Construction Management Group Pty Ltd v Freeman

[2003] NSWSC 712

CITATION:	Construction Management Group Pty Ltd v Freeman & Ors [2003] NSWSC 712
HEARING DATE(S):	1 August 2003
JUDGMENT DATE:	6 August 2003
JURISDICTION:	Common Law Division Professional Negligence List
JUDGMENT OF:	Studdert J
DECISION:	The application of the 1st, 2nd and 3rd Defendants: Order that the plaintiff provide security for the costs of the first, second and third defendants in the proceedings in the sum of $125,000; such security is to be in such form as the parties may agree, or in default of agreement, in such form as shall be fixed by a master. Liberty granted to the first, second and third defendants to apply for further security for costs should it become appropriate prior to the hearing, upon further evidence available at the time of making any further application. Liberty granted to the plaintiff and to the defendants to apply on seven days notice in relation to any matter in connection with security for costs in the cause. Order that the plaintiff pay the costs of this application. The application of the 4th Defendant: Order that the plaintiff provide security for the costs of the fourth defendant in the proceedings in the sum of $45,000; such security is to be in such form as the parties may agree, or in default of agreement, in such form as shall be fixed by a master. Liberty granted to the fourth defendant to apply for further security for costs should it become appropriate prior to the hearing, upon further evidence available at the time of making any further application. Liberty granted to the plaintiff and to the fourth defendant to apply on seven days notice in relation to any matter in connection with security for costs in this cause. Order the plaintiff to pay the costs of this application.
CATCHWORDS:	Security for costs - reason for belief as to inability of plaintiff company to pay costs if ordered to do so - consideration of discretionary issues - exercise of discretion.
LEGISLATION CITED:	Supreme Court Rules, Pt 53.2(1) Corporations Act, s 1335
CASES CITED:	Harpur v Ariadne Australia Pty Limited (1984) 2 Qd R 523 Parle Foods v McClunie Birch [2003] NSWSC 180 Yandil Holdings Pty Limited v Insurance Co. of North America & Ors (1985) 3 ACLC 542
PARTIES :	Construction Management Group Pty Limited (Plaintiff) Steven Martin Freeman (1st Defendant) Francesco Leonardo Andreone (2nd Defendant) William James Madden (3rd Defendant) Gary M. Colman (4th Defendant)
FILE NUMBER(S):	SC 20354/01
COUNSEL:	R.G. Kaye (Plaintiff) S.A. Kerr (1st-3rd Defendants) K. Sant (4th Defendant)
SOLICITORS:	JAMES Legal Pty Limited (Plaintiff) Phillips Fox (1st-3rd Defendants) McCabe Terrill Lawyers (4th Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
PROFESSIONAL NEGLIGENCE LIST

STUDDERT J

Wednesday 6 August 2003

20354/01 CONSTRUCTION MANAGEMENT GROUP PTY LIMITED v STEVEN MARTIN FREEMAN & ORS

JUDGMENT

1 HIS HONOUR: There are two applications for security for costs before the Court. One of these applications is brought by the first, second and third defendants, for whom Mr Kerr appears, and the other application is brought by the fourth defendant, for whom Ms Sant appears. Both applications are resisted by the plaintiff, for which Mr Kaye appears.

2 The first, second and third defendants are solicitors who acted for the plaintiff. The fourth defendant is a barrister who was engaged by the other defendants on behalf of the plaintiff, which is a construction company. It is alleged by the plaintiff that all the defendants were negligent, causing it harm. The negligence alleged broadly concerned advice given to the plaintiff in the course of its building construction business, and in particular in connection with a building project undertaken by the plaintiff for Franks Centre Lofts Pty Limited at Camperdown.

3 Fundamental to both applications is the contention that there is reason to believe that the plaintiff, being a body corporate, will be unable to pay the defendants’ costs if ordered to do so, thus enlivening Pt 53.2(1)(e) of the Supreme Court Rules and s 1335(1) of the Corporations Act 2001.

4 Each of the parties has relied on affidavit evidence which I identify:

The evidence of the first, second and third defendants :
The affidavit of Gregory Howlett sworn 13 June 2003

The evidence of the fourth defendant :
The affidavit of Christopher Donald Wood sworn 18 February 2003

The evidence of the plaintiff :
The affidavit of Alfred Attard sworn 11 April 2003;
The affidavit of Michael Anthony Henry sworn 4 July 2003;
The affidavit of Carl Terpstra sworn 4 July 2003;
The affidavit of Mary Cunningham sworn 11 April 2003.

5 None of the above deponents was required for cross examination.

6 Each of the defendants relies upon evidence that the plaintiff entered into a Deed of Company Arrangement dated 28 July 2000 and evidence that the plaintiff remained subject to that deed at least as at 18 March 2003. During the course of the hearing Mr Kaye very properly conceded that the position was that the plaintiff would be unable to pay the costs of the defendants in this cause if it was ordered to do so.

7 This is a very important threshold consideration to be weighed on each of these applications. In Harpur v Ariadne Australia Pty Limited (1984) 2 Qd R 523 Connolly J, with whose reasons the other members of the court agreed, said as to this consideration at 529:

“For practical purposes, once the legislature has made it legitimate to regard the lack of means of the plaintiff and its likely inability to meet an order for costs, this must always be a consideration of great weight and it will frequently be the determining factor.”

8 Whilst the plaintiff is in administration there is no evidence that the administrator has asked those who would ultimately benefit from litigation, namely the creditors, whether they would be prepared to pay the plaintiff’s costs should it fail in this cause. Nor is there evidence that the directors, or the shareholders, or the creditors have offered to assume responsibility for the costs of this litigation. Hence it ought not to be concluded that if security for costs is ordered, this will bring the plaintiff’s claim to an end. Thus in Yandil Holdings Pty Limited v Insurance Co. of North America & Ors (1985) 3 ACLC 542 Clarke J said at 545:

“…the mere fact that the plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order will stultify the plaintiff's claim. There is a line of authority, commencing with the unreported decision of Yeldham, J. in Tulloch v Walker, (8th December, 1976), standing for the proposition that if the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security then it is, generally speaking, inappropriate to refuse an order.
Indeed in Bell v Gates (No 2), 8 CLR 588, the Full Bench of the Federal Court said, at p. 591:
‘In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means.’
Read literally this statement suggests that a court is bound to order security unless the evidence referred to is forthcoming. But I do not understand their honours to be suggesting that the court's discretion was fettered in this way. They were dealing with a case in which the primary question was whether the onus lay on an applicant for security to bring forth evidence of the ability of the persons likely to benefit to provide the adequate security. Their Honours made the statement quoted in decisively rejecting the plaintiff's submission that that question should be answered affirmatively.
Indeed reference to a later portion of the judgment makes it quite clear that the court does enjoy an unfettered discretion. In the circumstances of the present case it is sufficient for me to say that it is unlikely that a plaintiff could successfully resist a security order on the grounds of its own inability to provide an adequate sum unless it provides evidence of the financial status of those who stand behind it.”

9 Very recently, and consistently with the authorities since Yendil Holdings, Barrett J said before ordering security for costs in Parle Foods v McClunie Birch [2003] NSWSC 180 at para 25:

“There is no evidence as to the financial status of the shareholders and the holder of convertible notes although, as I have said, I infer that Gresham Rabo is connected with a Dutch bank. It must follow that the plaintiff, in seeking to resist the order for security for costs, has failed ‘to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts’. In the absence of that proof, any apprehension that the order sought might leave the plaintiff itself, as a company, financially unable to continue the litigation must be left to one side. ”
(Emphasis added)

10 In the absence of evidence in the present case that an order for security for costs would stultify these proceedings, I should not, and I do not, make an assumption to that effect.

11 In resisting these applications, Mr Kaye submitted that it was proper for the Court in the exercise of its discretion to have regard to the plaintiff’s prospects of success in the pending action, and he submitted that I ought to conclude that there are reasonable prospects of success in this case. Counsel referred to the evidence in the affidavit of Alfred Attard, unchallenged on this application, and to the report of the Honourable Mr Mahoney annexed to that affidavit. In that report, Mr Kaye drew attention to passages at pp 5 and 8:

(At p 5)
“On one view it is clear that the plaintiff’s claim for damages should succeed. The Builder ceased work and refused to go further with the construction. The reasons it gave for ceasing work as it did are, as it now concedes, wrong, that is, not such as to justify its refusal to proceed with the work. The Proprietor treated the Builder’s refusal to proceed with the work as (as prima facie it was) a repudiation of the contract. It elected to accept the repudiation and to terminate the contract and to claim damages. Prima facie, if the builder did not have proper reasons for refusing to continue with the work, the Proprietor was entitled to do what it did.”
(Then at p 8)
“At the commencement of the reference and throughout, the Builder accepted that the particular reasons which, by its notice, it had relied on in doing what it did could not be supported. It has, I understand, brought proceedings against its then solicitors upon the basis that what it was advised to do and did was wrong.
Accordingly, prima facie the Builder ceased work under the contract without just cause; it refused to continue to work under the contract for reasons which, as it now concedes, cannot be supported. Therefore, prima facie what the Builder did was a repudiation of the contract and in principle the Proprietor was entitled (as it did) to treat the Builder as having wrongly repudiated the contract, to elect to terminate the contract for that repudiation, and to recover damages.”

12 Mr Kaye submitted that when viewed against the background of what Mr Attard claimed was the advice he was given, what Mr Mahoney said afforded support for the submission that the plaintiff has a reasonable case against the defendants.

13 Whilst Mr Attard was not cross examined on his affidavit, each of the defendants has denied negligence in defences filed. The first, second and third defendants in para 46 of their defence assert they advised the plaintiff inter alia that the grounds for determination set out in the Determination Notice were “thin” and further that the Determination Notice may not be valid. In his defence (at para 44), the fourth defendant pleaded that he advised against terminating the contract but recommended suspending the execution of the works.

14 Having reflected on Mr Kaye’s submission, I find myself unable to make any meaningful assessment of the prospects of the plaintiff succeeding in this case. An application of the nature of each of those presently before me is not a suitable vehicle for making any determination of ultimate prospects of success and it would not be proper to draw any adverse inference against any of these defendants for the failure to cross examination Mr Attard on his affidavit.

15 Mr Kaye next submitted that it was the conduct of the defendants which brought about the plaintiff’s impecuniosity and that I should take this into account in the exercise of my discretion. He submitted that the evidence indicated that the plaintiff was doing reasonably well until it ceased work at Camperdown having given the Notice of Determination. In this regard Mr Kaye referred to the evidence that the plaintiff had an operating profit after income tax of over $50,000 in 1998 compared with an operating profit after tax of just over $5000 in the previous year. Then he drew attention to the gross profit figure in excess of $3.7 million for the year ended 30 June 1999, in which year bad debts were written off totalling $2.9 million. Accepting, as Mr Kaye submitted, that the plaintiff went off the construction site at Camperdown in May 1999 he argued that it is reasonable to relate a deterioration in the plaintiff’s financial position thereafter to the consequences of advice given by the defendants.

16 Once again I find myself unable to reach a conclusion to that effect. Plainly it would be an important matter to be weighed in the exercise of my discretion if I was satisfied that it was the defendants’ conduct that brought about the plaintiff’s impecuniosity, since these proceedings are being brought to redress that impecuniosity. However, recognising the ambit of the contest between the parties in this cause I am simply unable on the material presently before me to determine that it was conduct by the defendants which led to the plaintiff’s present financial position.

17 I must have regard to all the circumstances in determining each of these applications.

18 Mr Kaye submitted that if I was otherwise minded to order security it was not appropriate for the fourth defendant to be separately represented. There was no reason why he should not have the same representation as the first, second and third defendants. I do not accept that submission. It seems to me that there may well be good reason for separate representation and I have regard to the difference in the advice allegedly given by the fourth defendant compared with that given by the first, second and third defendants as referred to in those paragraphs of the pleadings to which I made earlier reference.

19 I have concluded in the exercise of my discretion that each of these applications should succeed. This brings me to a consideration of what orders are appropriate in each case.

20 Mr Howlett, in his affidavit of 13 June 2003, has estimated that the costs that will be incurred in defending the action on behalf of the first, second and third defendants will be in the vicinity of $200,000 plus GST. This is based upon a six day hearing. Mr Wood, in his affidavit of 18 February 2003, has estimated the fourth defendant’s costs in defending this action as being in the range of $80,000-85,000, based upon a four day hearing.

21 Mr Terpstra, on considering the matter on behalf of the plaintiff, has arrived at an estimate differing significantly from that of Mr Howlett concerning the costs of the first, second and third defendants. His estimate for those costs is $106,840. So far as the fourth defendant’s costs are concerned, Mr Terpstra’s estimate is broadly in accord with that of Mr Wood, Mr Terpstra’s estimate for such costs being $81,090.

22 Mr Terpstra has deposed in his affidavit to fourteen months experience. In that time he has “assisted parties in analysing legal costs and prepared submissions and objections to charges in legal bills.” On the face of his affidavit it would not appear that Mr Terpstra’s experience is anywhere near that of Mr Howlett, who has been practising as a solicitor in litigation for nineteen years. Be that as it may, I do not propose to fix security for costs on either of these applications in the amounts sought by the applicants. This litigation is at an early stage and like other matters in the Professional Negligence List this case will be managed in the directions list consistently with the objective in the list of narrowing the issues and doing all that can reasonably be done to reduce the cost and time to be occupied by a hearing. It seems to me therefore that it is too early to try to arrive at an accurate estimate of the hearing time or to arrive at an accurate estimate as to the proper costs likely to be incurred by any of the defendants. What I propose to do therefore is to order security for costs on each application in sums which may or may not be exhausted prior to the matter being set down for hearing, but I intend to grant to each applicant liberty to apply for further security if appropriate upon evidence that may become available to justify any further application.

23 In the case of the application by the first, second and third defendants, I propose to order security for costs in the sum of $125,000, with liberty to make a further application. In relation to the application of the fourth defendant, I propose to order security for costs in the sum of $45,000, with similar liberty to apply.

Formal orders

The application of the first, second and third defendants

24 1. I order that the plaintiff provide security for the costs of the first, second and third defendants in the proceedings in the sum of $125,000; such security is to be in such form as the parties may agree, or in default of agreement, in such form as shall be fixed by a master.

2. I grant liberty to the first, second and third defendants to apply for further security for costs should it become appropriate prior to the hearing, upon further evidence available at the time of making any further application.

3. I grant liberty to the plaintiff and to the defendants to apply on seven days notice in relation to any matter in connection with security for costs in the cause.

4. I order that the plaintiff pay the costs of this application.

The application of the fourth defendant

1. I order that the plaintiff provide security for the costs of the fourth defendant in the proceedings in the sum of $45,000; such security is to be in such form as the parties may agree, or in default of agreement, in such form as shall be fixed by a master.

2. I grant liberty to the fourth defendant to apply for further security for costs should it become appropriate prior to the hearing, upon further evidence available at the time of making any further application.

3. I grant liberty to the plaintiff and to the fourth defendant to apply on seven days notice in relation to any matter in connection with security for costs in this cause.

4. I order the plaintiff to pay the costs of this application.

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Last Modified: 08/11/2003