Pritchard Pty Ltd (In Liquidation) v Bendigo Properties Pty Ltd
[2012] VCC 805
•26 June 2012
| Revised | |
| IN THE COUNTY COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST
BUILDING CASES DIVISION
Case No. CI-12-01414
| PRITCHARD PTY LTD (IN LIQUIDATION ) (ACN 006 342 829) | Plaintiff |
| v | |
| BENDIGO PROPERTIES PTY LTD (ACN 110 687 495) | Defendant |
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JUDGE: | HIS HONOUR JUDGE GINNANE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 June 2012 | |
DATE OF JUDGMENT: | 26 June 2012 | |
CASE MAY BE CITED AS: | Pritchard Pty Ltd (In Liquidation) v Bendigo Properties Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2012] VCC 805 | |
REASONS FOR JUDGMENT
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BUILDING CONTRACT - practice – security for costs – plaintiff in liquidation - company superintendent later appointed as contractor to complete works– corporate connection between superintendent and principal - plaintiff’s unpaid progress claims – certification by superintendent of amount owing – alleged conflict of interest of superintendent – plaintiff’s desire to review superintendent’s certificate – security ordered. Corporations Act 2001 s 1335 (1), County Court Civil Procedure Rules O 62.02 (1)(b)
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr B A Shnookal | Hall & Wilcox |
| For the Defendant | Mr H Foxcroft SC | Arnold Bloch Leibler |
HIS HONOUR:
1 The defendant seeks an order that the plaintiff give security for its costs of the proceeding. The application is made under Rule 62.02(1)(b) of the Rules of Court and s1335(1) of the Corporations Act 2001 and the inherent jurisdiction of the Court. The plaintiff, Pritchard Pty Ltd (“Pritchard”), contracted as contractor with the defendant, Bendigo Properties Pty Ltd (“Bendigo”), as principal, in December 2007 to construct an industrial warehouse at Bendigo for a sum of $1,880,000 plus GST.
2 The Construction Contract contained the AS4000-1997 General Conditions of Contract as modified by deletions, additions or amendments contained in Part B of the Construction Contract. Clauses 19 and 21 of Part B added clauses dealing with the requirements for the contractor’s claims for payment.
3 Hickory Developments Pty Ltd (“Hickory”) was the Superintendent under the Contract.
4 On 13 May 2008, external administrators were appointed to Prichard. Bendigo has paid Pritchard $340,203 in respect of its Claims numbered1 and 2. Pritchard had delivered invoices to Bendigo totalling $1,214,787 in respect of building work, that it claimed to have completed, of which $983,191, including retention of $101,406, remains unpaid.
5 The administrators’ report of 22 May 2008 showed that Pritchard had liabilities of approximately $9 million and assets, excluding amounts which may be recoverable for projects currently under construction, of approximately $2.5 million.
6 On 14 May 2008, Bendigo acting under clause 39.4 (a) of the Construction Contract took the remaining work out of the hands of Pritchard and appointed Hickory to complete that work under a cost plus contract. Under clause 39.6:
“ When work taken out of the Contractor’s hands has been completed, the Superintendent shall assess the cost thereby incurred and shall certify as money due and payable accordingly the difference between that cost (showing the calculations therefor) and the amount that would otherwise have been paid to the Contractor if the work had been completed by the Contractor.”
7 Hickory completed the project on 6 August 2008. On 23 December 2008, Hickory as Superintendent assessed and certified Bendigo’s costs to complete the work as a result of it being taken out of Pritchard’s hands as $1,719,234.79. The difference between that cost and the amount that would have been paid to Pritchard, if it had completed the work, which was assessed at $1,687,920, was $82,974.79.
8 Bendigo submitted a proof of debt to Pritchard’s liquidator in the amount of $82,974.79. Pritchard served a Notice of Dispute under the Contract, stating that it did not agree with the Superintendent’s certification. Bendigo claims a set-off of that amount of $82,974.79.
The causes of action
9 Pritchard sues for damages, which it particularised as the sum of $984,873 plus GST, which it says was due on 23 December 2008. It alleges that the amount of its progress claims were deemed to be progress certificates, because of the failure of the Superintendent to issue progress certificates. It also challenges the certification of Hickory as Superintendent made under Clause 39.6 of the Contract. It challenges the cost that the Superintendent certified for Hickory’s taking over and completing the work. It alleges that that cost was $720,792. It also pleads that Bendigo breached the contract in allowing Hickory to be appointed Superintendent and to make the certification and seeks a declaration that Hickory had ceased to be the Superintendent as at 23 December 2008 and that the purported certification was void and of no effect. It alleges that Bendigo did not ensure that Hickory, as Superintendent, fulfilled all aspects of its role and functions reasonably and in good faith.
10 In its defence, Bendigo pleads that Pritchard’s progress claims were not submitted in accordance with the Contract and that the Superintendent was not obliged to issue progress certificates, but nevertheless did so, and made payments to Pritchard totalling $340,203. It says that it was reasonable for it to engage Hickory to complete the whole of the remaining work under the Contract. Pritchard’s entry into administration, when the work was underway and incomplete, caused significant delay and disruption to the work, in circumstances where it was obliged to provide possession of the facility to a tenant, shortly after the date for practical completion of the work. Hickory was uniquely in a position to take over the work, as it was a qualified builder, with intimate knowledge of it arising out of its role as Superintendent. It says that the Superintendent’s assessment of the amount that would have been paid to the Contractor to complete the work was reasonable. It relies on a set off of $82,974.79.
The parties’ submissions
11 Bendigo relied on the prima facie position arising from Pritchard’s insolvency as establishing its entitlement to security for its costs of the proceeding. It relied on a range of discretionary considerations justifying such an order. The first was that Pritchard was both impecunious and suing for the benefit of others: see Livingspring Pty Ltd v Kliger Partners[1]. Secondly, it had not delayed in bringing its application for security. Thirdly, Pritchard could not establish that its claim was likely to succeed. Fourthly, Pritchard could not establish that if the application were granted, that the proceeding would be stultified. Fifthly, Pritchard could not establish that Bendigo was responsible for its insolvency. Pritchard bore the onus of proving any such allegation. Pritchard was significantly under capitalised and its directors had decided not to provide further funding. It had significant debts, exceeding any amount that might be owed to it by Bendigo.
[1](2008) 20 VR 377 at 382-383[19]
12 In opposing the application that it provide security, Pritchard submitted that there was a patent conflict of interest between Hickory’s role as Superintendent and as the builder that completed the work. Because of that conflict, the Superintendent was not able to act reasonably and in good faith as required by clause 20 of the General Conditions of Contract.[2] The conflict of interest that affected Hickory was further shown by the corporate connection of Hickory and Bendigo. They had common directors and the same secretary and apparently the same in- house counsel. The shareholders of Hickory are companies associated with the directors of Bendigo.
[2]See Kane Constructions Pty Ltd v Sopov [2005] VSC 237 at [614] - [626] dealing with the forerunner to clause 20.
13 Pritchard did not submit that there was anything dishonest or fraudulent about the conduct of Bendigo or Hickory (as builder or as superintendent) or of any of their directors. Rather, Pritchard submitted that the interrelated nature of the companies was such, that the Court should exercise its discretion to refuse the application for security, so as not to fetter a proper assessment of the amount due to Pritchard in the liquidation.
14 Pritchard submitted that the effect of the Superintendent’s certificate was that:
(a) had Pritchard completed the work under the Contract, it would have been entitled to the sum of $148,123 for variations. The inclusion of the $148,123 in the certified sum, to which Pritchard would have been entitled, was an example of artificial accounting. At the time the work was taken over, Pritchard had only claimed $40,943 for variations;
(b) all of the work Hickory had claimed in its three invoices as cost plus builder to Bendigo were costs certified by Hickory as Superintendent, as costs “thereby incurred” under the Contract between Pritchard and Bendigo as being a result of the insolvency;
(c) Hickory, as cost plus builder, had finished the work 63 calendar days later than Pritchard was required to finish and therefore Hickory, as Superintendent, purported to certify that Pritchard owed Bendigo $51,660 for liquidated damages for late completion. This sum was also certified by Hickory as a “cost thereby incurred”;
(d) the result was, according to Hickory’s certification of the amounts paid to Hickory and the liquidated damages that were presumably never paid by anyone to anyone, that Pritchard owed Bendigo $82,974.
15 Under the Contract the Superintendent’s certificate was not final, conclusive or binding, but could be reviewed under the dispute mechanism.
16 Pritchard submitted that the liquidator should be permitted to use the proceeding, and the Court processes associated with it, to obtain a proper accounting of the amount owed to it by Bendigo without the fetter of having to provide security.
17 The failure of Bendigo to pay Pritchard’s progress payments contributed to its insolvency.
18 No explanation had been provided as to why Hickory had delivered its third invoice for $265,876 to Bendigo on 10 November 2008 when the work had been completed on 6 August 2008.
19 The solicitor for Pritchard in his affidavit stated that Bendigo’s case entirely depended on the accuracy and validity of the certificate that Hickory provided to it. That, in turn, depended on the amounts that Hickory claimed from Bendigo under its costs plus building contract as being referable to the work that Pritchard was obliged to perform for Bendigo. He referred to an example to establish that the amount certified was unlikely to be accurate. Pritchard had entered into a subcontract with a concreter for all the concreting works for the sum of $400,000. That work was performed between February and May 2008. The concreter issued payment claims to Pritchard in the sum of $480,255.60. The progress claims delivered by Hickory as cost-plus builder, and apparently paid to it, included a further $210,000 for concreting work by the concreting sub-contractor. Hickory had no liability to the concreter for that sum and it could not be claimed by Bendigo from Pritchard.
20 Bendigo objected to parts of Pritchard’s solicitor’s affidavit on ground that it contained hearsay and contained expressions of personal opinion without apparent foundation.
Consideration of submissions
21 There was no dispute that on the evidence the Court could conclude that there is reason to believe that Pritchard would be unable to pay the costs of Bendigo, if it was successful in its defence (s1335(1) of the Corporations Act), or ordered to pay them ( O.62.02 (1)(b)).
22 That having been established it is necessary to consider the exercise of the discretion to decide whether to order security for costs, which is conferred on the Court. That discretion is sometimes said to be unfettered. In Livingspring Pty Ltd v Kliger Partners, Maxwell P and Buchanan JA stated:
“…The threshold condition for the exercise of the power to order security defines the circumstances in which Parliament contemplated that the power would be exercised. That is, the power was conferred for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, satisfaction of the threshold condition - demonstrating the existence of the risk – ‘calls for’ the fulfilment of the purpose for which the power was conferred. Whether the power should be exercised in the particular case, will, of course, depend on all the circumstances.”[3]
[3](2008) 20 VR 377 at 382-383 [19]
23 I consider that Bendigo has established that it is entitled to security for costs. I have reached that conclusion for the following reasons.
24 First, there is the substantial extent of Pritchard’s debts, which exceeds by a considerable margin, the amount of its claim against Bendigo. It cannot be maintained that Bendigo’s failure to pay Pritchard’s claim is the only, or main, reason for its debts and its liquidation.
25 Secondly, Pritchard does not argue that an order for security would necessarily stymie the proceeding, but says that that there is a risk of that occurring. It advanced no evidence to enable that risk to be assessed. Such a risk is often present when security is ordered.
26 Thirdly is the nature of Pritchard’s claim. It relies on its own progress claims, which it says have the status of progress certificates under the Contract because the Superintendent failed to issue certificates. It is the unpaid amounts of those certificates which comprise its claim. Bendigo alleges that those claims were not valid claims under the Contract and did not include the required information. That dispute will be decided, at least in the first instance, by a consideration of the requirements of the Contract. Little argument was directed by the parties to the likely outcome of that issue.
27 Pritchard responds to the Superintendent’s certificate of 23 December 2008 by challenging its validity, by pointing to alleged accounting inaccuracies contained in it and by alleging that Hickory had a conflict of interest. It alleges that Pritchard, by the proper application of clause 39.6 of the Contract, owed considerably less to Bendigo than Hickory had certified. Some of Pritchard’s arguments, particularly that related to the liquidated damages claim for delay, and without expressing a concluded view, may have some force. But those arguments may turn on the evidence presented at trial, including the question of whether Pritchard has liability for delays caused by the change of builder.
28 No dishonest or fraudulent conduct was alleged against Bendigo or Hickory. No authority was cited that establishes that Hickory was automatically disqualified from becoming the Contractor because it was the Superintendent as well. In assuming the additional role, Hickory of course, carried the risk that the certification would be challenged on the grounds now relied on by Pritchard.
29 The evidence in the affidavit of Pritchard’s solicitor about the concreting payments made to the subcontractor, is not of a character that enables the conclusion to be drawn that those payments, necessarily, were for work that was outside the scope of the Contract.
30 Pritchard, more than three years after it was placed into liquidation, is seeking a review of the amounts alleged, on the basis of Hickory’s certification, to be owing by it to Bendigo.
31 Even if Hickory’s certification is set aside, it does not necessarily follow that Pritchard’s claim will succeed. The evidence does not enable an assessment to be made about the prospects of either party’s case.
32 In the above circumstances, particularly the fact, that there is no evidence that an order for security will stymie Pritchard’s proceeding, the appropriate exercise of the discretion is to order security for costs in favour of Bendigo.
Amount of security
33 I consider that security for costs should be ordered in stages. At this time, security should only be ordered up to the completion of the mediation that will be required under the Court’s standard orders.
34 Bendigo pointed out that a mediation had already been conducted. However, that was required under the terms of the Contract and it is appropriate that a further mediation should occur after the witness statements of experts are exchanged.
35 Bendigo’s solicitor estimated the costs, up to and including the trial, to be $180,708. Pritchard’s solicitor provided an estimate of $120,884.
36 Pritchard’s estimate of costs differed from Bendigo’s on questions including the number of directions hearings that would be required, the absence of a need for senior counsel to attend directions hearings, or the mediation, and the estimate of the fees for instructions for brief and the fees and costs for miscellaneous matters, including copying, correspondence, perusals, scanning and examinations.
37 I approach the determination of the appropriate level of security on the basis that the parties will co-operate to ensure that unnecessary directions hearings do not occur. I do consider that the Court should include in the order for security amounts for counsel’s fees, at senior counsel’s rates, for attendance at the mediation. In addition, amounts should be included for the fees of experts for their involvement in the mediation. It will provide a significant opportunity to the parties to settle the proceedings.
38 I have considered the estimates of costs given by both solicitors. Neither party filed an affidavit from a costs’ expert. Both solicitors, at least in part, estimated costs by reference to the fees listed in the various Items in the Court’s Scale of Costs. I too will make reference to Items contained in that Scale.
39 I consider that I should include in an order for security the following amounts, or part amounts, appearing in the cost schedule contained in the affidavit of Bendigo’s solicitor.
40 There are a number of Items, where I have included only part of the amounts sought because it is likely that part of the cost, for which security is sought, will be incurred, if at all, after the completion of the mediation. These Items are: Item 3 (two interlocutory applications included – one to oppose an application and one apply for orders), 17 ( half the amount claimed included), 20 (half the amount claimed Included)and 26 ( 2 applications and 2 affidavits included). The amounts included in accordance with this paragraph total $2256.
41 In respect of other Items, I include the full amount claimed, because those fees and costs are likely to be incurred before the completion of a mediation. These Items are: 2, 4, 6, 8, 15 (a) and (b), and 16. The pleadings appear adequately particularised so I do not include Item 7. The amounts included in accordance with this paragraph total $2002.
42 I include the amount of $1,174 for solicitors fees’ associated with the mediation (Item 19).
43 I include $5000 for miscellaneous documents, copying and correspondence (Items 27-32) and $2500 for miscellaneous perusals, scanning and examinations (Items 33-35) and $5000 for miscellaneous attendances (Items 36-41). I include the sum of $7500 for instructions for brief (Item 21), in which I also include item 22. In each case these amounts are included in respect of the period up to the completion of the mediation. The amounts referred to in this paragraph total $20,000.
44 For counsel’s fees (Item 42) I include $5000 in connection with the drawing and settling the defence, and making, and responding to, requests for particulars of pleadings. I include two appearances for junior counsel at directions hearings in total $5250 and I include $5040 for other fees for junior counsel fees prior to the mediation, including for conferences, opinions and other documents (12 hours at $420 an hour). I include senior counsel’s fees of $10,000 for attending the mediation and for a half-day’s preparation and conferences. I consider that it is appropriate for senior counsel to attend the mediation. The amounts referred to in this paragraph total $25,290.
45 I include only half the expert witnesses’ fees claimed because part of those fees are associated with preparation for trial. The sum included is $10,245. I do not include the costs of other witnesses at this point, as no details of their potential claims were given.
46 I exclude Items 11 as cases are fixed for trial administratively or at directions hearings.
47 The amount of security that I therefore order Pritchard to provide up to the completion of the mediation is $60,967.
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