Atarashii Stone Pty Ltd v Granite Transformations Pty Ltd (No 3)
[2017] ACTSC 198
•18 July 2017
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Atarashii Stone Pty Ltd v Granite Transformations Pty Ltd (No 3) |
Citation: | [2017] ACTSC 198 |
Hearing Date: | 17 July 2017 |
DecisionDate: | 18 July 2017 |
Before: | Mossop J |
Decision: | See [26] |
Catchwords: | PRACTICE AND PROCEDURE – COSTS – Security for Costs – Court Procedures Rules 2006 (ACT) r 1902 – whether the plaintiff's lack of financial resources is attributable to the defendant's conduct – whether the plaintiff is effectively in the position of a defendant |
Legislation Cited: | Corporations Act 2001 (Cth), s 1335(1) Court Procedures Rules 2006 (ACT), rr 1900, 1901, 1902, 1904(2), Part 4.2 |
Cases Cited: | Amalgamated Mining Services v Warman International Ltd (1988) 19 FCR 324 Atarashii Stone Pty Ltd v Granite Transformations Pty Ltd [2017] ACTSC 116 Willey v Synan (1935) 54 CLR 175 |
Parties: | Atarashii Stone Pty Ltd (Plaintiff) Granite Transformations Pty Ltd (Defendant) |
Representation: | Counsel W D B Buckland (Plaintiff) J Ronald (Defendant) |
| Solicitors Trinity Law (Plaintiff) Gilberts Legal (Defendant) | |
File Number: | SC 138 of 2017 |
MOSSOP J:
Introduction
These proceedings have been the subject of two previous decisions on interlocutory matters: Murrell CJ on 19 May 2017 (see Atarashii Stone Pty Ltd v Granite Transformations Pty Ltd [2017] ACTSC 116) and myself on 6 June 2017, with reasons published on 19 June 2017 (see Atarashii Stone Pty Ltd v Granite Transformation Pty Ltd (No 2) [2017] ACTSC 139). They are presently subject to detailed directions in relation to preparation for a hearing due to commence on 5 September 2017. By application filed on 22 June 2017, the defendant seeks an order for security for costs pursuant to rr 1900 and 1901(a) of the Court Procedures Rules 2006 (ACT) or, in the alternative, pursuant to s 1335(1) of the Corporations Act 2001 (Cth).
An estimate of the costs of the proceedings and a request for information about the plaintiff's financial position was only made on 6 June 2017; that is, the day when orders were made continuing the injunction granted by Murrell CJ. A substantive response was only received on 14 June 2017 refusing to provide further information or security. The application filed on 22 June 2017 was dated 21 June 2017.
The purpose of an order for security for costs is to ensure that a successful defendant does not suffer an injustice because its costs cannot be met by the plaintiff. The Court's power to order security is unfettered. Courts have identified matters to be taken into account for the purposes of an application for security. See, for example, KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197–8.
These factors are largely reflected in the terms of r 1902 which outlines matters to which the Court may have regard in determining an application for security. Where the plaintiff is a corporation and there is good reason to believe that the corporation may not be able to pay the costs at the end of the proceedings then it provides a gateway by which an application for security for costs may be made. See r 1901(a) of the Court Procedures Rules and s 1335 of the Corporations Act.
The Court's determination of the capacity to pay an adverse costs order is made at the time of the judgment or immediately thereafter. In the present case the plaintiff has conceded that the threshold requirement for an order has been met, namely that there is reason to believe that the plaintiff will not be able to pay the defendant's costs if ordered to pay them.
In Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744 at [59] Einstein J said that the task faced by the Court was one involving striking a balance between the possibility an order for security would shut out a genuine claim by a small company and the requirement that the defendant have security for its costs. His Honour said:
[T]he basic notion of security for costs empowers the Court to order the plaintiff to do something that it will likely find difficult to do, ie. to provide security for the costs which ex hypothesi it is likely to be unable to pay. Despite this, the Court noted that this discretionary power should not be used as an instrument of oppression "by shutting out a small company from making a genuine claim against a large company". ... The Court must thereby strike a balance between this consideration and the notion that:
"...the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section."
(citations omitted)
Relevant considerations
The plaintiff is a private company incorporated in June 2016. It has paid up capital of $100. It purchased the business as a franchisee of the defendant in December 2016. It is therefore a new business. The financial position of the company is set out in the affidavit of Mr Maurice Falcetta of 30 June 2017. It shows a nominal net equity of $14,125. Assets of the business include goodwill of $610,679, which would be destroyed if the termination of the franchise agreement was effected.
For the purposes of this application, it is most efficient to consider relevant matters by reference to those set out in r 1902.
Rule 1902(1)(a), "the means of the people standing behind the proceeding"
The plaintiff put on no evidence as to the means of the sole director of the company, Ms Malone. As a consequence, her means, or lack of them, do not provide any basis for refusing to make an order for security. Similarly, there was no evidence of the assets or means of the company SM & NLH Holdings Pty Ltd, a company associated with Ms Malone, which is the sole shareholder of the plaintiff. In the absence of any such evidence, I infer that one or other or both of Ms Malone or the holding company would be able to provide security but has chosen not to.
Rule 1902(1)(b) and (c), "the prospects of success" and "genuineness"
The defendant has conceded that the plaintiff's claims give rise to a serious issue to be tried. The case is not such an obviously strong case that with only superficial examination it is possible to say that it is likely to succeed. It is not appropriate to undertake a more detailed assessment of the prospects of success for the purposes of this application.
Rule 1902(1)(d), "the corporation's lack of financial resources"
I have noted the financial position of the plaintiff earlier in these reasons. It is clear that the threshold requirement for the making of an order for security for costs has been met.
Rule 1902(1)(e), "whether the plaintiff's lack of financial resources is attributable to the defendant's conduct"
The principal reasons for the lack of financial resources is the occurrence of a fire on 19 December 2016 which damaged the premises from which the business was operating and also the fact that the fire occurred only four days after the plaintiff took over the business. Following the grant of interim and interlocutory injunctions restraining reliance upon the purported termination of the franchise agreement, the defendant's conduct has remained hostile to the successful operation of the business: see Atarashii Stone Pty Ltd v Granite Transformations Pty Ltd (No 2) at [9] to [14]. Because of the fire and the fact that it occurred so soon after the business was acquired, this conduct on the part of the defendant is not a reason why the threshold for ordering security has been met but it is conduct which should be taken into account in determining the quantum of security to be provided.
Rule 1902(1)(f), "whether the plaintiff is effectively in the position of a defendant"
The plaintiff has submitted that it is effectively in the position of a defendant even though it filed an originating application and statement of claim in the proceedings seeking declarations and damages. While there is no doubt that the Court is entitled to look at the substance of the matter notwithstanding the submissions of the plaintiff, the present circumstances do not put it in the position of a defendant.
The plaintiff relied upon the decision of the High Court in Willey v Synan (1935) 54 CLR 175 (‘Willey’) where it was said, at 184:
The principle is that a party to judicial proceedings, who resides beyond the jurisdiction, should not be required to give security for costs unless, however the parties are arranged upon the record, he is the person invoking or resorting to the jurisdiction for the purpose of establishing rights or obtaining relief. If he does avail himself of the remedies the jurisdiction provides in order to obtain affirmative relief or redress, he may be ordered to give security, although he becomes a defendant in the action.
The plaintiff relied upon the decision in Willey and subsequent cases to support the proposition that because the defendant was in a commercial sense the aggressor by terminating the franchise agreement, the plaintiff, for the purposes of this application, should be characterised as being effectively in the position of a defendant. The decision in Willey was relied upon by Blackburn J in Re:Travelodge Australia (1978) 21 ACTR 17. It was also relied upon in Amalgamated Mining Services v Warman International Ltd (1988) 19 FCR 324 (‘Amalgamated Mining’).
In each of these cases a step had been taken by the defendant which triggered or enlivened a statutory power which compelled, in a legal or commercial sense, the plaintiff to take the proceedings which it did. In Willey, it was the giving of the notice under s 207 of the Customs Act 1901 (Cth) which would result in the forfeiture of the goods the subject of the action. In Re: Travelodge Australia it was the service of a notice under the company's ordinance which would have required the respondent to acquire the applicant's stock. In Amalgamated Mining it was the assertion of breaches of copyright against a third party which was offering to supply the applicant's parts for the respondent's pumps. That gave rise to an entitlement under s 202 of the Copyright Act 1968 (Cth) to bring proceedings to obtain a declaration that threats of breach were unjustifiable. In such proceedings the respondent was statutorily entitled to make a counterclaim for relief for breach of copyright, which the respondent had done.
An equivalent category of case would also be applications to set aside a statutory demand under the Corporations Act where, because a party is compelled to respond to the statutory process invoked by the defendant, it would be inappropriate to make an award of security for costs.
So far as the researches of counsel have disclosed, these decisions have not been applied in cases where there is simply an allegation of a breach of contract. It is not appropriate on this application to apply the cases more generally so as to ask in the language of Scrutton LJ in Maatschappij voor Fondsenbezit v Shell Transport and Trading Co [1923] 2 KB 166 at 178, "[w]ho is the attacker and who the defender". If that was the case, then in any breach of contract case, notwithstanding the form of the action, an inquiry would need to be made having regard to the underlying commercial dealings of which party was appropriately characterised as attacker or defender.
In this case, although it can be seen that in order to preserve its business the plaintiff was compelled to challenge the termination by the defendant of the franchise, that is not sufficient to put it in the category of case equivalent to that in Willey.
Rule 1902(1)(g), "oppressive", and rule 1902(1)(h), stultification
There is no evidence that the factors referred to in these paragraphs ought to prevent the ordering of security for costs. The plaintiff bears the evidentiary onus in relation to these matters and there is no evidence that the proceedings would be stultified or that the ordering of security would otherwise be oppressive. As Einstein J pointed out at [50] of the decision in Idoport:
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.
(emphasis in original)
As pointed out above at [9], no evidence of the financial circumstances of Ms Malone or the holding company have been put before the Court. In those circumstances, it cannot be said that a request to provide security would be oppressive or that it would stultify the proceedings.
Rule 1902(1)(i), "whether the proceeding involves a matter of public importance"
A matter of public importance is generally one which involves the clarification of an important point of law. It is a factor which tells against the making of an order for security. There is no matter of public importance that appears to be necessary to determine in order to decide this case. Its ultimate disposition will turn on findings of fact applied to the requirements of the specific franchise agreement between the parties.
The discretionary factors in rr 1902(1)(j), (k) and (l) are not relevant in the present case.
Rule 1902(1)(m), "the estimated costs of the proceeding"
Mr Gilbert has deposed to the fact that the defendant has incurred a liability of $65,000, including counsel's fees of approximately $34,000, up to the date of his affidavit of 21 June 2017. He also estimates that a further $107,800 in costs will be incurred in bringing the matter to the conclusion of the hearing. His letter of 6 June 2017 outlines the basis of that calculation. He estimates that his client would recover 80 per cent of these costs on an assessment of costs on a party and party basis. This evidence is subject to further comments which I will make in a moment.
Decision
In light of the above, it is appropriate that security for costs be provided. I do not consider it appropriate to order the provision of security in relation to those costs incurred prior to the raising of the issue of security for costs. That is because the plaintiff was not put on notice of the likely demand for security and because it was substantially successful in obtaining interlocutory relief over the opposition of the defendant. I reached that conclusion notwithstanding that the costs of those earlier interlocutory proceedings have been ordered to be costs in the cause.
The principal difficulty with the evidence in relation to future costs put on by Mr Gilbert is there is no evidence that Mr Gilbert has any experience of the assessment of costs within the Australian Capital Territory. It is apparent from the terms of his affidavit that his opinion is given having regard to his assessment of what is "fair and reasonable" by cost assessors in New South Wales. He appears to proceed on the basis that his charge out rate of $450 per hour plus GST will be accepted by a registrar assessing costs in these proceedings. That rate is substantially inconsistent with the scale based costs assessment process identified in Part 4.2 of Schedule 4 of the Court Procedures Rules and to the hourly rates where those rates are identified in those rules.
The calculations of future costs in the correspondence of 6 June 2017 are not broken down in a manner that will permit assessment of the division of labour between Mr Gilbert and junior solicitors or in relation to the hearing between Mr Gilbert and counsel. It is therefore not possible to assess the extent to which this erroneous approach adopted in relation to the assessment of likely recoverable costs has affected the final figure or the rate at which the costs will be recovered on a party and party assessment.
Having regard to the inadequacies of the evidence put forward in support of the application for security and the conduct of the defendant following the making of the interim and interlocutory orders by this Court that has made more difficult or increased the costs of the plaintiff conducting the business, I consider that it is appropriate to order the plaintiff to provide security for costs in the sum of $50,000. Further, having regard to the fact that the proceedings are listed for a hearing and the parties are presently subject to a timetable, I do not consider that it is appropriate that the provisions of r 1904(2), which provide that time does not run in relation to a step required to be taken by the defendant, should apply.
The orders of the Court are:
1. The plaintiff is to provide security for the defendant's costs in the sum of $50,000.
2. The security must be provided by way of payment into Court, bank guarantee or in such other manner as is agreed by the parties.
3. The security must be provided by 1 August 2017.
4. The provisions of r 1904(2) of the Court Procedure Rules 2006 (ACT) do not apply.
5. The defendant has liberty to apply on one clear day's notice for an order dismissing the proceedings if security is not given.
6. Costs are reserved.
| I certify that the preceding twenty-nine [29] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Mossop. Associate: Date: 18 August 2017 |
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