PHHH Investments No 2 Pty Ltd v United Commercial Projects Pty Ltd
[2019] VCC 333
•25 March 2019
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
BUILDING CASES LIST
Case No. CI-18-01563
| PHHH INVESTMENTS NO 2 PTY LTD (ACN 602 191 506) | Plaintiff |
| V | |
| UNITED COMMERCIAL PROJECTS PTY LTD (ACN 110 860 369) | Defendant |
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JUDGE: | HER HONOUR JUDGE A RYAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 21 February 2019 | |
DATE OF RULING: | 25 March 2019 | |
CASE MAY BE CITED AS: | PHHH Investments No 2 Pty Ltd v United Commercial Projects Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2019] VCC 333 | |
REASONS FOR RULING
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Subject: PRACTICE AND PROCEDURE
Catchwords: Security for costs – threshold question satisfied – discretionary factors – delay – counterclaim traverse same issues – undertaking by defendant to treat counterclaim as stayed if security not paid by the plaintiff and proceeding stayed
Legislation Cited: County Court Civil Procedure Rules 2008 (Vic)
Cases Cited:Bakers Investment Group (Australia) Pty Ltd v Caason Investments Pty Ltd & Ors [2014] VSC 154;
Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301;
Bufalo Corporation Pty Ltd v Lendlease Primelife Ltd(No 3) [2010] VSC 263;
Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311;
Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621;
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377;
Obena Falls Pty Ltd v Normans Wines Ltd [2001] VSC 253;
Protectavale Pty Ltd v K2K Pty Ltd [2008] FCA 1248;
Sydmar Pty Ltd v Statewise Developments Pty Ltd 1987 73 ALR 289.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J F Richardson | Noble Lawyers Pty Ltd |
| For the Defendant | Mr N A Andreou | Macpherson Kelley |
HER HONOUR:
1 By summons dated 20 December 2018, the defendant (“United”) seeks an order for security for costs pursuant to r 62.02 of the County Court Civil Procedure Rules 2008.
2 United relies upon the affidavits of Victoria Nomikos sworn 20 December 2018 and 20 February 2019.
3 The plaintiff (“PHHH”) relies on the affidavit of Darren John Noble sworn 11 February 2019.
Background
4 PHHH engaged United as builder to carry out alterations and additions to a childcare centre which PHHH owned at 282-284 Victoria Street, Brunswick. The parties entered into a building contract on 16 March 2016 for the initial price of $3,833,665 inclusive of GST.
5 United took possession of the property on 16 March 2016 to carry out the works. The contract provided for the works to be completed within 195 working days. The administering architect on the project certified the date of practical completion as having occurred on 21 July 2017. A 12-month defect liability period commenced once practical completion occurred. The defects liability period expired on 20 July 2018. PHHH has since engaged other parties to undertake various rectification works which are ongoing.
6 This proceeding was commenced by writ on 12 April 2018. PHHH claimed the sum of $322,493.45 from United as liquidated damages as a result of an alleged delay on the part of United in completing the building works.
7 United filed a notice of appearance on 30 April 2018.
8 On 6 June 2018, PHHH entered judgment in default of a defence being filed by United. This default judgment was set aside by order of the court made 6 June 2018. Further orders were made regarding the timetabling of pleadings and requests for further and better particulars.
9 PHHH sold the childcare centre on 22 June 2018.
10 An Amended Statement of Claim was filed on 31 July 2018. The claim was broadened to include not only liquidated damages but also damages for defective works.
11 United filed and serve its defence and also a counterclaim on 31 August 2018.
12 PHHH filed and served a reply and defence to counterclaim on 21 September 2018.
13 On 5 October 2018, PHHH served a request for Further and Better Particulars of United’s defence and counterclaim.
14 On 9 October 2018, United served a request for further and better particulars of PHHH’s Amended Statement of Claim.
15 On 2 November 2018, procedural orders were made by consent including:
- the payment of a setting down for trial fee by PHHH;
- expert reports to be filed by 26 April 2019;
- mediation to occur by 17 May 2019; and
- listing the matter for hearing on 8 July 2019 with an estimate of 7-10 days.
16 A Further Amended Statement of Claim was filed on 5 November 2018. The liquidated damages claim remained unaltered. PHHH makes other claims including damages for alleged defective works. These damages have been assessed by its expert in the sum of $937,516.87.
17 United’s solicitors wrote to PHHH’s solicitors on 5 November 2018 seeking security for costs. A request was made that security be provided to cover the costs and disbursements up to and including mediation in the sum of $170,000. Mr Noble deposes that this was the first time the issue of security for costs was raised by United.
18 PHHH declined to provide security for the reasons set out by its solicitors in their letter in response dated 14 November 2018.
19 United filed an amended counterclaim seeking $923,689.42 on 4 December 2018.
20 The summons seeking security for costs was filed on 21 December 2018.
21 United challenges the claims made against it on various grounds, which include:
(a) the liquidated damages claim is not a genuine pre-estimate of loss and is therefore void;
(b) United took possession of the property on 8 April 2016, not 16 March 2016, and therefore the date for practical completion was later;
(c) PHHH approved numerous variations to the contract which had the effect of extending the date for practical completion;
(d) PHHH breached its obligation to ensure that the architect acted fairly and impartially when acting under the contract having regard to the interests of both parties;
(e) the adjustment to the date for practical completion constitutes a claim for an adjustment of time costs under clause H5 of the contract.
22 Given these matters, United says the date for practical completion was extended beyond 9 February 2017. United therefore claims to be entitled to prolongation costs being a sum equal to the loss, expense and damages caused by the adjustment of time costs. It says its counterclaim should be characterised as a defensive set off. United notes that even if it succeeds in its counterclaim, it is unlikely to recover any damages because PHHH has no assets.
23 The first affidavit of Ms Nomikos reveals PHHH is a limited liability company with $12 of paid-up capital. It acts as trustee of a trading trust. PHHH does not own any real property. There is no evidence that it owns any other assets.
Applicable legal principles
24 Under rule 62.02(1)(b), the Court may order security where the plaintiff is a corporation and there is reason to believe the plaintiff has insufficient assets in Victoria to pay the defendant’s costs, if ordered to do so. This is often referred to as being the threshold jurisdictional requirement before the exercise of the power can be established and before the discretionary power to order security costs is enlivened.[1] There was no dispute between the parties about the legal principles to be applied in applications of this type.
[1]Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at 10-11
25 It is well established that the Court has an unfettered discretion. If the Court has jurisdiction to order security, the burden rests on the defendant to persuade the Court that an order for security should be made.[2] A number of the discretionary factors that might be relevant have been summarised previously, in particular, by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd.[3] Such factors include:
[2]Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 at 17-18
[3]1987 73 ALR 289; see also Williams, Civil Procedure at [62.02.90]
(a) whether the plaintiff’s claim has reasonable prospects of success;
(b) whether the plaintiff’s impecuniosity was caused by the defendant;
(c) whether the plaintiff’s proceeding is merely defensive against “self-help” measures taken by the defendant;
(d) whether security would stultify pursuit a legitimate claim;
(e) contribution by shareholders or creditors to security ordered;
(f) delay in applying for security; and
(g) defendant’s cross-claim raises the same facts and whether they are substantially the same facts which are likely to be canvassed in determining the claim and counterclaim.
26 When exercising the discretion to grant an order for security for costs, the Court engages in a balancing exercise. This involves weighing up the injustice to a plaintiff if it is prevented from pursuing a proper claim against the potential injustice to a defendant if no security is ordered and at the trial, the plaintiff’s claim fails and the defendant is unable to recover costs from the plaintiff.[4]
[4]Colmax Glass Pty Ltd v Poly Trade Pty Ltd [2013] VSC 311 at 19
27 Counsel for PHHH conceded during his oral submissions that the threshold requirement had been met following receipt of Mr Noble’s affidavit dated 11 February 2019. Given this, the resolution of the application fell to consideration of the discretionary factors to be taken into account before ordering security. The debate before me focused on the discretionary factors of delay and whether the same facts were likely to be traversed in determining the claim and counterclaim.
Delay
28 Generally speaking, an application for security should be made promptly once the defendant has knowledge of the facts that would justify the making of an order. A delay in bringing an application brings with it the inevitable consequence that an order for security may unfairly prejudice the plaintiff who may have incurred considerable liability for costs prior to the application being made.[5]
[5]Above n 4, at 44
29 PHHH’s case was that United had failed to make its application promptly. In those circumstances, PHHH had incurred significant costs and therefore had suffered prejudice which may have been obviated if the application had been made earlier.
30 Counsel for PHHH noted that any application for security should be made at the outset and before substantial financial commitment is made towards litigating the claim.[6] He also said there was a requirement upon United to provide an explanation for the delay in making the application, which had not been given by United.[7] It was put that the financial matters relied upon in paragraph 4 of the letter dated 5 November 2018 were matters which were known well to United, long before the letter was sent.
[6]Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 309
[7]See Obena Falls Pty Ltd v Normans Wines Ltd [2001] VSC 253 at 9
31 United argued there was no real delay on its part in bringing the application. Counsel on behalf of United noted that pleadings were only finalised in November 2018, and the request for security was made shortly after pleadings had closed. To the extent that the Court might consider there was a delay, this could be dealt with by awarding United security for future costs only and excluding previous costs. The parties were ad idem that in assessing the quantum of any security to be ordered, the Court could adopt a broad brush approach.
32 This proceeding was commenced on 12 April 2018. The request for security for costs was made by letter dated 5 November 2018, some seven months later. As can be seen from the chronology of events listed above, a number of steps were taken in the litigation before 5 November 2018. It is clear that PHHH has conducted a significant part of its preparation for trial. This includes amending its claim on three occasions and responding to United’s counterclaim together with the interlocutory application to set aside default judgment. Mr Noble deposes that work has commenced relating to obtaining expert evidence in accordance with the timetable set by the court orders made on 2 November 2018.
33 An imminent trial date and the absence of any prior warning of an intention to seek security are factors which may militate against the making of an order for security.[8] Security for costs is not a card a defendant can keep up its sleeve and play at its convenience.[9] It is significant in my view that United consented to the matter being fixed for trial and various procedural orders without disclosing its hand at the time those orders were made.
[8]Williams Civil Procedure at [5597.2]
[9]Dal Pont, Law of Costs, 3rd ed at 29.124
34 The matters relating to PHHH’s financial circumstances were known to United before the letter of 5 November 2018 was sent. Additionally, the results of various searches exhibited to the second affidavit of Ms Nomikos could have been obtained at an earlier time. No explanation has been given on behalf of United as to why the request was only made on 5 November 2018 and not beforehand. It is not a sufficient answer to say that United did not delay, because pleadings only closed in November 2018. In my view, the request for security could and should have been made earlier. In the meantime, PHHH has taken a number of steps to progress its claim which it otherwise may not have done had the request been made more promptly. This is the prejudice which the authorities say should be taken into account when exercising the discretion to order security. I am satisfied the application should be refused on the ground of delay alone.
Common issues between claim and counterclaim
35 Ordinarily, a court will seek to avoid the position where a claim is stayed because of the inability of the plaintiff to provide security while the defendant’s cross-claim covering similar factual areas continues.[10]
[10]Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289 at 300
36 PHHH argued that the fact that there was a counterclaim should be exercised in its favour, namely if security were ordered, it would not be able to defend the counterclaim.
37 The counterclaim relates to prolongation costs said to be caused by PHHH’s delay. A key issue in the case will be which party is responsible for the works not being completed on time. It does seem to me that the issues in the claim and counterclaim will traverse similar facts and issues. If PHHH were ordered to provide security and was unable to do so, then this may have the result that PHHH may not be able to defend the counterclaim brought against it.
38 United says its counterclaim is defensive and is less than the claim made against such that it is more of a set off. PHHH notes that if this were the case, then the matter could have been pleaded as a set-off in the defence rather than as a separate counterclaim.
39 In its written submissions filed on 20 December 2018, United offered (in paragraph 35) for the first time to provide an undertaking in the event that security was granted, that its counterclaim may be stayed together with PHHH’s claim. The offer to give the undertaking was renewed by United’s counsel at the hearing of the application on the basis that it should only come into play if the Court had any concerns about the counterclaim being beyond defensive.
40 In my view, I consider the counterclaim is not merely defensive. It sets up as a separate claim for prolongation damages said to have been caused by PHHH’s delays. It rises and falls on its own and is not merely defensive to the claim made by PHHH which is for liquidated damages and damages caused by allegedly defective works.
41 PHHH argued that the undertaking was a contrivance and relied on the decision of Ormiston J in Interwest Ltd v Tricontinental Corporation Ltd[11], where his Honour had ruled that an undertaking given at the eleventh hour was not sufficient to cause a security for costs order to be made. The relevant passage reads as follows:
“The defendants in argument themselves relied upon the defensive nature of the counterclaim and therefore sought to overcome the difficulties created by the elaborate defence to counterclaim and the almost identical issues raised by it. But I should first deal with their offer to submit to a stay of that counterclaim as a price for any stay of the corporate plaintiffs’ claims. It is hard to believe that a claim of over $250m could be so easily abandoned. Nevertheless, in my opinion it is not appropriate to allow the applicants the luxury of pursuing the counterclaim and then having it stayed when it suits them … If the defendants had been genuine they could have discontinued the counterclaims as such and merely sought to defend the plaintiffs’ claims by way of set-off, as is presently pleaded in para 155 of their defence. That would have required some reconstitution of the pleadings to particularise those claims of set-off, which presently are set out in detail in over 150 paragraphs of the counterclaim. But the whole exercise is artificial. The defendants cannot blow hot and cold. They must accept the consequences of the fact that up to the present they have been seeking to enforce by counterclaim claims exceeding $250m which cannot be resolved without entering upon most of the issues raised by the plaintiffs in their statement of claim.”
[11](1991) 5 ACSR 621
42 By contrast, Judd J in Bufalo Corporation Pty Ltd v Lendlease Primelife Ltd (No 3)[12] was willing to make an order for security in circumstances where the defendants had offered to treat its counterclaim as stayed. The existence of the counterclaim was not a bar to an order for security for costs. A similar view was taken by Elliot J in Bakers Investment Group (Australia) Pty Ltd v Caason Investments Pty Ltd & Ors.[13] In that case, Elliot J took the view that it was highly likely, if not axiomatic, that had the plaintiff not sued the defendants, the defendants would not be pursuing a counterclaim independently. Given the undertaking given to the Court, the existence of the counterclaim was not a reason not to order security for costs.[14] His Honour had regard to the decision of Ormiston J in Interwest and noted that his Honour was of the view that the defendants had not genuinely intended to forego the counterclaims the subject of the proceeding. Ormiston J had noted that some of the corporate plaintiffs were still intending to pursue recovery of sums which were the subject of separate winding up applications.
[12][2010] VSC 263
[13][2014] VSC 154
[14]Above n 13, at 49
43 As stated by United, it is unlikely to pursue recovery of the counterclaim because of the fact the plaintiff has no assets. Accordingly, in the event that the proceeding is stayed by reason of the fact that the plaintiff could not pay security for costs, it does appear that the counterclaim will no longer be pursued.
44 The undertaking not to pursue the counterclaim if the proceeding were stayed because PHHH was unable to pay security does ameliorate any potential prejudice. Self-evidently, PHHH will not have to defend the counterclaim if it is unable to pay any security ordered and its claim is stayed in consequence. Therefore, I am of the view that the fact that there is a counterclaim is not of itself a barrier to making an order for security for costs in circumstances where the undertaking has now been given by United.
45 Another matter raised by PHHH was that the Court should take into account, in the exercise of its discretion, the fact that the claim and counterclaim both deal with payments made under the Building and Construction Industry Security of Payment Act 2002 (Vic) (“the SOP Act”). Reference was made to a passage in a decision from Finkelstein J in Protectavale Pty Ltd v K2K Pty Ltd[15] where his Honour said:
“The Payment Act places the claimant in a privileged position in the sense that he acquires rights that go beyond his contractual rights. The premise that underlies the legislation is that cash flow is the lifeblood of the construction industry and that the principal under a construction contract should pay now and argue later.” (citations omitted)
[15][2008] FCA 1248 at 7
46 PHHH submitted that the granting of security could run counter to the scheme established by the SOP Act whereby claimants are entitled to be paid once a progress claim is made and then can argue later as to whether the payment made should be adjusted. It was put that if security were ordered, then PHHH would be prevented from disputing the payments made by it which would cause it to suffer prejudice.
47 United noted in its written submission that it had obtained judgment against PHHH in the sum of $198,129.28 pursuant to s28R of the Act on 25 August 2017. A garnishee summons was subsequently issued and then the parties agreed to terms of the release of the garnisheed sums. This aspect was relied upon as providing the basis for saying that the plaintiff’s claim was not defensive to any action taken by the defendant.
48 As to the submission made about the application of the SOP Act being potentially obstructed by an order for security, United’s counsel submitted there was no basis arising under the SOP Act to say that an order for security should not be made. In the absence of any detailed submissions, or reference to any authority or legislative requirement by counsel, I am not prepared to make a finding that an order for security would defeat the purposes of the SOP Act. Accordingly I have disregarded this as a factor when considering the exercise of my discretion.
49 The only matter that has caused me to come to the conclusion that security should not be ordered is what I consider to be the unjustifiable delay on the part of United in making the application. Consequently, United’s summons seeking security for costs will be dismissed.
50 Subject to hearing from the parties, the order I propose is that United pay PHHH’s costs of and incidental to the application dated 20 December 2018 to be taxed on a standard basis, in default of agreement.
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Certificate
I certify that these 11 pages are a true copy of the Reasons for Judgment of Her Honour Judge A Ryan delivered on 25 March 2019.
Dated: 25 March 2019
Associate to Her Honour Judge A Ryan
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