Blue Constructions Pty Ltd v Karavias
[2019] VCC 277
•19 March 2019
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMON LAW DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-18-04646
| BLUE CONSTRUCTIONS PTY LTD (ACN 127 424 033) | Plaintiff |
| v | |
| DANIEL KARAVIAS | Defendant |
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JUDGE: | HIS HONOUR JUDGE BOWMAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 7 March 2019 | |
DATE OF RULING: | 19 March 2019 | |
CASE MAY BE CITED AS: | Blue Constructions Pty Ltd v Karavias | |
MEDIUM NEUTRAL CITATION: | [2019] VCC 277 | |
REASONS FOR RULING
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Catchwords: Security for costs – Rule 62.02 of County Court Civil Procedure Rules – action based on professional negligence of solicitor – building case – effective abandonment of variations as part of settlement – whether this due to prior negligence of solicitor – previous financial difficulties of plaintiff – whether security for costs should be ordered – quantum of same – factors to be considered.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R Andrew | Ward & Co |
| For the Defendant | Mr N Walter | Minter Ellison |
HIS HONOUR:
Background and submissions
1 This Ruling concerns an application brought by the defendant, Mr Daniel Karavias (hereinafter referred to as “Karavias”). He is seeking security for costs in relation to an action brought against him by Blue Constructions Pty Ltd (hereinafter referred to as “Blue”). Blue opposes the making of any such order. Should an order be made, it also opposes the suggested quantum which is sought.
2 Mr R Andrew of counsel appeared on behalf of Blue. Mr N Walter of counsel appeared on behalf of Karavias. Each made helpful and very detailed submissions. The defendant’s evidence consisted of two affidavits filed on behalf of Karavias. One is sworn by Ms Marjorie Helen Daley, a solicitor employed by Karavias’ solicitors and who has the day to day conduct of the defence of the proceeding. The other affidavit is of Mr Gregory John Carfoot, a partner in the same firm and under whose supervision Ms Daley has been conducting the defence. There are some five exhibits to the affidavit of Ms Daley and 84 exhibits to the affidavit of Mr Carfoot. On behalf of Blue, an affidavit of Ms Qinghua Ji was filed. Ms Ji is the sole director and secretary of Blue. There are four exhibits to her affidavit.
3 This litigation is at an early stage, although the background to it goes back several years. A Writ has been issued and a Defence served. There is no timetable in place, although it is anticipated that the matter will proceed to mediation.
4 The following is a summary of the background facts as they appear on the basis of the material put before me. Blue is what could be described as a construction or building company. Karavias is a legal practitioner who, at the relevant time, operated his own firm of solicitors, Karavias & Co. Karavias acted as the solicitor for Blue in litigation against another entity called ZX Group Pty Ltd.
5 That litigation had something of a long and chequered history. Karavias and his firm were not the only solicitors to have acted for Blue, but Karavias was the solicitor on the record and acting for Blue from approximately October 2014 until approximately 7 January 2016. In a nutshell, it is asserted by Blue that, in approximately October 2014 Blue instructed Karavias to amend the existing Statement of Claim to include some 15 variations and additional costs totalling the sum of $2,418,385.56. It asserted that, whilst an affidavit was prepared and indeed on 12 December 2014, Blue was given leave to file and serve any Further Amended Statement of Claim by 4 February 2015, Karavias failed so to do and informed the opposing solicitors that Blue did not intend to file amended pleadings. A hearing date was listed for 8 February 2016.
6 On approximately 7 January 2016, Blue retained its present solicitors to take over the matter. It is asserted that Karavias had neglected to prepare the case for trial. At directions hearings on 28 January 2016 and 2 February 2016 his Honour Judge Anderson granted a short adjournment of the trial from 8 February 2016 to 30 March 2016, but warned that no further adjournments would be granted and that the matter must proceed on the new scheduled trial date.
7 There was then a mediation on 18 February 2016, with Blue’s present solicitors now representing it. It is alleged that the position in which Blue found itself was virtually untenable in relation to the variations. It discovered that Karavias had failed to file and serve an amended claim, including the variations, and ultimately was virtually forced to settle the action without the benefit of the amount of $2,418,385.56 represented by the variations. Accordingly, it is suing Karavias in respect of that amount. The Defence filed on behalf of Karavias effectively denies liability and asserts contributory negligence.
8 It is against this background that the application for security for costs has been made by Karavias. As stated, detailed submissions were made by both counsel. I shall not set out the arguments in full, but shall summarise them as follows.
9 The arguments advanced by Mr Walter on behalf of Karavias could be summarised as follows.
10 The Court’s jurisdiction to order security for costs has been enlivened. Reference is made to Rule 62.02 of the County Court Civil Procedure Rules 2018. There is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so. There has to be a rational basis for the belief and no more. This is a low threshold – see Livingspring Pty Ltd v Kliger Partners (2008) 66 ACSR 455. Reference is also made to the recent decision in Brooklyn Landfill & Waste Recycling Pty Ltd v Commonwealth Golf Club [2019] VSC 52.
11 The circumstances in the present case are similar to those in Brooklyn Landfill. Blue has a paid-up share capital of $100 and does not appear to be the registered proprietor of any real property in Victoria. Requests for information as to whether Blue is in a position to meet a costs order have been ignored or answered with inadequate information. A balance sheet provided indicates that Blue has negative net assets of $531,465 and liabilities of $1,009,131, including a loan owing to its director of $744,781. Doubts exists as to whether its assets could be converted into the amount claimed of $477,486. It has less than $50,000 cash in bank accounts and trade debts of $274,800 of unknown credit worthiness. The director’s declaration as to solvency is unsigned. Blue may have projects on foot, but the information provided suggests that it is in a perilous financial position and may be reliant on third parties to provide it with working capital. A suggested undertaking by Blue’s director that she will not call on the Directors’ Loan is of little comfort. Blue is still free to borrow money.
12 The overall situation is that a reasonable belief exists that Blue would be unable to meet a costs order. In addition, it has been in financial difficulties since 2013 and reference is made to the contents of the affidavit of Gregory Carfoot and the exhibits thereto. Thus, it is argued the Court’s jurisdiction has been enlivened.
13 It is further argued that discretionary considerations support the making of the order sought. Reference is made to Raventhorpe Pty Ltd v Westpac Banking Corporation [2017] VSC 362. In the present case, there has been no delay in Karavias seeking security for costs. It was made very promptly after the commencement of proceedings. Further, the action against Karavias will fail because, inter alia, causation will not be established. Apart from anything else, Blue will not be able to establish that the conduct of Karavias prevented it from pursuing a late amendment to the pleadings in circumstances where the litigation was settled at mediation. In other words, Blue had the opportunity to pursue an amendment to the pleadings so as to cover matters allegedly not pleaded by Karavias. However, it opted to settle the litigation.
14 There is then the issue of whether the impecuniosity of Blue was caused by Karavias. As was said in Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311, the approach to be taken in respect of this is as follows. The plaintiff carries the burden of persuasion on the question of whether the conduct of the defendant was the cause of the plaintiff’s financial difficulties; there must be a solid foundation for that conclusion; and the plaintiff carries the onus of satisfying the Court of this on the basis of admissible evidence. In the present case, no evidence has been provided by Blue to establish that its impecuniosity was caused by Karavias’ conduct. As established by the Carfoot affidavit and its exhibits, Blue was in financial distress by late 2013. It was slow to pay or did not pay its own legal representatives.
15 Accordingly, security for costs in the amount of $90,000 should be ordered and Blue should pay the costs of and incidental to this application.
16 The submissions of Mr Andrew on behalf of Blue could be summarised as follows.
17 Much of the material relied upon by Karavias, including many of the exhibits to the Carfoot affidavit, relate to earlier proceedings. At one stage Blue had become self-represented and his Honour Judge Anderson had effectively ordered it to obtain legal representation. Matters relating to the action by Blue against ZX Group provide the background to the present action against Karavias. It is submitted that Karavias did not have a limited retainer. The action against Karavias is based upon his failure to amend the plaintiff’s Statement of Claim against ZX Group by including the claim for $2,418,385.56 by way of variations. Despite leave being obtained from his Honour Judge Anderson, the amendment was not done. The end result was that Blue was in essence forced into a position where it was obliged to settle the action against ZX Group at mediation and where no allowance was being made for the sum in relation to variations.
18 Hence, whilst the action of Blue against Karavias for professional negligence has as its background the action against ZX Group, the state of its finances during that earlier period have no bearing upon the present situation and the issue of whether security for costs should now be ordered.
19 In relation to the present situation, reference is made to Exhibit QJ-4 to the affidavit of Ms Qinghua Ji of 6 March 2019. That exhibit consists of financial statements prepared by Kesaco Pty Ltd, certified practising accountants, which indicate that Blue has financial assets totalling $477,486. Its liabilities include a Directors’ Loan of $744,781. The amount owing to trade creditors is $264,350.
20 Blue has offered an undertaking not to call upon the Directors’ Loan to be repaid until the end of the proceedings. A combination of financial statements and the undertaking not to enforce the Directors’ Loan results in the fact that the threshold test has been met.
21 Further, whilst it is asserted that an order for security for costs should not be ordered, if one is ordered, $90,000 is an extraordinary amount for the quantum of costs required to carry the matter through to the mediation phase. Given the factual background of the matter, no security for costs orders should be made and the action should be allowed to proceed to mediation without such an order.
22 Mr Walter clarified in reply that the $90,000 sought would include the costs associated with the application before me. Further, the alleged outstanding work book of $7,011,800 could well-lead to the drawing of an inference that extensive funds would be required by Blue in order to carry out the works in question.
Ruling
23 Over the years there have been a considerable number of cases involving the issue of security for costs. The general principles involved were again considered recently by the Court of Appeal in Jafari v 23 Developments Pty Ltd & Ors [2019] VSCA 16. In that decision, the Court referred to principles previously set out in Maher v Commonwealth Bank of Australia [2008] VSCA 122. In Jafari, the Court referred to the fact there is a wide and unfettered discretion in deciding whether or not to grant security in the context of an appeal. It was pointed out that, at first instance, there is a general rule that an impecunious natural person who sues will not be ordered to give security for costs. Of course, in the present situation the plaintiff involved is not a natural person, but an incorporated entity and, as a result, the general rule referred to has no application. However, at least some of the other factors listed in Maher and referred to in Jafari have application.
24 Without setting each of these out in detail, I have had regard to the relevant list of matters in arriving at a decision in the present case.
25 I am of the view that there is reason to believe that Blue could well have insufficient assets to satisfy a costs order, should one be made against it. Its share capital is modest indeed. It is not the registered proprietor of any real estate in Victoria. Whilst I appreciate the argument that a considerable part of the exhibits to the Carfoot affidavit are now four or more years old, I do not regard them as totally irrelevant.
26 In the proceedings by Blue against ZX Group, out of which the present action arises, it was asserted on behalf of Blue in a document of 1 December 2014 that the delay in bringing the application to amend the Statement of Claim was because of previous solicitors being given leave to withdraw as a result of Blue’s financial difficulties. There are references to a caveat on a property, the need for refinancing in relation to a home and the like. It was also put forward on behalf of Blue that the principals of it (Ms Ji and Mr Lu) were Chinese nationals with funds available to them in China which they were endeavouring to make available.
27 Similarly, in relation to the failure to comply with self-executing orders of his Honour Judge Anderson of 14 February 2014, it was submitted in writing on behalf of Blue that non-compliance was caused by financial difficulties then affecting the plaintiff. An affidavit of Ms Ji of 31 October 2015 contained the assertion that a reason for non-compliance with the orders was that Blue had been unable to continue to fund its previous solicitors. Written submissions on behalf of Blue on 12 December 2014 contained reference to the fact that, in late 2013 and early 2014, Mr Lu (Ms Ji’s husband) was described as having faced bankruptcy. As I understand it, he subsequently became bankrupt. There was further reference to Ms Ji having funds in China. Blue was described as not presently trading. In short, the information that is available concerning Blue’s financial background hardly inspires confidence.
28 I agree with the submissions of Mr Walter in relation to the financial statements from Kesaco Pty Ltd. Apart from the fact that the documents contain an unsigned Directors’ Declaration they indicate that more than half of the current assets of Blue is constituted by unspecified trade debts with a liability of $274,800. I note in passing that there is a current liability to trade creditors of $264,350. Indeed, the Financial Position Statement of Kesaco Pty Ltd shows that Blue has a negative net asset of $531,645.
29 In short, I accept the submissions of Mr Walter and am of the view that there is a substantial risk that an ultimate costs order would not be satisfied.
30 It is also worth noting that this would appear to be an action that is far from guaranteed of success. It may well succeed, but it also faces its share of hazards. Of course, further arguments and material may well come to light or be advanced. However, as I understand it, presently it is an action against a legal practitioner (Karavias) who, because of his failure to amend pleadings in a building case so as to add variations, effectively compelled Blue to settle the case at mediation without the inclusion of such variations.
31 I appreciate what was said by Jenkinson J in Hughes v Canon Aust Pty Ltd (1990) 8 ACLC 209 and which was very properly brought to my attention by Mr Walter. To give too much weight to the apparent prospects of a plaintiff’s success would not be prudent, as it would make applications of this nature unduly time-consuming. Without giving such a consideration too much weight in the present circumstances, it does seem to me that the plaintiff’s action is not without its share of contentious issues and faces its fair share of hazards.
32 I am not of the view that Blue’s impecuniosity was caused by Karavias. Blue seems to have been in considerable financial trouble well-prior to the alleged negligence of Karavias in early 2015. Delays seem to have been caused by Blue being either very slow to pay various fees or not paying at all. In any event, I am not persuaded that Blue’s apparent current state of impecuniosity has been caused by the alleged professional negligence of Karavias.
33 I shall not go through all possible matters relevant to the exercise of my discretion. As was said by the Court of Appeal in Jafari, it is a wide and unfettered one. As stated, I prefer the arguments advanced on behalf of Karavias and am prepared to order security for his costs.
34 One issue concerning which I do agree with Mr Andrew is that the amount of $90,000 in order to provide security for taking this case to mediation is excessive. I am not prepared to make such an order. Doing the best I can, it seems to me that security for costs in the sum of $50,000 represents a fair figure in order to at least take this matter to the mediation stage. Following that, if necessary, the situation can be revisited. I note that it was proposed by Mr Walter that the sum of $90,000 would have included costs associated with the hearing before me. The sum of $50,000 is intended to be similarly inclusive.
35 I shall hear the parties as to whether any further orders, in relation to costs or generally, are required.
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