Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 7589 of 2008

INDUSTRIAL CONVEYING (AUST) PTY LTD (ACN 006 490 544)	Plaintiff
v
SKM RECYCLING PTY LTD (ACN 086 098 660)	Defendant

AND BETWEEN

SKM RECYCLING PTY LTD (ACN 086 098 660)	Plaintiff by Counterclaim
v
INDUSTRIAL CONVEYING (AUST) PTY LTD (ACN 006 490 655)	First Defendant by Counterclaim
and
DONALD JAMES ERSKINE	Second Defendant by Counterclaim

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	10 and 17 October 2012
DATE OF JUDGMENT:	13 December 2012
CASE MAY BE CITED AS:	ICA v SKM (No 2)
MEDIUM NEUTRAL CITATION:	[2012] VSC 588

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PRACTICE AND PROCEDURE – Application to amend counterclaim after judgment – Whether proposed amendments consistent with judgment – Application refused.

SALE OF GOODS – Whether implied term as to fitness for purpose – Goods supplied by a manufacturer – Manufacturer supplied with design of goods – Cammell Laird & Co Ltd v Manganese Bronze & Brass Co Ltd [1934] AC 402 considered.

SECURITY FOR COSTS – Application for security made after judgment of preliminary questions – Whether delay – Whether counterclaim by defendant a defence to plaintiff’s claim – Application refused.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr T.J.P. Walker Mr R.J. Harris	Logie-Smith Lanyon
For the Defendant	Mr A.K. Panna S.C. Mr P.T Nugent	Di Camillo Lawyers

TABLE OF CONTENTS

Introduction............................................................................................................................... 2
The amendment application....................................................................................................... 3
SKM evidence in support of application to amend.................................................................. 11
ICA’s evidence on the application to amend............................................................................ 12
The proposed the conveyor amendments.................................................................................. 14
Section 19 of the Goods Act 1958............................................................................................ 15
Relevant principles to amendment.......................................................................................... 16
General principles – fit for the purpose.................................................................................... 18
Motors and gearboxes.............................................................................................................. 23
Merchantable quality............................................................................................................... 24
Generally.................................................................................................................................. 25
Application for security for costs............................................................................................. 26
The relevant test....................................................................................................................... 26
Evidence relied upon by ICA................................................................................................... 27
Submissions............................................................................................................................. 33
Applicable principles................................................................................................................ 34
The delay.................................................................................................................................. 35
Claim and counterclaim arise out of the same factual issues.................................................. 37
Voluntary entry into commercial relationship........................................................................ 38
Claim is bona fide and has reasonable prospects of success..................................................... 39
Should security be ordered?..................................................................................................... 40
Should the outstanding issues be referred to a referee?........................................................... 40
Orders...................................................................................................................................... 40

HIS HONOUR:

Introduction

ICA has sued SKM for moneys owing for items of equipment manufactured and supplied to SKM and for work done for SKM in the construction of a waste recycling plant. For its part, SKM has counterclaimed for alleged breaches of the contracts under which ICA provided the equipment and performed the work. The parties were in dispute over a significant number of contractual terms. I ordered that the disputed terms and some related allegations of misleading representations be determined as preliminary questions before deciding whether or not any of the contractual terms were breached and the question of damages if any.

After a lengthy hearing in October and November 2011, I delivered my judgment on the preliminary questions on 28 June 2012.[1] I directed that ICA file and serve short minutes of orders to reflect the findings I had made on the preliminary issues decided in my judgment of 28 June 2012. I also ordered that the trial resume on a date to be fixed to consider and make the orders on the preliminary issues and to make further orders and directions for the hearing of the balance of the trial.
[1]ICA v SKM [2012] VSC 278.

On 10 October 2012, the parties came before me to settle the orders to be made following my determination of the preliminary questions and for the further conduct of the trial. SKM contended that some contractual issues remain to be determined – in particular, whether or not the sale of motors and gearboxes on conveyors were subject to the implied warranties found in the Goods Act of being fit for the purpose and/or of merchantable quality. SKM conceded that these issues should be the subject of an application to amend the defence and counterclaim of SKM. Accordingly, I directed that if SKM wished to apply for an amendment to its counterclaim against ICA, SKM should do so formally and that this and any application by ICA for security for costs, be heard on 17 October 2012. SKM has formally applied to amend its counterclaim and ICA has sought security for costs.

The amendment application

At the beginning of its submissions, SKM addressed the legal principles that it says governs its application. SKM contends that the pleadings or particulars ought to reflect the case as actually run in order that the real issues be determined by the Court. SKM relies on the observations of Dawson J in Banque Commerciale S.A., En Liquidation v Akhil Holdings Limited, where His Honour said:[2]

It is, of course, the purpose of pleadings to define the issues between the parties so that they may know the case which they have to meet and in order that the proceedings upon trial may be conducted in an orderly fashion by reference to those issues. The defined issues provide the basis upon which evidence may be ruled admissible or inadmissible upon the ground of relevance. But modern pleadings have never imposed so rigid a framework that if evidence which raises fresh issues is admitted without objection at trial, the case is to be decided upon a basis which does not embrace the real controversy between the parties. Special procedures apart, cases are determined on the evidence, not the pleadings. It is incumbent upon the trial judge to see that the pleadings or particulars are amended so that the record reflects the proceedings as they have been conducted, but his failure to do so will not result in the invalidity of those proceedings. (emphasis added)

[2][1990] 169 CLR 279, 296-297; the emphasised passage was cited with approval by Gummow, Hayne, Heydon, Crennan and Kiefel JJ in Vale v Sutherland (2009) 237 CLR 638, 651.

SKM further submits that in considering whether, in all of the circumstances, it is “fair” to permit an amendment, it is important to consider the concept of ‘practical justice’ advanced by Gleeson CJ in Re Minister for Immigration and Multicultural Affairs; Ex parte Lam:[3]

Fairness is not an abstract concept. It is essentially practical. Whether one talks in terms of procedural fairness or natural justice, the concern of the law is to avoid practical injustice.

[3](2003) 214 CLR 1, [37].

SKM contends that the amendments sought are fairly embraced by the evidence which is before the Court. SKM says that rather than introducing new causes of action, the proposed amendments simply narrow the existing pleaded causes of action.

On the other hand, SKM concedes that the case it now seeks to put is an alternate case to that originally pleaded and argued during the hearing (that original case is that ICA were responsible for the design of the plant, and the design of the plant did not achieve the required throughput).

SKM says that the alternate case is not inconsistent with the case originally pleaded. SKM says that even if it was not a term of the agreements that a certain throughput be achieved, SKM should nevertheless be entitled to allege that it was an implied term that particular items of equipment had to be able properly to convey recyclable materials from one part of the plant to another.

SKM says that since at least December 2009 it has been part of SKM’s case that terms relating to fitness for purpose and merchantable quality were said to be implied under s 19 of the Goods Act 1958. In paragraph 3 of the counter claim, SKM alleged that the terms of the Stage One Agreement were, inter alia, implied by “the conduct of the parties and the need to give business efficacy to the Stage One Agreement and by the operation of section 19 of the Goods Act 1958.” A similar reliance on the s 19 of the Goods Act 1958 was made in paragraph 5 in relation to the Stage Two Agreement.

SKM says that although s 19 of the Goods Act 1958 has been pleaded previously, the amendment sought seeks to plead a narrower purpose than the broader one that is presently pleaded.

In particular, SKM now seeks to plead as follows:

3A     Prior to entering into the Stage One Agreement the defendant impliedly made known to the plaintiff the purpose for which it required:
(a)       the conveyors which were to be supplied by the plaintiff as part of the Stage One Works, namely, to carry recyclable materials, comprising paper, metal, glass and rubbish, which materials were to be collected from domestic kerbside recycling bins and delivered to the Recycling Plant, from one recycling process at the Recycling Plant to another;
(b)      the motors and gearboxes which were to be supplied by the plaintiff as part of the Stage One Works, namely, to drive the various conveyors to be supplied by the plaintiff as part of the Stage One Works;

3B     Conveyors, and motors and gearboxes to be used with the conveyors supplied by the plaintiff, are goods of a description which it is in the course of the plaintiff’s business to supply.
3C     The defendant relied upon the plaintiff’s skill or judgment in the design, supply and construction of the conveyors, and the motors and gearboxes for use with such conveyors, which the plaintiff was to supply as part of the Stage One Works.
3D     The conveyors, and the motors and gearboxes to be used with the conveyors, which the plaintiff was to supply as part of the Stage One Works, were goods bought from the plaintiff by that description.
3E     The plaintiff deals in goods of the description “conveyors”, and “motors” and “gearboxes” to be used with the “conveyors” supplied by the plaintiff.
4         There were terms of the Stage One Agreement that, inter alia:
(a) the plaintiff would perform the Stage One Works in accordance with Drawing No 24620 Revision 4;
(b)   the plaintiff would design, supply and construct the conveyors to be provided as part of the Stage One Works in compliance with relevant legislation and Australian Standards;
….
(k)    the conveyors, and motors and gearboxes supplied by the plaintiff as part of the Stage One Works and the materials specified and provided by the plaintiff in the construction of the conveyors supplied by the plaintiff as part of Stage One Works would be fit for their intended purpose as alleged in sub-paragraph 3A;
(l)     the conveyors provided by the plaintiff as part of the Stage One Works would be of merchantable quality;
….

Particulars
The term[s] in subparagraph[s] 4(b) [are] written and contained in the Stage One quotation
....
The term pleaded in subparagraphs 4(k) is also to be implied by operation of s.19(a) of the Goods Act 1958 (Vic).
The term pleaded in subparagraph 4(l) is also to be implied by operation of s 19(b) of the Goods Act 1958 (Vic).

SKM submits that the proposed amendments in paragraph 3A do not require any further evidence as the allegation is based on an implication. In respect of the conveyors, SKM says that the implied purpose now sought to be pleaded is that the conveyors were to convey material from one process to another.

In respect of the motors and gearboxes that were to be supplied as part of the Stage One Works, SKM now seeks to narrow the scope of the purpose for which these items were supplied to this purpose: to drive the various conveyors that were supplied by ICA to SKM.

SKM says that the proposed paragraph 3B is uncontroversial in that it merely alleges that the motors and gearboxes to be used with the conveyors supplied by ICA, are goods of a description which it is in the course of ICA’s business to supply.

The proposed paragraph 3C alleges that SKM relied upon ICA’s skill or judgment in the design, supply and construction of the conveyors, and the motors and gearboxes for use with such conveyors, which ICA was to supply as part of the Stage One Works. SKM does not seek to rely on any further evidence in support of this term.

The proposed paragraph 3D alleges that the conveyors and gearboxes were bought by that description. SKM says that this is not a controversial proposition.

Finally, paragraph 3E seeks to allege that ICA deals in goods of that description

SKM says that it is not seeking to plead any failure with any system. Rather, SKM says that there are three types of goods (conveyors, motors and gearboxes) and that s 19 implies a fitness for purpose in respect of each different type of good.

The proposed amendment to paragraph 4 (b) is that ICA would “design, supply and construct the conveyors to be provided as part of the Stage One Works” rather than that ICA would “conduct the Stage One Works” in compliance with the relevant legislation and Australian standards.

SKM accepts that its original complaint was that the plant did not perform as expected. It contends, however, its case was that the plant didn’t achieve what it was expected to because individual pieces of equipment such as conveyors either jammed or stopped, bent or buckled, and because gearboxes broke, in addition to the plant not being properly designed to achieve the required output.

In other words, SKM says that, when analysed, its complaint all along about the failure of the plant to achieve what was expected involved a complaint that the conveyors, motors and gearboxes were not fit for the purpose. SKM says that its case never was solely that the plant was not designed properly (with no complaint about the individual components). Rather, SKM says its complaint all along was that the plant was not designed properly and that the individual components of the plant were not fit for the purpose or of merchantable quality.

SKM referred to the evidence of Mr Anthony Metcalfe where he says that he was told by one of the leading hands at ICA (while that person was building the SKM conveyors) that the conveyors were going to be used to convey plastic bottles, paper, and similar recyclable matters. SKM says that this evidence goes to what was in ICA’s mind. SKM asks, what other purpose could the conveyors have but to convey plastic, bottles, paper and similar recyclable matter.

In the proposed paragraph 4(l), SKM seeks to plead that the conveyors provided by ICA as part of Stage One Works would be of merchantable quality rather than the goods provided for the Stage One Works would be of merchantable quality. SKM wishes to make similar amendments in respect of Stage Two.

When one comes to the alleged breaches of the alleged agreements, SKM wishes to amend the allegations as follows:

7.    In breach of the Stage One Agreement and the Stage Two to Four Agreement (collectively "The Agreements") the plaintiff:
….
(j)    designed, supplied and installed conveyors which were not fit for their intended purpose as alleged in sub-paragraphs 3A and 5A that resulted in inefficient use of plant capacity and therefore resulted in decreased overall output;
Particulars
The plaintiff installed the conveyor that fed into the incline conveyor such that it tracked to the right resulting in an uneven spread of materials. This was caused by the plaintiff installing a static "A" frame gravity splitter which was not configured so as to divide the materials evenly into two streams but instead caused most of the material to be directed into one stream.
….
(t)    supplied and installed motors and gearboxes on the conveyors which were supplied by the plaintiff that were not fit for their intended purpose as alleged in sub-paragraphs 3A and 5A;
Particulars
The plaintiff supplied and installed motors and gearboxes for the conveyors that were not powerful enough for the loads that the conveyors were required to carry and repeatedly blew up and required replacement.

(u) designed, supplied and installed conveyors that were not fit for their intended purpose as alleged in sub-paragraphs 3A and 5A;
Particulars
The plaintiff designed, supplied and installed conveyors that were not suitable to carry recyclable materials, comprising paper, metal, glass and rubbish, from one recycling process at the Recycling Plant to another and as a result had to be replaced after 8 months. The industry standard life for such a conveyor is five to ten years.

(v) designed, supplied and installed conveyors which were not of merchantable quality;
Particulars
The defendant refers to and repeats the particulars to subparagraph (u) above
….

The allegation in paragraph 7(j) that ICA “designed and installed conveyor systems that resulted in inefficient use of plant capacity and therefore resulted in decreased overall output” is sought to be amended to ICA designed, supplied and installed conveyors which were not fit for their intended purpose as alleged in sub-paragraphs 3A and 5A that resulted in inefficient use of plant capacity and therefore resulted in decreased overall output”.

SKM says that this would not be a significant change even though the complaint goes from being about a conveying system to a complaint about the conveyors individually. SKM points to the particulars, specifically to paragraph 7(j) which alleges that ICA installed the conveyor that fed into the incline conveyor such that it tracked to the right resulting in an uneven spread of materials. SKM says that “this was caused by ICA installing a static “A” frame gravity splitter which was not configured so as to divide the materials evenly into two streams but instead caused most of the material to be directed into one stream.”

SKM seeks to amend paragraph 7(t) that provided that ICA “designed and installed motors and gearboxes on the conveyors that were not fit for the purpose of a commercial grade recycling plant.” SKM now seeks to plead that ICA “supplied and installed motors and gearboxes on the conveyors which were supplied by the plaintiff that were not fit for their intended purpose as alleged in sub-paragraphs 3A and 5A.” The existing particulars provide that ICA “designed motors and gearboxes for the conveyors that were not powerful enough for the loads that the conveyors were required to carry and repeatedly blew up and required replacement.” SKM seeks to delete “designed” and to add “supplied and installed.”

SKM says that the amendments do not change the substance of the existing allegations. SKM says that the amendment addresses the purpose of the motors and gearboxes being to drive or rotate the conveyors and thus the particulars do not change in any material sense. SKM says that the allegation remains the same: in particular, that the motors and gearboxes supplies for the conveyors weren’t powerful enough for the loads which the conveyors had to carry.

SKM says that a similar amendment is sought to be made in paragraph 7(u) in relation to the conveyors. SKM says that the existing allegation in the particulars is narrowed to make it clear that the allegation is that the conveyors were not suitable to carry recyclable materials comprising paper, metal, glass and rubbish from one recycling process at the Recycling Plant to another. The existing particulars allege that the conveyors were not suitable for use in a commercial grade recycling plant and (as a result) had to be replaced after 8 months. “The industry standard life for such a conveyor is five to ten years.”

SKM contends that its existing plea alleges implied terms under s 19 of the Goods Act 1958 but that in substance my judgment found that on the existing pleading SKM did not allege particular defects in an particular item of equipment, as opposed to the plant system or design. SKM says that the amendments seek to make clear that such an allegation is the very allegation that SKM wishes to make.

ICA opposes the proposed amendments. ICA says, inter alia, that the amendments seek to re-agitate the questions already heard by the Court in October 2011 and determined in my judgment in June 2012. ICA says that if the amendments are allowed, the preliminary issues determined in my judgment would need to be reagitated.

In reply, SKM says if the amendment does have that consequence, then the purpose of these amendments is to enable the real issues to be before the Court in circumstances where practical justice is best achieved by permitting the amendments. SKM says that no harm would occur to ICA, but substantial harm would occur to SKM if it is not permitted to continue with what in essence was always the gravamen of its complaint simply by reason of an incorrect framing of the particular allegations which it made.

SKM accepts that the new way the case is put is to be contrasted to the case that SKM ran at trial, namely that ICA was responsible for the overall design, supply and installation of the commercial recycling facility.

SKM says that ICA would not have done anything differently in leading evidence and non is deposed to. SKM does concede, however, that a greater number of issues will be required to be determined by the Court than the narrow range presently outstanding after the delivery of my judgment in June 2012.

SKM says that the amendment will not require any further evidence to be led. It is simply a construction that is put on the existing evidence.

SKM evidence in support of application to amend

SKM relies on the affidavit of Anthony Basilone, the solicitor for SKM. Mr Basilone swears that SKM seeks leave to amend its counterclaim so that the real questions in controversy between the parties are determined.

Mr Basilone says that he did not commence acting for SKM until September 2010, when he was retained to take over the conduct of this matter on behalf of SKM. At the time he took over the conduct of this proceeding on behalf of SKM, the firm Lander & Rogers had been acting for SKM.

Mr Basilone says that in about August 2010, SKM obtained an expert’s report from Mr Mark Griffith of Hinds Blunden Engineering. He says that ICA was provided with a copy of Mr Griffith’s draft report prior to the mediation which occurred on or about 27 August 2010.

Mr Basilone says that report set out the various complaints made by SKM in respect of, inter alia, the conveyors, motors and gearboxes which had been supplied by ICA under various contracts with SKM.

Mr Basilone says that the final report, which was filed and served in April 2011, did not materially change from the draft report which had been supplied in August 2010 to ICA.

Mr Basilone says that Mr Anthony Italiano’s witness statements provided evidence of the alleged defects in respect of the conveyors, motors, and gearboxes. Witness statements were served by ICA in reply.

Mr Basilone says finally that SKM obtained witness statements, in relation to the condition and operation of the conveyors and related equipment from staff previously employed by ICA. He says that the reports and witness statements which were subsequently served by ICA were in response to, and addressed, the report of Mr Griffith, including the evidence given by Mr Griffith in relation to conveyors, motors and gearboxes.

Mr Basilone says that when SKM’s legal advisers considered the pleadings, as drawn by the solicitors who had formerly acted for SKM, it appeared that the pleadings were sufficiently wide to cover the allegations that the various agreements contained terms implied by s 19 Goods Act 1958 relating to fitness for purpose and merchantable quality in respect of the equipment which was supplied by ICA.

Mr Basilone says that it was not until SKM’s legal advisers read the judgment that a view was formed that SKM’s pleading, as presently drawn, did not clearly encompass the narrower “purpose” which is referred to in various parts of the judgment.

Mr Basilone says that now that the issue has been raised by the Court, in the judgment, SKM seeks leave to amend its claim to make it clear that SKM relies on terms implied by s 19 of the Goods Act in respect of the narrower purpose, ie the fitness for purpose and merchantability of the goods and material supplied by ICA. Mr Basilone says that it is not expected that SKM will seek to adduce any evidence other than that which has already been filed. He says that he is not aware of any reason why, if the amendments sought are permitted, that ICA will need or seek to file evidence in addition to that which has already been filed. He says that in the evidence the parties have filed, they extensively addressed the issues about the alleged defects in the equipment supplied by ICA.

ICA’s evidence on the application to amend

Ms Sonia Louise Hancock, a solicitor in the employ of the firm of solicitors acting for ICA, has sworn an affidavit of 16 October 2012 in opposition to the application to amend.

Ms Hancock deposes that had SKM’s claims (as they are made in the proposed pleading) been identified in a timely manner, ICA would have approached preparation for the trial differently. Amongst other things, ICA would have given further attention to the following matters:

(a) the purpose or purposes alleged to have been made known by SKM to ICA in respect of any particular conveyor, motor or gearbox;

(b) whether particular conveyors, motors or gearboxes are goods of a description which it is in the course of ICA’s business to supply;

(c) whether particular conveyors, motors or gearboxes were goods bought by a particular description; and

(d) whether SKM relied on ICA’s skill or judgment in particular respects.

Ms Hancock says that it is very likely that preparing for the trial in that way would have resulted in ICA relying on further evidence at the hearing of this matter in October 2011. She also says that it is very likely that ICA would have conducted the trial of preliminary issues differently, including testing SKM’s witnesses in relation to the purpose or purposes alleged to have been made known to ICA in respect of any particular conveyor, motor or gearbox.

She says that if the proposed amendments are allowed, ICA will have lost the opportunity to prepare and run its defence to SKM’s Counterclaim at the trial of the preliminary issues in a fair manner, as it did not then know how SKM now says it wishes to put its case.

Ms Hancock refers to Mr Basilone’s affidavit, in which Mr Basilone refers to elements of SKM’s current evidence and submits that none of these aspects of evidence go to the question of the proposed amendments and whether the new allegations did in fact form part of the contractual agreements between SKM and ICA. Ms Hancock says that if the amendments are permitted, ICA will need to consider the need to file further evidence, and she anticipates that further evidence would be filed by ICA to address the new allegations both as to the new alleged terms and the new allegations of breach. She says that that evidence would likely be of lay witnesses and expert witnesses. She also says that the amendments would also require a further round of pleadings to be completed.

Ms Hancock says that in addition to the procedural unfairness she has referred to, if the proposed amendments are made she anticipates that the proposed amendments would significantly prolong the preparation and hearing time for the remainder of this proceeding and significantly add to ICA’s already substantial costs of the proceeding.

Ms Hancock says that ICA is particularly prejudiced in respect of its position on costs, because there is real doubt as to SKM’s ability to satisfy any order for costs made in ICA’s favour. She refers to ICA’s application for security for costs.

The proposed the conveyor amendments

SKM seeks to allege that there was an implied term that the conveyors were not fit for their purpose or of merchantable quality. In the existing pleading, it is pleaded that ICA:

(a) designed and installed rake conveyor belts that were not fit for the purpose of commercial grade recycling; (paragraph 7(f)) and

(b) designed and installed conveyors that were not fit for the purpose of a commercial grade recycling plant. (paragraph 7(j))

In my judgment of 12 June 2012, I found that Mr Robert Italiano specified a great deal of detail in relation to the design of the conveyors. I noted that Mr Miller had said that Mr Robert Italiano gave details of the conveyor dimensions, and specified the width, length and speed of the conveyors required under the contracts.

I accepted Mr Miller’s evidence. Accordingly, I found that the ‘particular purpose’ for which the goods were required so as to show that SKM relied on ICA’s skill or judgment was not the general one of the purpose of commercial-grade recycling.

The following issues are raised by the proposed amendments:

(a) Are the proposed amendments inconsistent with my findings in my judgement?

(b) Do the proposed amendments raise a justiciable cause of action?

(c) If so, do the proposed amendments enliven my power to amend SKM’s counterclaim?

(d) If so, should I, in my discretion, allow the amendments?

(e) If so, on what terms should I allow the amendment?

Section 19 of the Goods Act 1958
Implied conditions as to quality or fitness
Subject to the provisions of this Part and of any Act in that behalf there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows—
(a)     where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to show that the buyer relies on the seller's skill or judgment and the goods are of a description which it is in the course of the seller's business to supply (whether he be the manufacturer or not) there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose;
(b)     where goods are bought by description from a seller who deals in goods of that description (whether he be the manufacturer or not) there is an implied condition that the goods shall be of merchantable quality: Provided that if the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed;
(c)     an implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade;
(d)     an express warranty or condition does not negative a warranty or condition implied by this Part unless inconsistent therewith.

Relevant principles to amendment

The relevant provisions and rules in this court are as follows:[4]

Section 29(2) of the Supreme Court Act 1986 relevantly provides that the court:
…subject to the provisions of this or any other Act, must so exercise its jurisdiction in every proceeding before it as to secure that, as far as possible, all matters in dispute between the parties are completely and finally determined, and all multiplicity of proceedings concerning any of those matters is avoided.

[4]I have adapted what I said on this issue in Re AWB Limited (No 7) [2009] VSC 413; see also, Hodgson v Amcor Ltd [2010] VSC 204; Matthews v SPI (Ruling No 6) [2012] VSC 70; Amcor Ltd v Barnes [2012] VSC 434; Fenridge v Retirement Care Australia [2012] VSC 439.

Rule 1.14 of the Supreme Court (General Civil Procedure) Rules 2005 provides:

Exercise of power
(1)     In exercising any power under these Rules the Court—
(a)       shall endeavour to ensure that all questions in the proceeding are effectively, completely, promptly and economically determined;
(b)       may give any direction or impose any term or condition it thinks fit.

(2) The Court may exercise any power under these Rules of its own motion or on the application of a party or of any person who has a sufficient interest.

Rule 36.01(1), (2) and (3) provides:

General
(1)     For the purpose of—
(a)       determining the real question in controversy between the parties to any proceeding; or
(b)       correcting any defect or error in any proceeding; or
(c)       avoiding multiplicity of proceedings—

the Court may, at any stage order that any document in the proceeding be amended or that any party have leave to amend any document in the proceeding.
(2) In this Order document includes originating process, an indorsement of claim on originating process and a pleading.
(3) An indorsement of claim or pleading may be amended under paragraph (1) notwithstanding that the effect is to add or substitute a cause of action arising after the commencement of the proceeding.

Rule 36.03 provides:

Amendment of pleading
A party may amend any pleading served by that party—
(a) once before the close of pleadings; or
(b) at any time, by leave of the Court or with the consent of all other parties.

Despite the difference in wording in the rules under consideration in AON Risk Services Australia Limited v Australian National University,[5] the following principles can be drawn from the decision.
[5](2009) 239 CLR 175.

The reference to “the real question in controversy” in r 36.01 refers to the real question in controversy that exists at the time of the application to amend.[6] It does not encompass a new claim or issue even if it arises out of the same general matter being litigated.
[6]Ibid, [71] (Gummow, Hayne, Crennan, Kiefel and Bell JJ), [31] (French CJ) and [119] (Heydon J); a similar conclusion had been reached in this Court in Etna v Arif [1999] 2 VR 353.

An unduly narrow approach should not be taken to what are the real issues in controversy.[7] They may extend beyond the existing pleadings.[8] In Etna v Arif,[9] Batt JA (with whom Charles and Callaway JJA agreed) said that r 36.01(1) should “be read, and as, in substance, comprehending questions potentially within the ambit of the controversy or lis between the parties.”[10]
[7]Ibid, [83] (Gummow, Hayne, Crennan, Kiefel and Bell JJ).
[8]Ibid, [71] (Gummow, Hayne, Crennan, Kiefel and Bell JJ).
[9][1999] 2 VR 353.
[10]Ibid, [33].

General principles – fit for the purpose

It is well settled that the s 19 Goods Act 1958 implied terms may apply to the sale of goods contracted to be manufactured by the seller for the buyer. If, however, the buyer specifies certain specifications for the manufacture of the goods, then the buyer may still partially rely on the sellers skill or judgment that may be sufficient to impute the implied term as to fitness for purpose. The reliance, however must be such as to constitute a substantial and effective inducement which leads the buyer to agree to purchase the commodity. Importantly, it must be shown that the matters of which the buyer complains were matters in respect of which he relied on the seller.[11]
[11]PS Atiyah, The Sale of Goods (6^th ed, 1980) (Atiyah), 116 summarising the principles established in Cammell Laird & Co Ltd v Manganese Bronze & Brass Co Ltd [1934] AC 402 (‘Cammell Laird’) and Christopher Hill Ltd v Ashington Piggeries Ltd [1969] 3 All ER 1496, 1515-1516 (‘Hill v Ashington’) (upheld on this point in the House of Lords ([1972] AC 441)).

Before applying these principles it is worth turning to the facts of Cammell Laird.[12] The plaintiff shipbuilders entered into a contract with propeller manufacturers to manufacture propellers for two ships. The contract for the manufacture and supply specified the metal, diameter and pitch of the propellers to be made, along with other details and working drawings supplied by the buyer. On trialling the ships with the manufactured propellers, the propeller fitted to one of the vessels caused such noise that the ship could not be classed A1 at Lloyds. The problem lay in the thickness of the propeller blade at a certain point of the propeller. The thickness at that point of the propeller was not specified by the buyer and the House of Lords accepted that the manufacture of this part of the propeller fell within the skill and judgment of the propeller maker to determine.
[12]Cammell Laird has often been referred to in Australian decisions without any suggestion that it is not correct: see David Jones Limited v Willis (1934) 52 CLR 110; Rivers Locking Systems Pty Ltd v Reg GlassPty Ltd [1968] 2 NSWR 187, 192 (although overturned on appeal on another issue; Reg Glass Pty Ltd v Rivers Locking SystemsPty Ltd (1968) 120 CLR 516); Dependable Motors Pty Ltd v Ashford Shire Council (1959) 101 CLR 265, 274 (Dixon CJ, although dissenting on a separate issue); Gibbett v Forwood Products Pty Ltd [2001] FCA 290, [104] (Mansfield J). See also discussion of implied condition as to fitness in KS Sutton, Sales and Consumer Law (4^th ed, 1995).

The House of Lords held that the implied term of fitness for purpose was imputed to the contract. Lord Wright (with whom Lord Tomlin, Lord Warrington of Clyffe and Lord Russell of Killowen agreed as to his Lordship’s statement of the law) considered whether the purchaser had made known the purpose for which the goods were required. He said that the propeller was not purchased in gross but as a propeller for use as a propeller on a specific ship.[13]
[13]Cammell Laird, 422-423.

The next issue he addressed was whether the buyer had make known not only the purpose for which it required the propeller but also made known that the buyer relied on the seller’s skill and judgment. As Lord Wright said, “the buyer must bring home to the mind of the seller that he is relying on him in such a way that the seller can be taken to have contracted on that footing.”[14]
[14]Ibid, 423.

Lord Wright said that the definition of the particular purpose will vary according to the contract in question. In the case before him, the propeller was to be fit for the ship and engines (in the specified ship) but only as a propeller.

[T]hat is, it has to work efficiently when fitted to the vessel … but the propeller makers are not concerning with matters relating to the ship and engines as a whole, such as matters of speed; for instance, if the propeller worked efficiently as a propeller, it would not matter to the respondents if owing to something in the design of ship or engines, it could only propel the ship at two miles and hour.[15]

[15]Ibid, 424-425.

Lord Wright turned to the statutory provision reference regarding relying on the seller, and whether the reliance could be only partial. Lord Wright held that a reliance which was partial but substantial and effective would bring the implied term into play.[16]
[16]Ibid, 428.

In Hill v Ashington, the issue before the Court was the suitability of a manufactured food for consumption by minks. Before the Court of Appeal, the manufacturer was held not liable for manufacturing a food that was harmful to minks. The purchaser had supplied the recipe for the food manufactured by the seller of the food. The Court applied the statement by Lord Wright that:[17]

… reliance partial but substantial and effective will bring the implied condition into play: it would then be a matter of construction of the particular contract whether the condition that “goods shall be reasonably fit for such purpose” is to be read without qualification or whether it is to be limited to matters with the particular province entirely left to the seller’s skill and judgment. There are no doubt in fact many such cases of limited reliance.

[17]Cammell Laird [1934] AC 402, 428.

Davies LJ (who delivered the judgment of the Court) said that:[18]

It follows that the question here is the unsuitability of King Size for feeding of mink arose from a matter which was within, or a matter which was outside, “the particular province entirely left to the seller’s skill and judgment.” That phrase of Lord Wright’s is not merely authoritative. It is the only passage to which we have been referred in any case in which this curious question of qualification or limitation of the implied condition of reasonable fitness has been discussed.

[18]Hill v Ashington 1516; the Court of Appeal was overruled in the House of Lords but not on this issue (Ashington v Hill [1972] AC 441).

Turning to the issue in this case, it is implicit in the findings I made in my judgment that SKM did make known that the purpose of the conveyors was to convey recycling material from part of the plant to another part of the plant. Similarly to Cammell Laird, it is arguable that SKM did rely on ICA’s skill and judgment in making conveyors, but ICA was not concerned with all matters of operation of the conveyors, such as (for example) the amount of material that could be carried from one part of the plant to another and similar matters.

The critical issue in the application before me is whether or not the proposed amended pleading shows that the matter about which SKM seeks to complain is a matter in respect of which SKM relied on ICA’s skill and judgment and made known to ICA that SKM was so relying; and whether or not the matter about which SKM seeks to complain is not inconsistent with the findings I have already made in my judgment. The existing pleadings do give some particulars of the alleged defects of the conveyors.

The particulars given in paragraph 7(u) of SKM’s amended counterclaim are that ICA designed, supplied and installed conveyors that were not suitable to carry recyclable materials (comprising paper, metal, glass and rubbish) from one recycling process at the recycling plant to another, and as a result of this the conveyors had to be replaced after eight months (when the industry standard life for such a conveyor is five to ten years).

On 5 March 2010, ICA sought particulars of paragraph 7(u), including particulars relied upon in asserting that the conveyors designed and installed by ICA “were not suitable for use in a commercial grade recycling plant.” SKM responded by referring to and repeating paragraph 5(q)(ii) of particulars given by SKM to ICA on 4 June 2009.

Paragraph 5(e) of the particulars of 4 June 2009 include an allegation that certain identified conveyors were not properly enclosed, causing mechanical failure, blockages, equipment stoppages and premature wear. The particulars of 4 June 2009 also separately allege (at paragraph 5(g)(i)) that all conveyors on the paper and glass lines did not comply with Occupational Health and Safety Legislation. There may well be other alleged deficiencies. During the submissions on the amendment application, I was not taken to the particulars of the alleged defects provided by SKM to ICA and SKM did not identify all the defects that may be relevant to the proposed amendment.

I note that an existing issue in this case concerns an admitted term that ICA was to enclose moving parts on the conveyors.

In my view, the proposed amendments concerning the conveyors have two defects. First, the proposed amendment still alleges that ICA would design the conveyors. That is inconsistent with the findings in my judgment. Secondly, SKM has failed to identify any component or aspect of any of the conveyors where SKM relied on ICA’s skill or judgment that accepts or is otherwise consistent with the findings in my judgment that SKM provided specific design specifications for the conveyors ICA was asked to provide. The particulars relied under the proposed amendment are still the particulars that were relied on when SKM alleged that ICA had taken responsibility for the design of the plant and the design of the conveyors.

For example, the allegation about the conveyors not being properly enclosed raises the question whether that was an alleged defect in the conveyor as a conveyor or if it was a defect in the design specified by SKM of the conveyors for the plant as designed by SKM. This highlights the issues that SKM now faces. I accepted ICA’s case that it did not hold itself out as having any experience in building conveyors for recycling plants (contrary to the case put by SKM). The fact that ICA did not hold itself out as having any skill in manufacturing conveyors for a recycling plant would have a distinct bearing on whether SKM relied on ICA’s skill and judgment in providing conveyors to SKM with or without enclosures. On the contrary, as the designer of the plant, my findings are consistent with SKM not relying on ICA to make a decision whether or not to include enclosures on conveyors ICA was making to SKM’s design..

Further, to make out the implied term, SKM has to establish that it made known to ICA that it relied on ICA’s skill and judgment. I do not see how I could fairly decide that issue without permitting reopening the trial on the issue of the actual terms of the contracts.

In my opinion, SKM has not properly identified in its proposed amendments the real question in controversy that has not been resolved by my judgment that the proposed amendments now seek to plead.

In circumstances where SKM is seeking to amend after judgment on the issues of the contractual terms has been delivered and where it says it will call no further evidence, it is incumbent on SKM to show that the claim that it now seeks to plead is not inconsistent with my judgment and otherwise discloses a cause of action that has been a real question in controversy between the parties in the proceeding.

In paragraph 7(j), the particulars allege that the cause of the problem with the conveyor was that ICA installed a static “A” frame gravity splitter which was not configured so as to divide the materials evenly into two streams but instead caused most of the material to be directed into one stream. This is the only alleged breach of the alleged implied Goods Act terms in respect of conveyors alleged in paragraph 7(j). The breach pleaded relates to the configuration of the static “A” frame gravity splitter. In those circumstances, there is no breach alleged of the alleged Good Act terms. The breach relates to a design feature of the “A” frame gravity splitter. There is no allegation in paragraph 7(j) that the conveyors failed to convey properly as a conveyor.

Motors and gearboxes

I now turn to the motors and gearboxes. The particulars given in paragraph 7(t) of SKM’s amended counterclaim are that ICA supplied and installed motors and gearboxes for the conveyors that were not powerful enough for the loads that the conveyors were required to carry and repeatedly blew up and required replacement.

On 5 March 2010, ICA sought particulars of paragraph 7(t), including particulars relied upon in asserting that the motors and gearboxes designed and installed by ICA “were not suitable for use in a commercial grade recycling plant.” SKM responded by referring to and repeating paragraph 5(p)(ii) of 4 June 2009. SKM alleges that the conveyors ran at low speed and constantly stalled, and that the motors repeatedly burnt out. SKM alleges (in paragraph 5(p) of the 4 June 2009 particulars) that within the first 12 months of operation all of the undersized motors and gearboxes on all conveyors failed and required replacement.

In substance, SKM alleges that ICA supplied and installed motors and gearboxes for the conveyors that were not powerful enough for the loads that the conveyors were required to carry and repeatedly blew up and required replacement. That is not an allegation that the motors and gearboxes were not fit for the purpose to drive the various conveyors to be supplied by ICA as part of the Stage One Works. Rather, that is an allegation that the motors and gearboxes were not powerful enough for the loads that the conveyors were required to carry (as referred to in the particulars to paragraph 7(t)).

In terms of s 19 of the Goods Act 1958, SKM alleges that it made known to ICA the loads that the conveyors were required to carry and thus the purpose of the motors and gearboxes.

Thus, the critical element of SKM’s complaint is “the loads that the conveyors were required to carry”. That allegation lies at the heart of the original issue I had to decide in my judgment of June 2012, ie whether it was a term of the agreements that the plant would achieve a certain throughput or were the agreements merely an agreement for ICA to supply SKM certain items of plant to ICA’s specification. The term implied by the alleged breach would require more than an implication; it requires ICA to be told of the loads the conveyors were required to carry and it also requires evidence that SKM made known that it was relying on ICA’s skill and judgment in selecting a motor that was suitable for those loads. In any event, such an allegation would not be consistent with my findings that SKM assumed responsibility for the design of the plant and that ICA did not hold itself out to SKM as having any experience in providing conveyors for a recycling plant.

Similarly, as with regard to the conveyors, SKM has failed to identify a alleged defect in relation to the motors and gearboxes that lies within the province left to the skill and judgment of ICA that is not inconsistent with my judgment.

Merchantable quality

The plea that the manufactured goods were not of merchantable quality relies on the same particulars as the allegation of fitness for purpose. The breach now alleged is that ICA “designed, supplied and installed conveyors which were not of merchantable quality”. The particulars relied upon refer to and repeat the particulars to paragraph 7(u) discussed above, and are subject to the same observations I have made about the proposed amendments to paragraph 7(u).

Generally

That brings me to another reason why the amendments should not be permitted. SKM says that the alleged terms are to be implied. ICA says that it may wish to lead further evidence. I accept this. ICA may well wish to respond by saying that the term should not be implied, as there was some specific conversation about that particular piece of equipment that qualifies or otherwise alters the terms otherwise implied to the design, construction and installation of that piece of equipment, or bears on the purpose of the particular piece of equipment.

I accept that the trial should be governed by the real issues and not the pleadings. Nevertheless, the real problem in the application before me is the failure of the amendments to accept the findings in my judgment, and that allowing the application would involve reopening the case on the contractual terms that has already been heard and determined and SKM making allegations inconsistent with my judgment.

I consider that the application is akin to reopening a case that has closed on all issues. In Spotlight Pty Ltd v NCON Australia Ltd,[19] the Court of Appeal endorsed principles relevant to whether or not leave should be given to reopen a case laid down by Kenny J in Inspector-General in Bankruptcy v Bradshaw.[20] The Court of Appeal (Harper JA, Tate JA and Beach AJA) said:[21]

There were, in her Honour’s opinion four recognised classes of case in which a court may grant leave to reopen; and the appellants could not bring themselves within any of them. The four classes (with which we respectfully agree) are: (i) where fresh evidence, unavailable or not reasonably discoverable before, becomes known and available; (ii) where there has been inadvertent error; (iii) where there has been a mistaken apprehension of the facts; and (iv) where there has been a mistaken apprehension of the law.
These classes are not closed; but the present case shares with Bradshaw the distinction that it falls into none of them, and no applicable new category is suggested. The overriding principle is that the court consider whether, taken as a whole, the justice of the case favours the grant of leave to reopen. We are satisfied that, in the present case, it does not.

[19][2012] VSCA 232 (‘Spotlight’).

[20][2006] FCA 22.

[21]Spotlight [2012] VSCA 232, [25]-[26] (citations omitted).

In Spotlight judgment had not been delivered, the plaintiffs had sought damages during the trial but were held not entitled to reopen the case to prove their damages claim. In the present case, judgment has been delivered. The overriding principle is whether the justice of the case favours the grant of leave to reopen. For the reasons explored above, I am not satisfied that the present application does favour reopening.

I refuse the application to amend.

Application for security for costs

By a summons dated 12 October 2012, ICA seeks an order that SKM (as plaintiff by counterclaim) provide security for the costs of ICA (as the defendants by counterclaim) for the remainder of the proceeding or such part thereof as the Court considers appropriate. ICA relies on s 1334(1) of the Corporations Act 2001, or alternatively r 62.02(1)(b) of the Supreme Court (General Civil Procedure) Rules 2005.

The relevant test

Rule 62.02(1)(b) relevantly provides that, where there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant it ordered to do so, the court may order that the plaintiff give security for costs. Section 1335(1) of the Corporations Act 2001 provides:

Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

Evidence relied upon by ICA

In her affidavit of 23 August 2012, Ms Hancock swears that the preparation for and the running of this trial to date has been intensive and costly. She is informed by Mr Erskine, and believes, that ICA is a medium-sized business and that the cost of these proceedings is continuing to have a significant impact on its financial position.

She estimates that ICA’s future legal costs associated with determination of the remaining issues will be in the range of $314,200.00 to $525,950.00 in respect of the following activities (but it is to be noted that additional costs would be incurred in respect of other events such as an application to the Court for the adoption of a referee’s report, and in respect of the resolution by the Court of any matters not determined by a referee):

Item Estimated Duration Estimate of Disbursements Estimate of LSL Professional Fees

Preparation for Trial of Remaining Issues 10 – 20 days
§ Counsel’s fees ($9,000 per day)

§ Referee’s fees ($2,175 per day)

$111,750.00 - $223,500.00

$26,000.00 - $52,000.00

Trial of Remaining Issues 10 – 15 days
§ Daily room fee ($550)

§ Daily Counsel Fees (Approximately $9,000)

§ Daily Special Referee Fees (Approximately $2,175 plus allowances)

$120,000.00 - $180,000.00

$26,000.00 - $40,000.00

Special Referee – Preparing Report
14 days
§ Referee’s fees ($2,175 per day)

$30,450.00

Ms Hancock deposes that using, as a guide, a figure of 60% of total costs, she estimates that ICA’s party-party recoverable costs in respect of the remaining issues will be in the range of $188,520.00 to $315,570.00.

Ms Hancock further deposes that ICA faces the significant risk that SKM will not satisfy any adverse order for costs made against it, or satisfy a judgment made against it. (She refers to the 11 April 2011 finding of Zammit AsJ on ICA’s application for security for costs, and the following paragraphs). In the circumstances, she deposes that ICA will suffer significant prejudice if it is required to incur additional costs associated with a reference.

Ms Hancock deposes that a current search of the database of the Australian Securities and Investments Commission in respect of SKM reveals, inter alia, that:

(a) it was incorporated on 2 February 1999;

(b) it has issued share capital of $6.00, comprising 6 ordinary shares of $1.00 each;

(c) its registered sole shareholder is SKM Industries Pty Ltd;

(d) its registered sole director and secretary is Giuseppe Italiano (the father of Robert Italiano);

(e) it granted a fixed and floating charge in favour of the Commonwealth Bank of Australia on 15 June 2001; and

(f) no Annual Returns have been lodged by it since 31 January 2003.

Ms Hancock deposes that current proprietor searches in Victoria reveal that that there is no real property asset of which SKM is the registered proprietor. Ms Hancock also deposes that to date, SKM has not satisfied any cost order made against it in this proceeding. In this regard, she refers to the costs orders made on 27 November 2008, 11 April 2011 and 28 July 2011.

Ms Hancock has also conducted a litigation search of SKM in both the Supreme Court of Victoria and the County Court of Victoria. Her searches have revealed that in the past six years, SKM has been involved in five legal proceedings (including this proceeding). SKM was a defendant in four of those five proceedings.

Her searches have further revealed that:

(a) on 18 April 2012, his Honour Judge Smith of the County Court of Victoria ordered (by consent at trial) that SKM pay the costs of the plaintiff in proceeding No. CI-08-01606, including any reserved costs; and

(b) on 18 April 2012, his Honour Judge Smith of the County Court of Victoria ordered (by consent at trial) that SKM (as a co-defendant) pay the costs of the plaintiff in proceeding no. CI-08-05684, including any reserved costs.

Ms Hancock deposes that on 10 August 2012, she wrote to the then solicitors on the record for SKM, N.A. Young & Co., requesting to be provided with evidence of SKM’s ability to satisfy any order in respect of costs to be incurred pursuant to the proceedings to determine the remaining issues and/or for the remuneration of a special referee.

The substance of ICA’s application for costs is set out in the letter. It provides as follows:

…
The result of the Judgment of 28 June 2012 is, in summary, that SKM is required to pay ICA the sum of $189,980.64 which, ultimately, may be subject to any set-off SKM may establish.
There are clearly significant on-going costs associated with the determination of the remaining issues, whether this be by the Court only, or with the added element of a referral pursuant to rule 50.01.

Those costs will include:
1. costs payable to experts; and
2.costs payable to solicitors and counsel to prepare for and appear at future hearings.

There is a real risk that SKM will be unable to satisfy any judgment and/or pay the costs of the proceedings that may be ordered.
We refer to the following matters relevant to this (a number of which were identified for the purposes of ICA’s application for security for costs determined by Associate Justice Zammit on 11 April 2011):
(a)SKM has issued share capital of $6, comprising six ordinary shares of $1 each;
(b)SKM granted a fixed and floating charge in favour of the Commonwealth Bank of Australia on 15 June 2011;
(c)SKM owns no land in Victoria;
(d)SKM does not own plant and equipment;
(e)SKM’s registered sole shareholder is SKM Industries Pty Ltd;
(f)SKM’s registered sole director and secretary is Giuseppe Italiano, the father of Robert Italiano;
(g)SKM has not lodged annual returns since 31 January 2003;
(h)from or about 12 August 2003 to 17 February 2007 payments of invoices generated by ICA to SKM were paid by either CBFC Leasing Limited or Bank of Queensland by way of cheque or direct deposit for and on behalf of ITL Investments Pty Ltd (a former shareholder of SKM);
(i)the recycling plant in Coolaroo was destroyed or nearly destroyed by fire in November 2010. Although the plant and land at Coolaroo are owned by ITL Investments Pty Ltd it is expected that the business interruption resulting from the fire adversely impacted SKM’s financial position;
(j)to date, SKM has failed to provide any evidence of its ability to satisfy any costs order made in favour of ICA and Mr Erskine;
(k)on 18 April 2012, His Honour Judge Smith of the County Court of Victoria ordered (by consent at Trial) that SKM pay the costs of the Plaintiff in proceeding no. CI-08-01606, including any reserved costs; and
(l)on 18 April 2012, His Honour Judge Smith of the County Court of Victoria ordered (by consent at Trial) that SKM (as a co-defendant) pay the costs of the Plaintiff in proceeding no. CI-08-05684, including any reserved costs.

In the circumstances, we request that SKM provide evidence of its ability to satisfy any order in respect of costs to be incurred pursuant to the proceedings to determine the remaining issues and/or for the remuneration of a special referee.
Given that directions for the future conduct of the proceedings are to be made shortly, please:
1.inform us of your client’s attitude to whether the remaining issues should be the subject of a reference under rule 50.01; and
2.provide evidence of your client’s ability to satisfy any order in respect of costs to be incurred pursuant to the proceedings to determine the remaining issues and/or for the remuneration of a special referee.

Ms Hancock deposes that on 20 August 2012, she received a response to her letter of 10 August 2012 from SKM’s solicitors, Di Camillo Lawyers stating (inter alia) that it was their view that “it would be more economical for a suitable, qualified, special referee to hear this part of the case …”. Ms Hancock deposes that the letter also made various comments in relation to her request to be provided with evidence of SKM’s ability to satisfy any order in respect of ICA’s future costs and/or for the remuneration of a special referee, but did not provide any evidence or details of the same.

Ms Hancock deposes that to date, SKM has not provided any evidence of its present ability to satisfy an adverse costs order or to pay for the remuneration of any special referee, such as:

(a) evidence of its current financial position; or

(b) current financial statements, a balance sheet and/or statement of assets and liabilities.

In opposition to the application for security for costs, Mr Basilone, the solicitor for ICA, deposes that ICA originally filed its complaint against SKM on 16 May 2007. On 27 June 2007, SKM filed its notice of defence. On about 27 August 2007, SKM filed its counterclaim for loss and damage. On about November 2007, ICA filed its defence to the counterclaim.

Mr Basilone deposes that an application for security for costs was not brought by ICA until November 2010. He contends that this was substantial delay, of about 3 years.

He says that by the time the first application for security was brought, SKM had expended in excess of $300,000 in legal fees in defending the claim and prosecuting its counterclaim.

Mr Basilone deposes that ICA’s previous application for security for costs was dismissed by Zammitt AsJ on 11 April 2011.

He deposes that since the first application for security, SKM has further expended about $480,000 in legal costs in defending the claim brought by ICA against it and prosecuting its counter claim.

Mr Basilone refers to paragraphs 7 and 13 of the Amended Statement of Claim dated 21 December 2009, in respect of the subject matter of the dispute between the parties (the recycling plant and the supply of various goods and materials by ICA to SKM). Mr Basilone says that by those paragraphs, ICA admits that it has received payment of about $2,296,382.00. He says that SKM did not pay any further monies claimed by ICA as a consequence of the present dispute.

Mr Basilone refers to Ms Hancock’s first affidavit of 16 October 2012. Mr Basilone deposes that the facts set out in those paragraphs have not materially changed since ICA’s previous failed application for security.

Mr Basilone deposes that it is apparent from the facts of this matter that ICA entered into substantial commercial dealings and contracts with SKM, worth over $2.2 million, despite the facts set out in paragraph 26 of Miss Hancock’s affidavit. He says that this was a commercial decision by ICA to deal with SKM. Mr Basilone says that there is nothing to suggest from those dealings (which involved the payment to ICA of over $2.2 million dollars over two years) that SKM was in any way unable to meet its obligations to ICA.

Mr Basilone says that in the usual course of a trial, the Court would have considered the evidence and given judgment on all issues in the claim and counterclaim. A further application for security would not have been expected in the middle of the trial.

In reply to Mr Basilone, Ms Hancock deposes that the invoices rendered by ICA were not paid by the Defendant/Plaintiff by Counterclaim entity SKM, but rather by other entities (including ITL Investments Pty Ltd).

Ms Hancock deposes that in this regard she is informed by Donald Erskine, and believes, that from on or about 12 August 2003 to 17 February 2007, payments of invoices generated by ICA to SKM were paid by either CBFC Leasing Limited (a subsidiary of Commonwealth Bank of Australia) or Bank of Queensland, by way of cheque or direct deposit, for and on behalf of ITL Investments Pty Ltd. Ms Hancock says she is not aware that SKM has paid the sum of $620.00, as ordered by the Court on 17 November 2008.

Submissions

ICA contends that SKM has been substantially unsuccessful in its claims and that ICA has been substantially successful in relation to its contract claims, but failed in respect of the optimisation claims (which it no longer pursues). In summary, ICA says that it has a judgment or is entitled to a judgment in its favour and that the only party pressing any claims is SKM.

ICA relies on the decision of Zammit AsJ of 11 April 2011, dismissing ICA’s then application for security for costs. ICA says that Zammit AsJ found that, on balance, there was a real risk that SKM may not be able to pay an adverse costs order. ICA says that the decision went against it because of SKM’s counterclaim and the delay on ICA’s part in making the application.

ICA says that the position has now changed. The trial has been split and SKM is now the only party that is pursuing positive claims. ICA says that there is no delay in the present circumstances where ICA is not pursuing a claim.

Applicable principles

The applicable principles have been developed – and applied – on the assumption that they apply equally to the relevant rule of court and relevant the statutory provision.[22]
[22]Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, [10] (‘Livingspring’).

The Court’s discretion is enlivened if it is satisfied that there is reason to believe that the plaintiff corporation has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so.[23] The phrase “reason to believe” requires a rational basis for the belief and no more. “The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay?”[24] Once the Court’s jurisdiction is enlivened, the onus rests on the applicant for security from first to last to persuade the court that the order for security should be made.[25]
[23]Ibid, [11].
[24]Ibid, [15].
[25]Ibid, [21].

SKM accepts that it may be treated as a plaintiff by reason of its counterclaim. Nevertheless, SKM says that there are four matters that should inform my discretion not to make an order as follows:

(a) that there has been delay in ICA making an application for security for costs, both the first time, and in this present case;

(b) that the defence and counterclaim by SKM are in response to the same money claims made by ICA, and if successful will extinguish the money claims which the Court has found due to it;

(c) that ICA has voluntarily entered into a commercial relationship with SKM, in circumstances where it either knew, or could have known, that SKM was a proprietary company; and

(d) that the defence or counterclaim is made bona fide and has some reasonable prospects of success.

The delay

SKM contend that it has long been held that delay in making an application for security for costs can be fatal to an application which may otherwise have succeeded.

SKM refers the judgment of Gillard J, sitting in the Full Court of the Supreme Court of Victoria in Smail v Burton,[26] where his Honour explained why delay was such an important factor:

First, it is well established that an application for security of costs should be made promptly. 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 that 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 of costs should be made promptly and before considerable expense is incurred by the appellant.

[26][1975] VR 776, 777.

Similar views were more recently expressed by Young J in Avner Pty Ltd v Dimopoulos,[27] as follows:

It is, of course, axiomatic that notice of an application for security for costs must be made promptly... The reason why delay may lead the court in the interests of justice, to refuse an application for security of costs, which is otherwise right and proper, is that it is unfair to lull a plaintiff into a situation where it invests a large sum of money in preparation for a hearing and then to frustrate that expenditure by a last minute application. However, the main cases where delay has been held to be fatal have been situations where the application has been made very close indeed to the hearing date. (See case referred to by Beach J in Aspendale Pastoral Co case and see also Buckley v Bennell Design and Construction Pty Ltd) (1974) 1 ACLR 301). It does not seem to me that those cases particularly assist the respondent in the instant matter. There was no evidence before the learned Master as to what costs were incurred, particularly between September and November. The court files and the chronology shows that other parties filed defences and there was discovery in that period, but there was no evidence at all as to what otherwise had been done, whether witness statements had been taken, whether the brief for counsel on hearing had been delivered or what. It does not seem to me that utterances of learned judges in cases where applications for security for costs were made on the eve of a hearing or into a hearing are of great assistance where there is no evidence that the party opposing the order for security for costs has in fact incurred great expense.

[27]Unreported, Supreme Court of New South Wales Equity Division, Young J, 12 February 1987.

In Ballato v Pezzano,[28] Walsh J rejected an application brought by a defendant after the proceeding had been running for 10 days, in circumstances where it was conservatively estimated that a further 10 sitting days may be required. The Court observed that if it were to order security at that late stage, it would stifle a proceeding in which the parties had already committed substantial time and costs.
[28]Unreported, Supreme Court of Western Australia, Walsh J, 19 August 1993.

In Natcraft Pty Ltd v. Det Norske Veritas,[29] the Queensland Court of Appeal dismissed an appeal from a Judge who refused to order an appellant to provide security for the costs of an appeal. The principal reason for refusing an order for security for costs was delay.
[29][2002] QCA 241.

ICA made an earlier application for security for costs, which application was heard by Zammit AsJ on 13 March 2011 and 1 April 2011. Her Honour rejected ICA’s application principally because of the inordinate delay which had occurred in the bringing of the application.

The relevant chronology, as deposed to by Mr Basilone, was as follows:

(a) The first counterclaim was filed on 24 October 2007.

(b) An amended counterclaim was filed on 27 February 2008.

(c) A defence to amended counterclaim filed on 12 March 2008.

(d) The further amended counterclaim was filed 3 December 2009.

(e) The defence to the further amended counterclaim filed on 19 February 2009.

(f) The matter was set down for trial in June 2011.

(g) SKM had, at that time, expended $300,000 in preparation for the proceeding.[30]

[30]Affidavit of Anthony Joseph Basilone (sworn 24 November 2010), [6].

Her Honour concluded: “I am not satisfied that there is a reasonable basis for the delay in applying for security.”[31]
[31]Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd (Unreported, Supreme Court of Victoria, Zammit AsJ, 11 April 2011), [64].

SKM submits that since judgment was delivered in that case on 11 April 2011:

(a) the trial commenced and is now part heard before me;

(b) SKM has spent a further $300,000 on legal fees, bringing its total legal fees to date to approximately $600,000.

Claim and counterclaim arise out of the same factual issues

SKM contends that in the present case, the contractual documents relied upon by SKM in its defence and counterclaim are the same agreements relied upon by ICA in respect of its claim. Accordingly, SKM argues that the performance by ICA of its obligations under those agreements will be required to be determined in order to dispose of both ICA’s claim and SKM’s defence and counterclaim. In each case, the same facts will be canvassed.

SKM rely on Sydmar Pty Ltd v Statewise Developments Pty Ltd,[32] where Smart J said that a relevant factor in the exercise of the discretion to award security for costs was:

…[w]hether 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 area proceeds.

[32](1987) 73 ALR 289.

To similar effect is the judgment of Master Newnes in Marand Holdings Pty Ltd v Cateus International Pty Ltd:[33]

It is true that, in this case, the issues raised in the counterclaim itself are limited and discrete. However, as the pleadings stand, the determination of the counterclaim will involve canvassing substantially the same factual issues as those raised in the plaintiff's claim. Accordingly, if the action were stayed because of the plaintiff's inability to provide security, the same factual issues would nevertheless have to be canvassed in order to determine the counterclaim. In my view, a Court should be slow to allow that situation to come about. I do not consider there is anything in the circumstances of this case that would justify the prospect of such a result.

[33][2003] WASC 238, [41]-[42].

In Dalma Formwork Pty Limited (Administrator Appointed) v Concrete Constructions Group Limited,[34] Rolfe J considered a situation where substantially the same facts were likely to be canvassed in determining the claim and the counterclaim.

Put simply if CCG [the Defendant] seeks to recover any part of the debt the issues raised by Dalma [the Plaintiff] in its claim would be available to it as a defence, and there has never been any suggestion that a party could be precluded from defending proceedings, where the defence is bona fide, by reason of impecuniosity. It is, therefore, a somewhat arid exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence. This situation can be overcome by a defendant if it unequivocally states that it will not pursue any claims against the plaintiff in the event of an order for security being made and not met. There is obvious logic in a defendant not wishing to pursue cross-claims against an insolvent plaintiff, not the least of which would be the necessity to pay its own costs and, even if ultimately successful, risk receiving little or nothing.
...
In the result I consider that by virtue of the pendency of claims and counter claims arising out of the same or essentially the same factual matrix, the proper exercise of discretion dictates that this is not an appropriate case in which to order security.
[34][1998] NSWSC 472, and on appeal Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (Administrator Appointed) [1999] NSWCA 16, [24]

Voluntary entry into commercial relationship

SKM contends that several Supreme Courts decisions have held that a relevant factor to consider in exercising the discretion to order security for costs is whether ICA voluntarily entered into a commercial relationship with SKM and the dispute arises out of that commercial relationship.[35]
[35]Letore Pty Ltd v Associated International Finance Pty Ltd (Unreported, Supreme Court of Victoria, McDonald J, 28 May 1993), 15-17; Tenth Anemot Pty Ltd v Colonial Mutual General Insurance Co. Ltd [1993] 2 VR 48, 56-57; New Zealand Pelt Export Co. Ltd v Trade Indemnity New Zealand Ltd [2001] VSC 46, [10].

In Denward Lane Pre Cast Panels Pty Ltd v Cornerstone Constructions Australia Pty Ltd,[36] Hansen J, in dismissing an appeal from a Master in which the Master refused to order that the defendant provide security for the Plaintiff’s costs, stated:[37]

It has been considered a relevant factor in deciding whether to order security that the defendant had determined it was appropriate to enter into the subject commercial agreement with the plaintiff. See Letore Pty Ltd v Associated International Finance Pty Ltd. The subcontract works were an obviously important part of the defendant’s head contract and the price for the works was substantial. Not only did the defendant voluntarily choose to contract with the plaintiff, but it first of all selected the plaintiff as one of the three tenderers for the works. It may be assumed that the defendant considered the plaintiff to be an appropriate company to engage for these purposes, which must have included an assessment of the plaintiff’s financial and managerial ability to perform any engagement. Having done so, it is relevant that it is under the very agreement thus entered into that this litigation arises. Counsel for the plaintiff submitted that in choosing to contract with the plaintiff, the defendant took the risk of litigation with an impecunious litigant.

[36][2008] VSC 144.

[37]Ibid, [26].

SKM argues that in the present case, ICA entered into a commercial relationship with SKM, in the knowledge that SKM was a limited liability company with a small amount of share capital.

Claim is bona fide and has reasonable prospects of success

In J & M O’Brien Enterprises v The Shell Company of Australia Ltd (No 2),[38] the Court stated that:

One matter which is generally considered in relation to applications for security for costs in relation to proceedings at first instance is what prospects of success the plaintiff has in the proceedings. If the plaintiff has a strong and apparently meritorious case the court is reluctant to make an order which may have the effect of shutting the plaintiff out.
[38](1983) 70 FLR 261, 264.

Should security be ordered?

In my opinion, security should not be ordered. I accept that the delay has been inordinate. SKM has expended much time and money to bring the proceedings to the breach and assessment stage. The claims of SKM are pleaded as a set-off. The counterclaims were essentially raised as defences and arise out of the very same transactions ICA sues on.

After taking into account the principles set out above, which were not disputed by ICA, I propose to dismiss ICA’s application.

Should the outstanding issues be referred to a referee?

In my opinion they should not be. A large number of the alleged contractual terms have not been upheld. The outstanding issues are of a small compass. I consider that in seeking to achieve the just, efficient, timely and cost-effective resolution of the real issues in dispute,[39] the appropriate approach is for me to hear the balance of the outstanding issues and deliver a final judgment resolving the claims and counterclaims.
[39]Civil Procedure Act 2010 .

Orders

I propose to make the following orders:

(a) Declaring that ICA is entitled to judgment against SKM in the sum of $278,257.20 subject to any set off against that sum that SKM may establish in this proceeding.

(b) Dismissing the claims made by SKM against ICA in its further amended counterclaim of 3 December 2009 in paragraphs 10 to 29 inclusive.

(c) Dismissing ICA’s claim for security for cost.

(d) Dismissing SKM’s application to amend its further amended counterclaim.

(e) Fixing the further hearing of all outstanding issues in this matter for trial on 4 February 2013 on an estimate of four days.

(f) Directing that the parties meet and agree on any further steps that need to be taken before the resumption of the trial and in default of agreement that the outstanding issue be referred to an associate justice on the order of the associate justice in charge of listing.

(f) Reserve all questions of costs arising be reason of this order.

Citations

Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd [2012] VSC 588

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Item	Estimated Duration	Estimate of Disbursements	Estimate of LSL Professional Fees
Preparation for Trial of Remaining Issues	10 – 20 days	§ Counsel’s fees ($9,000 per day) § Referee’s fees ($2,175 per day) $111,750.00 - $223,500.00	$26,000.00 - $52,000.00
Trial of Remaining Issues	10 – 15 days	§ Daily room fee ($550) § Daily Counsel Fees (Approximately $9,000) § Daily Special Referee Fees (Approximately $2,175 plus allowances) $120,000.00 - $180,000.00	$26,000.00 - $40,000.00
Special Referee – Preparing Report	14 days	§ Referee’s fees ($2,175 per day) $30,450.00

[2012] VSC 588

13 December 2012