Energy Drilling Inc v Petroz NL

[1989] FCA 184

Re: ENERGY DRILLING INC.
And: PETROZ N.L.; PACIFIC SUPPLIER INC.; ENSEARCH CHARTERING PTY.
LIMITED and ZWEITE BETEILIGUNGSGESELLSCHAFT DAMMTORWALL mbh
No. G 1361 of 1988
FED No. 184
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Gummow J.(1)

CATCHWORDS

Practice and Procedure - Security for costs - applicant incorporated outside Australia - s. 56 (1) of Federal Court of Australia Act 1976 and Order 28 Rule 3 (1) of the Federal Court Rules - observations on matters relevant to exercise of discretion.

Trade Practices Act 1974

Federal Court of Australia Act 1976

Bell Wholesale Co. Ltd. v Gates Export Corporation (1984) 2 FCR 1

Cameron's Unit Services Pty. Ltd. v Kevin R. Whelpton & Associates (Australia) Pty. Ltd. (1986) 13 FCR 46

DSQ Property Co. Ltd. v Lotus Cars Ltd. (1987) 1 WLR 127

Porzelack KG v Porzelack (UK) Ltd. (1987) 1 WLR 420

Lord Aldborough v Burton (1834) 2 My. & K. 401; 39 ER 997

Ogilvie v Herne (1805) 11 Ves. Jun. 598; 32 ER 1220

Redondo v Chaytor (1879) 4 QBD 453

Crozat v Brogden (1894) 2 QB 30

In re T. Donnelly, deceased (1927) 44 WN (NSW) 72

Willey v Synan (1935) 54 CLR 175

Lines v Tana Pty. Ltd. (1987) VR 641

Elna Australia Pty. Ltd. v International Computers (Aust.) Pty. Ltd. (1987) 14 FCR 461

Kent Heating Ltd. v Cook-on Gas Products Pty. Ltd. (1984) 59 ALR 277

Barton v Minister for Foreign Affairs (1984) 2 FCR 463

CBS Records Australia Ltd. v Telmak Teleproducts (Aust.) Pty. Ltd. (1987) 72 ALR 270

HEARING

SYDNEY

#DATE 3:5:1989

Counsel and Solicitors for M.A. Pembroke Esq.
the Applicant: instructed by

Messrs. Hunt & Hunt.

Counsel and Solicitors for P.M. Biscoe Esq.
the First, Second and instructed by
Third Respondents: Messrs. Phillips Fox.

ORDER

The applicant provide security for costs of the first, second and third respondents in the amount of $20,000 in a form agreed between the solicitors for the parties, failing which in a form acceptable to the District Registrar.

Liberty be granted to the first, second and third respondents to apply to seek further security in respect of the prosecution of the proceedings after discovery and inspection of documents.

The proceedings be stayed until Order (1) has been complied with.

The costs of the present motion be costs in the substantive proceedings.

Note: Settlement and entry of orders is dealt with by Order 36 of the Federal Court Rules.

JUDGE1

This is a motion by the first, second and third respondents seeking an order that the applicant provide security for their costs in such sum as the Court considers appropriate.

1. This motion was heard on 29 April 1989, immediately after, on the motion of the fourth respondent, an order had been made dismissing the proceedings against the fourth respondent.

2. The applicant is duly incorporated in the Republic of Liberia. So is the second respondent. The first and third respondents are incorporated in the Australian Capital Territory.

3. Sub-section 56 (1) of the Federal Court of Australia Act 1976 ("the Federal Court Act") provides as follows:
   

"56. (1) The Court or a Judge may order a plaintiff in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him."

1. Sub-section 59 (1) of the Federal Court Act confers power on the Judges of the Court to make Rules of Court, not inconsistent with the Federal Court Act, making provision for or in relation to the practice and procedure to be followed by the Court. Pursuant to that power, Order 28 had been promulgated. Rule 3 (1) of Order 28 provides:
   

"3. (1) Where, in any proceeding, it appears to the Court on the application of a respondent -

(a) that an applicant is ordinarily resident outside Australia . . .

the Court may order that applicant to give such security as the Court thinks fit for the costs of the respondent of and incidental to the proceeding."

1. The discretion to make orders under s. 56 of the Federal Court Act must be exercised judicially; but that is the only relevant limitation and the Rules of Court in relation to matters of practice and procedure cannot operate so as to limit the wide power conferred by s. 56 itself: Bell Wholesale Co. Ltd. v Gates Export Corporation (1984) 2 FCR 1 at 3; Cameron's Unit Services Pty. Ltd. v Kevin R. Whelpton & Associates (Australia) Pty. Ltd. (1986) 13 FCR 46 at 52-53.

2. Thus, limited assistance is to be derived from the recent English decisions concerning security for costs under RSC Order 23, to which counsel referred, namely DSQ Property Co. Ltd. v Lotus Cars Ltd. (1987) 1 WLR 127 and Porzelack KG v Porzelack (UK) Ltd. (1987) 1 WLR 420. However, it may be noted that in the first of these cases, Millett J. stated ((1987) 1 WLR at 133) that one of the purposes of the introduction in 1964 of the new RSC Order 23 was to make a new start "by sweeping away the encrustation of accumulated practice and substituting a general discretion".

3. The rule in England was that all persons, not being alien enemies or resident in the territory of an enemy without a licence or authority from the British government, were entitled to maintain an action in England as plaintiffs and petitioners in any of the superior courts of law and equity even though they were resident out of the jurisdiction of the court: Daniell's "Chancery Practice", 7th Ed., Vol. 1, p 82. But as a matter of inherent power, the court might order that security for costs be given, because if the cause was lost and costs awarded against the plaintiff or petitioner, they could not be recovered by the process of the court: Lord Aldborough v Burton (1834) 2 My & K 401; 39 ER 997.

4. There was some disagreement between Lord Hardwicke LC and Lord Eldon LC as to whether costs were ordered as a rule of practice or whether there was a discretion to be exercised in each case: Ogilvie v Herne (1805) 11 Ves Jun 598; 32 ER 1220. In Redondo v Chaytor (1879) 4 QBD 453, the Court of Appeal affirmed a settled rule of practice that a foreigner usually residing abroad would not be called upon to give security for costs if he were temporarily residing in England to pursue his action there. This led to the making of RSC Order 65 Rule 6A:
   

"A plaintiff ordinarily resident out of the jurisdiction may be ordered to give security for costs, though he may be temporarily resident within the jurisdiction."

But beyond this, no specific provision dealing with the giving of security for costs by plaintiffs residing abroad was then made by the Rules of the Supreme Court of Judicature.

1. In Crozat v Brogden (1894) 2 QB 30, Lord Esher MR, somewhat uncharacteristically confessing a difficulty in making up his mind, tended to the view that there was a discretion to order security but that it was exercised only in one way, "unless there is something very exceptional". On the other hand, Lopes LJ spoke of "the inflexible rule of the Court" that security for costs be ordered against plaintiffs resident abroad and Davey LJ appears to have agreed with him.

2. Much will depend upon the form of the particular rules of court and whether they supplement, qualify, or do away with "inherent jurisdiction". In Australia, various rules of court have been interpreted so as to give a discretion, and the difference with the older English rules has been pointed out: In re T. Donnelly, deceased (1927) 44 WN (NSW) 72; Willey v Synan (1935) 54 CLR 175 at 178. Further, rules have been read as not exhausting the "inherent jurisdiction" to order security; see Lines v Tana Pty. Ltd. (1987) VR 641; Parker's "Practice In Equity", 2nd Ed., p 356. Section 56 of the Federal Court Act is to be read against this background. The presence of that provision renders unnecessary any debate as to the "inherent jurisdiction" of this Court: Elna Australia Pty. Ltd. v International Computers (Aust.) Pty. Ltd. (1987) 14 FCR 461 at 465-466.

3. I turn to consider briefly the nature of the principal proceedings. By its Statement of Claim, the applicant alleges that the first, second and third respondents were at all material times the owners of a drilling ship known as "MV Energy Searcher" ("the vessel"). It is then alleged that by Deed dated 13 December 1984, between, inter alia, the applicant and the first, second and third respondents ("the Deed"), the first and second respondents covenanted that if at any time it was proposed that the vessel be sold by, inter alia, the first, second or third respondents, the vessel would first be offered to the applicant or its nominees. The applicants allege that the Deed provided that any such offer would remain open for acceptance for 14 days, and would be capable of acceptance by the applicant or by any person or corporation proposed by the applicant as purchaser of the vessel; if any such offer was not accepted within 14 days, the owner would be at liberty to sell the vessel to any other party, but only upon terms and conditions no less onerous than those offered to the applicant, and at a price no less than that offered to the applicant. The first, second and third respondents by their Defence do not admit that these allegations give the full terms and effect of the Deed.

4. The applicant then alleges that in breach of provisions of the Deed, the first respondent, in or about September or October 1988, entered into a binding agreement for the sale of the vessel to the fourth respondent. This is alleged to have been in breach of the provisions of the Deed because the vessel was not first offered to the applicant or to its nominees or alternatively no offer capable of acceptance by the applicant was made in accordance with the requirements of the Deed.

5. The first, second and third respondents deny these allegations, and in further response say that in accordance with the requirements of the Deed, the vessel was offered for sale to the applicant or to its nominee in November 1988 and that offer was not accepted within 14 days or at all.

6. The applicant concludes its Statement of Claim by claiming the difference between the value of the vessel and the price at which it was sold to the fourth respondent, and lost profits. The first, second and third respondents say that if they were in breach of the provisions of the Deed, which they deny, such breach did not cause the applicant any loss or damage because the applicant was unable, at all relevant times, to fund the purchase of the vessel.

7. The applicant seeks declaratory relief and damages, including damages under s. 82 of the Trade Practices Act 1974.

8. The proceedings were commenced on 17 November 1988. On 10 November 1988, the solicitors for the fourth respondent had written to the solicitors for the applicant giving notice that their client had entered into a contract to purchase the vessel without notice of any claim which the applicant or its nominee might have under the Deed, which was stated to have come recently to the attention of the fourth respondent. The contract was said to have been concluded by offer dated September 7 1988, accepted on September 9 1988, and confirmed by a further document dated September 19 1988.

9. The vessel was engaged in performing drilling work in the waters of the north west coast of Western Australia, under charter.

10. On 1 November 1988, the solicitors for the first, second and third respondents wrote to the applicant, c/- its solicitors in Sydney. The material part of the letter read as follows:
    

"Our client has received an offer to purchase the vessel known as MV 'Energy Searcher' ('the Vessel') for the sum of $A13,200,000.00 payable as to:- a) a deposit of $A1,000,000.00 upon acceptance of the offer, and b) the balance forthwith in exchange for a Bill of Sale to transfer the Vessel and discharge of any Mortgages relating to the Vessel. In accordance with the Deed of Release dated the 13th day of December 1984 our client hereby offers to sell the Vessel to you, or your nominee on the same terms and conditions.

This offer is open for acceptance for a period of 14 days from the date of delivery of this letter, and acceptance must be accompanied by a deposit of $A1,000,000.00. Should you not accept this offer within the said time, our client will be at liberty to, and will, sell the Vessel to the other party. . . ."

1. Correspondence between the solicitors ensued. With a letter to the applicant's solicitors dated 8 November 1988, the solicitors for the first, second and third respondents enclosed an agreement which was stated to contain the terms and conditions upon which the third respondent intended to sell the vessel. The applicant was invited to execute the document and return it with the deposit of $A1,000,000 within 14 days, if it wished to purchase the vessel. Then, as I have indicated, on 10 November 1988, the solicitors for the applicant were given notice by the fourth respondent of the rights which it asserted. On the next day, 11 November 1988, the solicitors for the applicant wrote to the solicitors for the first, second and third respondents stating, inter alia, that it seemed to them "that all correspondence from you to us from 1 November 1988 to date has been nothing more than an exercise in obfuscation, deliberately designed to give the appearance of complying with clause 13 of the Deed of Release when it was clearly beyond your client's capacity to do so".

2. In response to this letter, the solicitors for the first, second and third respondents wrote on 14 November 1988 to the solicitors for the applicant, stating that the first, second and third respondents maintained "that there is not now nor has there been a binding contract between their clients and ours". However, on 23 November 1988, after the commencement of these proceedings, the solicitors for the first, second and third respondents wrote to the solicitors for the fourth respondent stating that "upon further consideration it is now our clients (sic) position that there is a binding contract between them and your client".

3. Upon the motion for security for costs, counsel for the applicant invited the Court to take into account the conduct of the first, second and third respondents as revealed by this correspondence as a matter tending to favour an exercise of discretion against making an order for security in their favour.

4. Counsel for the first, second and third respondents submitted that whatever might be the conclusion to be drawn as to the character or quality of his clients' conduct before the institution of the proceedings (as to which he made no admissions) those circumstances were irrelevant to the exercise of the present discretion as regards security for costs. I disagree. In the circumstances of the present case, it is, in my view, appropriate to have regard to the circumstances which had led up to the commencement of the litigation. However, I am conscious of the difficulty in dealing on an interlocutory basis with a submission such as that of the applicant, involving as it does an invitation to attach a stigma to the conduct of its adversaries. On the state of the evidence as it appears on the interlocutory application, there is a prima facie case that in the period before the institution of proceedings, the first, second and third respondents were dealing concurrently with the applicant and the fourth respondent in the matter of the sale of the vessel, without disclosing their hand to either of those parties. But, as the evidence presently stands, in my view the Court would not be justified in acceding to the applicant's submission that in dealing with it before the institution of the proceedings, the first, second and third respondents were indulging in merely a charade.

5. The purpose of ordering security for costs against an applicant ordinarily resident outside the jurisdiction is to ensure that a successful respondent will have a fund available within the jurisdiction of this Court against which it can enforce the judgment for costs, so that the respondent does not bear the risk as to the certainty of enforcement in the foreign country and as to the time and complexity of the action there which might be necessary to effect enforcement: Kent Heating Ltd. v Cook-on-Gas Products Pty. Ltd. (1984) 59 ALR 277 at 279. On the other hand, the mere circumstance that an applicant is resident outside the jurisdiction does not necessarily invite an exercise of discretion in favour of ordering security, the question being how justice will best be served in the particular case: Barton v Minister for Foreign Affairs (1984) 2 FCR 463; CBS Records Australia Ltd. v Telmak Teleproducts (Aust.) Pty. Ltd. (1987) 72 ALR 270 at 284-285.

6. As I have said, the applicant is incorporated in the Republic of Liberia. It was not suggested that there was in force any international arrangements between this country and the Republic of Liberia whereby there might be enforced in that country any order for costs made in this Court in favour of the first, second and third respondents and against the applicant. No evidence was given as to the law and procedures in the Republic of Liberia whereby such an order might be enforced there. Nor was there any evidence given which would suggest that the making of an order against the applicant for security for costs, even in a substantial amount, could be used as a measure to stifle the proceedings (cf. Porzelack KG v Porzelack (UK) Ltd. (1987) 1 WLR 420 at 426). By Notice to Produce dated 24 November 1988, the first, second and third respondents sought what might shortly be described as financial and accounting records of the applicant. None were produced. However, the evidence does disclose that the applicant does not possess audited financial statements from 1 January 1985 to the present. There is also evidence that the applicant had at its disposal on 29 November 1988 a loan facility from a foreign corporation in the amount of $A1,000,000 for the purpose of assisting it in the acquisition of the vessel. But there is no evidence of the presence in the jurisdiction of any assets of the applicant which could be made available to satisfy an order for costs.

7. The issues in the case have been clarified somewhat by correspondence passing between the solicitors. On 1 December 1988, the solicitors for the applicant wrote to the solicitors for the first, second and third respondents a letter including the following:
   

"It is our present view that the issues in dispute between our respective clients are as follows:-

1. Whether there was a breach of clause 13 of the Deed of Release dated 13 December 1984?

This issue will involve, as far as we understand it, the construction of a number of documents, including the said Deed of Release.

2. Whether the applicant, or its nominee, had the means and was willing to purchase the vessel, 'Energy Searcher', at all relevant times?

3. Given that there was a breach of clause 13 and our client was willing and able to purchase the vessel, what are the measure of the Applicant's damages, namely what is the value of the lost bargain? The damages question will raise the following further questions:-

(a) what is the true value of the vessel, and

(b) what profits could have been made by our client if the sale had proceeded.

The first question will involve the expert evidence of a marine surveyor and the second question will involve examination of a number of documents by an accountant and by an officer of the Applicant.

We understand that you are instructed to make an application for security of costs. At this stage, we are not instructed to offer any security as we are of the opinion that the Applicant has established a prima facie case that there has been an actionable breach of clause 13 of the Deed and that the only real issue in contention is the question of the damages suffered by our client as a result of your client's breach."

1. By letter dated 7 December 1988, the solicitors for the first, second and third respondents replied as follows:
   

"We confirm that we are instructed to pursue our clients' application for security of (sic) costs. Even if it be accepted that your client has established a prima facie breach of clause 13 of the Deed (which is not admitted) there still remain important issues as to whether your client could and would have completed the purchase of the subject vessel and, if so, whether it has, in any event, suffered any damage. These questions will be expensive to litigate. For example, the question of whether your client in fact suffered any damage will involve an examination of a number of matters, including the current state of the oil exploration industry, the availability and cost of other vessels of similar specification or alternatively other vessels and the cost of modification thereto and the necessity of such modifications. . . ."

1. I accept for the purposes of this application that the applicant has a prima facie case for breach of clause 13 of the Deed of Release. But this is not a case where the applicant necessarily should succeed in recovering damages. There are, as is highlighted by the correspondence between the solicitors, real questions that arise as to whether the breach occasioned any loss to the applicant for which the first, second and third respondents are liable in damages.

2. In my view, the present is an appropriate case for an order for security. It was not seriously disputed between the parties that if I should reach this conclusion, an appropriate order for security would be in the sum of $20,000, to take the proceedings down to discovery and inspection of documents.

3. Accordingly, I propose to order that the applicant provide security for costs of the first, second and third respondents in the amount of $20,000. Such security is to be in a form agreed between the solicitors for the parties, and, failing such agreement, it is to be in a form acceptable to the District Registrar. I will grant liberty to the first, second and third respondents to apply to seek further security in respect of the prosecution of the proceedings after discovery and inspection of documents. I will also order that the proceedings be stayed until such security has been provided.

4. I note that the timetable laid down at a directions hearing on 17 February 1989 has now been met, and that further directions should be given after disposal of the present application, on the footing that the order for costs will be complied with promptly.

5. The costs of the present motion should be costs in the substantive proceedings.