Mantzaris v Smith Construction Group Pty Ltd (Security for Costs)
[2023] VCC 2424
•22 December 2023
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-22-02279
| Liza Mantzaris | Plaintiff |
| v | |
| Smith Construction Group Pty Ltd (ACN 151 183 201) | Defendant |
| and | |
| Brett Wiltshire | Third Third Party |
| and | |
| Paul Anthony Friend | Fourth Third Party |
| and | |
| FAS Group Pty Ltd (ACN 124 596 130) | Fifth Third Party |
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JUDGE: | Her Honour Judge Kirton | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 October 2023 | |
DATE OF JUDGMENT: | 22 December 2023 | |
CASE MAY BE CITED AS: | Mantzaris v Smith Construction Group Pty Ltd (Security for Costs) | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 2424 | |
REASONS FOR RULING
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Subject:Security For Costs
Catchwords: Security for costs – third-party claim by defendant against fifth third party - defendant indemnified by the insurer for costs of the third-party claim including costs ordered in favour of the third-party - sufficiency of that indemnity.
Legislation Cited: Civil Procedures Rules (2010); Corporations Act 2001 (Cth).
Cases Cited:Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, Ariss v Express Interiors Pty Ltd [1996] 2 VR 507, Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd (1999) 2 VR 191, US Realty Investments LLC #1 v Need [2013] VSC 590, Ballymoss Pty Ltd v Kollaras & Co Pty Ltd (No 4) [2023] VCC 1268, Nylex Corporation Pty Ltd v Basell Australia Pty Ltd [2009] VSC 97, DIF III Global Co-investment Fund, LP v BBLP LLC [2016] VSC 401, Selig v Wealthsure Pty Ltd (2015) 255 CLR 661, Matthews v SPI Electricity Pty Ltd (No 9) (2013) VSC 671.
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APPEARANCES: | Counsel | Solicitors |
| For the Defendant | Mr J Waters | Wotton + Kearney |
| For the Fifth Third Party | Mr A Morrison | KCL Law |
HER HONOUR:
Introduction
1The fifth third party, FAS Group Pty Ltd (FAS Group), has applied:
(a) to strike out paragraphs 33 to 40 of the third party claim filed by the defendant, Smith Construction Group Pty Ltd (Builder), pursuant to r 23.02 of the County Court Civil Procedure Rules, with leave to re-plead, and
(b) for orders that the Builder, provide security for costs up to mediation in the sum of $63,031.00. [1]
[1] By summons filed on 22 September 2023.
2On 16 October 2023, I made orders granting the application for strike out and ordered that the defendant has leave to file and serve a further amended third party notice.
3I otherwise reserved my decision on the application for security of costs.
4The application for a security of costs order is supported by the affidavit of Callum Ernikiolis, solicitor for FAS Group, affirmed on 22 September 2023. The Builder opposes the application and relies on an affidavit of its solicitor Mr Tully Anders affirmed on 9 October 2023. Both parties have filed written submissions.
5FAS Group seeks orders that the Builder provide security for FAS Group’s costs as it reasonably believes that the Builder has insufficient assets available in Victoria to pay the costs of FAS Group’s costs in this proceeding, if ordered to do so.
6The Builder submits that its insurer will indemnify it for the payment of any costs order in favour of FAS Group, and so no order for security is required.
7For the reasons set out below, I am not satisfied that an order for security of costs should be made.
Relevant Background
8The proceeding involves the plaintiff, Liza Mantzaris’ claim against the Builder for breach of warranty, alleging defective or incomplete items of building work performed at two properties. Ms Mantzaris seeks damages of approximately $200,000.00 for each unit , plus investigative costs and loss arising from reduced rental income.
9The Builder denies liability to Ms Mantzaris for the claim and pleads that the claim is an ‘apportionable claim’ within the meaning of ss 24AE and 24AF of the Wrongs Act 1958[2] (Wrongs Act) and that the following parties are ‘concurrent wrongdoers’ in respect of the claim under the Wrongs Act:
(a) FAS Group;
(b) Andrew Black of Stokes Perna Building Surveyors;
(c) Brett Wiltshire of Greater City Plumbing;
(d) Trevor Showell of Trevor Showell Tiling and Waterproofing; and
(e) Paul Friend of La Trobe Roofing.
[2] Wrongs Act 1958, 24AE and 24AF.
10The Builder’s third party claim against FAS Group alleges three discrete causes of action against FAS Group:
(a) that FAS Group has breached a contract between FAS Group and the Builder;
(b) for negligence against FAS Group;
(c) for a claim for contribution and/or indemnity against FAS Group pursuant to Part IV of the Wrongs Act. [3]
[3] Wrongs Act 1958 (Vic), Part IV.
11FAS Group is yet to file a defence to the third party claim.
12On 16 August 2023, the solicitors for FAS Group sent a letter to the solicitors for the Builder stating that FAS Group intends to make an application for security for costs if the Builder does not agree to provide security. FAS Group raised concerns that the Builder has insufficient funds to meet any adverse costs order as it is a proprietary limited company with $2 paid up capital. [4]
[4] Letter from FAS Group solicitors to Smith Construction Group solicitors dated 16 August 2023.
Affidavit of Callum Ernikiolis affirmed 22 September 2023, exhibit pg 170 – 174.
13On 28 August 2023, the solicitors for the Builder sent a letter to the solicitors for FAS Group stating that it would not provide any security and it takes instructions from the Builder’s liability insurers who have effective control and responsibility for this litigation. [5]
[5] Ibid, pg 176.
Relevant evidence
14The Builder does not dispute that its financial situation is as contended by FAS Group,[6] nor that absent an indemnity from the insurer, it is unlikely to be able to pay a costs order in favour of FAS Group.
[6] Ibid, paragraphs 19 – 27.
15However, it says that the Builder’s insurers have agreed to pay all legal costs of the third party claim via a Deed of Indemnity dated 29 September 2022, and have agreed to indemnify the Builder against liability for any order for costs made against it by FAS Group.[7]
[7] Deed of Indemnity dated 29 September 2022 exhibited to the Affidavit of Tully James Anders affirmed
9 October 2023, pgs 22-26.
16In this application Mr Anders gave the following evidence:
“Although I expect that the Insurers would ordinarily indemnify Smith in respect of costs and expenses incurred in defence of the plaintiff’s claim which included costs arising out of any third party proceeding, to avoid any doubt regarding the rights and obligations of Smith and the Insurers, they entered into a separate deed of indemnity arising out of the Insurers’ decision to cause Smith to join the third parties to the proceeding (the Deed). Pursuant to the Deed, the Insurers agree to indemnify Smith in respect of any costs orders made against Smith in favour of any party that the Insurers cause to be joined as a third party to the proceeding.” [8]
[8] Affidavit of Tully James Anders affirmed 9 October 2023, paragraph 17.
17A copy of the Insurance Deed was exhibited to his affidavit. The third party claim is defined as the ‘Contribution Proceedings’ in the Deed. Clauses 1.1 and 1.2 of the Deed provide as follows.
1. Costs of the Contribution Proceedings
1.1 Underwriters will pay all legal costs (including disbursements) of the Contribution Proceeding.
1.2 In the event that a costs order is made against Smith in favour of any party joined as part of the Contribution Proceedings, Underwriters will Indemnify Smith against any such liability to pay costs.[9]
[9] Deed of Indemnity dated 29 September 2022 exhibited to the Affidavit of Tully James Anders affirmed
9 October 2023, pgs 22-26.
18The Builder also provided evidence that the insurers are not impecunious and have sufficient funds to meet any liability that the defendant might have to pay FAS Group’s costs incurred in the proceeding, for example, a $150 million letter of credit held by one of the insurers.[10]
[10] Anders affidavit, 29, exhibit pg 83.
Legal Framework
19There is no dispute between the parties as to the relevant principles to be applied in an application for security for costs, nor that they apply to a claim between a defendant and a third party. The parties referred to r 62.02 of the Civil Procedure Rules and s 1335 of the Corporations Act 2001 (Cth), and to the decisions of Livingspring Pty Ltd v Kliger Partners[11], Ariss v Express Interiors Pty Ltd[12], Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd[13] and others.
[11] Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377.
[12] Ariss v Express Interiors Pty Ltd [1996] 2 VR 507, 514.
[13] Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd (1999) 2 VR 191, 14 – 15.
20The principles and factors to take into account on the exercise of the discretion were succinctly summarised recently by Derham AsJ in US Realty Investments LLC #1 v Need[14], as follows:
[14] US Realty Investments LLC #1 v Need [2013] VSC 590, 18 – 38. (Need)
(a) the principles applicable to an application for security for costs brought against a corporate plaintiff under r 62.02 of the Civil Procedures Rules 2005 and s 1335 of the Corporations Act are the same; [15]
(b) the jurisdiction to make an order is enlivened, if it appears by credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if it is successful in its defence of the proceeding;
(c) the discretion to order or not to order security is unfettered, although like any discretion it must be exercised judicially. There is no general predisposition in favour of making an order for security once the jurisdictional threshold is passed. But impecuniosity is itself a significant discretionary factor and often a most significant factor;
(d) in exercising the discretion whether to order a company to give security for costs, the Court must carry out a balancing exercise. It must weigh the injustice to the plaintiff if it is prevented from pursuing a proper claim by an order for security, against the injustice to the defendant if no security is ordered and at trial the plaintiff's claim fails and the defendant is unable to recover costs from the plaintiff;
(e) the Court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, but also it will be concerned not to be so reluctant to order security that an impecunious company can use its inability to pay costs to put unfair pressure on the defendant;
(f) the burden rests on the defendant, from first to last, to persuade the Court that the order for security for costs should be made;
(g) there are, however, particular discretionary matters in respect of which the plaintiff must necessarily have the carriage. Thus if the plaintiffs, as in this case, assert that an order for security would impose on it such a financial burden as to stultify or frustrate the litigation, the plaintiffs must establish the facts which make good that assertion;
(h) as a general rule, where a claim is prima facie regular on its face and discloses a cause of action, the Court should proceed on the basis that the claim is bona fide with reasonable prospects of success in the absence of evidence to the contrary;
(i) assessing the plaintiffs’ prospects of success is not really a practicable test in any case of reasonable complexity… Although it will ordinarily not be practicable to reach any clear view about the merits of the plaintiff's claim, that is not to say that the merits are always irrelevant (unless totally lacking) or that the bona fides of the claim may be disregarded… The Court is not obliged to consider at length the merits of the claim, and to do so would ordinarily be a waste of resources;
(j) there is a well-recognised factor (sometimes called a principle), which may affect the exercise of the Court’s discretion, that the Court will not make an order for the provision of security if the order would operate to frustrate or stultify the plaintiff's arguable case legitimately instituted. The “stultification principle”, being a factor relevant to the exercise of the discretion, does not automatically lead to refusal of the application for security. It nonetheless "usually operates as a powerful factor in favour of exercising the Court's discretion in the plaintiff's favour”.
[15] Civil Procedures Rules 2005, r 62.02; Corporations Act (2001), s 1335.
Has the jurisdictional threshold to order security been enlivened?
21As stated above, it is necessary, as a threshold question for FAS Group to establish that the jurisdiction to order security is enlivened. That is, is there reason to believe that the Builder will be unable to pay FAS Group's costs?
22Her Honour Judge Ryan recently observed in Ballymoss Pty Ltd v Kollaras & Co Pty Ltd (No 4):
The first question to be asked and commonly described as the “threshold requirement,” is whether there is a rational basis founded on credible testimony to believe that the plaintiff will be unable to pay the costs of a successful defendant. It is a low threshold which requires making a risk assessment – requiring a practical, common sense approach to the corporation’s financial affairs. No more than a rational basis for the belief is required. This requirement reflects the policy of protecting a defendant against the risk of a plaintiff’s impecuniosity. As Livingspring makes clear, the approach requires a practical risk assessment. In this instance, would there be a real risk that Ballymoss could not recoup its costs if it successfully defended the counterclaim? [16]
[16] Ballymoss Pty Ltd v Kollaras & Co Pty Ltd (No 4) [2023] VCC 1268, 186.
23As the Builder concedes its financial situation is such that it alone would be unlikely to be able to pay FAS Group’s costs, the question before me is whether the agreement by the insurers to indemnify it for FAS Group’s costs (as confirmed by the Deed) is sufficient to overcome the rational belief that the Builder will be unable to pay the costs of FAS Group.
24In response, FAS Group submits that unless the insurers of the Builder are prepared to guarantee the payment of any costs order in favour of FAS Group, it should not be a reason to deny FAS Group an order for security. It says that the indemnity is insufficient, and relies on the decision of Nylex Corporation Pty Ltd v Basell Australia Pty Ltd (Nylex). [17]
[17] Nylex Corporation Pty Ltd v Basell Australia Pty Ltd [2009] VSC 97. (Nylex)
25In Nylex, the plaintiff, Nylex, was a subsidiary of Nylex Ltd, and the parent company had voluntary administrators appointed, with its shares suspended and receivers and managers appointed to the assets of the Nylex group (including the plaintiff). It was the appointment of the administrators and the receivers and managers that precipitated an application for security for costs.
26The plaintiff’s claim was brought largely as a subrogated action at the instance of the insurers of the plaintiff. It was common ground that, as a general rule, to the extent that any action was a subrogated action, the insurers would be obliged to indemnify a plaintiff against any orders as to costs. The insurers had also offered and continued to offer an enforceable undertaking to pay the defendant’s costs.
27Mandie J did not consider that was a sufficient answer to the defendant’s application, and he made an order for security to be provided. His Honour’s reasons included the following:
(a) he noted the lack of evidence put on by the plaintiff of the relevant insurance policy or the extent to which the action was a subrogated action;
(b) as it is an indemnity to Nylex, the proceeds would have to be paid into the pool available to all creditors and would not be directly available to the defendant. This position may be contrasted with that which arises when a company in liquidation is liable to a third party and is covered by a relevant insurance policy under which the third party can look to the liquidator for direct payment of the insurance monies;
(c) he also noted that the defendant might in due course seek an order for costs against the non-party insurers, but concluded that of itself could not be relied upon as a sufficient answer to the application;
(d) the undertaking offered by the insurers was uncertain and complex and did not constitute an appropriate mode of providing security. There were concerns about the financial position of the various Lloyds syndicates comprising the insurers and inadequate evidence addressing this. Further, the proposed written undertaking relied for its efficacy upon two warranties of authority and offered only proportional liability by the various insurers.
28It is apparent from the findings of his Honour Mandie J (and is uncontroversial) that the question of the adequacy of the protection offered will turn on the facts of each case. In the present matter, I agree with the Builder that the facts of this case are different to those in Nylex, and as a result, the decision is distinguishable.
29In the present matter, I accept that the evidence before me is credible. There is no reason to not accept the matters deposed to by Mr Anders and the Deed itself.
30The first distinguishing factor is that the Builder is not insolvent, or in administration or liquidation, unlike Nylex or its parent group.
31Next, in the present matter, the Builder has provided detailed evidence establishing the extent of the indemnity, including the Insurance Deed itself.
32Further, unlike Nylex, in the present case there is evidence of very substantial assets of the insurers in Australia. This situation is analogous to DIF III Global Co-investment Fund, LP v BBLP LLC, where Hargrave J considered the provision of an indemnity by an overseas insurer and discussed Nylex and other decisions. In relation to the sufficiency of the insurer’s financial position, his Honour observed that the evidence established the insurer was a substantial and well-regulated insurer and there was no evidence for questioning its credit worthiness and ability to honour its obligations under the indemnity. [18]
[18] DIF III Global Co-investment Fund, LP v BBLP LLC [2016] VSC 401, 75.
33Next, although in Nylex, the option for the defendant to seek a costs order directly against the insurer was considered of itself insufficient, there are other authorities which support the Court’s unfettered discretion to order costs against the non-party insurer. For example in Selig v Wealthsure Pty Ltd, the High Court ordered QBE insurance, a non-party insurer, to pay the costs of the appeal to the Full Court and the High Court. [19]
[19] Selig v Wealthsure Pty Ltd (2015) 255 CLR 661.
34Similarly, in Matthews v SPI Electricity Pty Ltd (No 9), Derham AsJ observed in relation to whether security for costs should be ordered against insurers subrogated to the rights of the plaintiff in relation to the Kilmore East bushfire:
The critical factor necessary to enliven the jurisdiction to make an order against a non-party is that there is reason to believe that should an order for costs be made against the Insurers at the conclusion of the proceeding that such an order will not be met. There is no suggestion, nor any submission, of any risk that the Insurers will be unable to pay costs if any are ordered against them… [20]
[20] Matthews v SPI Electricity Pty Ltd (No 9) (2013) VSC 671, 179 – 180.
35I understand the concern of FAS Group that an agreement to indemnify the Builder is not the same as a guarantee or undertaking that the insurer will pay it directly. However. the onus is on FAS Group to establish the necessary requirements for an order for security.[21]
[21] Nylex, 16; Need, 24; Livingspring, 21.
36Taking a practical, common sense approach to my assessment of the Builder’s financial affairs, and noting it is a low threshold which requires making a risk assessment, I am not satisfied there is a rational basis to believe that the Builder will be unable to pay the costs of FAS Group, having regard to the indemnity offered by its insurers.
Conclusion
37As a result of this finding, the jurisdictional threshold for an order for security has not been met.
38Accordingly the application is dismissed.
39Absent any objection, it appears to be appropriate to make an order that costs follow the event, assessed on the standard basis on the County Court scale. However, if a party seeks a different order, they have liberty to file submissions and any affidavits, followed by responses from the other party. Costs will then be determined on the papers.
Orders
1. The application by the Fifth Third Party made by summons filed on 22 September 2023 is dismissed.
2. The question of the costs of the application will be determined on the papers.
3. If any party wishes to oppose the proposed order that costs follow the event, assessed on the standard basis on the County Court scale, they must file and serve written submissions (limited to no more than four pages) and any affidavit by 9 February 2024 at 4.00pm.
4. If any submission is filed pursuant to order 3, the other party must file and serve any material in response by 23 February 2024 at 4.00pm.
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Certificate
I certify that these 14 pages are a true copy of the ruling of her Honour Judge Kirton delivered on 22 December 2023.
Dated: 22 December 2023
Tracey Huang
Associate to Judge Kirton
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