Allstate Life Insurance Co v ANZ Banking Group Ltd
[1995] FCA 1080
•21 DECEMBER 1995
CATCHWORDS
PRACTICE AND PROCEDURE - security for costs - foreign applicants - whether security can be fixed in an amount arrived at by reference to probable amount of respondents' costs on an indemnity basis - whether amount of security should be fixed by reference to that amount.
Federal Court of Australia Act 1976 (Cth) s 56.
Federal Court Rules O 28 r 3.
Gould v Vaggelas (1985) 157 CLR 215.
Procon (GB) Ltd v Provincial Building Co Ltd [1984] 2 All ER 368 (CA).
The Airlie Group Pty Ltd v John Fairfax Group Pty Ltd, unreported (FCA/Sheppard J) 7 June 1991.
Farmitalia Carlo Erba SrL v Delta West Pty Ltd, unreported, (FCA/Heerey J) 4 March 1994.
Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 (FC).
Quad Consulting Pty Ltd v David R Bleakley & Associates Pty Ltd, unreported (FCA/Burchett J) 28 June 1991.
Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 (Fullagar J).
Set Technologies Pty Ltd v Lewis (1993) 10 ACSR 61 (FCA/Spender J).
Menhaden Pty Ltd v Citibank NA (1984) 1 FCR 542 (Toohey J).
Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 (French J).
Bruce Pie & Sons Pty Ltd v R H Mainwaring, English and Peldan [1985] 1 Qd R 401 (McPherson J).
Electrona Carbide Industries Pty Ltd v The Tasmanian Government Insurance Board [1985] Tas R 68 (Cox J).
Crothers v Simpson Sears Ltd (1988) 51 DLR (4th) 529 (Alberta CA).
ALLSTATE LIFE INSURANCE CO & ORS v AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED & ORS (No 19)
No NG 381 of 1994
Lindgren J
Sydney
21 December 1995
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 381 of 1994
GENERAL DIVISION )
BETWEEN:
ALLSTATE LIFE INSURANCE CO and the parties listed as applicants in Annexure A to the third further amended statement of claim.
Applicants
AND:
AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED and the parties listed as respondents in Annexure B to the third further amended statement of claim.
Respondents
CORAM:Lindgren J
PLACE:Sydney
DATE:21 December 1995
MINUTE OF ORDERS
THE COURT ORDERS:
THAT it be referred to a deputy registrar to provide to the 6th, 11th, 12th, 13th, 14th, 15th and 17th applicants and the 54th respondent an estimate of the probable amount of the 54th respondent's party/party costs for Stages 3 and 4 of the proceedings.
THAT the proceedings be stood over to 22 December 1995 at 9.30 am for the making of orders in conformity with the reasons of Lindgren J published on 21 December 1995.
THAT the costs of the 6th, 11th, 12th, 13th, 14th, 15th and 17th applicants and the 54th respondent of the 54th respondent's motion brought by notice of motion filed on 18 August 1995 be those respective parties' costs of the proceedings.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No NG 381 of 1994
GENERAL DIVISION )
BETWEEN:
ALLSTATE LIFE INSURANCE CO and the parties listed as applicants in Annexure A to the third further amended statement of claim.
Applicants
AND:
AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED and the parties listed as respondents in Annexure B to the third further amended statement of claim.
Respondents
CORAM:Lindgren J
PLACE:Sydney
DATE:21 December 1995
REASONS FOR JUDGMENT (No 19)
(Freehills' motion for "Stage 3" and "Stage 4"
security for costs)
NATURE OF PROCEEDINGS
By notice of motion filed on 18 August 1995, the 54th respondent ("Freehills") move for orders that the 6th, 11th, 12th, 13th, 14th and 15th applicants ("the Ariel Entities") and the 17th applicant, David H Schieber, provide security for Freehills' costs to be assessed on an indemnity basis, or in the alternative, on a party/party basis, and that the other applicants provide security for such costs on a party/party basis. As I understand the position, the applicants, including the Ariel Entities and Mr Schieber, do not object to an order that they provide security for Freehills' costs on a party/party basis.
Freehills' submissions ignored Mr Schieber's position. Generally, I will do the same but the determination of the issues on the motion as between Freehills and the Ariel Entities will also determine the result of the motion in so far as it relates to Mr Schieber.
GENERAL BACKGROUND
It is not necessary for me to give a detailed account of the factual background to the litigation. This has been done with varying degrees of particularity in earlier reasons for judgment delivered in these proceedings. Of particular relevance for present purposes is judgment No 18 delivered on 13 December 1995 relating to the Ariel Entities' attempt to invoke the letter of request procedure. I quote from the Reasons for that Judgment as follows:
"With one exception not presently relevant, the 17 applicants are substantial American investors who are the holders of debentures issued by Linter Textiles Corporation Limited ('Linter Textiles'), a corporation formed under the laws of New South Wales (the exceptional applicant is a trustee for debenture holders, and therefore for the other applicants). The debentures were issued in New York in October 1988. The amount of capital raised by
the issue was $US200,000,000. It has been alleged that the investors in the debentures lost substantial amounts of money. The applicants say that the losses were caused by the wrongful and actionable conduct of various Australian corporations and individuals who were associated in various ways with the issue of the debentures. These are the respondents. For present purposes I need not give details of the causes of action on which the applicants rely, save to say that an important allegation is that there were misrepresentations in the prospectus associated with the debenture issue ('the Prospectus').
Some of the applicant-debenture holders were not 'relying debenture holders', that is to say, they did not rely on the conduct in 1988 of the corporations and individuals in question. In particular, all the Ariel Entities became holders of debentures by reason of having purchased them subsequently. In some cases the assignments to the Ariel Entities were directly from relying debenture holders but in other cases they were from intervening holders. The Ariel Entities claim to be entitled to the benefit of the causes of action which the relying debenture holders which were their predecessors in title had against the respondents. But they do not know the identity of those individuals who, within or on behalf of those relying debenture holders, were induced by the misrepresentations or other wrongful conduct complained of, to cause them to subscribe for the debentures in question. The Ariel Entities have sought to invoke the letters of request procedure for the taking of 'evidence' from the five individuals referred to in the nature of information as to the identity of persons who will be able to give such evidence of reliance and inducement". (at pp 2-3)
(In these Reasons for Judgment I will use the abbreviated forms of reference mentioned in the passage quoted above.)
Since the applicants are all "ordinarily resident outside Australia", the Court has power to order that they give security for the costs of the respondents of and incidental to the proceedings; see O 28 sub-r 3 (1) (a) of the Federal Court Rules (quoted later). It was not submitted that the Ariel Entities have assets in Australia. Nor was it contested, as Freehills submitted, that for any other reason I should be influenced by the consideration that Freehills, if successful, would or might be able to recover the whole or part of any costs awarded in its favour from the Ariel Entities. (None of the courts within the United States of America are referred to in the Foreign Judgments Regulations made under the Foreign Judgments Act 1991 (Cth).)
Earlier applications and orders for the provision of security for costs have referred to the following "stages":
Stage 1: The period from the commencement of the proceedings down to the filing of defences (September 1994).
Stage 2: The period from the filing of defences in (September 1994) to 3 July 1995 (the day before the date on which the trial of the issue of reliance in the proceedings was once fixed to begin).
Stage 3: 4 July 1995 to 17 March 1996 (the day before the date on which the trial of the proceeding generally is fixed to begin).
Stage 4: The period of the trial on the basis of an estimated duration of six months - 18 March 1996 (the date now fixed for the commencement of the trial of the proceedings generally) to 17 September 1996.
Pursuant to orders previously made, the applicants have provided security for the respondents' costs of Stages 1 and 2. All or nearly all the respondents have reached an agreement with the applicants as to the security to be provided by them in respect of Stages 3 and 4. Pursuant to those agreements I have made orders by consent for the provision of security.
It is necessary that I now give a more detailed account of the background referred to above. "Informal" estimates of the party/party costs for Stage 1 of those respondents which sought security were provided by a Registrar of the Court. The amounts of security to be provided for Stage 1 were then negotiated and agreed upon between the applicants and those respondents. The total amount paid as security for Stage 1 was apparently $256,782.
In respect of Stage 2, on 7 July 1995 Beaumont J ordered "on an interim and emergency basis, that is to say without prejudice to anyone's position" that the applicants provide security in an amount equal to two thirds of the amount of an informal estimate of party/party costs for that Stage also provided by a Registrar. Pursuant to that order, the applicants have provided security apparently in a sum of $791,726.01.
Freehills, the last respondent to have been joined, was not so joined until 11 October 1994. As at 7 July 1995, Freehills had not received from the Registrar an informal estimate of its party/party costs. It later received such an estimate in a sum of $250,566.70. This was in respect of Freehills' costs from its joinder down to 3 July 1995 and so was, in effect, for Stages 1 and 2. On 8 September 1995, by which time Freehills had the Registrar's informal estimate, Freehills asked that I order the applicants to furnish security in the total amount of that estimate, namely $250,566.70. I was not persuaded in the very brief debate on the issue which took place at that time to accede to that application. In conformity with the orders which Beaumont J had made on 7 July in favour of other respondents, I ordered that the applicants furnish security for the Stage 2 costs of Freehills in an amount equal to two thirds of that sum, that it to say, $188,380.
There is evidence in the form of an affidavit sworn 7 September 1995 of Stanley Robert Lewis, a partner of Norton Smith & Co, the solicitors for Freehills, that Freehills' costs for Stages 3 and 4 will be as follows on an indemnity and party/party basis respectively.
Indemnity Party/party
Stage 3 2,180,222.00 1,765,829.40
Stage 4 2,137,132.50 1,540,282.50
4,317,354.50 3,306,111.90
The difference between the aggregate amounts is $1,011,242.60.
In respect of Stage 3, the applicants have offered Freehills security in an amount of $205,725.04. In this respect, the applicants rely on an affidavit of Alan Robinson, legal costs consultant, sworn 1 September 1995. Mr Robinson's qualifications and experience were not, and could not be, challenged. His affidavit was directed to the positions of respondents generally, not Freehills alone. However, at the time when he swore his affidavit, he did not have available to him Mr Lewis's affidavit which gave an account of the likely nature and amount of the costs to be incurred by Freehills in respect of Stages 3 and 4.
Mr Robinson's approach in respect of Stage 3 was to record the amounts originally claimed by various respondents in respect of Stage 2, the amounts of the Registrar's estimates, and the percentage which the latter represented of the former. These ranged from 66% to 86%. He applied the same percentages to the amounts claimed by those respective respondents for Stage 3. However, in respect of Freehills, neither the Registrar's estimate of Freehills' Stage 2 party/party costs nor Freehills' own assessment of its Stage 3 costs were available to him. Accordingly, he could not carry out that exercise in relation to Freehills. However, he calculated the average percentage reduction made to the other respondents' own estimates of their party/party costs for Stage 2 and applied the average to Freehills' own estimate of its party/party
costs for Stage 2 and took two thirds of the result to arrive at a figure of $131,954.33. By a process of extrapolation from the other respondents' estimates of their party/party costs for Stage 3, he arrived at the figure of $205,725.04 for Freehills for Stage 3. It is interesting to note that before application of the two thirds fraction, Mr Robinson's figure for Freehills' party/party costs for Stage 2 is $197,931.50 but it transpired that the Registrar's estimate was in fact $250,566.70.
Freehills' estimates of its costs for Stages 3 and 4 on an indemnity basis and a party/party basis referred to above were founded on Mr Lewis's affidavit which set out the time which Mr Lewis estimated would be spent by senior counsel, first junior counsel, second junior counsel, solicitors and "paralegals" in the periods 3 July 1995 to 4 February 1996, 5 February 1996 to 17 March 1996 and 18 March 1996 to 18 September 1996.
In response to Mr Lewis's affidavit, John Frederick Warburton, a partner of Deacons Graham & James, the solicitors for the applicants, swore an affidavit on 24 October 1995. Mr Warburton's affidavit addressed Freehills' claim in respect of Stage 4. I will not discuss the detail, but the resultant figure is $627,650 as against Freehills' estimate of its party/party costs for Stage 4 of $1,540,282.50.
FIXING OF AMOUNT OF SECURITY BY REFERENCE TO COSTS ON AN INDEMNITY BASIS
Freehills' motion for security raises an initial general question of whether the Ariel Entities can and should be ordered to provide security by reference to an indemnity basis rather than by reference to the usual party/party basis.
Shortly, Freehills submits that if the Ariel Entities fail in the proceedings, they will probably be ordered to pay Freehills' costs on an indemnity basis. It is put for Freehills that the Ariel Entities are in the business of purchasing "distressed companies" in the hope of making a profit by recovering substantial damages from wrongdoers who caused those companies to be in that position. In the present case, the Ariel Entities did not subscribe for the debentures issued by Linter Textiles but purchased them much later for a price equal to a mere fraction of their face value. As will be seen below, in some instances they purchased after the order was made for the winding up of Linter Textiles and in some cases, even after litigation had been commenced arising out of the events complained of in these proceedings. This has given rise to the suggestion that the Ariel Entities "purchased a lawsuit": they did not expect that Linter Textiles would pay the amounts of the debentures but hoped that by outlaying a small amount of money and taking an assignment from the debenture holders, not only of their debentures but also of their causes of action against the
wrongdoers, they would be enabled to recover substantial damages.
Freehills submits that the Ariel Entities' purchase of the debentures and prosecution of the present litigation is in the nature of a "speculation" which ought not to be permitted unless the Ariel Entities provide security for costs on an indemnity basis.
THE NATURE OF THE ARIEL ENTITIES' CLAIMS IN MORE DETAIL
The nature of the aspect of the Ariel Entities' claims just mentioned is revealed in more detail by paras 64-67 of the third further amended statement of claim filed on 3 October 1995. But in order that the significance of the dates of the various assignments may be appreciated, it is necessary to note certain other dates.
Linter Textiles' parent company, Linter Group Limited ("Linter Group"), was ordered to be wound up on 12 April 1991. Linter Textiles itself was ordered to be wound up on 19 August 1991. Subsidiaries of Linter Textiles were ordered to be wound up in September 1991. Various proceedings were commenced in 1991 by some of the applicants against some of the respondents arising out of the events complained of in the present proceedings. In particular, in March 1991 some of the applicants commenced proceedings in the United States District Court, Southern
District of New York, against Linter Textiles, Linter Group and officers of those companies. Those proceedings, Allstate Life Insurance Co et al v Linter Group Limited et al 91 Civ 1655 (SDNY), have been referred to as "Linter I". In April 1991 the same applicants commenced additional proceedings in the same United States District Court against the 1st to 4th and 7th to 11th respondents (some of the respondents known as "the Initial Banks"). Those proceedings, Allstate Life Insurance Co et al v Linter Group Limited et al 91 Civ 2873 (SDNY), have been called "Linter II". On 17 September 1991 proceedings were commenced by the debenture holders in this Court. Thus, throughout most of 1991 it must have been obvious to any investor contemplating purchasing debentures issued by Linter Textiles, that there was no chance of payment being made by Linter Textiles in the ordinary way.
According to para 64 of the third further amended statement of claim, certain of the original debenture holders assigned to the Ariel Entities in various proportions their debentures and all choses in action relating to them and to the acquisition of them. Particulars of these direct assignments by original debenture holders (also called "relying debenture holders", an expression which I will use without implying reliance in fact) to the Ariel Entities are given in a table in para 64 as follows:
"Table of Assignments to Ariel Entities by Relying Debentureholders
Date Face
Assignor Amount Paid Amount
($US) ($US)
American Capital 17.04.90 4,880,000 115,900.00
Templeton Global ) 24.04.90 5,000,000 ) 148,437.50
Templeton Investment ) 500,000 )
Templeton Global ) 250,000 )
Templeton Income ) 500,000 )
Aim Capital 07.02.91 350,000 4,812.50
Aim Advisors 07.02.91 600,000 8,250.00
Colonial Management 14.05.91 1,000,000 15,000.00
Franklin Age 10.07.91 15,000,000 421,875.00
Franklin Universal 10.07.91 7,000,000 196,875.00
Franklin Partners 10.07.91 500,000 14,062.50
Prudential Insurance 08.08.91 7,350,000 229,687.50
Prudential High Yield 08.08.91 6,500,000 203,125.00
Prospect International 08.08.91 3,000,000 82,500.00
American Income 26.12.91 600,000 5,250.00
Industrial Indemnity 16.09.92 3,000,000 75,000.00
Westchester Fire 16.09.92 2,000,000 50,000.00
American Income 06.10.92 1,000,000 20,000.00
Dependable Insurance 23.09.93 1,000,000 20,000.00
Equitable Capital 15.03.94 2,000,000 25,000.00
[62,030,000][1,635,775.00]"
It emerges that the earliest assignment occurred some 18 months after the distribution of the Prospectus and issue of the debentures in October 1988. The various dates will be noted.
According to para 65, other relying debenture holders assigned to other persons ("non-relying debenture holders") their debentures and all choses in action in relation to them and to the acquisition of them, and those non-relying debenture holders in turn assigned to the Ariel Entities in various proportions their debentures and all choses in action in relation to them and to the acquisition of them. The following table within para 65 gives particulars of the assignments by the non-relying debenture holders to the Ariel
Entities:
"Table of Assignments to Ariel Entities by Non-Relying Debentureholders
Predecessor Face Amount
In Title Assignor Date Amount Paid
($US)($US)
N/K Grandchester & Co 22.06.90 500,000 4,698.50
N/K Oppenheimer & Co 06.03.91 5,000,000 62,500.50
N/K New England Asset 08.03.91 5,000,000 87,500.00
N/K Prudential High Yield 08.08.91 4,000,000 125,000.00
N/K US High Yield 08.08.91 1,000,000 31,250.00
N/K Prudential High Yield 08.08.91 700,000 21,875.00
Prudential Nomura Target 17.09.91 1,000,000 32,500.00
N/K Columbia Universal 23.06.92 300,000 6,750.00
N/K Hill Country 23.06.92 200,000 4,500.00
N/K RTC 02.10.92 15,000,000 93,750.00
N/K American Income 06.10.92 1,400,000 3,500.00
N/K Andrew Lester 15.10.92 300,000 1,500.00
Sec Pac Bankers Life 07.05.93 843,000 1,686.00
[35,243,000] [477,010.00]
Note: N/K indicates not known at this stage.The Ariel Entities are not presently able to give any better particulars of the assignments by the Relying Debentureholders to the Non-Relying Debentureholders."
According to the above table in para 65, in all cases except two, the Ariel Entities do not know the identity of the original debenture holders. The unidentified original debenture holders represent US$33,400,000 in value of the debentures. Again the various dates will be noted.
Para 66 pleads that a particular relying debenture holder assigned to Mr Schieber its debentures (US$1,000,000) and all choses in action in relation to them and to the acquisition of them. Mr Schieber is in the same position as the corporate applicants referred to in para 64.
It will be seen from paras 64 and 65 that the aggregate amount of the Ariel Entities' claims is US$97,273,000 and that they
paid US$2,112,785 for the assignments. If successful, they will have made a "profit" of US$95,160,215 on the outlay of US$2,112,785. Of course, this is an oversimplification in that it does not take into account that part of the Ariel Entities' costs and expenses which would not be recoverable.
Finally, para 67 pleads that under the general law of New York and/or under Article 13-101 of New York General Obligations Law ("GOL"), causes of action in tort and breach of contract are assignable; that the present assignments of them do not fall within any of the cases which are exceptions referred to in the GOL; that under United States Federal Law and/or the law of New York, an assignment of securities laws claims in conjunction with an assignment of debentures is wholly enforceable; that the assignments were effective under United States Federal Law and/or the law of New York and/or the Law of California to vest in the Ariel Entities and Mr Schieber, the right to bring this proceeding in their own names to enforce the causes of action; and finally that under the law of New South Wales, this right will be recognised. Paragraph 67 also pleads particulars of the foreign law to which I have just referred.
Orders for the filing of evidence
Freehills submits that the speculative nature of the Ariel Entities' claims and the Ariel Entities' ignorance of the identity or even the existence of witnesses from the relying
debenture holders which were their predecessors in title who might be able to give evidence of reliance and inducement, should persuade me to conclude that if the Ariel Entities fail they will be ordered to pay Freehills' costs on an indemnity basis. In this regard, it is convenient to quote from Judgment No 18 my account of the orders previously made in the proceedings for the filing of evidence:
"The Ariel Entities have never made any secret of the fact that they do not know the identity of the individuals from their predecessors in title which subscribed for the debentures who might be called as witnesses.
On 10 November 1994, Beaumont J directed that the applicants file any non-expert witness statements by 15 December 1994. On 14 December 1994, his Honour directed them to file and serve all statements of evidence (other than expert evidence) on which they intended to rely by 1 March 1995.
When the proceedings were before the Court on 1 February 1995, senior counsel for the applicants informed the Court that any outline of the evidence of reliance to be given by individuals from the Ariel Entities' predecessors in title who may have been induced by the misrepresentations in the Prospectus to cause the debentures to be subscribed for, would be 'pretty sketchy' if the Ariel Entities' counsel in the United States had not been able to speak to them. Beaumont J referred to the provision of an 'outline' of the evidence and senior counsel for the applicants said that his clients had no difficulty in submitting to a direction that they give the other parties such notice as they could of what they thought the witnesses would say.
On 1 March 1995, the applicants' solicitors supplied what were described as 'outline statements of evidence which the applicants believe will be given by: (1) officers of relying debenture holders which assigned to the Ariel Entities; and (2) officers of subsequent (non-original) debenture holders which assigned to the Ariel Entities'. These documents were truly remarkable. They were pro forma outline statements in, mutatis mutandis, identical form, prepared by the applicants' legal advisers without
instructions from the witnesses. But it must be remembered that both before and after service of the draft outlines, the Ariel Entities informed the Court and the respondents that the documents would and did represent evidence which they 'hoped' or 'expected' would be given on the assumption that someone within each relevant relying debenture holder could be found who read and relied on the Prospectus.
There was an exchange between Beaumont J and counsel appearing for the applicants on 22 March 1995 as to whether an outline of the evidence which the Ariel Entities 'hoped' that the unidentified witnesses would give, satisfied his Honour's direction that they file an outline of the evidence which it was 'expected' that they would give. His Honour referred to the outlines as being 'a ritual incantation' and said that the spirit of the direction was that the outline would be of the evidence that the witness could reasonably be expected to give on the information that the applicants had, 'not some best case scenario'. Counsel for the applicants said:
'These are the things we expect them to say because these are the things all of the other witnesses who have signed statements said, the substance is the same. We have not changed the words to try and pretend that they are actual statements, they are not. That is why we need the letters of request.'" (at pp 9-11)
Later, on 21 March 1995, counsel for the applicants agreed with Beaumont J's description of the pro forma witness statements as a "wish list". On 22 March, he said that the fact that some individuals within relying debenture holders had said that they had read and relied on the Prospectus, enabled the Ariel Entities "to both hope and expect that the other witnesses [including those yet to be identified from relying debenture holders including relying debenture holders yet to be identified] would say the same thing". The Ariel Entities were seeking to use the letter of request procedure, not only to lead evidence of reliance from persons within relying debenture holders whose identities were known, but also to obtain from other persons information as to the identity of persons within relying debenture holders who might be able to give evidence of reliance.
By Judgment No 18 dated 13 December 1995, I set aside the order for letters of request in so far as it related to four of the five "information witnesses" and sought to make it clear in relation to the fifth that it would be an improper use of the letter of request to examine him for the purpose of obtaining information as to the identity of potential witnesses from relying debenture holders as to reliance. Accordingly, I proceed on the basis that the applicants will not be able to use the letter of request procedure to obtain information as to the identity of individuals able to give evidence of reliance.
OUTLINE OF PARTIES' SUBMISSIONS
Outline of submissions of Freehills (applicant on the motion)
Freehills submits that if the evidence of the witnesses sought does not match those of the pro forma statements, the case will be a strong one for indemnity costs, on the basis that it will be demonstrated that the Ariel Entities, properly advised, should have known at the outset that they had no chance of success. Freehills refers to Fountain Selected
Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 (FCA/Woodward J) and Colgate Palmolive Co v Cussons (1993) 46 FCR 225 (Sheppard J) at 232-234.
Freehills points out that according to paras 59, 61 and 66 of the pleading, the claims of applicants other than the Ariel Entities total US$70,700,000 (including the claim of Mr Schieber for US$1,000,000). Of the total claims of US$167,973,000, the Ariel Entities' claims of US$97,273,000 account for 57.91%. Freehills points to an affidavit of William Hartley Roth sworn 17 March 1995 relied on by the Ariel Entities in support of their application for the issue of letters of request (see Judgment No 18 in these proceedings) which, according to the submission, shows that of the claims totalling US$62,030,000 referred to in para 64 of the pleading, US$41,000,000 represents claims in respect of which the Ariel Entities do not have witnesses from the original debenture holders willing to come to court and say that they relied on the Prospectus. This was not disputed by the Ariel Entities. When this amount is added to the para 65 claims totalling US$35,243,000, the overall amount in respect of which the Ariel Entities have commenced the proceedings without witnesses as to reliance is US$76,243,000 (it may be that the figure of US$843,000 for "Bankers Life" referred to in para 65 should be deducted).
Freehills submits that if the Ariel Entities fail in respect of these claims, there will be a strong case for an order that
they pay Freehills' costs on an indemnity basis.
In addition, Freehills refers to the fact that the applicants plead such a serious charge as fraud against it. They say (the contrary is not argued) that it is a necessary element of the Ariel Entities' case that they prove reliance by, and inducement of, the original debenture holders which were their predecessors in title.
Freehills relies on Procon (GB) Ltd v Provincial Building Co Ltd [1984] 2 All ER 368 (CA) ("Procon") at 375-376 for a rejection of the proposition that security for costs should be automatically awarded on the basis of two thirds of the amount of party/party costs likely to be incurred. More importantly, they rely on that case as authority for the more general proposition that the correct approach is to order security in such an amount as the Court thinks just in all the circumstances of the case. Freehills submits that a similar approach has been adopted in this Court, referring to The Airlie Group Pty Ltd v John Fairfax Group Pty Ltd, unreported, 7 June 1991 (Sheppard J) (Nos NG 28 of 1991 and NG 100 of 1991) ("Airlie") and Farmitalia Carlo Erba SrL v Delta West Pty Ltd, unreported, 4 March 1994 (Heerey J) (No VG 49 of 1992) ("Farmitalia") at p 17.
Outline of submissions of applicants (respondents to Freehills' motion)
The applicants submit that it simply cannot be known at present what the ultimate result of the proceedings as between the Ariel Entities and the respondents will be, and that no case is shown for a departure from the general practice of ordering security on a party/party basis.
The applicants further submit that even if the Ariel Entities prove to be unable to lead evidence of reliance from witnesses, this would not necessarily be fatal to their claims, since they would be entitled to rely upon the drawing of inferences as to reliance. In this respect they refer to Gould v Vaggelas (1985) 157 CLR 215 ("Gould v Vaggelas") at 236 (Wilson J) and Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 (FC) ("Dominelli Ford") at 480-483 in relation to the drawing of an inference of reliance where a material representation is made which is calculated to induce the representee to enter into a contract and the representee does so.
The applicants further submit that even if it should be established that there was no warrant for the commencement of the proceedings in relation to some US$76,000,000, there would remain a substantial balance as to which it is not suggested that the proceedings were commenced without good cause. The applicants submit that there is no suggestion that additional
costs are being incurred by reason of the existence of the Ariel Entities claims as distinct from other parties' claims, yet security is sought by reference to indemnity costs in respect of the entirety of the proceedings.
Outline of submissions of Freehills in reply
Freehills submits that the Gould v Vaggelas/Dominelli Ford principle has no operation in the absence of evidence that the representation in question was communicated to the representee, and that in the present case the Ariel Entities lack evidence that the Prospectus was received by the original debenture holders in question prior to their subscription for the debentures.
Freehills further submits that the defence of the Ariel Entities' claims has added to Freehills' costs. By way of illustration, Freehills points to the fact that inspection of documents produced by the Ariel Entities on discovery has taken place in the United States of America.
REASONING
The power to order, in the circumstances of the present case, the giving of security for costs is found in s 56 of the Federal Court of Australia Act 1976 (Cth) and O 28 sub-r 3 (1) of the Federal Court Rules. The section and the relevant portion of the rule are as follows:
Section 56
"56(1)The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him.
(2)The security shall be of such amount and given at such time and in such manner and form, as the Court or Judge directs.
(3)The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given.
(4)If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed.
(5)This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security."
Order 28 sub-r 3 (1) of the Federal Court Rules:
"(3) Where, in any proceeding, it appears to the Court on the application of a respondent --
(a)That an applicant is ordinarily resident outside Australia;
(b)... (c) ... (d) ...
the Court may order that applicant to give such security as the Court thinks fit for the costs of the respondent of and incidental to the proceeding."
The terms of these provisions do not, apart from the use of the word "security" itself, give any guidance as to the amount of security that should be ordered. The amount is in the
discretion of the Court and should be such sum as the Court thinks just, having regard to all the circumstances of the case. Obviously, a factor of prime importance will be the amount of a respondent's costs which an applicant, if unsuccessful, will be ordered to pay to the respondent if the proceeding continues to a determination by the Court. But the estimation of that amount involves many factors, some of them imponderable. Generally speaking, it cannot be assumed that a failure by an applicant will be on any particular basis. Moreover, the course of events down to and during the trial may be relevant to the particular order for costs to be made. The assessment of the work which will be done in the respondent's interests is also difficult.
I am not aware of any case in which the amount for which security for costs has been ordered to be provided has been arrived at by reference to a conclusion that the applicant will probably be ordered to pay the respondent's costs on an indemnity basis. None of the three cases referred to by Freehills was such a case. In all of them, only party/party costs were in contemplation.
In Procon, what was in issue was a generally observed practice in England of ordering security in an amount equal to two thirds of the amount of party/party costs (the practice was referred to in the annotations to RSC Ord 23 under the heading "Amount of Security" in the English Supreme Court Practice (1982) vol 1, p 440 - "the White Book"). The trial judge had
ordered security in an amount arrived at as representing the estimated amount of party/party costs without deducting the one third. The Court of Appeal upheld that exercise of his discretion. Cumming-Bruce LJ, who gave the leading judgment in the Court of Appeal, said in relation to a passage from the judgment of the trial judge that in the Commercial Court it was the practice, where there was a particularisation of costs with facts and figures, not to deduct one third but to "give an indemnity":
"It is important for a proper understanding of that passage in the judgment to bear in mind, as is clear from the preceding passage in the judgment, that when the judge used the phrase 'grant an indemnity' he meant an indemnity to protect the party seeking security in respect of party and party costs only, and nothing in his judgment is to be understood as meaning that he was intending to grant an indemnity for anything else, eg solicitor and client costs, solicitor and own client costs and so on." (at 370c - emphasis supplied)
Similarly, Griffiths LJ said:
"I can see no sensible reason why the court should not order security in the sum which it considers the applicant would be likely to recover on taxation on a party and party basis if the court thinks it just to do so." (at 379d)
Stephen Brown LJ agreed with Cumming-Bruce and Griffiths LJJ. Accordingly, while the case is authority for the proposition that a proper exercise of discretion will not necessarily require deduction of some part of the estimated amount of party/party costs, it is important to appreciate that only party/party costs were in contemplation and that Cumming-Bruce
LJ was at pains to point this out.
In the second case referred by Freehills, Airlie, Sheppard J dealt with a submission that the amount to be ordered should not be a complete indemnity. His Honour said that he had reached the conclusion that there was "no such rule at least in the sense of a binding rule which governs the way in which the discretion which the Court has should be exercised" (at 4). There were three respondents in the case. They led evidence which estimated the party/party costs of each at an amount of the order of $200,000 or somewhat more. No evidence was led in opposition. However, a Deputy Registrar recorded that on a party/party basis, the amount which would probably be allowed on taxation would be approximately $73,000, $83,000 and $94,000 for the respective respondents. His Honour ordered that security of $100,000 be provided to each respondent, but noted that the amounts were provisional and were not to be treated as a finding that they represented the costs incurred by any particular respondent for any particular period or for any particular work, and directed that a Deputy Registrar furnish a further report setting out a provisional estimate of costs incurred or to be incurred.
In the third case referred to by Freehills, Farmitalia, Heerey J followed Procon in rejecting the notion of a "conventional" reduction of a certain proportion of the probable amount of party/party costs which a respondent established. His Honour emphasised, however, that the decision was a discretionary one
and referred to various factors which might lead to the making of some reduction. He referred, for example, to the possibility that the case might collapse and not come to trial, the prospects of success in so far as they might be discernible, the adequacy of the evidence of the costs likely to be incurred, the fact that some part of the costs might relate to aspects of a respondent's case which are not truly "defensive", and the likelihood that a taxing officer would, in any event, reduce to some extent the amount sought. The respondent's evidence was of party/party costs in an amount of approximately $255,000 and his Honour ordered provision of security in that sum less $25,000, the deduction being made by reference to the factor last mentioned above.
Authorities can be pointed to in which, with various degrees of explicitness, it has been accepted that the security should be ordered by reference to the party/party basis and is not intended "to provide an indemnity": cf Aberdare & Plymouth Co v Hankey (1888) 32 SJ 644; Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1; Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 (Fullagar J) at 175; Set Technologies Pty Ltd v Lewis (1993) 10 ACSR 61 (FCA/Spender J).
This approach to the discretion to order security for costs may reflect the genesis of the power. Aspects of this are noted in Colbran, Security for Costs (Longman Professional, 1992) Ch 16:
"16.3In the Court of Chancery, prior to the Supreme Court of Judicature Act, 1873 (U.K.) [36 & 37 Vict., c. 66] security for costs was limited to a fixed and arbitrary sum, except in cases within the Companies Act, 1862 (U.K.) [25 & 26 Vict., c.89] s. 69. In contrast, at common law security for costs in a substantial sum would be ordered, varying in amount according to the requirements of the case. The rules of the Supreme Court of Judicature adopted the common law practice. In particular R.S.C. (Eng.) (Feb., 1876) O. 55, r. 2, which has been largely reproduced and followed in all jurisdictions provided:
'In any cause or matter in which security for costs is required, the security shall be of such amount, and be given at such time or times, and in such manner and form, as the Court or a Judge shall direct.'
The courts gradually accepted the breadth of the discretion even though there was some initial reluctance to order security for costs beyond the arbitrary sums required by the former chancery practice."
(para 16.3 at pp 287-288 - footnote references omitted). There is a helpful review of the conventional fixing of the amount of security at two thirds of the estimated amount of party/party costs in Quad Consulting Pty Ltd v David R Bleakley & Associates Pty Ltd, unreported, 28 June 1991 (FCA/Burchett J) (NG 243 of 1990).
In Brundza v Robbie & Co (No 2) (1952) 88 CLR 171, Fullagar J, in the context of an application by a respondent to an appeal for security for the costs of the appeal, said this:
"... in ordering security for costs, the Court does not set out to give a complete and certain indemnity to a respondent: see Aberdare & Plymouth Co v Hankey [(1888) 32 SJ 644]. It is not, of course, to be assumed that the appellant will fail." (at 175)
In Menhaden Pty Ltd v Citibank NA (1984) 1 FCR 542 at 547, Toohey J, quoting the first sentence in this passage, ordered security of $12,000 to be provided in a case in which the respondent estimated "its costs for the hearing" at approximately $20,000. It is not clear whether the estimate was of party/party costs. In Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497, French J (at 515) cited with approval Toohey J's acceptance of the proposition that the Court does not set out to give a complete and certain indemnity.
Procon has been referred to in Bruce Pie & Sons Pty Ltd v R H Mainwaring, English and Peldan [1985] 1 Qd R 401 (McPherson J) at 404 and Electrona Carbide Industries Pty Ltd v The Tasmanian Government Insurance Board [1985] Tas R 68 (Cox J) at 74. These cases confirm that the discretion as to the amount of security to be ordered is unfettered except, of course, by reason of its nature as a judicial discretion. The ambiguity of references to "indemnity" in the present area of discourse is revealed again in the Electrona case. Cox J said:
" ... there is no jurisdiction for an arbitrary discount of one third of the genuinely estimated party and party costs of the applicants rather than ordering security on a full indemnity basis." (at 74)
Like the trial judge in Procon referred to earlier, his Honour
was using the word "indemnity" to refer, not to an order for costs in an amount calculated by reference to an indemnity basis, but to an unreduced amount of estimated party/party costs.
Halsbury's Laws of England contains the following statement:
"The amount of security for costs ordered to be given is in the discretion of the court, which will fix such sum as it thinks just to do so, having regard to all the circumstances of the case. It is not the practice to order security for costs on a full party and party, still less on an indemnity basis. In the case of a plaintiff resident out of the jurisdiction the more conventional approach is to fix the sum at about two-thirds of the estimated party and party costs up to the stage of the proceedings for which security is ordered, but there is no hard and fast rule."
(37 Halsbury's Laws of England (4th ed) para 307, p 232 - emphasis supplied)
In Crothers v Simpson Sears Ltd (1988) 51 DLR (4th) 529, the Alberta Court of Appeal said this:
"Security for costs never exceeds (and may be less than) estimated party-and-party costs, which are rarely more than a fraction of solicitor-and-client costs on one side: cf. Supreme Court Practice (U.K.), Rules 23/1-3/22. So the security, but a drop in the total bucket of litigation expenses, is highly unlikely to be the prohibitive expense." (at 536)
There is an obvious difficulty in ordering an applicant to provide security in an amount representing the estimated amount of a respondent's costs on an indemnity basis: it cannot be predicted with confidence that if the proceedings continue to determination, an order for indemnity costs will be made. Take the present case: it cannot be known that if the Ariel Entities fail, they will fail for lack of any evidence of reliance. A failure by the Ariel Entities is consistent with the availability of such evidence. Such a failure might be attributable to matters having nothing to do with the issue of reliance. Again, the Ariel Entities might fail on the reliance issue because the evidence led by them on that issue is not accepted or does not carry the day because of cross examination or countervailing evidence. However, taking into account all the circumstances, including the unavailability to the Ariel Entities of the letter of request procedure for the purpose of their obtaining information as to the identity of "reliance witnesses", I accept that there is a real possibility that if the Ariel Entities fail one reason for that failure will be the lack of such evidence.
I am not persuaded by the applicants' submission in reply based on Gould v Vaggelas and Dominelli Ford. Those cases recognise that where A makes to B a representation calculated to induce B to act in a certain way and B then does so, it may, and often will, be proper to infer that the representation induced B so to act, although B has not given evidence that it did. The principle operates where there is an evidentiary basis for concluding that the representation was communicated to B. Moreover, the two authorities referred to were addressing representations which were obviously significant and which were made in the course of negotiations.
The numerous representations to be found in a prospectus widely distributed are of a different order. Notwithstanding evidence that a prospectus relating to securities is received by a company which then subscribes for the securities, it may or may not be proper to infer that the company was induced to invest by each and every representation to be found anywhere in the prospectus, irrespective of its importance or of the prominence given to it in the prospectus. At least Gould v Vaggelas and Dominelli Ford do not require acceptance of the proposition that in such a case inducement must be inferred.
A question raised by the applicants' submission in reply is this: is it appropriate to order some of several applicants to pay the whole of a respondent's costs on an indemnity basis where it is established that the claims or some of the claims of those applicants, but not the claims of the others, were brought without warrant and in circumstances in which, if they had been the only claims made in the proceedings, it would have been proper to make such an order? Clearly, it would at least be proper to order that the applicants in question pay those costs of the respondent which were additionally incurred by reason of the unjustified inclusion in the proceedings of the claims in question. In the present case, undoubtedly there are some such costs: the cost of the inspection in America of the discovered documents of the relevant Ariel Entities has been mentioned. As well, there may be costs related to witnesses called by the relevant Ariel Entities. The Ariel Entities represent six of the sixteen debenture
holder applicants. Their claims account for US$97,273,000 of the total claims made in the proceedings of US$167,973,000, that is, 57.91%. It may or may not be the case that without the Ariel Entities, the proceedings would not have been brought at all. In any event, the absence of reliance witnesses does not affect the whole of the Ariel Entities' claims of US$97,273,000, although it affects their claims to the extent of US$76,243,000, that is, 45.39% of the total of US$167,973,000.
I would not be prepared to hold that it could never be an appropriate exercise of discretion to order some only of several applicants to pay the estimated amount of a respondent's costs on an indemnity basis. However, the kinds of consideration to which I have referred indicate again the impossibility of predicting at this stage whether an order for indemnity costs will be made against the Ariel Entities, and if it were possible whether the contemplated order would be one relating to the whole of Freehills' costs or only to that part of them incurred by reason of the supposedly insupportable inclusion in the proceedings of the claims in question.
An argument against the proposition that an order for indemnity costs should never be made in the circumstances predicated, that such a "rule of practice" would or might be seen to countenance the inclusion of unjustifiable claims, even many and substantial unjustifiable claims, with one
supportable claim or a small number of supportable claims, perhaps of small amount.
In my view it is only possible to take a "broad brush" approach to the exercise of the discretion invoked by para 1 of Freehills' notice of motion. Having taken all the circumstances into account I think that the proper order is that the Ariel Entities pay, without deduction of one third or of any other fraction, Freehills' estimated party/party costs in respect of Stages 3 and 4.
CONCLUSION
In conformity with what has occurred on previous occasions, the papers will be referred to a deputy registrar for the provision to Freehills and the applicants of an informal estimate of the probable amount of Freehills' party/party costs for Stages 3 and 4, in the hope that this may assist them to agree on the probable amount of those costs, and so, on the amount of security to be provided. The orders to be made in due course will be designed to achieve the effect that the Ariel Entities and Mr Schieber provide security in an amount equal to the probable amount of Freehills' party/party costs for Stages 3 and 4 and that the other applicants provide security in an amount equal to two thirds of that probable amount.
I will not make these orders at present but the matter will be listed for a date shortly after these reasons are published for the making of orders in conformity with them.
I certify that this and the preceding 33 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren.
Associate:
Dated: 21 December 1995
Heard: 16 November 1995
Place: Sydney
Decision: 21 December 1995
Appearances: Mr A R Emmett QC with Mr D R Stack of counsel instructed by Deacons Graham & James appeared for the applicants (respondents to the motion).
Mr R M Smith with Mr L V Gyles of counsel instructed by Norton Smith & Co appeared for the 54th respondent ("Freehills") (applicants on the motion).
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