Premier Capital (China) Ltd v Sandhurst Trustees Ltd
[2011] VSC 572
•18 November 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2010 02891
B E T W E E N:
PREMIER CAPITAL (CHINA) LTD Plaintiff
and
SANDHURST TRUSTEES LTD and others Defendants
---
JUDGE: | MUKHTAR AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27 June, 28 September 2011 (written submissions from defendants in reply on 11 October 2011) | |
DATE OF JUDGMENT: | 18 November 2011 | |
CASE MAY BE CITED AS: | Premier Capital (China) Ltd v Sandhurst Trustees Ltd and others | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 572 | |
---
COSTS ― Security for costs ― Foreign Corporation ― No assets in Victoria ― Availability of registration of judgment in foreign place ― Sufficiency of evidence ― Applicable discretionary considerations ― Foreign Judgments Act 1991 (Cth), s 5
COSTS ― Security for costs ― Stage of litigation to which order should ordinarily be made ― Quantification of expected costs of litigation ― Evidence of costs consultants ― Conflict of evidence ― Costs consultant assuming additional role of litigation lawyer ― Reliability of assessment
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S R Grahame | Henderson & Ball |
| For the First and Third Defendants | Mr S Rubenstein | Wantrup and Associates |
| For the Second and Fourth Defendants | Mr R J L McCormack | John Denton and Associates |
HIS HONOUR:
The four defendants have applied for an order requiring the plaintiff to give security for their costs. They do so on the ground that the plaintiff is a foreign corporation that has no assets in Victoria or Australia. The plaintiff was registered in Hong Kong in 1998. It is in the business of negotiating the sale of real estate in Hong Kong, China, New Zealand and, in the last three years, Australia. Its director, Philip Leung, says the company trades profitably. He does not say the company cannot pay any sum that may be ordered by way of security.
After some revision of the figures, the first defendant Sandhurst Trustees Ltd (“Sandhurst”) and the third defendant Leonard Francis O’Brien (“O’Brien”) who is its director, jointly seek security on a party/party basis in the revised sum of: $171 385 up to and including mediation; and additional $81 542 up to and including the first day of trial; and an additional $108 003 on the expectation of a nine day trial. That makes for a total of $360 930. Those figures are not split up as between these two defendants. Their interests coincide. They have the same solicitors and have filed a joint defence.
On the same division of stages in the litigation, the second defendant Sovereign MF Ltd (“Sovereign”) and the fourth defendant Michael Stefan Grochowski (“Grochowski”) who is a former director jointly seek $253 000; plus $213 497; plus $119 458. That makes for a total of $585 958. Sovereign and Grochowski are willing, without legal concession, to make an allowance of $96 000 for moneys paid by the plaintiff under the agreement which is the subject of this case and which could be refundable. Making that allowance gives a total of $489 958 to the end of trial. Those figures are not split up as between these two defendants. Their interests coincide. They have the same solicitors (separately from the others), and have filed a joint defence.
All up then, the combined amount of security sought by the four defendants is $850 888 to the end of trial. Up to and including mediation, the combined figure is $334 452. A legal costs consultant was engaged on opposing sides. The same consultant was used by all defendants, namely Ms Melanie Crow. For the plaintiff, the costs assessment of Mr Peter Trimbos up to and including mediation was $10 818 for the Sandhurst/O’Brien interests and $12 250 for the Sovereign/Grochowski interests. It comes as no astonishment that adversarial costs assessments in these applications are poles apart. The discrepancy between them is usually attributable to instructions given to or presumptions about the scale of the case, an understanding of the legal issues, and prognostications about the expectable legal tasks ahead for the conduct of the case. The applicants, particularly Sovereign and Grochowski, were portraying the case as a complex fraud case which they say naturally intensified any case and therefore would attract much legal work and expense. And so their costs consultant proceeded. The plaintiff said its case of deceit, based on fraudulent pre-contractual misrepresentations, was not complicated at all. It says allegations are specific, facts are objectively ascertainable and had been essayed already in affidavits, and much of the defence seemed to be based on a construction of the contract and a case that it was void for uncertainty. Above all the plaintiff’s costs consultant said the defendants’ cost assessments were grossly exaggerated, based on unreasonable assumptions, and elsewhere simply did not show the grounds or the facts on which assessments were made. There was no cross examination of either costs consultant.
Oral argument on the application went for well over a day and a half followed by written reply submissions. Materials were substantial, including many affidavits about the facts of the case adduced for the purposes of an earlier injunction application. The file is already corpulent.
I have had to look into the elements of the case in greater depth than is normal for such an application. The apparent prospects of success are relevant to the discretion to the extent they are discernible.[1] Often in these applications the Court cannot make a rational prediction about merits and proceeds on an assumption that the case is brought in good faith and defences raised in good faith. But as I am about to show, and in the strenuous way this application was conducted, there are some peculiar features of the case making it necessary to look into its procedural history, and to examine the elements of the plaintiff’s case, the defences, and a little of the evidence. This comes to play a part in understanding the issues and degree of complexity in the case, and moreover, better assessing where the balance of justice lies in this most unusual application.
[1]See Farmitalia Carlo Erba v Delta West Pty Ltd (1994) 28 IPR 336 at 345.
Two opening conclusions
At the outset I wish to state two conclusions. First, I see nothing in this case to depart from the court’s developing practice, or predilection, of making an order for security only for the costs up to and including mediation. The reason is plain. It pays homage to the idea that in modern litigation the parties are to be encouraged to alternative dispute resolution at some time after the close of pleadings and maybe the completion of discovery depending on the nature of the case and the need for information. The maximisation of the prospects of settlement are better achieved if a plaintiff is not labouring under the financial burden, or tactical disadvantage, of a substantial security for costs order calculated as if the trial was going to run. Although the defendants will say there are some serious and provocative aspects of the case put against them and they should not have to come back to Court and ask for a top up if mediation fails, it is equally the case of the plaintiff that it has been the innocent victim of a fraud and deception in land deals. My judgment overall is that the defendants have overreached in this application, and the application calls for a measured approach.
Thus if the application be granted, it is down to the applicants’ combined figure of $334 452 as against $26 068. And even that does not take into account the plaintiff’s attack made on the propriety of the applicants’ assessment, and the discounting that invariably occurs in these applications on various grounds such as the real prospect that bills of costs will be reduced by the Costs Court on taxation.
My second conclusion is to reject the plaintiff’s submission that the counterclaim from Sandhurst and Sovereign means that substantially the same facts (or legal issues) are likely to be canvassed in determining the claim and counterclaim, and that should be a disqualifying or discretionary factor. Courts do recognise that it is unfair to stay a claim because of the plaintiff’s inability to provide security but to allow the cross action covering the same facts to proceed: see Sydmar Ltd v Statewise Developments Pty Ltd.[2] That can be viewed in the same way by asking: who is the real defendant or real protagonist in the case?
[2](1987) 11 ACLR 616 at 627.
The plaintiff is right to say that the counterclaims seek relief by reference to the same agreement which is the subject of the plaintiff’s claim. But in my view they do so in way consequential or commensurate to the defence they raise to the claim put against them. It is more a shield than a sword. It cannot be said the defendants or at least Sandhurst and its principal Sovereign are the real plaintiffs. I think the plaintiff truly is the real plaintiff and the protagonist; it is the one asserting its legal rights against the defendants’ alleged wrongdoing. Accordingly, I would reject this ground of resistance to the application for security.
The plaintiff’s overseas residence
The applicant was on solid ground here to attract the Court’s discretion. When a plaintiff is ordinarily resident out of Victoria, the Court’s power to order security, by that fact alone, is conferred by rule 62.02. The absence of assets in the local jurisdiction carries great weight in the exercise of the discretion. The following statement by McHugh J in Chellaram and Co Limited v China Ocean Shipping Co is frequently cited[3]
The weight to be given to any circumstance depends not only upon its own intrinsic persuasiveness but upon the impact of the other circumstances which have to be weighed. A circumstance which may have very great weight when only two or three circumstances have to be weighed may be of minor significance when many circumstances have to be weighed. However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for 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.
[3](1991) 102 ALR 321 at 323.
But an order for security is a tool of justice. Despite the absence of assets here, there may be countervailing factors in favour of the plaintiff. The considerations to be balanced were stated conveniently by Gummow J in Energy Drilling Inc v Petroz NL[4] in this way (with my emphasis)
The purpose of ordering security for costs against an applicant ordinarily resident outside the jurisdiction is to ensure that a successful respondent will have a fund available within the jurisdiction of this Court against which it can enforce the judgment for costs, so that the respondent does not bear the risk as to the certainty of enforcement in the foreign country and as to the time and complexity of the action there which might be necessary to effect enforcement. [citation omitted]. On the other hand, the mere circumstance that an applicant is resident outside the jurisdiction does not necessarily invite an exercise of discretion in favour of ordering security, the question being how justice will best be served in the particular case. [citations omitted].
[4](1989) ATPR 40-954 at p50,422
In Chelleram the foreign plaintiff was hopelessly insolvent. Where there is no issue about solvency (as here), security for costs may be refused where there is evidence showing that Australian judgments are enforceable upon registration in the place of the plaintiff’s residence: see for example Barton v Minister for Foreign Affairs[5] which involved the reciprocal enforcement of a judgment in the United Kingdom. The decision in Barton was endorsed by Heerey J in Farmitalia Carlo Erba SrL v Delta West Pty Ltd[6] a case in which there was no evidence that the overseas plaintiff had any assets outside Australia. Even so, his Honour took the view, as would I, that where an overseas corporation does not put forward any evidence as to what its assets are and where they are located, then it would not be enough to resist an application merely by showing that it was ordinarily resident in one of the countries recognised under the Foreign Judgments Act and the Foreign Judgment Regulations. To do so would be effectively to introduce a qualification to the rules under which a court may grant security for costs.
[5](1984) 2 FCR 463.
[6](1994) 28 IPR 336 at 341-2.
In this case, the plaintiff sought to neutralise this, the opening issue on the discretion, in two ways.
First, a director of the plaintiff, Tam Yuk Wan of Shanghai in China, has sworn an affidavit stating that she is a director of the plaintiff and is prepared to personally guarantee payment of all legal costs and disbursements for which the plaintiff might become liable in this proceeding. She is the sole registered proprietor of an apartment in Shanghai and exhibits a copy of the title. She says the property is worth AUD $904 600. She is prepared to give a first ranking charge over the property as security for her guarantee. As further support, an affidavit of Cia Ling Qiang from Shenzhen swears that he is a registered real estate appraiser in China. He says the current market value of the property is RMB 6 500 000 which converts presently to AUD $1 024 750.
Secondly, the plaintiff relies on an affidavit of Xue Qing XU who swears he is a lawyer in Shanghai, in practice since May 2009. He says “A foreign judgment for payment of money, secured against real estate in China can be registered and enforced in the Intermediate People’s Court in China.” He explains the legal process as follows. The judgment creditor lodges an enforcement application in the local court of the city where the property is located. If the parties cannot agree on a value, he says the Chinese Court directs an assessment to be made of the property before an auction. That Court then sets a reserve of 80% before ordering the auction company to undertake the auction.
The evidence of the director and of the value of her property naturally shows good faith in the conduct of litigation. But I see some problems which create a lack of certainty. First, maybe it was intended, but there is no statement by the director that she would be willing to ensure that the property is not dealt with in such a way as to reduce its value as a security in the event that the plaintiff should lose this case. Secondly, it is not clear to me what is meant when the Chinese lawyer deposes that “a foreign judgment for payment of money, secured against real estate in China, can be registered and enforced in China.” It is not explained, but I construe him to mean that there has to be a judgment which has been obtained as the result of an enforcement of a security on real property. That is, a judgment against a mortgagee for the moneys secured as well as possession of the secured land. In one sense, should the defendants succeed in this case and obtain an order for costs, then that order will be “secured” by the guarantee as secured by the mortgage. But I am not sure that is what the evidence means or if it is directed at a security for costs situation.
Thirdly, doubt has been raised about the reference to the Intermediate People’s Court in China. The starting point is s 5 of the Foreign Judgments Act 1991 (Cth), which falls within Part 2 of the Act. I shall not go into the legislative details. The scheme of the Act is well explained in Nygh’s Conflict of Laws in Australia.[7] The Act is based on substantial reciprocity of enforcement. It provides for the enforcement of judgments rendered by superior courts, and certain specified inferior courts in countries to which the Act has been extended by regulation. Such an extension will only be made if substantially reciprocal arrangements have been made for the enforcement of judgments of Australian courts in the overseas country concerned.
[7](Eighth ed) Ch 41
But in the first instance the legislation only applies to the enforcement of money judgments rendered by superior courts; that is courts of the level and standing of a Supreme Court. According to the Foreign Judgment Regulations 1992, as amended by the Foreign Judgment Regulations (Amendment) 1997 (No 205) there are no inferior courts to which the Act has been extended, and the only court to which the Foreign Judgment Act applies will be the superior court in China, that is the Court of Final Appeal and the Court of First Instance in Hong Kong Special Administrative Region of the People’s Republic of China. The effect of this is to cast doubt on whether there is any reciprocity with the Intermediate People’s Court in China, as the plaintiff’s lawyer states.
Argument could go no further on this. And I am not about to correct or extrapolate from the Chinese lawyer’s evidence. Despite the apparently genuine endeavours taken by the plaintiff, I think there is unacceptable doubt about the matter. Even assuming a judgment for costs in favour of the defendants could be registered in China it is not clear to me how a reciprocal enforcement process would than attach to a mortgage that is given in support of a guarantee which stands as security for the costs order. And as I raised in argument, all of this would need at the outset a guarantee to be procured and translated, together with evidence that it complied with the laws of China and more evidence about the mortgage, its translation, its registration and its validity under Chinese law.
All things considered, the evidence puts the defendants in a position where there is real apprehension about the efforts and the costs and the delay that would be involved in enforcing the guarantee and the security underlying it. As the plaintiff does not say it cannot pay costs, and there is no stultification point raised, I think there would be no injustice to the plaintiff if, in modern banking, it could use arrangements between Chinese banks and local banks to use the director’s property as security to obtain a bank guarantee for any order for security for costs.
Accordingly I would hold that the complications of foreign enforcement and the uncertainty are too great to say that the director’s guarantee deals with or satisfies the application. That leaves the question whether there are any other countervailing factors in the exercise of the discretion, and the amount of the security to be ordered should the application be granted. Things now start to get expansive.
Is this application a “second bite at the cherry”?
An unusual question arises whether Sandhurst’s application is precluded, or ought be disallowed as a matter of fairness because its prior application for security for costs was dismissed by operation of a self-executing order made by an Associate Justice on 4 November 2010. I am told that order was made by consent. The order was fashioned to meet a peculiarity which implicated Sovereign as well. To understand that requires unavoidably an exposure of what the case is about and its procedural history.
The plaintiff filed its writ on 27 May 2010 only as against Sandhurst. Its case in essence was as follows:
(a)The plaintiff made an agreement with Sandhurst on 28 August 2008 called a put and call option agreement. The agreement recited that Sandhurst was the registered proprietor or entitled to become the registered proprietor of 48 lots of residential land identified as Lot 121 to Lot 168 in a plan of subdivision known as the Westbourne Fields estate in Laverton.
(b)The agreement stipulated the area and sale price for each lot ranging from $126 000 to $145 000.
(c)In effect the agreement said if the plaintiff (called “the referrer”) obtained a customer to purchase any lot for an amount not less than the stipulated price, and if the contract proceeded to completion, Sandhurst agreed to pay the plaintiff a management fee of $10 000 per lot sold and to also reimburse the option fee of $2000 per lot paid by the plaintiff (see (e) below).
(d)In addition, if the plaintiff obtained a sale for a price higher than the stipulated price for a Lot, then Sandhurst would pay the plaintiff the differential above the stipulated sales price. If it sold for less than the stipulated sale price, the management fee would be reduced commensurately.
(e)The agreement refers to an option fee of $2000 per lot payable by the plaintiff. In consideration of the payment of $96 000 (which is $2000 multiplied by 48 lots), the plaintiff granted to Sandhurst a put option requiring it to purchase from Sandhurst any other lots for the price as stipulated in the agreement. The agreement also granted to the plaintiff a call option to purchase the subject property at the stipulated price.
(f)Under clause 7.1, if the plan of subdivision did not become registered by a certain date then the plaintiff could give notice of its withdrawal from the agreement and obtain a refund of its option fee “whereupon the Option Fee will be refunded in full by the Owner [i.e., Sandhurst].” Likewise under clause 7.2, if the plan of subdivision was not registered, Sandhurst could give written notice of withdrawal from the agreement “whereupon the Option Fee will be refunded in full by the Owner”. (This clause is of great significance in this and the previous application for security for costs.)
(g)Under clause 7.3, if before the registration date of the plan, a customer signed a contract to purchase the property for a price not less than the stipulated price, and if completion of the contract occurred, then Sandhurst was still required to satisfy its obligation under the agreement to pay the management fee.
(h)Clause 16 said that Sandhurst was making the agreement solely its capacity as the custodian of The Sovereign Tarneit Land Fund and that Sovereign was the trustee of that fund. It said that Sandhurst was not liable to pay any of its obligations under the agreement and had no liability to “the other parties” except to the extent of its right of indemnity out of the assets of the land fund.
I have avoided details, but that is the gist of the agreement. Sovereign is not a party to the agreement but it is commercially connected as the disclosed trustee. Commercially, it means Sandhurst or Sovereign has managed its risk in the land venture by being virtually guaranteed disposal of the lots at the hands of the plaintiff, either by referrals from the work of the plaintiff or the exercise of the put or call option. The incentive for the plaintiff is to solicit sales, gain the $10 000 management fee and a reimbursement of the $2000 option fee, and in a rising market, to try and obtain a sales price above Sandhurst’s stipulated price and take the “cream”.
The plaintiff alleges that its rights to sell the stipulated lots under the agreement were exclusive, and if it sent a contract signed by a purchaser with a deposit, then Sandhurst was bound to complete. The plaintiff paid the option fee of $96 000 in July 2008. It commenced marketing in early September 2008 with weekly exhibitions in China and using internet portals. It was given pro forma contracts of sale. Between December 2009 and March 2010 the plaintiff says it found purchasers for 42 of the 48 lots who signed contracts. It sent in the contracts and deposits for 27 of the lots, but says that Sandhurst would not sign. Then by letter dated 10 March 2010 Sandhurst’s solicitors notified the plaintiff that it was withdrawing from the agreement and ― this is a crucial fact for this application ― the letter said Sandhurst would refund the $96 000 option fee forthwith.
The plaintiff then sued Sandhurst. It applied for an interlocutory injunction to restrain Sandhurst from selling any of the 48 lots other than to the buyers introduced by the plaintiff and named in contracts of sale. On 10 June 2010, Sandhurst gave the Court an undertaking not to sell transfer or otherwise dispose of the Lots 121 to 168. That undertaking was renewed later, but eventually discharged by the Court on 2 March 2011 because, in essence, the Court decided that damages were an adequate remedy and because some of the purchasers introduced by the plaintiff chose not to proceed and obtained a refund of their deposit. The legal problem for the plaintiff was that specific performance of any contract lies at the hands of the purchaser not the plaintiff as referrer who has no proprietary interest for equity to protect. That leaves the claim for expectation loss based I suppose on the implied negative covenant not to sell any lot other than to purchasers introduced by the plaintiff.
For the purposes of the injunction application, O’Brien (not then a party) swore an affidavit identifying himself as the Manager of Corporate Trusts of Sandhurst. He said the land was an asset of a registered managed investment scheme in which Sovereign was the responsible entity for the scheme, and Sandhurst was the custodian of the asset under the terms of a custodian agreement. I interpolate here to say that typically the responsible entity has statutory and other duties in conducting the scheme, and holds scheme property on trust for scheme members, although it is open to the responsible entity of the scheme to use the statutory power to appoint and agent as custodian to hold the scheme’s property.
O’Brien admits signing the agreement with the plaintiff. He did so on the instruction of Sovereign. He stated that the plan of subdivision for the subject land had not been registered and there were delays because lenders to Sovereign had commenced proceedings in May 2010 to wind up the company, and then appointed a receiver over the land, before settling differences with Sovereign. He says Sandhurst did not know the plaintiff had marketed and sold lots or sent over contracts of sale for signing. In any event he says Sandhurst as custodian could not sign any contracts as vendor without instructions from Sovereign. However, O’Brien revealed that based on information from Sovereign’s solicitors, there were signed contracts of sale for 29 lots of land with purchasers not referred by the plaintiff, and that only upon examination of files would it be possible to tell if there were more.
As for the $96 000 O’Brien swore that he did not know that Sandhurst’s solicitors had notified the plaintiff by letter that the money would be refunded forthwith. But he says “Nevertheless I agree with the contents of the letter.” In a subsequent affidavit sworn on 22 September 2010, O’Brien swears that the $96 000 was deposited into the Sovereign Tarneit Land Fund Operations Account at the request of Sovereign, not Sandhurst. He says Sandhurst is only the custodian and he was in no position to instruct its solicitors to say that the $96 000 would be refunded forthwith.
This now starts to paint the picture about the commercial and legal dynamics in this case, and the significance of the $96 000. The contract says in plain and unmistakeable language that upon withdrawal, the option fee is repayable to the plaintiff by “the Owner”, that is, Sandhurst. But in its defence, Sandhurst sought to excuse itself from responsibility on the ground that on 10 March 2010 it had lawfully terminated the agreement under clause 7.2. It denied receiving any contracts of sale from the plaintiff. It said it made the option agreement with the plaintiff on the instructions of Sovereign as the responsible entity, and it could not engage in any actions in connection with the land without an express direction from Sovereign. It said that as custodian of the scheme, it was not liable to the plaintiff.
The earlier application for security
On 18 August 2010, Sandhurst filed a summons seeking security for costs. It was then the only defendant. A supporting affidavit of the costs consultant for Sandhurst, Melanie Crow, gave an assessment of Sandhurst’s costs up to and including mediation in the sum of $102 921. She said the costs from mediation to day one of trial would be $31 149.
Before the application for security for costs was heard, things changed. On 7 September 2010 the plaintiff filed a cross summons to join Sovereign, O’Brien and Grochowski. For that purpose, a proposed statement of claim was filed and served on Sandhurst. That was a substantial document of 99 paragraphs however the case as against each defendant followed the same methodical composition with the same substratum of alleged facts. The case against each defendant was put coextensively in deceit at common law, and for misleading and deceptive conduct (and accessorial liability) in contravention of the Trade Practices Act and its Fair Trading Act equivalent. One of the elements of actionable deceit is proof of a representation of fact made with the knowledge that it is false; that is, knowingly false or without belief in its truth recklessly, or careless whether it be true or false: see Magill v Magill.[8] The plaintiff alleged it was deceived by all defendants into thinking that by paying $96 000 in option fees, and incurring the burden of a put option, they had exclusivity as a referrer under the agreement for the stipulated lots. Yet before and while it was marketing the land and obtaining sales, Sandhurst, Sovereign, O’Brien and Grochowski had allegedly already sold or were continuing to sell land behind the plaintiff’s back and Sandhurst would not sign contracts or provide section 32 statements for referrals from the plaintiff. As against Sandhurst the case was that Sovereign or Grochowski made fraudulent misrepresentations on behalf of Sandhurst about entitlements under the agreement. As against O’Brien, the case was that he made the same fraudulent misrepresentations.
[8][2006] 226 CLR 551 at [37]ff and [112] ff.
I said earlier that for the purposes of Sandhurst’s security application its costs consultant gave an assessment of costs up to and including mediation in the sum of $102 921. But she then reduced that to $76 149 in response to an opposing assessment by the plaintiff’s costs consultant, Ms Penelope van den Berg. She admitted that in forming that view she had regard to the proposed amended statement of claim. That is a very important fact. She also swore that the allegations against Sandhurst/O’Brien and Sovereign/Grochowski were “significantly intertwined” (which I think is correct) and that operated as a factor to reduce her assessment, which I think is also correct.
As Ms Crow had regard the amended pleading then I think Mr Graeme, counsel for the plaintiff is quite right to point out with incredulity to the difference between that assessment of $76 149 with the figure of $180 313 now put by Ms Crow for Sandhurst and O’Brien on this application. And even though Ms Crow says the allegations are intertwined amongst all four defendants, the figure for Sovereign/Grochowski is $253 003. That might be a reflection on the expectation that the lime light in this litigation is likely to be Sovereign and in particular Grochowski who negotiated the contract. Despite that, the figures have jumped to a degree that attracts scrutiny.
The point is this: when the application for security for costs by Sandhurst came on for hearing on 4 November 2010, it is the fact that Sandhurst and its costs consultant knew that the case was going to be enlarged to include three other wrongdoers, including O’Brien as its director, and it was a case of deceit based on the fraudulent misrepresentations by O’Brien, Sovereign and Grochowski about the exclusivity and benefits under the agreement.
The Court’s order on 4 November 2010
Sandhurst’s application for security and the cross application by the plaintiff for joinder and amendment was determined by a consent order made on 4 November 2010 by Associate Justice Daly. The order recorded this in “Other Matters”:
Sovereign MF Limited (Sovereign) has agreed that by 25 November 2010 it will provide the Defendant with the sum of $96 000 being an amount equal to the option fee paid pursuant to clause 3.1 of the Put and Call Option Agreement between the plaintiff and the Defendant (the option fee) which sum the Defendant will then pay into an interest bearing account in the joint names of [the plaintiff’s solicitors and the defendants’ solicitors] to be held in accordance with paragraph 1 of these orders (the security for costs payment).
The Court made the following orders where relevant:
1.Pursuant to Order 62.02(1) (a) alternatively (b) of the Supreme Court (General Civil Procedure) Rules 2005 (the Rules), by 25 November 2010, the Plaintiff give security for the costs of the Defendant of the proceeding (to and including the First day of trial) in the sum of $96 000 by way of a security for costs payment referred to in “Other Matters” to these orders.
2.In the event that the security for costs payment is not made by the Defendant by 25 November 2010 or otherwise as agreed between the parties or as varied by order of the Court, the Defendants’ summons for security for costs be dismissed.
…
6.Pursuant to Rule 9.06 Leonard Francis O’Brien, Sovereign MF Limited … and Michael Stefan Grochowski be added as Defendants …
6 (bis)The Plaintiff has leave to file and serve an amended statement of claim substantially in the form of exhibit A to the affidavit of Andrew Thomson Burgess sworn 4 November 2010.…
Sovereign was not then a party to the proceeding, but it was to be joined; and by the order it was joined. Although Sovereign was not represented on the day it must have known, and must have been acting cooperatively with Sandhurst its agent presumably in their mutual interests. All this “must” be so because Sovereign is not now disavowing the agreement announced to the Court that day.
It is significant to note that when the order was made, Sandhurst was willing to accept $96 000 as a satisfactory sum as security for costs up to the first day of trial. That figure now is $180 313 plus $109 051 which is nearly a threefold increase. Furthermore, it is significant that although Sandhurst and its principal Sovereign were not willing to refund the $96 000 under the contract, they were willing under the order to treat the option fee as being a surrogate for the security for costs. The plaintiff would say with justification that the $96 000 was being recognised as its “asset” within the jurisdiction.
The plain fact is that although the Court’s order recorded that Sovereign had agreed to provide the $96 000, it did not do so. There is no evidence before me why the money was not provided. Nothing. The only evidence is from Sandhurst saying that Sovereign did not do so.
Thus, by operation of the self-executing order made by the judge in paragraph 2 of her orders on 4 November 2010, Sandhurst’s summons for security for costs was dismissed. Then six months later, on 12 May 2011, all defendants applied for security in the current application. By that time the Court had made two sets of directions: on 22 February and 9 May 2011. The directions covered further and better particulars, discovery and inspection and extended the date for mediation to 30 June 2011. Thus as at the time the second application for security was filed, the steps that lay ahead (that is, future costs) was inspection of discovered documents and mediation.
In the interim, Sovereign and Grochowski had filed an amended defence in which they admitted the plaintiff introduced various purchasers; admitted that Sandhurst sold various lots to other purchasers, but denied that was in breach of the option agreement. They say Sandhurst was entitled to refuse to sign sale contracts for purchasers found by the plaintiff. They contend the absence of certain details in the schedule of the agreement meant the contract was void or voidable for uncertainty, and that the option fee of $96 000 does not have to be refunded under the terms of the agreement. They seem to be contending that the $96 000 was not payable by way of an option fee for the opportunity to sell land but rather was in consideration of the grant of the put option. A good part of the defence of Sovereign and Grochowski seems to be raising questions of construction of the option agreement. As I read the defence, it seems to be saying that even if it were true to say that Sovereign and Grochowski were selling land to others, there are no legal consequences of such conduct because the agreement was void for uncertainty.
Sovereign makes a counterclaim seeking a declaration that the $96 000 was not refundable and that the agreement was void or voidable for uncertainty. It also seeks damages, including equitable damages, although the basis for claiming damages is not clear. In the end the question will be whether the agreement is void (a question of law), whether they were entitled to sell the land themselves despite the option agreement and the alleged representations, and whether on its proper construction the $96 000 was or was not refundable.
The legal effect of the prior dismissal
I do not think that Sandhurst is precluded from reapplying for security, in the sense as understood in preclusionary legal doctrines such as estoppel or election in a procedural context. There would need to be, at least, a representation in the Verwayen[9] sense. But in any case the application is interlocutory, and a party may reapply. But what is required to justify a reapplication is a demonstration of some supervening facts or changed circumstances. Otherwise it would be regarded as an abuse of process to simply try again on no different material. Thus it is not uncommon for applicants to reapply for a variation in the amount of security previously ordered if the case changes and is shown to be more expensive: see Fubiliian Catering[10] and Aqua Blue.[11] Sandhurst submits it can reapply despite the dismissal and the earlier agreement from Sovereign is simply a factor that may be relevant to the question whether security should be increased.
[9]Commonwealth v Verwayen (1990) 170 CLR 394
[10][2005] FCA 1009
[11][2010]QSC 176
Sandhurst may not be precluded, but the outcome of the earlier application is, so I would determine, a powerful factor in the exercise of discretion in this application and not just for the amount. I think the dismissal under the consent order creates a very troublesome situation for all defendants now, and it has more significance than Sandhurst or Sovereign is willing to acknowledge. This is how I see it:
(a) Before the order was made, Sandhurst’s solicitors said unequivocally that the $96 000 would be refunded forthwith, faithful to the option agreement. It was not refunded.
(b) Self-evidently the consent order was recognition that the $96 000 option fee was an acceptable fund as security for Sandhurst. I can only see that as a tacit recognition by both Sandhurst and its principal Sovereign that it was to be treated as an asset of the plaintiff. So, rather than handing it back to the plaintiff as the option agreement said, it was instead to be preserved and used as security.
(b) Sovereign told the Court and the parties to the application that it agreed to make the funds available as security. If it resiled from that agreement, then both the plaintiff and Sandhurst (its agent) stood to suffer; but especially Sandhurst because its application would be dismissed by the action of Sovereign its principal. But that is what Sandhurst agreed to under the consent order. The plaintiff suffered by not obtaining the money to be held jointly by the solicitors, but it obtained the agreed benefit of a dismissal of the application for security. The oddity is, if it resiled, Sovereign would advantage its adversary the plaintiff at the expense of Sandhurst its agent and custodian.
(c) Sovereign resiled. Now, it says it will be willing to make an allowance for the $96 000 in its favour by deducting it from the quantum of costs sought by it for this application. Oddly, Sovereign seeks to deduct the $96 000 in the second stage between mediation and trial, but not before then.
(d) For its part, Sandhurst now says it should be allowed to reapply for security despite the agreed dismissal. Not only that, but it asks for more than $96 000 (which was a figure it was willing to accept up to trial on the first occasion). It wants $171 385 up to mediation.
What does justice call for here? Sandhurst submits the supervening event or changed circumstance was the enlarged case after the plaintiff was given leave to amend on the same day the security was ordered. This is not at all convincing. Sandhurst consented to the security order for $96 000 having seen the proposed amended statement of claim, on the same order as joined the other defendants. Sandhurst and its costs consultant well knew what lay ahead. So did Sovereign which had been joined as defendant that day, but it agreed to pay over the $96 000 as security for Sandhurst’s costs rather than retain it as notional security for its costs. In my assessment of the facts, it is clear enough that the supervening event or changed circumstance was that Sovereign resiled from its agreement to pay the money.
Moreover, on close analysis, what Sandhurst is latently doing is seeking to set aside the self executing order to free it from the dismissal. It might be asserted there is injustice in an outcome which says Sandhurst is now to defend itself in a claim brought by a foreign corporation with no realisable assets in Australia, without an order for security. But such an injustice is caused by the accepted effect of the consent order. Despite that, to try and avoid an injustice, the Court has the power to set aside a self executing order even though that is not the application made.[12] But that would require evidence to show some good extenuating reason why the order should be set aside or varied. The only evidence is that Sovereign did not pay. But that is the very triggering event for a self executing order. Thus Sandhurst is in a trap of its own making and its real grievance, so it would seem, is against its principal Sovereign.
[12]See rule 59.01
This all leads me to two conclusions.
First, I think Sandhurst is bound by the previous order and the consequential dismissal. The previous order was resolute, was consensual, and it must stand. The plaintiff has not been shown to have unfairly procured it, or to have done anything subsequently to in effect justify setting aside the self-executing order. The cause of Sandhurst’s predicament is the conduct its principal, Sovereign, who now as responsible entity of the scheme seems to be taking up the cudgels of this litigation even though it was not a party to the option agreement. Then again, that is the consequence of Sandhurst’s passive position that as custodian it is beholden to instructions form Sovereign.
Accordingly, as matter of discretion, Sandhurst’s application must be dismissed. Collaterally that will include O’Brien as the application was made jointly and in any case there is no evidentiary basis for me to isolate his interests for this application.
Secondly, I am firmly of the view that it would be unjust not to allow the $96 000 under the control of Sovereign to be treated as an asset of the plaintiff and as available as notional security for Sovereign’s costs. The self executing was so predicated. Great care has to be taken with forming conclusions about the merits of a claim or a defence in a security application. But the prospects of success if discernible are a relevant consideration in the exercise of the discretion. I think there is a rational basis to say now that the clear and simple language of clause 7.3 gives the plaintiff an apparently strong case for its refund. I say nothing about the rest of the case for damages. The evidence is already that Sandhurst once said it would refund the $96 000. If the agreement is found to be void for uncertainty I have trouble seeing how that means the $96 000 stays with Sandhurst. Restitutionary principles governing payments made under an invalid contract would say otherwise.
It will be observed that Sovereign’s resilience now means it in effect gains recourse to security, having deprived Sandhurst. The Court can do nothing about that. It is a matter between principal and agent both of who have a common interest and purpose in defending the plaintiff’s claim.
The assessment of expected costs
This application was filed on 12 May 2011. An application for security is for future costs. That is why defendants are expected to apply early. Hence, the assessment of costs for this application is essentially for inspection of documents and preparation for mediation. There is no suggestion of expected fights over pleadings or discovery. This narrows the scope of expected costs and disbursements.
The expert costs evidence is polarised. Unfortunately, despite procedural codes, an expert as unconscious advocate for a cause is not an unknown problem. I prefer to think here that the discrepancy between costs consultants may be attributable to instructions that are given to them about the elements of the case in an adversarial context, an understanding of the issues, or presumptions made by them about the expected burdens of the case. In these situations a costs consultant is dealing in prognostications about the conduct or cost burdens of litigation. Unlike a taxation of costs they are not dealing with the application of costs scales to known facts of completed litigation. That is why time and time again, in these applications courts have to do their best to make a judgment based largely upon an admixture of the expert evidence, personal experience or a store of knowledge in the conduct of litigation as barristers or solicitors, or by dint of experience in the courts.
I do not think this is an especially complex case which will attract especially greater legal labours and investigation such as to warrant the Court looking to the higher side of an assessment of costs for the application. Much was made in submissions, particularly on behalf of the Sovereign interests of the shock and horror in alleging fraud, and how that would ineluctably impact on the costs of the case. Of course, any allegation of fraud has to be taken seriously and the Court will assume the statement of claim, settled by counsel has a proper evidentiary basis. But by nature this is really not an uncommon misrepresentation case, with a question of construction. The allegation really is that the plaintiff was told one thing about rights and benefits but in truth the defendants were selling land behind the plaintiff’s back which belies the representations made. The defences are that no such representations were made, but in any event the defendants were entitled to do what they did. Moreover a good part of the Sovereign’s defence seems to turn not on the alleged fraud but on the construction and enforceability of the agreement. As the agreement was made with Sandhurst not Sovereign, Sandhurst will presumably align itself with Sovereigns case in that regard. Further the assessment of damages for the plaintiff is based on the lost expectation of the management fee and the higher price. There are 48 lots of land and the question of damages will largely be based on objective facts about contracts signed by referred purchasers and the contracts signed over the same lots by the defendants.
The applicants’ cost consultant seems to have been instructed, or formed her own assessment, that a fraud case necessarily results in widespread burdens and high scale preparation which in turn leads to many legal labours and high costs. I think the difficulty that has occurred here for her is that she has in effect assumed the responsibility for assessing the expectable burdens of the case as if she was the litigation lawyer in charge of the matter. She also seeks to assess the costs of tasks that were ordered to be done before the application. None of this is to impugn Ms Crow’s professional integrity. It is to say that the Court does not accept her approach.
The plaintiff’s assessor Mr Trimbos I think took the more disciplined course of confining himself to a costs assessment based upon instructions given to him by the litigation solicitor in charge and an explanation of the issues. That explanation broadly conforms to the issues as I have tried to expose them. He came in with a “nil” assessment in some areas because he simply could not respond to Ms Crows assessment without knowing the basis on which figures were reached or assumptions made by her. Mr Trimbos was of course correct to say that questions about the construction of the agreement or of its uncertainty are all legal questions that do not call for any evidence. Furthermore, as he says, there is already a vast amount of affidavit evidence adduced concerning the facts of the case. What remains to be proved is whether the alleged representations were made. The fact that Grochowski was marketing and selling the land and that O’Brien was signing contracts with other purchasers is admitted.
I do not intend going through copiously the assessments that have been made. I will isolate what I regard as the “big ticket items”.
First, the biggest item was for drawing and engrossing witness statements. Ms Crow proceeds on the basis of ten witness statements before mediation. On my calculations, the costs and disbursements for witness statements for Sovereign and Grochowski is nearly $78 000. [13]
[13]For Sandhurst and O’Brien the figure adds add up to about $38 460.
I will not allow this. Witness statements do not have to be prepared for mediation. To charge (part and party) over $78 000 for witness statements gives support for the growing dissatisfaction amongst many Judges on this Bench (myself included) about the expense, ineffectiveness and abuse of the witness statement. Recent practice statements have directed that witness statements will not be ordered as a matter of course. They must now be justified. This is a witness case and I foresee evidence will be substantially viva voce. The plaintiff’s proof of its loss will be based upon applying the lost opportunity by reference to the sale contracts which it gave to Sandhurst or Sovereign for completion.
I accept that for a proper mediation solicitors must get proper instructions but I will assume that has already been done when it came to filing the defence and preparing the many affidavits already. Moreover, it is not as if work and labour done for the preparation of mediation is done solely for mediation. It surely has a dual purpose so that it can be also used for the purposes of trial.
Secondly, there is a substantial amount for drawing interrogatories. On my calculations, it is almost $12 000 for Sovereign. I do not accept interrogatories are necessary in this case, and certainly not before mediation. The party that would be interested in interrogatories would be the plaintiff to prove its case. The plaintiff says it does not intend interrogating.
Thirdly, there are substantial amounts involved for “general attendances on plaintiff’s solicitors”. On my count there are 90 solicitors’ attendances, 70 clerical attendances and 275 special and ordinary letters. No justification is shown for this. The figure is nearly $26 000 for Sandhurst and $33 500 for Sovereign. It is hard to see how these and other figures can be justified for the post-application tasks.
Fourthly, the claim for “instructions for brief” is almost $79 000 for Sovereign. This is a discretionary item covered by rule 63.48. According to the seminal work Law of Costs by L.L. Oliver, the term instructions for brief
…consists in getting together all the facts and information which would enable counsel holding the brief to understand and conduct the case at the trial, collating the facts and extracting the relevant from the irrelevant, and presenting the whole of the evidence to counsel so as to get the case in a concise, logical and intelligible form.[14]
The author goes on to say[15] that the matters to be taken into consideration in arriving at an allowance for instructions to brief are –
… The pleadings and the evidence, both of witnesses and documentary, the amount claimed to be due, the importance of the case, the responsibility of the solicitor in conducting the case, and the labour and anxiety involved in getting up the evidence.
[14]At p 205.
[15]At p 206.
I think these figures claimed are extravagant up to mediation. I accept that preparation for mediation has to be undertaken to maximise the prospects of a resolution, but it is not the same as trial. That is the whole idea. The tasks between this application and mediation have not been shown to be substantial and no justification is given by Sovereign beyond assertion.
Fifthly, there is a claim for the costs and disbursements of this application for $17 400 for Sovereign. But as Mr Trimbos says, costs for this application are not allowable as they are not future costs and are recoverable according to costs orders made on the application.
Sixthly, Ms Crow makes an allowance of $10 434 for five hours of conference with counsel and witnesses yet it is not clear what the conferences are about. She sets aside two days for a mediation. One day should suffice.
I shall not go further. This is not a taxation. All in all, I am afraid to say that Ms Crow has been led to think or has presumed to think that this case calls for legal labours far in excess which I think will truly exist for the tasks since the application was filed. I prefer the cautious approach taken by Mr Trimbos. I cannot adopt his base figure of $10 818 because for some items he is not able to provide a responsive figure without knowing how Ms Crow attained her figure. But there is sufficient in the manifestly excessive assessment of some of the items I have exposed to make me conclude, without arithmetic precision, that the sum would certainly not exceed $96 000 (up to and including the first day of mediation) and would be substantially less.
I have described this case as peculiar, as I am sure it is. There are two elements in how I shall decide this application. First, the Court has power to impose conditions to do justice: see rule 1.14. I think justice would be done in this case by granting Sovereign’s application on condition that it either pay into Court or into a private jointly held account with the plaintiff the sum of $96 000 which sum shall constitute security for its costs up to and including mediation, failing which this application will be dismissed. The imposition of that condition is not novel; for I am recreating transparently the consensual conditions that prevailed in November last year, but this time as against Sovereign. The $96 000 was back then treated by both Sovereign and Sandhurst as the plaintiff’s notional asset. Secondly, from that amount the sum of $30 000 shall be treated as security for Sovereign’s costs for the post application steps up to and including mediation. That is to triple Mr Trimbos’ figure but with a view to ensuring costs incurred for a properly prepared mediation are secured. The balance of the security is to remain for any future application for a top up should mediation not succeed.
I now ask Counsel to settle on the terms of an appropriate order to reflect these reasons. As for costs of the application, I say now there is a real question of who the true successful party has been. Sandhurst has failed. Sovereign has not, but I have imposed a substantial condition. Its application was extravagant and that caused Court time and exertion. The plaintiff will say all things considered, its position has been vindicated.
I am bound to hear submissions on costs, but too much expense has been incurred already in this application. Unless the parties can agree on the costs order, I will receive written submissions which must not exceed 2 pages.
---
2
6
0