilitated the continuation of the appeal without ensuring that the respondents are able to enforce any costs order made in their favour. 5The appellant submitted, without contradiction, that if he were successful on the appeal, he would be likely to recover in excess of $500,000 plus costs. He has two creditors, one owed approximately $4,000 and another (Genworth Financial Mortgage Insurance Pty Ltd: "Genworth") owed about $116,000. The appellant's costs at first instance and on appeal are estimated to be in the order of $250,000 but the evidence indicates that if he were successful on appeal he would be likely to recover 50 to 60 per cent of those costs, assuming, as is likely, that costs orders were made in his favour. As a result, his success on appeal would be likely to result in a benefit to him personally of more than $250,000, quite apart from his ability to pay his legal fees. On the other hand, the benefit to the larger of the appellant's two creditors would represent less than 25 per cent of the total judgment in the appellant's favour and there is nothing to indicate that that creditor would hazard a liability for costs in return for the benefit it might obtain from the appeal proceedings. If, as I conclude below, the appeal has only limited prospects of success, the creditor would be more likely to lose its appeal funding than to derive a benefit. Indeed, the appellant's trustee in bankruptcy unsuccessfully sought funding for the appeal from creditors and the evidence suggests that it was only with some reluctance that Genworth consented to the annulment of the bankruptcy to enable the appeal to proceed 6As indicated by Hodgson JA (with whom Campbell JA agreed) in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 at [7], "[t]o the extent that a party asserts that an order that security be provided would stultify the proceedings, it must satisfy the Court that those who stand behind it or stand to benefit from its success in the proceedings are unable to provide security for costs". In the present case however, I do not consider that the prospective benefit to Genworth is of sufficient magnitude to warrant the conclusion that the appeal is effectively being brought for its benefit and that the appellant should be precluded from pursuing his appeal because that creditor is not providing funds to secure the respondents' costs. (The debt owed to the other creditor is so small that it can be disregarded for present purposes). 7The appellant gave oral evidence in response to the applications for security for costs. He said that he had no assets and knew no one who would lend him money to conduct the appeal. However when asked whether he knew anyone who had funds which, if available to him, would enable the appeal to proceed (assuming security for costs were ordered) the appellant said that he had a cousin with such funds. There was no basis in the appellant's or any other evidence for thinking that the appellant's cousin might have a reason to provide funds to assist in the appeal proceedings and I would not in those circumstances conclude that he would be likely to do so. Thus, I do not regard this evidence as significant. 8The respondents further contended that the appeal had poor prospects of success. The first respondent claimed, for example, that the appellant had not pleaded that the first respondent was vicariously liable for the second respondent's conduct, as distinct from being liable for breach of a retainer of him by the appellant. However that basis of liability appears to have been in issue at first instance as the primary judge dealt with it. Although overall the appeal does not appear to me to have strong prospects of success, the respondents' arguments have not persuaded me that it is hopeless. 9The respondents' applications are made under r 51.50(1) of the Uniform Civil Procedure Rules which permits the Court to order security for the costs of an appeal in "special circumstances". In my view the respondents have not shown that there are special circumstances in the present case warranting an order for provision of security for their costs. As the appellant contends, the appeal would be stultified if security were ordered. Whilst there is a third party, Genworth, which may to some extent benefit if the appellant succeeds on the appeal, the evidence does not suggest that that third party would be willing, or indeed would have a sufficient reason, to fund the provision of security for the respondent's costs. It is also relevant that the appellant's impecuniosity is alleged to have resulted from the respondents' breaches of duty for which they are sued. 10The present case differs from those in which the appellant (or plaintiff) is supported by a litigation funder as the appellant's legal representatives are conducting the present appeal on a no win/no pay basis. The potential unfairness of the appellant/plaintiff's costs being secured by a third party, whilst the respondent/defendant's costs are not, is therefore absent. 11In these circumstances I do not consider that I should make an order for the provision of security for the respondent's costs. This will have the consequence that the respondents' costs are unlikely to be paid if the appeal fails. This is a regrettable, but an inevitable corollary of the fact that a moving party's impecuniosity is not itself a basis for ordering security for costs (Green at [6]), particularly where, as here, the relevant legislation requires the existence of "special circumstances". 12Accordingly, I order that the respondents' notices of motion seeking security for costs be dismissed with costs.