O'Brien v NZI Insurance

[1995] QSC 94

IN THE SUPREME COURT
OF QUEENSLAND

Brisbane
  No. 1140 of 1991

[O'Brien v. NZI Insurance]

BETWEEN:

NEIL O'BRIEN
  Plaintiff
AND:

NZI INSURANCE AUSTRALIA LTD
  First Defendant

AND:

WILLIS CORROON LIMITED
  Second Defendant

JUDGMENT  -  DERRINGTON J.

Delivered:24 May 1994

CATCHWORDS:     COSTS.  Security for Plaintiff ordinarily out of the jurisdiction and impecunious.  Action carried by one creditor on behalf of four.  Little substantial interest by Plaintiff in result.  Security orders.  Forum of security permitted.  Guarantees by creditors.

Counsel:A.I. Philippides for Plaintiff

G.A. Thompson, for 1st Defendant

M.A. Wilson Q.C.,  for 2nd Defendant

Solicitors:Murrell Stephenson for Plaintiff

Bain Gasteen for 1st Defendant

Phillips Fox for 2nd Defendant

Hearing date :   15/5/95
IN THE SUPREME COURT
OF QUEENSLAND

Brisbane
  No. 1140 of 1991

[O'Brien v. NZI Insurance]

BETWEEN:

NEIL O'BRIEN
  Plaintiff
AND:

NZI INSURANCE AUSTRALIA LTD
  First Defendant

AND:

WILLIS CORROON LIMITED
  Second Defendant

JUDGMENT  -  DERRINGTON J

Judgment delivered the  24th day of   May 1995

The plaintiff was the insured under a value commercial hull policy with the first defendant covering loss to his boat.  It has rejected his claim based on constructive total loss of the vessel on a variety of grounds, as to which he sues the second defendant, his insurance broker, in the alternative.  The trial of this matter is set down for seven days commencing on 5 June 1995.  The defendants seek an order for security for costs, but limited to future costs. With respect, this is the correct approach: Southern Cross Explorations v. FAI (1985) 1 NSWLR 114.
           Their grounds are that the plaintiff ordinarily resides out of the jurisdiction, he is impecunious, and the action is really brought in his name as nominee for the benefit of four of his creditors, to all of whom he has in effect proposed to assign substantially the whole of the benefits which he might derive from the litigation.  They are L.E. Hamilton Pty Ltd ("Hamilton"), the Commonwealth Development Bank of Australia ("C.D.B.A."), the Queensland Industry Development Corporation ("Q.I.D.C.") and Murrell Stephenson ("the solicitors"), who are his solicitors in this action and to whom he is indebted for certain costs to date.
           The evidence that the plaintiff ordinarily resides out of the jurisdiction is not particularly strong but in the absence of any contrary evidence from the plaintiff, who knows the position best, it is sufficient.  He is shown in an agreement, to be mentioned shortly, as having an American address.
           There is ample evidence that he is also impecunious, and indeed that is the basis of one of his own arguments against the proposed order.  This invoked the strong principle adverse to an order if impecuniosity were to have the result that an order would frustrate the action: MA Productions Pty Ltd v. Austarama Television Pty Ltd (1982) 1 ACLC 404. It is said in an affidavit by Robert John Luxton, filed on the plaintiff's behalf as follows:-

"I am advised by Ronald O'Brien, the brother of the plaintiff who has a power of attorney from the plaintiff and who has sworn some of the court documents (eg. affidavit of documents) on behalf of his brother, that should an order for security for costs be made against the plaintiff that such action would prohibit the conduct of the trial."

To digress for a moment, it might be mentioned that objection was taken to this evidence, not on the ground that it did not depose as to the belief of the deponent (which could have been cured), but because no detail was provided.  The objection is good for although it might be accepted that the plaintiff is impecunious, it does not follow that any order for costs would frustrate the action.  The creditors referred to above might be thought, at least between them, to have sufficient funds to meet any security that may be ordered.
           The curious form of the transactions associated with the proposed assignment should be explained.  By one agreement the plaintiff and Hamilton agreed that, subject to cl.2(iii) of the agreement, the plaintiff would assign his right title and interest in the policy to Hamilton for $1.00.  Clause 2(iii) made the agreement conditional upon the due execution of a second agreement, so that the first should have no effect until the later had been duly executed.
           That later agreement has yet to be executed by Hamilton, though it has been executed by the only other parties to it, C.D.B.A., Q.I.D.C. and the solicitors.  The plaintiff is not one of them.  The debts of some of these parties are secured, and all the debts have some association with the vessel or this action.
           This agreement recites that the plaintiff will assign his interest in the policy to Hamilton (although C.D.B.A. and Q.I.D.C. also have interests in the policy as mortgagees of the vessel), and that Hamilton intends to pursue the plaintiff's claim in these proceedings.  It is then agreed that in consideration of Hamilton's agreeing to pursue the proceedings and to incur such legal costs and disbursements as may be incidental to them "(including any costs and disbursements which may be payable to (the insurer))", the parties would divide the fruits of the claim for the insurance moneys in certain sums in a prescribed order of priority, with the balance, if any, being equally divided between the plaintiff and Hamilton.  In the event of only partial recovery of the sum claimed, the amount recovered would be apportioned between the four signatories according to a prescribed division, and the plaintiff would receive nothing.
           The difficulty with Hamilton's undertaking to pay the insurers' costs, apart from the fact that the agreement is not signed, is that if the defendants were to succeed in obtaining an order for costs against the plaintiff, because the plaintiff is not a party to that agreement they could not pursue any right under it as an asset in the plaintiff's estate;  and that may be the reason why this unusual arrangement was entered into.
           That is not the end of its curious features.  In the first agreement, Hamilton agrees to indemnify the plaintiff against any order as to costs, a right which the defendants might have been able to enforce if the plaintiff were to fail to meet any order to pay costs.  But because without any explanation Hamilton withholds its signature, the agreement and therefore this indemnity is not operative.  This means that Hamilton retains control both of the action and of its own liability.  If the action is successful it can sign the second agreement; and if the plaintiff becomes liable for costs it need not sign it.  The absence of this indemnity removes this case from any analogy with that class where a liquidator suing in his own name, as distinct from that of the company, would not be required to give security because of his personal liability to a costs order if his action should prove unsuccessful: cf. Hession (supra) at 123.
           The curious features continue. Despite its failure as yet to execute the second agreement, Hamilton is showing all the signs of controlling the carriage of the action in place of the plaintiff, and its doing this while failing to execute the document also remains unexplained.  Apart from the effect of any assignment of the policy on the plaintiff's claim in this action (which can be easily cured), this is all probably tactical. 
           Because of this arrangement, albeit presently inchoate, while it is reasonable to accept that the plaintiff is impecunious, it certainly does not follow that any order for a security for costs would frustrate the action.  In the present circumstances it is highly likely that security would be provided by the creditors, particularly Hamilton, and no evidence to the contrary has been advanced by the plaintiff.  The bare assertion in Mr Luxton's affidavit referred to above should not be accepted, and it is a pity that it was made if support was not to be forthcoming in the form of other evidence.  The burden of proof o this point is on the plaintiff.
           Moreover, the claim that an order for security would frustrate the action because of the plaintiff's impecuniosity is, in a case like this, of any force only if those behind the plaintiff are also impecunious; and on this issue the onus is again on the plaintiff:  Bell Wholesale Co Pty Ltd v. Gates Export Corp (1984) 2 F.C.R. 1,3. When those persons are financially able to provide security, generally speaking an order should not be refused on this ground: Yandil Holdings Pty Ltd v. Insurance Co of North America (1985) 3 A.C.L.C. 542, 545; K.P. Cable Investments Pty Ltd v. Meltglow Pty Ltd (1995) 13 ACLE 437.
           There is some analogy here to the case where the plaintiff's impecuniosity can be identified with the very act of the defendant which is the subject of the action: M.A. Productions Pty Ltd v. Austarama Television Pty Ltd (infra) for it is the first defendant's refusal to meet the indemnity cover of the policy that disables the plaintiff from paying his creditors, and it is the justification of the first defendant's refusal that is in issue.  The same principle applies to the alleged negligence to the second defendant.  However, the analogy is incomplete, for the plaintiff's indebtedness substantially existed apart from the insurer's refusal to pay.  In other words, most or all of any moneys recovered will go to his creditors in any case.  However, it is a factor that the defendants' actions, if culpable, would have contributed in part to his impecuniosity.
           Although on an application such as this the court will approach the exercise of its discretion without any predispositions (Southern Cross Exploration v. FAI (1985) 1 N.S.W.L.R. 114, 122; M.A. Productions Pty Ltd v. Austarama Television (1982) 7 A.C.L.R. 97, 99; Shaftesbury Nominees v. Brixmond [1992] 2 Qd.R. 543, 545-546), that does not exclude its general recognition of the consequences of the absence of the plaintiff from the jurisdiction, and particularly an impecunious one. This alone will usually provide good reason for an order (Aeronave SPA v. Westland Charters [1971] 1 W.L.R. 1445, 1449; Harpur v. Ariadne Australia Ltd [1984] 2 Qd.R. 523, 530-531); and there is no good reason why it should not be so here. However, there are other considerations.
           The third point in the defendants' argument, that the plaintiff is a mere nominee for others and has no real interest in the result of the action, is slightly more complex.  Under the preposed arrangement, he still has the right to receive one half of any balance after the payment of his creditors in accordance with the terms of the deed.  If his claim were successful the value of this interest would have been of the order of one half of about $90,000 at the date of the deed, 28 February 1994, but his liability for further interest since that date will have consumed most if not all of that.  He would expect to receive interest on any judgment, which would tend to offset this accruing liability, but it is doubtful whether he has realistic expectation of receiving into his own hands anything from any judgment which he might nominally recover.  At best, it would be a very small part of the whole.  Further, under the proposed arrangement, he will receive nothing unless the full amount of the claim is recovered.
           The defendants' argument that in these circumstances he has no interest at all overlooks the proposition that the result of any judgment in the sum claimed would be to extinguish substantial debts which he now owes to the other beneficiaries of that arrangement. This may not be so attractive to him as it would be if he were able to keep the money himself; but it is little different in the result from the position which would have obtained in the absence of the deed, for the fruits of any judgment which he might have recovered by his own activity would have been largely amenable to prior secured claims or execution by those creditors who are parties to the arrangement.
           The defendants are correct to the extent that the plaintiff's equity in the fruits of any judgment is relatively small and, because he is impecunious, it is his creditors who will be the real beneficiaries in a practical sense.  He has not yet been discharged from those debts, nor, unless the action were completely successful, would he be discharged, even if the agreements be finally executed.  But he would then have assigned his interest in the policy and in those circumstances his role in the action could only be described as that of a trustee.
           If that were the end of the matter it would not make any difference to the substance of the question that Hamilton had engaged in the ploy of withholding its signature so as to postpone the effect of the agreement.  It is not however the end of the matter.  While the plaintiff is de facto a trustee, he also has the real beneficial interest in seeing his creditors paid so that he may avoid bankruptcy, with possibly some return to himself.  However, where the plaintiff has assigned his interest for the benefit of some creditors who are carrying the action for their own benefit, and he is impecunious, the tendency of the courts is to have little regard for the plaintiff's potential benefit in avoiding bankruptcy: cf. Semler v. Murphy (1968) 1 CL 183.  He will still be considered a nominal party.
           The position here is certainly far removed from that in Thune v. London Properties Ltd [1990] 1 W.L.R. 562, where the plaintiffs were merely trustees of a bankrupt's estate and the rights that were the subject of the claim had passed to the estate for the benefit of the creditors. So too in Hession v. Century 21 South Pacific Ltd (In Liq) (1992) 28 N.S.W.L.R. 120, the company against which the order was sought was in liquidation so that the only beneficiaries were the creditors, and no benefit at all would accrue to the company. But it is not necessary to the utility of this factor that a nominee plaintiff have such total disinterest in the outcome.
           The interest of the plaintiff in this action, such as it is, is not the only relevant feature in this issue.  That the action is controlled and carried by others with a much greater interest is more significant.  And when a creditor is behind the commencement and continuation of the action, the danger that it may be pursuing a risky action at no risk to itself and to the great risk to the other side is a weighty consideration:  cf. Sent v. Jet Corporation of Australia Pty Ltd (1984) 2 F.L.R. 201, 215. It is the injustice of this that is behind the reasoning supporting the making of an order in these cases.
           While it is not possible to say that in this case the plaintiff will have no interest in the outcome of this action, because the creditors are the force behind the action, the plaintiff engages in little if anything more than cooperative activity in its prosecution.  For such a situation to support the making of an order, Coyle v. Cassimatis [1994] 2 Qd.R. 262 does not require that the plaintiff have no interest, even the most insignificant, in the action before the state of affairs such as this can be regarded as a contributing factor in the result. If this were the only ground advanced to found on order, the presence of some small residual interest held by the plaintiff might have more dramatic influence; but when that is not the case, the reality of the high level of active interest of parties pressing the action in the plaintiff's name cannot be ignored as a factor having some influence along with others in supporting the application.
           The unfortunate tactic adopted by Hamilton in with-holding its signature from the agreement does not help it.  The support for an order for security provided by the facts that the plaintiff ordinarily resides out of the jurisdiction, and that he is impecunious has already been noted; and this becomes stronger when the action is conducted by others such as creditors in the plaintiff's name substantially for their own benefit.  It becomes even stronger when there is an arrangement proposed for a creditor to control the action subject to an indemnity to the plaintiff for his liability for costs, and it then controls the action without giving the indemnity.   As to the relevance of this, see K.P. Cable Investments (supra) and the cases cited at 440, (principle 7). 
           The exercise of the court's discretion to make or refuse such an order depends upon the weight of the competing factors that are relevant to the circumstances of each particular case: P.S. Chellaran & Co v. China Ocean Shipping Co (1991) 765 ALJR 642, 643; 9 ACLC 1603, 1605. The weight of a factor may be greater in one case that another, either by reason of its own inherent quality or by comparison with other factors in the particular circumstances. The combined weight of the factors supporting an order in this case far outweigh those that are adverse.
           Consequently, subject to what follows, the merits justify the making of an order. However, the plaintiff complains of delay in the defendant's applications, and if there is inordinate delay allowing the plaintiff to expend substantial further costs, the injustice of an order in such circumstances will work strongly against an order: Grant v. Banque Franco - Egyptienne (1876) 1 CPD 143; Shaftesbury Nominees Pty Ltd v. Bruxmond Pty Ltd (1992) 2 Qd.R. 543. This may be aggravated when, as here, the application is made close to the trial date.
           It is true that the defendants generally had some warning of the plaintiff's ordinary absence from Australia and of his arrangements with his creditors as early as November last.  Although it is doubtful, there may be room for some mild criticism of their delay in making these applications, but having regard to a degree of uncertainty about these things, associated with the difficulty in obtaining satisfactory proof of the facts which were within the plaintiff's control, the delay has not been inordinate.  It is further excused by the plaintiff's solicitors' equivocation and eventual failure to respond to the defendants' request of 17 April for a consent order, a request which was commendable in trying to avoid unnecessary costs.
           Although there has been fairly substantial activity in the action since November last, there has been far less in the period since the defendants might at the reasonably earliest time have sought the order.  Moreover, the circumstances of this action are such that the delay, if any, has probably had no prejudicial effect on the position of the plaintiff or those behind him.  It is very likely that the matter would have proceeded much as it has done even if an order had been obtained earlier, and the same costs and outlays would have been expended.
           As for the propinquity of the trial and the difficulty that might cause if an order were made, that should be overcome by the form of the order that will be made.  For these reasons, any delay that may have occurred was not in the circumstances so inordinate as to justify the refusal of an otherwise meritorious application.
           The order for security should be fully effective if the creditors jointly and severally provide guarantees of the plaintiff's payment of any future costs which he is ordered to pay, but this should be limited to the sum of $25,000.00 for the first defendant's costs and $20,000.00 for the second defendant's costs in the first instance, with liberty to apply to the trial judge to enlarge or reduce it in either or both cases.  The amount has been limited but with the possibility of enlargement or reduction at the discretion of the trial judge, who may then adjust the order, depending upon the reasonableness of the respective parties' conduct of the trial.  The creditors can of course provide indemnities inter se as they may wish, and could even apply to vary the order if a reasonably safe alternative could be advanced. Of course the creditors may not all wish to give guarantees.  For that contingency, there should be liberty to apply so that a suitable alternative form of security can be ordered.

           In other circumstances it might have been enough to have limited the security to a guarantee by Hamilton, but the circumstances relating to its non-execution of the agreement leaves any confidence in the safety of such an order undermined.  The disadvantages of any such doubts should be borne by the other creditors.
           The costs of each application should be costs in the cause, for the plaintiff and his supporters should not suffer if his claim be justified. 
           The formal orders will be in the terms of the drafts initialled by me.