Phirex Middle East Co v Invention Technologies Pty Ltd
[2018] WADC 133
•17 OCTOBER 2018
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS
LOCATION: PERTH
CITATION: PHIREX MIDDLE EAST CO -v- INVENTION TECHNOLOGIES PTY LTD [2018] WADC 133
CORAM: PRINCIPAL REGISTRAR MELVILLE
HEARD: 18 SEPTEMBER 2018
DELIVERED : 17 OCTOBER 2018
FILE NO/S: CIV 2484 of 2016
BETWEEN: PHIREX MIDDLE EAST CO
Plaintiff
AND
INVENTION TECHNOLOGIES PTY LTD
Defendant
INVENTION TECHNOLOGIES PTY LTD
Plaintiff by counterclaim
PHIREX MIDDLE EAST CO
Defendant by counterclaim
Catchwords:
Security for cost - Turns on its own facts
Legislation:
Corporations Act 2001, s 1335
Rules of the Supreme Court 1971 (WA) O 25
Result:
Application dismissed
Representation:
Counsel:
| Plaintiff | : | Mr J S Burton |
| Defendant | : | Mr M S Crawford |
| Plaintiff by counterclaim | : | Mr M S Crawford |
| Defendant by counterclaim | : | Mr J S Burton |
Solicitors:
| Plaintiff | : | Spyker Legal |
| Defendant | : | Arns & Associates |
| Plaintiff by counterclaim | : | Arns & Associates |
| Defendant by counterclaim | : | Spyker Legal |
Case(s) referred to in decision(s):
Brown v Haig [1905] 2 Ch 379
Construction Industries Australia Ltd (In Liq) v WFI Insurance Ltd [2016] WASC 404
LPH Developments Pty Ltd v Jameson Moore Pty Ltd [No 2] [2017] WASC 128
Mighty River International Ltd v Mineral Resources Ltd [2017] WASCA 72
PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321
Romeo v Wesley College [2015] WASCA 52
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Pty Ltd [2013] WASC 57
PRINCIPAL REGISTRAR MELVILLE:
By writ issued 13 July 2016 the plaintiff commenced proceeding against the defendant for the sum of $US405,583 or the equivalent sum of $AUD534,505.80.
It is alleged in the indorsement to the writ that the plaintiff had a contract with Alsaad General Contracting for the installation, testing and commissioning of water mist firefighting systems at four sites located in Saudi Arabia and that the contract was either assigned to the defendant in exchange for the defendant paying the plaintiff a commission, or the defendant was contracted by the plaintiff to perform the works under the Alsaad contract. Either way the result was that it was agreed between the plaintiff and the defendant that the monies payable under the Alsaad contract would be paid initially to the defendant and the amount claimed in the writ would then be paid to the plaintiff by the defendant. These contracts were entered into in June 2009.
The plaintiff obtained a default judgment which was subsequently set aside following a hearing before a deputy registrar on 3 November 2016. This decision was appealed and the appeal was dismissed on 20 March 2017 on the basis that judgment had been entered irregularly and the defendant had an arguable defence on the merits. It was the court's view that the defendant had a counterclaim and set‑off. The counterclaim appears to be based on an argument that as between the defendant and the plaintiff, the plaintiff was required to perform some of the contractual obligations under the plaintiff's contract with Alsaad, that it failed to do so and as a result the defendant suffered loss and damage in the nature of damage to its reputation and loss of the chance to obtain further contracts in that part of the world and to make a profit on them, which loss and damage would appear to be an unliquidated claim. Accordingly, it would seem that any set‑off, if in the end there is a set‑off, is an equitable set‑off.
Following the setting aside of the default judgement the defendant then filed a memorandum of appearance and brought an application for security for costs. The principle concern of the defendant was that the plaintiff was a company operating out of Egypt with no assets in Australia or Egypt.
The application was successful insofar as the registrar of this court ordered on 21 July 2017 that the plaintiff pay security for costs in the sum $30,000.
This sum was paid into court and since then a statement of claim has been filed, a defence and counterclaim has been filed, a reply to the defence and a defence to the counterclaim has been filed, the parties have been to mediation, the parties have filed affidavits of discovery and the action has been entered for trial. On 17 May 2018 the plaintiff filed particulars of damages. However, the defendant does not appear to have filed any particulars of damage.
On the 4 July 2018 the defendant brought another application for security for costs in the sum of $64,680, being by way of preparation for trial and for the trial itself.
The pleadings
The statement of claim alleges that the plaintiff had a contract with Alsaad to perform work under the contract for the price of $US1,591,001.
The plaintiff also entered into a contract with the defendant (the Phirex contract) for the defendant to perform works under the Alsaad contract in the sum of $AUD1,180,189.
The statement of claim goes on to allege that it was agreed between the plaintiff and the defendant that, because the defendant required money upfront in order to be able to buy the equipment it required and the defendant's bank would not lend the defendant money unless monies payable under the Alsaad contract were paid by letter of credit direct to the defendant, the plaintiff should arrange for Alsaad to pay the monies that would otherwise have been payable to the plaintiff under the Alsaad contract directly to the defendant, and in turn, the defendant would pay to the plaintiff the difference between the Alsaad contract price and the quote.
The plaintiff claims that in breach of that agreement the defendant has not paid the difference.
In its defence the defendant admits pars 5 and 6 of the statement of claim, namely that pursuant to the Alsaad contract, the plaintiff entered into a written contract with Alsaad to do works under that contract to a total of $US1,549,361 which amount was subsequently varied by a letter dated 4 July 2009 to $US1,591,001.
The defendant at par 7 of its defence admits that it provided quotes to the plaintiff for the performance of works under the contract totalling $AUD1,180,189.
The defendant then goes on to plead that some of the work under the Alsaad contract, namely the testing, project supervision, training and commissioning was, by reason of the agreement between the plaintiff and the defendant under the Phirex contract, to be performed by the plaintiff. The defendant alleges it is an implied term of the Phirex contract that the work to be done by the plaintiff would be performed in a proper and workmanlike manner. At par 9(d) the defendant admits that it was to pay to the plaintiff the difference between the Alsaad contract price and the quote forming part the Phirex contract if the plaintiff completed its part of the works in a proper workmanlike manner and the project successfully completed handover by the plaintiff to the client. It is these latter allegations that give rise to the defendant's counterclaim because the defendant alleges the plaintiff failed to do this and as a result of this suffered loss and damage.
At no stage is it alleged in either the statement of claim or the defence that the defendant was a party to the Alsaad contract and in the affidavit of Mr M Bebic, the director of the defendant, dated the 20 October 2016 at par 8 he deposes to the plaintiff entering the contract directly with Alsaad and the plaintiff subcontracting to the defendant.
Whether the defendant can prove that it was a term or condition of the Phirex contract that the plaintiff would perform certain of the works under the Alsaad contract and whether it was an implied term of the Phirex contract the plaintiff would do this in a workmanlike way, and whether it was an expressed or implied term of the contract that if the plaintiff failed to do this it would have no entitlement to payment for the work that it had done, is a matter to be determined at trial. At this stage I do no more than observe that it is far from clear to me that the defendant will be successful on this argument when the effect of them is that the plaintiff would obtain a contract with Alsaad for $US1,591,001 worth of work and walk out the other side with nothing, because some of the work it is alleged to be responsible for was not done in a proper or workmanlike manner and that the defendant would retain the monies payable for the Alsaad contract which include payment for work that the defendant as a subcontractor was not required to do and did not do.
The law
By s 1335 of the Corporations Act 2001, where a plaintiff is a corporation and it appears by credible testimony that there is reason to believe the corporation will be unable to pay the costs of the defendant if successful in his her or its defence the court may stay proceedings until security is given.
In this case there is credible evidence to provide reason to believe this plaintiff is impecunious. It is the existence of the credible evidence of impecuniosity, not the fact of impecuniosity that enlivens the discretion to order security for costs under this section.
The question of security for costs is also addressed by O 25 to the Rules of the Supreme Court 1971. By O 25 r 2 the court is given discretion to order security for costs in a number of circumstances including circumstances in which a plaintiff is ordinarily resident out of the jurisdiction, notwithstanding that he or she may be temporarily within the jurisdiction.
By O 25 r 3, the court is required to take into account a number of considerations being:
(a)the prima facie merits of the claim;
(b)what property is available within the jurisdiction to satisfy any costs order against the plaintiff; and
(c)whether the normal processes of the court would be available within the jurisdiction for enforcement of any order for costs against the plaintiff.
In PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 (McHugh J), whilst observing, to make or to refuse to make an order for security for costs involved in the exercise of the discretionary judgment, and observing the weight to be given to the circumstances of a case depended not only on its own intrinsic persuasiveness but the other circumstances which had to be weighed, went on to observe that one circumstance which may have very great weight was the fact that a party bringing the proceedings was resident out of the jurisdiction and had no assets within the jurisdiction. He said (323):
Indeed, for many years the practice has been to order such a party to provide security of the costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction.
In Romeo v Wesley College [2015] WASCA 52 [7] (Newnes JA) said:
The purpose of an order for security for costs is protective, so as to ensure that the primary purpose of an award of costs (that is, indemnification of the successful party) is achieved.
Other matter that are relevant to the exercise of the discretion have been set out conveniently by Edelman J in Westonia Earthmoving Pty Ltd vCliffs Asia Pacific Iron Pty Ltd [2013] WASC 57 [6] in which he said:
Depending on the circumstances, various factors may have different strength and effect on the exercise of the discretion to award security for costs. The most commonly cited, non‑exclusive, factors include the following, most of which I extrapolate from the cases footnoted:
(i)the strength and bona fides of the plaintiff's case;
(ii)the likelihood of the plaintiff being unable to pay the defendant's costs;
(iii)whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;
(iv)whether the application for security is oppressive;
(iv)whether the award of security would deny an impecunious applicant a right to litigate;
(v)whether there are persons standing behind the plaintiff who were likely to benefit from the litigation;
(vi)whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(vii)whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's self‑help procedures;
(ix)whether the application for security had been brought promptly;
(x)whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and
(xi)any factors relating to the public interest.
The plaintiff's submissions
Is the question of security for costs concluded?
The plaintiff's first contention is that the court has already ordered the payment of $30,000 into court by way of security for costs and that concludes the matter.
In my view it is open the defendant to bring this further application because the decision of the registrar in ordering security of costs was not intended to dispose of the question once and for all. In particular I refer to pages 125 and 153 of the transcript of the hearing before the registrar on 21 July 2017 in which his reason for ordering security for costs in the sum of $30,000 was because that sum was adequate to cover the costs up to and including mediation. In the context of his reasons it is apparent that the registrar was at that point prepared to look at the question on a staged basis. It is open to order security for costs on a staged process. Brown v Haig [1905] 2 Ch 379; Construction Industries Australia Ltd (In Liq) v WFI Insurance Ltd [2016] WASC 404.
The strength and bona fides of the plaintiff's case
The evidence of the director of the plaintiff Mr Elmoatazbellah Ahmed Hamed Moussa dated 4 October 2016 annexes a train of correspondence between he and Mr Mate Bebich, director of the defendant. The annexures MN 15, MN 16, MN 17 and MN 18 are emails and statements between 29 May 2013 and 11 February 2014 in which the defendant acknowledges its liability to pay the plaintiff the money the subject of this action, apologising for the delay and explaining that it was due to financial pressures the company has been under. At annexure MN 15 Mr Bebich states:
actually we have had it really tough here for the past 4 years – remember when I flew into see you concerning an MOI and other projects about four years ago and I said to you then that we needed to secure some big projects in a hurry. The world economic recession hit us real bad with no jobs or cash-flow. It was tight monetary wise then and I really contemplated closing down the water mist business. The recession is still biting us but to be honest it is getting better slowly.
The correspondence goes on to document difficulties the defendant has had in arranging finances with the bank and to advise Mr Moussa that the defendant has to trade out of its situation which would inevitably take some time and patience.
At MN 17 is a statement dated the 30 September 2013 addressed to the plaintiff by Mr Bebich stating:
Therefore, the estimated total value outstanding to Phirex Middle East is as follows:
Total contract value: USD$ 1,591,001.00
Less Phirex Australia amount USD$ 1,105,418.00
Less fire testing donation USD$ 20,000.00
Less payments made to date USD$ 60,000.00
Balance owing: USD$ 405,583.00
At MN 18, Ms G Bebich, financial controller of the defendant has provided a statement dated 11 February 2014. This statement confirms that the contract amount is $US1,511,449. It is said that the fourth and final instalment of $79,549.90 remained outstanding (presumably from Alsaad). If this is accurate then it seems the defendant has received $US1,431,899.10. When the amount it is entitled to under the Phirex contract is deducted there would appear to be a balance of $US326,034 available and owing to the plaintiff.
It is also worthy to note that nowhere in this correspondence is it suggested by the defendant that it had a claim against the plaintiff, whether by set‑off or otherwise. I conclude that there is merit to the plaintiff's claim and that although the defendant may have an arguable defence, in the circumstances the strength of the defence is questionable.
The plaintiff's position is essentially defensive?
The plaintiff submits that his position in the proceeding is essentially defensive. In this regard it is to be noted that if the plaintiff's position is to be regarded as defensive it is not because he is attempting to prevent the defendant exercising any form of self‑help remedy. However the plaintiff is, on the face of the pleadings, required to defend a counter claim brought by the defendant for $750,000. Without more it would be unfair to preclude the plaintiff from pursuing a claim against the defendant when at the same time it is required to defend itself against a claim by the defendant, particularly when the defendant's claim arises out of the same subject matter. However, there is more. In this case the defendant has offered an undertaking not to pursue the counterclaim in the event the court was to order further security for costs which the plaintiff declines to pay. Whilst I accept that the relevance of an undertaking is dependant of the likelihood of the defendant pursuing the plaintiff on the counterclaim but for the precarious financial position of the plaintiff, and whilst I decline for the reasons that follow to make any findings as to the financial position of the plaintiff, the offering of an undertaking weakens the argument that the plaintiff's position is essentially defensive. In this regard see LPH Developments Pty Ltd v Jameson Moore Pty Ltd [No 2] [2017] WASC 128 at [47].
Impecuniosity
The plaintiff submits that it is impecunious and this is due to the defendant's conduct in failing to pay the amount it has claimed. However, the evidence before me as to the financial position of the plaintiff is unsatisfactory. In his affidavit filed the 30 August 2018, Mr Moussa states that the plaintiff has only a small amount of money constituted by $US2,067 and 33,417 Egyptian Pounds. I have no evidence of what the Egyptian pounds convert to in Australian dollars. Mr Moussa annexes banks statements for the account holding US dollars and the account holding Egyptian pounds. In the former case, the statement covers the period 29 March 2018 to 08 July 2018 and shows a balance of $US2,067.20. In the latter case it covers the period 2 January 2018 to 31 July 2018 and reveals credits of 100,460.50, 100,000.00 (this figure is a little illegible), 49,995.00, 33,116.45 and 20,000.00 over this period. I assume these entries represent Egyptian pounds. I am given no financial records that indicate profit and loss, income and expenditure, or assets and liabilities for any period of time at all and the documents provide no reliable insight into the financial position of the company.
Mr Moussa also attaches what appears to be a tax return for himself for the financial year ending 31 December 2017. This has next to no information on it other than it states 'paid balance by increase for the previous years', '9657' for both 'Year of Tax Return' and 'Previous Year'. This gives me no insight into the financial position of the company, or Mr Moussa.
Accordingly I am not prepared to make any findings in the context of this application that the plaintiff is impecunious or that it is not impecunious. It necessarily follows that neither am I prepared find in support of the allegation that the plaintiff's impecuniosity is caused by the defendant breach of contract.
The persons standing behind the plaintiff
The evidence as to the financial position of the beneficiaries of this litigation and their ability to fund the litigations is unpersuasive. In his affidavit Mr Moussa described his mother as an 'unnamed partner on the company search of the plaintiff' and as a 'silent partner in the business run by the Plaintiff'. Apart from this, it is not clear what the mother's involvement in this company is. Mr Moussa says the company rents its office from premises owned by his mother and says that she has no involvement in running the business. It may be the case that she has no involvement in running the business but that does not mean she does not have a financial stake in its successful operation. To that extent she may be no different to a majority shareholder of a company who is not a director or manager.
Further, contrary to the Rules of the Supreme Court O 37 r 6(2), Mr Moussa does not swear that he believes his mother does not have the funds to pay for any amount of security for costs and does not explain the basis upon which he makes this assertion.
Further, Mr J Burton swore an affidavit in support of the plaintiff explaining how the sum of $30,000 ordered by way of security for costs was paid into court. The explanation is that the sum was transferred from a brokerage account in the United States with a copy of the account statement being annexed. The statement seems to shows that at one stage in a 20 day period between 11 October 2017 and 31 October 2017, there was $US4,070,655.45 in securities purchased and $US4,067,702.91 in securities sold. No explanation is given for where the money for the purchase came, or where the money from the sale went.
The plaintiff has not persuaded me that the people standing behind the company and who stand to benefit from the proceeds of the litigations do not have the capacity to pay security for costs.
Stultify the proceedings
It is impossible to arrive at the view that an order security for costs will stultify the proceedings without being able to make finding as to the financial position of the company or the people standing behind it.
Should the plaintiff be required to provide further security for costs?
The plaintiff also submits that the defendant retains $US405,583 that is owed to the plaintiff and this effectively provides sufficient security for costs in any event. In this regard, if that is right, the plaintiff retains sufficient of the plaintiff's money to cover any costs that the defendant might be entitled to recover in the event its defence, insofar as it is constituted by counterclaim and set‑off, is successful. This a consideration that has been seen as relevant in Westonia Earthmoving Pty Ltd vCliffs Asia Pacific Iron Pty Ltd.
I regard the most significant material considerations in the context of this case as being the fact that:
(a)the plaintiff has already been paid the sum of $30,000 into court by way of security for costs which amount is approximately one third of the total costs of the action, including those conservatively estimated by the solicitor for the defendant up to and including trial of $64,680 and that security for costs are not intended to be a complete indemnity for costs: Mighty River International Ltd v Mineral Resources Ltd [2017] WASCA 72 at [66];
(b)on the pleadings, the plaintiff has a good case with evidence of written admissions by the defendant. There is nothing in the defence denying the sum of $US405,583 is owed to the plaintiff and the defence appears to be a counterclaim for unliquidated damages and an equitable set‑off, which on the evidence before me appears to have been raised for the first time at a very late stage. The defence does not appear to me to be as strong as the claim;
(c)in effect the defendant has its security for costs; and
(d)the plaintiff is resident outside of the jurisdiction and appears to have no assets within the jurisdiction and few assets outside of the jurisdiction. The defendant appears to face challenges in enforcing any judgement in its favour.
On weighing those considerations I do not consider I should exercise my discretion to order any further security for costs. Accordingly, I will dismiss the application.
I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
JC
COURT OFFICER17 OCTOBER 2018
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