Ausbulk Limited T/A Ausbulk Grain Storage & Handling v Ewing International Limited Partnership - [2009] SASC 202

SUPREME COURT OF SOUTH AUSTRALIA
(Appeal from a Master: Civil)
AUSBULK LIMITED T/A AUSBULK GRAIN STORAGE & HANDLING v EWING INTERNATIONAL LIMITED PARTNERSHIP
[2009] SASC 202
Judgment of The Honourable Justice Bleby
10 July 2009
ARBITRATION - COSTS - SECURITY FOR COSTS
PROCEDURE - COSTS - SECURITY FOR COSTS
Appeal against order of a Master that the appellant provide security for respondent’s costs in an arbitration – appellant entered into contracts under which it agreed to construct grain silos for respondent – company related to appellant gave performance guarantee to respondent for due performance of appellant’s obligations – respondent alleged defective work and terminated contracts – appellant disputes validity of termination and claims it is owed money for work done – appellant referred its claim to arbitration under the terms of the agreement – respondent issued counterclaim relating to breaches of contract – Master ordered that appellant provide security for costs – whether Master failed to have regard to appellant’s contention that it had a significant and bona fide claim and that its impecuniosity had been caused by respondent – whether Master erred in failing to take into account respondent’s counterclaim against appellant – whether respondent was adequately protected by performance guarantee provided by related company – whether Master erred in mis-characterising appellant’s contentions.
Appeal dismissed – fact that appellant has bona fide claim not a reason to refuse security – determining whether respondent caused appellant’s impecuniosity would involve deciding appellant’s case on the merits – Master did not err in finding that appellant was the real plaintiff in the arbitration and that the counterclaim was by way of defence only – inappropriate to decide whether performance guarantee extends to respondent’s legal costs as related company not a party to proceedings – financial situation of related company such that guarantee will be of little value if appellant’s claim fails – contractual arrangements and appellant’s status as limited liability partnership do not mean that respondent has agreed not to seek security for costs.
Commercial Arbitration and Industrial Referral Agreements Act 1986 (SA) s 47; Supreme Court Civil Rules 2006 (SA) r 194, referred to.
John Arnold’s Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd (1979) 22 SASR 20, applied.
Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289, not followed.

WORDS AND PHRASES CONSIDERED/DEFINED
"security for costs"

AUSBULK LIMITED T/A AUSBULK GRAIN STORAGE & HANDLING v EWING INTERNATIONAL LIMITED PARTNERSHIP
[2009] SASC 202
Appeal from a Master
BLEBY J.
Introduction

This is an appeal against an order of Judge Lunn, in his capacity as a Master, that the appellant, Ewing International Limited Partnership (“Ewing”) provide security for the costs of the respondent, Ausbulk Limited (“Ausbulk”), in connection with an impending arbitration between Ewing and Ausbulk under the Commercial Arbitration and Industrial Referral Agreements Act 1986 (SA) (“the Commercial Arbitration Act”). The amount of the security ordered was the sum of $160,000.
Background
Ewing is a construction firm specialising in steelwork and the erection of steel tanks. It has carried on business as a tank fabricator in Australia since January 2006. It was the defendant at first instance in this action and the claimant in the arbitration.
A company known as Gemahw Pty Ltd and the trustees of the Ewing Trust, the Heard Trust and the Hampton Trust are each partners in Ewing. The three trusts are discretionary family trusts established in New Zealand whose potential beneficiaries are the members of the various respective families. The three trusts hold a 99% share in the limited partnership. Their combined liabilities are limited to $989. Gemahw Pty Ltd holds a 1% share, and its liabilities are unlimited. Gemahw is controlled by Messrs Ewing, Heard and Hampton, and has no significant assets.
Ewing Construction Ltd (“Construction”) is a company registered in New Zealand whose director is Mr Ewing and whose shareholders are Messrs Ewing, Heard and Hampton and some of the trusts controlled by them. It carries on the business of constructing large tanks and silos.
Ausbulk is the plaintiff in the action and respondent to the appeal. It is a company engaged in the supply of grain and grain products. It is the respondent in the arbitration.
Ewing and Ausbulk entered into contracts for the construction of large grain silos at Outer Harbour for a price in excess of $23 million. The contracts included an arbitration clause in the event of a dispute. By a separate undated document Construction gave a performance guarantee to Ausbulk for the due performance of Ewing’s obligations under the contracts. Construction’s obligations were supported by undertakings of ASB Bank Ltd New Zealand to pay Ausbulk $896,100.
Ausbulk alleged defective work in the performance of the contracts. On 14 June 2007 it terminated the contracts. Ewing disputes the validity of the termination and claims that it is owed in excess of $10 million for work done under the contracts.
On 16 November 2007 Ewing referred its claim against Ausbulk to arbitration. In a separate action in this Court instituted on 18 December 2007, Ewing sought an injunction restraining Ausbulk from calling up the money payable by ABS Bank until the completion of the arbitration. An injunction was granted by Layton J in this Court on 8 February 2008.
The decision of the Judge at first instance
On 3 March 2008 Ausbulk instituted this action under s 47 of the Commercial Arbitration Act seeking an order under r 194 of the Supreme Court Civil Rules 2006 (SA) for security for its costs of the arbitration. The only issues raised before the Judge at first instance were whether the Court should exercise its discretion to order security for costs, and if so, as to the amount of the security.
In the proceedings below Ewing conceded that it was insolvent. Its principal contention was that if it was ordered to give security it would not be able to pursue the arbitration and thus enforce its claim. On the evidence, the Judge was not satisfied that Ewing had shown that it could not raise $160,000 for security for costs. There was therefore no basis for the exercise of the Court’s discretion against the giving of security on the grounds of stultification of the claim. This finding was not challenged on the appeal.
Ausbulk had issued a counterclaim in the arbitration seeking the cost of rectifying the alleged defective work of Ewing and the additional costs to Ausbulk of having another contractor complete the work. The counterclaim is unquantified. It generally arises out of the same facts as Ewing’s claim as pleaded in its points of claim in the arbitration. A substantial part of the counterclaim is by way of defence to Ewing’s claim. In reliance upon John Arnold’s Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd[1] the Judge held that such a defensive purpose was not relevant to the provision of security. There was no suggestion that, at least up to the end of the first day of hearing, Ausbulk’s work in defending itself at arbitration would be significantly increased because of the counterclaim, so it was likely that Ausbulk would be incurring much the same costs. That factor did not cause the Judge to reduce the amount of security otherwise to be ordered.
[1] (1979) 22 SASR 20.
The Judge also did not accept Ewing’s contention that any legal costs awarded to Ausbulk on the Arbitration were the subject of the performance guarantee given by Construction. He considered that its costs were not recoverable from Construction under the guarantee.
In the proceedings below Ewing suggested that some special consideration might apply to the exercise of the Court’s discretion in respect of arbitrations being conducted under agreements between the parties. No authority was cited. The Judge held that in the circumstances it was not a relevant factor to the exercise of discretion merely because it related to an arbitration rather than a Supreme Court action.
The Judge ordered that the appellant provide security for costs to the end of the first day of hearing of the arbitration in the sum of $160,000. In so ordering, the Judge discounted Ausbulk’s claim based on his assessment of the likely costs to the end of the first day, and some allowance by way of off-set was made by the Judge for the costs awarded against Ausbulk on the injunction application.
Against that background I now consider the grounds of appeal of Ewing.
Ground 1
Ewing contends that the Judge erred in fact and in law by failing to give due weight to factors which were not in dispute. It maintains that the Judge failed to have regard to Ewing’s contention that it had a significant and bona fide claim and that its impecuniosity had been caused by Ausbulk.
In the absence of a claim of stultification, which is not now alleged by Ewing, the fact that Ewing’s claim is bona fide and significant is not a ground for refusing security. Even if Ewing’s impecuniosity was caused by Ausbulk, that too was not a reason to refuse security. More importantly, however, no finding can be made on an application for security for costs as to whether Ewing’s impecuniosity was caused by Ausbulk’s conduct. That would involve deciding Ewing’s case on the merits, which is the subject of the arbitration. This ground of appeal must therefore fail.
Ground 2
Ewing argues that the Judge erred in law in his application of John Arnold’s Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd[2] in his decision not to take into account the fact that Ausbulk had brought a counterclaim against Ewing. The Judge held that, in respect of the counterclaim, Ausbulk was not in substance a plaintiff, which could have exposed it to an order for security against it, as the counterclaim was, in substance, a defence to Ewing’s claim. Additionally, Ewing contends that, as the claim and counterclaim in the arbitration arise out of substantially the same facts, an order to provide security which Ewing says it cannot provide would effectively stay the claim while the counterclaim would proceed on those same facts. It seeks to gain support for that submission from a dictum of Smart J of the New South Wales Supreme Court in Sydmar Pty Ltd v Statewise Developments Pty Ltd,[3] a dictum to which I shall return.
[2] Ibid.
[3] (1987) 73 ALR 289.
The submission loses much of its force because Ewing has in fact provided the security without any apparent prejudice to its ability to pursue the arbitration. Nevertheless, there are other reasons why the submission should be rejected.
In the John Arnold Case the plaintiff was a company in liquidation. It brought an action to prevent a secured creditor from acting to enforce its guarantee against the plaintiff and to prevent it from realising the security it held. The plaintiff in liquidation denied the debt, claiming that liability under the guarantee had been discharged by reason of a breach of duty of the defendant to it. In effect, the defendant was asserting the existence of the debt which the plaintiff denied. The defendant applied, among other things, for an order for security for costs against the plaintiff. Section 363 of the Companies Act 1962 (SA) provided in substance that where a company was a plaintiff in legal proceedings and there was reason to believe that the company was unable to pay the costs of the defendant if the defendant was successful in its defence, the Court could require security to be given.
Besides reiterating that the Court had an unfettered discretion to order security, the Court also affirmed that it was appropriate to look at the real cause of action and to ascertain who was the real plaintiff. In that case it was the defendant as the party pursuing the debt, and that was one of the reasons why security would not be granted.
It was on the application of that reasoning that the Judge below decided that the real plaintiff in this case was Ewing and that Ausbulk’s counterclaim was not an independent counterclaim but one by way of defence to Ewing’s claim. Hence, he considered that there was no barrier to making an order for security against Ewing.
In Sydmar Pty Ltd v Statewise Developments Pty Ltd[4] Smart J reaffirmed the principle expressed by the Full Court of this Court in John Arnold that the decision to order security was unfettered, and then listed a number of factors which he considered to be relevant to the exercise of the discretion to grant security. Among those factors was the following:[5]
(H)Whether substantially the same facts are likely to be canvassed in determining the action and the cross-action. The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action covering substantially the same factual areas proceeds.
It was that dictum on which Ewing relied on the appeal.
[4] Ibid.
[5] Ibid 300.
A number of observations need to be made about that dictum. First, unlike every other factor which Smart J identified, he offered no authority for that proposition. In the second place, that observation needs to be read in the context of the facts of that case. Of the cross-claim in that case the Judge later observed:[6]
By reason of the complexity of the matters raised in the cross-claim, the time it will take to hear them and the amount claimed, the cross-claim is now the dominant part of the proceedings. The plaintiff’s claim, while important to it, is, in the overall picture of the hearing time and the amount claimed, of minor importance.
[6] Ibid 302.
Thirdly, the proposition, on its face, represents a misunderstanding of what this Court decided in John Arnold. That is that one of the relevant factors against ordering security for costs is where a plaintiff is, in reality, a defendant. Ausbulk, in this case, is a defendant in the arbitration. Although it has a cross-claim, it was open to the Judge below to conclude that it was effectively a cross-claim by way of defence only, being based on Ewing’s alleged breach of contract, the very substance of Ausbulk’s defence to Ewing’s claim. Such a defensive counterclaim does not preclude a defendant from obtaining an order for security.
This ground of appeal must therefore fail.
Ground 3
The third ground of appeal is that the Judge erred in law in finding that the costs to be protected by an order for security were not the subject of the performance guarantee given by Construction. Ewing argues that Ausbulk was adequately protected by that guarantee. This turned out to be the principal argument of Ewing on the appeal.
Ewing’s argument turned on the proper interpretation of the defined expression “Guaranteed Money” and the defined expression “Guaranteed Obligations” contained in the performance guarantee. It is not necessary to recite the argument in full. Ausbulk put a contrary argument based on the definition of those expressions and other relevant clauses contained in the guarantee.
Construction is not a party to these proceedings. Any decision I might make on the proper interpretation of the performance guarantee will not be binding on Construction. It would be inappropriate to decide that issue in the absence of a party to the contract. Without deciding the issue, I am satisfied that there is an arguable case that the performance guarantee does not extend to Ausbulk’s costs if it succeeds in the arbitration. There is no evidence that Construction concedes that it does so extend, even though Construction is controlled by one of the same persons who control Ewing.
The Judge below went further and held that the subject of the guarantee does not extend to Ausbulk’s legal costs. While I am not prepared to go that far, my conclusion on the issue, in the absence of any concession from Construction, also weighs in favour of an order for security.
However, there is another compelling reason why the performance guarantee cannot be relied on. The Judge below found that Construction had net assets of approximately $1.5 million. In fact, the information before the Judge showed that its surplus of assets over liabilities was $1,433,054. That was one of the reasons which influenced the Judge’s conclusion, not sought to be disturbed on appeal, that there was no basis for finding that, if security were ordered, Ewing’s claim would be stultified.
Ausbulk argues, which I accept, that for the purpose of examining the effectiveness of the performance guarantee, Construction’s situation must be examined in the event that Ewing fails in its claim in the arbitration, for it is in that event that Ewing’s liability to Ausbulk for its costs of the arbitration would arise, and when the protection of the guarantee would be needed.
An analysis of Construction’s balance sheet shows that one of the assets is a receivable of $580,548.73 from Ewing. Another asset is a loan to Ewing in the amount of $764,266. As mentioned above, Ewing is currently insolvent. If it fails in the arbitration those amounts are unlikely to be recovered at all by Construction. In that event, on its latest balance sheet, the net assets of Construction would only be $88,239.27.
However, Construction’s difficulties do not stop there. Construction has provided to Ewing’s bankers a performance bond for the Ausbulk contracts of $896,000. The bond and Construction’s other borrowings are secured over Construction’s assets, including a cash deposit of NZ$210,000. That performance bond is not shown as a liability in the balance sheet. If the Bond is called upon, for example, on Ewing failing in its arbitration against Ausbulk, Construction’s assets would be reduced by a further $896,000. Therefore, even if Construction’s performance guarantee is effective to provide for the payment of Ausbulk’s costs, Ausbulk’s prospects of recovering those costs, which would only arise in the event of Ewing failing to succeed in its claim in the arbitration, would be remote indeed.
Ewing claims that Ausbulk cannot rely on this argument and at the same time rely on Construction’s net assets of $1.4 million in order to demonstrate lack of stultification if security is ordered. I do not accept that argument. It was appropriate to rely on Construction’s current balance sheet to show that there were avenues available to Ewing to provide security without stultifying its claim. What is now relied on by Ausbulk for the purpose of this argument is not the current balance sheet but the likely effect on Construction’s balance sheet of Ewing failing in its claim against Ausbulk, and whether there would then be other sources available to Ausbulk to satisfy its claim for costs against Ewing which would be likely to follow. The suggested alternative source is unlikely to yield anything, even if Construction is liable for the costs under the performance guarantee. I reject this ground of appeal.
Ground 4
Ewing claims that the Judge, in deciding that there were no special considerations in exercising his discretion not to order security, erred in law and fact in mis-characterising Ewing’s contentions. It says that relevant factors in the exercise of the discretion against Ausbulk are that Ausbulk entered into the contract knowing of Ewing’s status as a limited liability partnership, that Ausbulk provided a form of contract with a right to arbitrate, and that Ausbulk made special arrangements with Construction to obtain the performance guarantee.
Ausbulk argues that upon entering into the contract it did not agree to not seek security for costs in the event that Ewing instituted a claim by way of arbitration, and that absent such a circumstance, Ewing’s argument is untenable.

I agree. Ewing’s status as a limited liability partnership was no different in effect from that of a limited liability company. The fact that Ausbulk knew that Ewing was a limited liability partnership is not a relevant factor in determining whether Ausbulk is entitled to an order for security. None of the contractual arrangements referred to by Ewing were expressed to be in consideration of a right of Ausbulk to seek security for costs in the event of an arbitration. There was nothing unusual about the contractual arrangements made. In fact, they are typical of many similar commercial undertakings.
Ground 5
Ewing claims that if regard had been had to the matters raised in grounds 1-4, then no order for security for costs should have been made. This ground must fail in the light of the failure of the other grounds.
Conclusion
It was open to the Judge below to exercise the discretion in the way he did and to provide an order for security for costs. It has not been shown that the discretion was exercised on irrelevant grounds or that the Judge made any error of fact or law in exercising his discretion. It follows that the appeal must be dismissed.