Australian Dream Homes Pty Ltd v Stojanovski
[2016] VSCA 38
•11 March 2016
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2015 0099
| AUSTRALIAN DREAM HOMES PTY LTD | Applicant |
| v | |
| ILIJA STOJANOVSKI and ZAGORKA STOJANOVSKI | Respondents |
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| JUDGES: | SANTAMARIA and McLEISH JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 4 March 2016 |
| DATE OF ORDERS: | 4 March 2016 |
| DATE OF REASONS: | 11 March 2016 |
| MEDIUM NEUTRAL CITATION: | [2016] VSCA 38 |
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PRACTICE AND PROCEDURE – Application for security for costs – Equivocal evidence as to impecuniosity – Delay in bringing application – Genuinely arguable question of law of public importance – r 64.38(2) of the Supreme Court (General Civil Procedure) Rules 2015 – Application dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr R de Meyrick | Lovegrove Smith & Cotton |
| For the Respondents | Mr R Andrew and Mr N Phillpott | Noble Lawyers Pty Ltd |
SANTAMARIA JA
McLEISH JA:
On 21 August 2011, the applicant (‘the builder’) entered into a domestic building contract to construct a new single storey brick veneer dwelling upon land in Reservoir owned by the respondents (‘the owners’). The contract was in the printed form of a Master Builders Association of Victoria New Homes Contract (HC-6 Edition 1-2007) (‘the contract’). The contract was a standard building contract governed by the Domestic Building Contracts Act 1995. Clause 20 of the contract conferred upon the owners the right to terminate the contract in certain circumstances.
Clause 20.1 provided, in part:
If the Builder:
…
· fails to proceed with the Works with due diligence or in a competent manner; OR
· unreasonably suspends the carrying out of the Works; OR
· refuses or persistently neglects to remove or remedy defective work or improper Materials, so that by the refusal or persistent neglect the Works are adversely affected; OR
· refuses or persistently neglects to comply with this Contract (including the requirements of municipal or other authorities); OR
· is unable or unwilling to complete the Works or abandons the Contract; OR
· is in substantial breach of this Contract;
THEN
the Owner may give written notice by registered post to the Builder:
· describing the breach or breaches of the Contract by the Builder; AND
· stating the Owner’s intention to terminate the Contract unless the Builder remedies the breach or breaches of this Contract within a period of fourteen (14) Days after the Builder’s receipt of the above notice.
Clause 20.2 of the contract provided that if the builder failed to remedy the breach the owner may terminate the contract by giving a further written notice to the builder. Clause 20.3 provided that the owner may not terminate the contract unreasonably or vexatiously or if the owner was in substantial breach of the contract.
In late October or early November 2011, the works commenced. In early November 2011, the concrete slab was poured. On or around 15 November 2011, the builder received a letter from the owners’ daughter raising a number of concerns regarding the construction of the works. On 13 April 2012, the builder issued the owners with the lock-up stage progress claim for $112,000.
On or about 17 April 2012, the owners served the builder with a notice of intention to terminate the contract pursuant to cl 20.1 (‘the default notice’). The default notice alleged that the builder was in substantial breach of the contract because it:
(a)failed to carry out the works in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract;
(b)failed to carry out the works in accordance with all laws and legal requirements; and
(c)failed to carry out the works with reasonable care and skill.
Attached to the default notice was an expert report of some 43 pages, which identified 21 items of defective work to be rectified. The report stated that, as a result of numerous defects in the brickwork, that work needed to be demolished and rebuilt. The notice required the builder to remedy the breaches described in the report within 14 days.
Between 17 April 2012 and 3 May 2012, there was a series of communications between the owners and the builder, conducted through their respective solicitors. Among other things, the owners contended that lock-up stage had not been reached, by reason of the outstanding defects. The builder disputed the defects that had been alleged and stated that it was ready, willing and able to complete the building works, subject to being paid moneys outstanding.
On 4 May 2012, the owners served on the builder a notice of termination pursuant to cl 20.2 of the contract.
Proceedings in VCAT
On 30 May 2013, the builder commenced proceedings in the Victorian Civil and Administrative Tribunal. In its points of claim, the builder sought payment of the lock-up stage payment claim or, alternatively, an award of damages for the fair value of all works which it had carried out and which had not been paid for up to the date of termination.
The owners filed amended points of counterclaim, alleging that the builder had failed to remedy the substantial breaches identified in the default notice within the 14 days specified and that they had lawfully terminated the contract pursuant to cl 20.2. They sought the costs of completing and rectifying the works and damages for the loss of use and enjoyment of the works.
The matter was heard over five days in April and May 2014 with the last written submissions filed on 20 June 2014. On 7 August 2014, the Tribunal ordered the owners to pay the builder $21,914.85 together with interest.[1] It held that the purported contractual termination by the owners was ineffective and that it amounted to a repudiation by them of the contract.[2] The Tribunal decided that the builder was not entitled to the lock-up stage payment claim because that stage had not been completed, but the builder was nonetheless entitled to payment for the work done based on a quantum meruit.[3] At the same time, the works contained significant defects which required rectification for which the builder was required to pay. In the event, the Tribunal ordered that the costs of rectifying the building defects should be set off against the quantum meruit amount due to the builder.
[1]Australian Dream Homes Pty Ltd v Stojanovski [2014] VCAT 975.
[2]Ibid [66].
[3]Ibid [70], [89].
It was important to the reasoning of the Tribunal that it considered that the builder had not been in ‘substantial breach’ of the contract, notwithstanding the extent of the rectification required to remedy the alleged defects. The Tribunal considered that, because the works had not been completed and there remained significant time under the contract for that to be done, it could not be said that the builder was in substantial breach of the contract.[4] The Tribunal also construed the 14 day period in cl 20.1 as a minimum period for rectification of defects, capable of being extended by the parties so as to prevent cl 20.1 being used to effect unreasonable termination of the contract contrary to cl 20.3.[5]
[4]Ibid [31]–[32].
[5]Ibid [50].
Appeal to the Supreme Court on a question of law
On 30 October 2014, Derham AsJ refused the owners leave to appeal pursuant to s 148 of the Victorian Civil and Administrative Tribunal Act 1998. On appeal from that decision, on 9 December 2014, Rush J granted the owners leave to appeal. The owners’ notice of appeal raised seven grounds, including that:
(a) the Tribunal should have held that the significant defects in the building works amounted to a substantial breach of the contract within the meaning of cl 20.1;
(b) the Tribunal erred in finding that the 14 day remediation period in cl 20.1 was a minimum period and that it was open to the parties to extend that period so as not to offend cl 20.3; and
(c) the Tribunal erred in allowing the builder to claim a quantum meruit instead of damages for the breach of contract by the owners.
On 17 August 2015, a judge in the Trial Division delivered written reasons for decision and on 25 August 2015 made orders allowing the owners’ appeal and remitting the matter to the Tribunal for hearing and determination in accordance with law.[6] The Court held that the Tribunal ought to have concluded that the owners validly terminated the contract under cl 20. The judge held that whether a breach of contract was substantial was a question of fact, depending on the nature and consequences of the breach.[7] The breach of the builder’s obligation in the present case to carry out the works in a proper and workmanlike manner was substantial, within the meaning of cl 20.1, notwithstanding that the time for completion had not arrived.[8]
[6]Stojanovski v Australian Dream Homes Pty Ltd [2015] VSC 404.
[7]Ibid [53].
[8]Ibid [59].
In relation to the 14 day notice period, the judge held that the requirement of reasonableness related to the act of termination, not the defects notice period.[9] The proper question was whether the owners acted unreasonably in serving the termination notice when they did.[10] That did not depend only on the 14 day period, but was to be decided by reference to all the relevant circumstances.[11] During the notice period, the builder had repeated its demand for payment for the lock-up stage, to which it was not entitled, and had stated that the default notice was without substance. In these circumstances it was not open to the Tribunal to hold that the owners had acted unreasonably in terminating the contract.[12]
[9]Ibid [63].
[10]Ibid [65].
[11]Ibid [67].
[12]Ibid [74].
Application for leave to appeal to the Court of Appeal
On 21 September 2015, the builder applied for leave to appeal the decision of the primary judge.[13] In its application for leave to appeal, it identified several questions of law, including whether the judge erred in holding that it was not open to the Tribunal to hold that the conduct of the owners in serving the notice of termination was unreasonable, whether the judge had failed to take account of relevant considerations, whether the judge had erred in regard to the proper time to assess the reasonableness of termination under cl 20, and whether the judge had erred in law by disturbing the Tribunal’s findings of fact.
[13]The application for leave to appeal was at first rejected by the Registry, as it did not comply with the relevant procedures. An extension of time to file a further application was granted in order for the defects to be remedied. On 25 September 2015, the builder’s application for leave to appeal was accepted by the Registry.
On 27 October 2015, the owners filed a notice of contention in which they said that the judgment of the primary judge should be affirmed on the basis that the Tribunal had erred in law in finding that the builder was entitled to accept the owners’ repudiation and terminate the contract at law in circumstances where the builder was itself in substantial breach of the contract.
On the same date, the owners filed their written case in response.
On 17 November 2015, the builder’s solicitors wrote to the Registry advising it that a minor error had been discovered in their written case. On 18 November 2015, the Judicial Registrar granted leave to the builder to file an amended written case. On the same date, the builder filed its amended written case.
On 20 November 2015, the builder filed its written case in response to the owners’ notice of contention.
On 10 December 2015, an agreed summary for this Court was filed by the parties.
Security for costs
On 10 December 2015, the owners obtained a title search showing that the builder did not own any real property in Victoria, and a company search showing that the builder had a paid up share capital of $2.
On 15 December 2015, through their solicitors, the owners wrote to the builder requesting security for costs in the amount of $36,400. In the letter, the owners said that their costs of the application to the Court of Appeal would be likely to exceed $36,000, and they provided a breakdown. They stated that a search of the Land Titles Office revealed that the builder did not hold any real property in Victoria, and that a company search recorded that it had a paid up share capital of only $2. The letter continued
Therefore, our clients are concerned that your client will likely not have sufficient assets to meet any adverse costs order that may be made in this proceeding against your client in circumstances where your client’s case is weak.
The letter sought confirmation by 18 December 2015 that the builder would provide security for costs in the amount of $36,400 within 7 days.
On 18 December 2015, the builder’s solicitors replied refusing to provide security. They said that the owners’ likely legal costs had been significantly overestimated. In addition, the letter said ‘[w]e are instructed that our client has funds to meet any costs award and for this reason and other reasons we do not consider it necessary to provide security for costs as you have requested’. The letter also noted that the judgment sum, which had been held in a joint account, had been released to the owners.
On 21 December 2015, the builder filed and served an agreed leave application book index.
On 19 January 2016, the owners obtained a title search showing that the builder is not the registered proprietor of any of the titles created upon the subdivision of a title (CT 08880/564) in which it previously held an interest.
On 21 January 2016, pursuant to r 64.38(2) of the Supreme Court (General Civil Procedure) Rules 2015, the owners filed an application for security for costs, a supporting affidavit and an outline of submissions in respect of the application. They also sought an order that the builder’s application for leave to appeal be stayed until security for their costs was provided by the builder.
The supporting affidavit was sworn by Darren John Noble on 21 January 2016. Mr Noble deposed to the facts at paragraphs 22 and 27 above, and exhibited copies of the described searches.
On 22 January 2016, the draft leave application book was due to be filed. The Court was informed at the hearing that this happened on 25 January 2016.
On 5 February 2016, the builder filed a notice of opposition to the application for security, a supporting affidavit of its solicitor and an outline of submissions. Among other things, the affidavit states that ordering security ‘could … stifle a strong and arguable claim of public importance by the [builder] on an appeal’. On 2 March 2016, a supplementary affidavit in support of the notice of opposition was filed. In that affidavit, the builder’s solicitor stated that the owners have not previously sought security for costs either before the Tribunal or in the Trial Division. He also referred to the amounts that the builder has incurred in legal fees in the various proceedings to date.
On 3 March 2016, the owners filed a supplementary affidavit in response to the builder’s 2 March affidavit. In the affidavit, the owners’ solicitor deposed to the reasons why they made no application for security for costs in the Tribunal or in the proceeding before the primary judge. He further expressed the opinion, based on his experience as a construction lawyer, that the legal issues raised by the proceeding would have limited application in the building industry.
Parties’ submissions
In support of their application for security, the owners submitted that security for costs should be ordered for the following reasons:
(a) the decision of the primary judge is without error and the builder’s application for leave to appeal will fail or, at the least, the prospects of success fall to be treated as a neutral factor;
(b) there is a significant risk that the builder would not be able to satisfy a costs order in the owners’ favour, as evidenced by the matters already mentioned and the fact that the builder’s solicitor had sworn that an order for security ‘could stifle’ the builder’s application for leave to appeal;
(c) an order for security for costs would not prejudice the builder in continuing to pursue its application for leave to appeal;
(d) the owners are not the cause of the builder’s impecuniosity;
(e) there are no public interest factors militating against the making of an order for security; and
(f) there are no unique discretionary matters which would have any impact on the question of awarding security.
In oral submissions, counsel for the owners added that, as a result of the reforms to the civil appeal procedures, delay no longer had the significance it had when an appeal was commenced by notice of appeal alone. Now, most of an appellant’s work has been done before a respondent is served with the documents instituting the application for leave to appeal. Moreover, the parties were engaged in satisfying interlocutory requirements in the period after the application was served, and it would not be efficient or practicable for a respondent to divert attention from those processes to consider the issue of security as early as was formerly the case.
Counsel for the owners also submitted that the case was merely one of many over time involving the application of general principles to the termination of a building contract. As such, no public interest considerations militated against making an order for security.
Counsel further pointed out that the amount of security sought had been calculated before the parties had been advised that the application for leave would be heard along with argument on any appeal. The amount was therefore conservative when the likely total costs were considered.
In opposition to the application, the builder submitted that an order for security for costs should not be made for the following reasons:
(a) there has been significant delay in making the application for security, the proceeding has significantly progressed and the application for leave to appeal has been set down for hearing;
(b) the owners have not made out any proper factual basis to demonstrate a significant risk of the builder failing to meet a costs order in their favour;
(c) the appeal has good prospects of success — the matter was not clear-cut, as indicated by the fact that Derham AsJ had refused leave to appeal;
(d) the owners’ overall conduct in relation to the building contract and subsequent hearings has disadvantaged the builder financially since 2012;
(e) the order should not be made for reasons of public interest — the legal issues involved relate to termination and/or repudiation of building contracts and are of significant public interest to the building industry;
(f) there are other unique discretionary matters that are relevant, namely:
(i) the builder has already been involved in significant legal work on the appeal to date;
(ii) in mid-December 2015, the builder agreed that the amount of the judgment sum and some accrued interest could be released back to the owners; and
(iii) the builder will argue that the appeal relates to inconsistent findings of fact between the primary judge and the Tribunal, in regard to the builder’s conduct.
Analysis
The principles which inform the exercise of the power to grant security are well established. In Timbercorp Finance Pty Ltd (in liq) v Tomes,[14] McLeish JA said:
[14][2015] VSCA 322.
It has regularly been held that the power of the Court to order security for costs in relation to an appeal (including an application for leave to appeal) is unconfined, but that the following matters are relevant to the exercise of the Court’s discretion:
(a) the prospect of success of the application, and any appeal;
(b) the extent of the risk that a costs order will not be satisfied;
(c)whether the making of an order for security would be oppressive by stifling a reasonably arguable claim;
(d)whether any impecuniosity of the applicant/appellant arises out of the conduct complained of;
(e)whether there are aspects of the public interest which militate against the making of an order for security; and
(f)whether there are particular discretionary matters peculiar to the circumstances of the case.[15]
[15]Ibid [16] (citations omitted).
As indicated above, the builder has contended that the owners have delayed in bringing the present application. In Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd,[16] McLeish JA said:
However, ordering security at this stage would mean that preparation of the matter for hearing by the Court had been futile. In Smail v Burton, Gillard J (with whom Newton and Norris JJ agreed) said:
If an appellant has expended sums of money preparing the appeal for hearing and all the matters necessary to be performed have already been performed and the appeal is ready for hearing, it would be patently unjust to permit a respondent who stood by and allowed the work to be done to come to court and to ask for security after such expenses have been incurred. Accordingly, it is well established by authority that applications for security for costs should be made promptly and before considerable expense is incurred by the appellant.
These observations must now be read in light of two changes in procedure. First, an applicant for security for costs on appeal is no longer required to establish ‘special circumstances’, as r 64.24(2) formerly required. Secondly, since an applicant for leave to appeal is now required to file a written case at the time of applying for leave, a successful party at trial first learns of the making of an application for leave to appeal only after all the written materials required for the appeal have already been prepared. Nonetheless, the risk of wasted expenditure on appeal, of which Gillard J spoke in Smail v Burton, still exists. In cases where impecuniosity of a prospective applicant for leave to appeal is known to the successful party at trial, it will often be unjust to allow that party to stand by and take steps towards seeking security only after the unsuccessful party has performed the work necessary to prepare the appeal for hearing. In this regard, Gillard J made it clear that he was relying, not on delay on the part of the applicant for security, but on the fact that preparation for the appeal was complete.[17]
[16][2015] VSCA 169.
[17]Ibid [17]–[18] (citations omitted).
The basis for making an order for security for the costs of an appeal lies in identifying a risk, which is unacceptable in all the circumstances, that the respondent to the appeal may be put to the expense of defending the judgment or decision in its favour without the benefit of expecting that, in the usual course, if it is successful in doing so, the unsuccessful appellant will be required to pay the respondent’s costs of the appeal. As already observed, the considerations that may bear on the Court’s discretion to order security are of many kinds, depending on the features of the particular case. But it is fundamental to the resolution of any application for security to identify the nature and extent of the risk in question (usually, as here, the risk as to the appellant’s impecuniosity).
In the present case, the evidence as to that risk is equivocal. The applicant builder owns no land in Victoria. It is a proprietary company with a nominal paid up share capital. Its solicitor has given evidence that an order that it provide security could stifle its appeal. Counsel for the owners submitted that, in the circumstances, they had done all that is normally done in order to show impecuniosity for the purpose of a security for costs application, and that an inference adverse to the builder could be drawn from its failure to respond to the owners’ solicitor’s letter of 15 December 2015 seeking security. Counsel for the builder submitted that the evidence of his client’s impecuniosity was ‘flimsy’ and pointed out that the letter had not asked for evidence of the builder’s financial standing; it had simply requested that security be given.
In our opinion, the evidence of impecuniosity of the builder, while not necessarily ‘flimsy’, is far from compelling. There is no suggestion of external intervention, actual or threatened, or any difficulty in the conduct of the builder’s business. To the contrary, it appears to have carried on business as a builder, and to have engaged in costly litigation in the present matter at the same time, throughout the relevant period leading to the primary judge’s decision. It is true that proof of its ability to satisfy a security for costs order lies in its own hands, but the onus rests on the party seeking security to establish the impecuniosity or other cause that gives rise to the risk which security for costs is intended to ameliorate. In this case, the letter of 15 December 2015 did not, in terms, ask the builder to affirm the availability of funds to meet an adverse costs order (although its solicitor did so, on instructions, in his letter of 18 December 2015). Nor did the owners’ solicitor ask for financial statements or other evidence of the builder’s financial position. Refusal to provide such evidence when requested might, although it need not always, found an inference that together with other evidence helps establish a case of impecuniosity. But that is not this case. There was no such request, and no refusal. We do not consider that the statement by the builder’s solicitor about the possibility of an order for security stifling the appeal takes the matter any further.
If matters rested there, the application would perhaps be finely balanced. But in our view two further considerations require it to fail. First, while it is true, as discussed above, that delay in seeking security on appeal does not have the same significance as it formerly did, the new civil appeals regime still enables an application for security to be made before an applicant for leave to appeal has undertaken further work after making the application for leave. Here, the application for security was not made until after the builder had filed written submissions in response to the owners’ notice of contention, agreed with the owners on the summary for the Court and agreed upon the application book index. Further, the draft leave application book was prepared and filed on the same day as the application for security was served. The owners therefore allowed considerable work to be done by the builder during the almost four month period between the making of its application for leave to appeal and their application for security.
Secondly, it further militates against an order for security that the proposed appeal involves questions about the construction and operation of the termination provisions of a contract prepared by a major building industry organisation in Victoria and used, even if not exclusively, by its members. While each case is different, the rights of parties under this contract in the event of breach are a matter of public importance upon which the present case shows that there may be very different views.
When all these matters are taken into account, the case for ordering security for costs is not made out. The application should therefore be dismissed.
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