William Buck (Vic) Pty Ltd v Perception Pty Ltd
[2006] VSC 385
•18 October 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
No. 4748 of 2002
| WILLIAM BUCK (VIC) PTY LTD (ACN 054 150 051) | Plaintiff |
| and | |
| PERCEPTION PTY LTD (ACN 070 795 621) | Defendant |
| AND BETWEEN | |
| PERCEPTION PTY LTD (ACN 070 795 621) | Plaintiff by counterclaim |
| and | |
| WILLIAM BUCK (VIC) PTY LTD (ACN 054 150 051) | Defendant by counterclaim |
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JUDGE: | CAVANOUGH J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 29 September 2006 | |
DATE OF JUDGMENT: | 18 October 2006 | |
CASE MAY BE CITED AS: | William Buck (Vic) Pty Ltd v Perception Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 385 | |
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Security for costs – Counterclaim – Assessment of counterclaimant’s financial position – Whether overlap between claim and counterclaim – Whether delay – Significance of insurance against the counterclaim – Whether quantum of likely costs sufficiently verified – Whether past costs and/or future trial costs should be excluded – Security for future pre-trial costs ordered.
Pleading – Claim for damages for delay in obtaining allegedly lucrative contracts – Pleading alleges that the contracts remain on foot – Losses calculated accordingly – In fact, contracts known to have been terminated beforehand – Allegations struck out as embarrassing or vexatious – Costs.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J Dixon | Moray & Agnew |
| For the Defendant | Mr M Gronow | A M Rizza Lawyers |
HIS HONOUR:
There are two applications before me: an application by the plaintiff/defendant by counterclaim, William Buck (Vic) Pty Ltd (“Buck”) for further security for costs and an application by Buck to strike out parts of the defendant’s counterclaim. The applications are related, in that Buck relies in part on certain circumstances concerning the financial affairs of the defendant/plaintiff by counterclaim, Perception Pty Ltd (“Perception”) in support of both applications. The applications were heard in the course of the Major Torts List directions hearings on Friday 29 September 2006. At that time I indicated that I would accede to the strike-out application, and I reserved my decision on the application for further security for costs.
Security for costs: general principles
The jurisdiction of the Court to order security for costs against a company is derived from:
(a)section 1335 of the Corporations Act 2001;
(b)Rule 62.02(1)(b); and
(c)the inherent jurisdiction of the Court.
The parties accepted that the test to be applied was as expressed by Waddell J in Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd[1]:
“Two questions have to be decided. The first may be described as a threshold question. It is, whether, having regard to the whole of the evidence before the court, there is credible testimony by which it appears that there is reason to believe that the plaintiffs will be unable to pay the costs of the defendants if successful in their defence. If this question is answered, yes, the second question arises which is whether, in the exercise of the discretion given to the court by the sub-section, the relief sought should be granted wholly or in part or should be refused.”
[1](1985) 1 NSWLR 114 at 116.
There is no “predisposition” to order security against an impecunious company. However in Ariss v Express Interiors Pty Ltd, to which both counsel referred, Phillips JA (with whom Ormiston and Charles JJA agreed) said[2]:
“Although, of course, like any discretion conferred on a court, it must be exercised judicially, the discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.”
[2][1996] 2 VR 496 at 514. This passage was referred to with apparent approval by Winneke CJ and Phillips JA in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at 196.
Security for costs can be ordered against a counterclaimant[3]. Generally speaking, security will not be ordered where, or to the extent to which, the counterclaimant’s claims are simply defensive[4]. However, where the counterclaimant has in substance “taken up the position” of a plaintiff, security may be required, although a discount may be appropriate to reflect the costs of any issues common to the applicant’s claim[5].
[3]Saint-Gobain RF Pty Ltd v Maax Spa Corporation Pty Ltd [2004] VSC 335 at [38]-[43].
[4]Ibid.
[5]Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 628.
Security for costs: the issues
The present application was foreshadowed in a detailed letter of demand dated 1 June 2006, and was commenced in the Court by a letter dated 3 July 2006 accompanied by supporting affidavit material. It seeks security in the total sum of $485,000 (in addition to the sum of $30,000 already provided), comprised of $70,000 in respect of past costs, $108,500 in respect of anticipated pre trial costs and $306,500 in respect of anticipated trial costs.
Perception resists the application on six bases, which may be summarised as follows:
(i)There is no sufficient reason to believe that Perception’s financial position is such that it would be unable to pay Buck’s costs;
(ii)The issues raised by the counterclaim are inseparable from those raised by Buck’s claim;
(iii)Buck has been guilty of delay;
(iv)Buck is insured against the counterclaim;
(v)Buck’s evidence as to the likely quantum of its costs is insufficient;
(vi)In any event, it would be contrary to usual practice at this interlocutory stage to allow for past costs or for the costs of the trial itself.
I appreciate that some of these matters may overlap and that, in the end, if the pre-condition for the ordering of security is met, I must balance all of the considerations relied on by the respective parties and endeavour to exercise my discretion in such a way as will best serve the interests of justice. However it seems appropriate to structure my consideration of the application by reference to the six issues raised by Perception.
Before doing so I should say something about the parties and about the substantive disputes between them. Buck is in the business of providing business advisory and accounting services. Perception develops and markets electronic video games. In the year 2000 Perception engaged Buck to assist it to raise “mezzanine funding” of $2 million (later reduced to $1 million) in order to expand its business. There is a dispute about the terms of the retainer. Buck says that it was retained at an hourly rate to provide professional services of an accounting and advisory nature and to introduce Perception to a suitably licensed organisation to raise the capital required. Buck further says that it duly performed its obligations under the retainer, including by introducing Perception to Intersuisse Corporate Pty Ltd, a suitably licensed body. Buck sues Perception for approximately $50,000 on unpaid invoices for this work. The proceeding was originally commenced in the County Court in October 2001.
By way of defence, Perception contends that Buck itself was under an obligation to use its best endeavours to raise the capital, but failed to do so. It claims that Buck was only to be remunerated if the capital required was actually raised, ie on a “success fee” basis. Buck denies this. Perception has counterclaimed for damages ranging between $13.85 million and $28.9 million. It alleges breach of agreement, negligence and misleading and deceptive conduct. In addition to the allegation that Buck failed to use its best endeavours itself to raise the finance, Perception says that Buck repeatedly and erroneously represented that Intersuisse would soon raise the necessary finance, and that Perception deferred looking elsewhere for finance accordingly. It says that, as a result, it was unable to expand its business as quickly as it otherwise would have done, and that it thereby lost opportunities or chances to make very large profits or to make such profits sooner than it has been able to do. In reply, Buck says that Intersuisse made a suitable, timely offer to raise the capital required subject to Perception satisfying certain reasonable requirements as to the soundness of its business and of its plans. Buck says that Perception failed to satisfy those requirements. In any event, Buck says, Perception has not suffered any, or any compensable, loss of opportunity.
A substantial part of Perception’s counterclaim relates to profits it says it would have made from obtaining, some 12 months earlier than it did, a “deal sheet” for a licence from MGM Interactive Inc (“MGM”) to develop and market a new range of electronic video games based on a globally marketed movie and television series called “Stargate SG-1”. Perception ultimately obtained the “deal sheet” in December 2001 and the licence itself in December 2003. At about the same time as it obtained the MGM licence, Perception contracted with a European company known as JoWooD to exploit the computer program to be developed by Perception under the MGM licence. Pursuant to the JoWooD contract, JoWooD was obliged to pay to Perception, by instalments, a development budget of 7 million euros and, later, royalties as agreed. Perception’s elaborate calculations of its loss in relation to this part of the counterclaim were based on expectations of future revenue arising from the combined operation and implementation of the MGM licence and the JoWooD contract. Needless to say, the size and complexity of Perception’s counterclaim required that the proceeding be transferred from the County Court to this Court.
Both the MGM licence and the JoWooD contract have since been terminated. This has implications for the strike-out application, to which I will come. However, Buck submitted that, having regard to those developments and other matters, I should conclude that the counterclaim is “extremely weak” and that I should be more inclined to order security for costs for that reason. I do not think that I am in a position to form a judgment as to whether the counterclaim is weak or not on the limited evidence before me in this complex matter. In any event, my decision on the security application, at this stage, would be the same even if I were to conclude that the counterclaim was “extremely weak”.
Perception’s financial position
Conflicting submissions have been made about the effect of the evidence relating to the financial position and prospects of Perception. In these circumstances I am guided by a passage, which has been followed on numerous subsequent occasions,[6] from the judgement of Von Doussa J in Beach Petroleum NL v Johnson[7]:
“In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.”
[6]See, eg Stelmag Pty Ltd v Tifferly Manufacturing Pty Ltd [2002] ACTSC 99; Men’s Tailoring & Alterations Pty Ltd v Jeanswest Corp Pty Ltd [2003] FCA 1108.
[7](1992) 7 ACSR 203 at 205.
Counsel for Perception, Mr Gronow, said in his written outline of submissions:
“The defendant has provided cogent recent evidence of its financial position and ability to meet any costs order, including affidavits sworn by its director Mr. Lenzo and its accountant and auditor Ms Megale. No proper basis has been shown for going behind the accounts prepared by the auditor and signed by the directors, which show that the plaintiff has substantial net equity and assets and that its financial position is improving and that it is profitable.”
I do not accept that submission. On proper analysis, Perception’s evidence about its financial position actually points in the opposite direction. This is confirmed by the comments of Buck’s retained accounting experts, Ferrier Hodgson, in their various reports, none of which has been convincingly challenged.
It is true that Mr Lenzo said in his affidavit of 7 July 2006 that he believed that Perception was solvent and would be able to pay costs of $485,000 if ordered to do so. He referred to Perception’s signed accounts of 31 March 2006 showing a profit for the preceding nine months of approximately $2.2 million. However, the financial statements later produced by Perception for the whole of the financial year ended 30 June 2006 show a profit of only $815,501.49. More importantly, in compiling both sets of financial statements, Perception has treated as “revenue” an amount of $3,074,586 which had been physically received as a “game development fee” (paid by JoWooD) in 2004, not during the 2006 financial year. This amount had earlier been treated as income in Perception’s accounts for 2004. However, new accountants were engaged to prepare Perception’s accounts for the 2005 and 2006 years. They reversed the previous treatment of the amount of $3,074,586. They decided that that sum should be carried forward in 2005 as “unearned revenue” and brought to account as income in 2006.
Perception says that the new accounting treatment is appropriate because, under its contract with JoWooD, Perception was not entitled to treat the money as its own until it had completed the development work for which the money was paid, and because Perception did not complete that work until the 2006 year. In other words, on an accruals accounting basis, the money ought to have been treated as “unearned revenue” in 2004, and was rightly carried forward as such in 2005, and was rightly treated as income or revenue only when it was “earned”, ie in the 2006 year. This was pointed out to Perception for the first time when it engaged its new accountants (Duncan Dovico, Chartered Accountants) in 2005.
However that may be, once the nature of the book entry of $3,074,586 is appreciated, the accounts for the 2006 year do not tend to show that the financial position of Perception is sound, much less that it is “improving”. The money was paid pursuant to the JoWooD contract which is no longer on foot. There will be no more work done under the JoWooD contract nor will there be any more revenue received from JoWooD. Moreover, as Buck discovered only relatively recently, the JoWooD contract was terminated as long ago as August 2005. Further, the termination of that contract has led to the writing off by Perception, in its June 2006 accounts, of a JoWooD “receivable” of $1,055,907.39.
Indeed, contrary to Mr Gronow’s submission, Perception’s overall financial position appears to be parlous, and deteriorating.
The revised accounts for the 2004 year (as prepared by Duncan Dovico) show a profit of $985,981, comprising income of approximately $2.64 million less expenses of approximately $1.65 million. The audited accounts for the 2005 year show a loss of $2,189,653. This was mainly due to a dramatic increase in the level of total expenses to approximately $6.9 million, as against income of approximately $4.7 million. Further, Perception reported a net asset deficiency of $3,638,109.63 as at June 2005. In this regard, Duncan Dovito said (in Note 1 to the 2005 accounts) that Mr Lenzo:
“has provided a guarantee of financial support, and … believes that such financial support will continue to be available.”
Duncan Dovito also said:
“In the event that the entity is unable to generate sufficient future revenues … and net cash flows or access to additional funding as required, there is uncertainty as to whether it will be able to continue as a going concern, and therefore whether the company can liquidate its assets and extinguish its liabilities at the amounts stated in its financial position.”
The (unaudited) 2006 accounts show total “income” of $5,113,177.69 and, as mentioned above, net profit of $815,501.49. However, of the $5.1m or so of “income”, $4,130,493.17 is recorded as “games development fee” and consists of two components: the abovementioned sum of $3,074,586 transferred from the 2004 year and the other abovementioned sum of $1,055,907.39 representing a JoWooD receivable which was simultaneously written off. In other words, Perception did not actually receive any part of the $4,130,493.17 “games development fee” in the 2006 year. During that year the total of its “actual” income was only $982,684.52, representing reimbursement by the Australian Taxation Office of research and development expenditure ($945,147.91), interest received ($23,338.90) and profit on sale of non-current assets ($14,747.91). Total expenditure was less than for the 2005 year, but was still relatively high at $4,297,676.20, albeit that this figure includes the writing off of the JoWooD bad debt of $1,055,907.39. The major reduction in expenditure related to contractors’ costs for research and development (from $906,326.41 to nil) and wages and salaries (from $2,109,426.44 to $1,166,036.40). These large reductions in expenditure on research and development and on staff are troubling in themselves. They suggest that the business is shrinking quickly. In any event, in cash flow terms, Perception had a deficit of approximately $2.2 million in 2006.
Given this sorry state of affairs, and given what Duncan Dovito had said in the Notes to the 2005 accounts concerning the doubt about Perception continuing as a going concern without “sufficient future revenues and net cash flows or access to additional funding as required”, one might well have expected some further comment on this question in the Notes to the 2006 accounts. There is none. The topic is not mentioned. Nor is there any reference to whether Mr Lenzo’s “guarantee of financial support” remains available.
This omission may have something to do with another major change as between the (unaudited) 2006 accounts and the (audited) 2005 accounts, namely the inclusion in the balance sheet in 2006, for the first time, of an intangible asset called “Software Development, at Directors’ Valuation”. The value given is $5,453,789.72. Without that item, the 2006 balance sheet would show a net asset deficiency of $3,272,607.14 (which would be comparable with the reported 2005 net asset deficiency of $3,638,109.63).
Mr Lenzo deals with this new intangible asset in paragraphs 15-18 of his affidavit of 6 September 2006. The explanation is quite unsatisfactory. Mr Lenzo says:
“The most significant asset held by Perception is its investment in intellectual property and is reflected as a non-current asset in the 31 March 2006 and 30 June 2006 balance sheets described as ‘intangibles’.
Note 6 of the respective accounts breaks down the intangibles, which demonstrate that the majority of the intangibles asset is the ‘software development’ at a director’s valuation of $5,453,789.72.
This software development relates to the game referred to in paragraph 6 of my affidavit sworn 7 July 2006, of the first Stargate title which is in the process of being re-badged. Specifically, the software development includes programming code, artwork, gameplay and audio.
Upon the termination of the MGM licence, the game could no longer be marketed as a Stargate game (for which revenue was being earned). I believe that the game continues to have value by the ability to re-badge the game by removing references to Stargate and thereby creating a new game for the purpose of deriving future revenue streams. Hence, the software development item which constitutes the intellectual property of the game is included as an intangible asset. The value attributed to the software development at director’s valuation is derived from forecasts based on actual sales data of comparative products of a non-licensed nature in similar genres. I am advised by Ms Megale and believe that these forecasts were then converted to current value by Duncan Dovico, by taking the net present value of the net profit for the re-badged product.”
Perception was presumably working on the Stargate SG-1 software from, at the latest, the time it obtained the licence from MGM in December 2003, if not from the time of obtaining the “deal sheet” from MGM in December 2001. Perception had been very keen to acquire the licence and was very disappointed to lose it.[8] It is hard to imagine that the loss of the licence could enhance the value of the software development at all, much less raise it from nothing (as indicated by the 2005 accounts) to over $5 million (as indicated by the 2006 accounts). Yet this appears to be the import of what Mr Lenzo is saying in his affidavit by way of explanation of the 2006 balance sheet. This strikes me as extraordinary. I raised my concern with Mr Gronow. He said that, on his instructions, the value of the software development had been included in the 2005 accounts under some other heading, but I was and remain unable to see this. Entries corresponding to a figure of approximately $5 million should be easy to spot, but I cannot see any.
[8]The loss of the MGM licence, to which Mr Lenzo refers, had occurred in January or February 2006. Perception did not disclose this to Buck at the time. As was also the case in relation to the termination of the JoWooD contract, Buck found out about the matter through its own researches: see para 19 of the affidavit of Buck’s solicitor, Andrew Graham McAdam, dated 3 July 2006. Mr McAdam also deposes that, on the basis of Perception’s discovery of documents in this proceeding and from its website, it is apparent that for the past two years or so Perception has had no other business apart from the development of the Stargate SG-1 game. Perception has not challenged this assertion, and the extracts from Mr Lenzo’s affidavit of 6 September 2006 set out above tend to confirm it.
Mr Dixon, who appeared for Buck, submitted that, in any event, in applications for security for costs, intangibles should always be excluded from consideration because they are not readily convertible into cash. He cited Southern Cross Exploration, supra[9]; Dolby Australia v Catto[10] and Haoma Mining Pty Ltd v Carpentaria Gold Pty Ltd[11]. I do not think that these cases support such a sweeping proposition. There will be a vast range of situations involving various kinds of companies and various kinds of intangibles. Each situation needs to be considered on its own merits. However, it is certainly open to a Court not to accept a party’s books of account or assurances by a party or its accountant as to the assets or their value as listed therein: see Dal Pont, Law of Costs, 2003, para [29.12] and the cases mentioned there, especially Stelmag Pty Ltd v Tifferly Manufacturing Pty Ltd[12], a case quite similar to the present in some respects, in which the Court did not accept that an intangible research and development asset, which made up the bulk of the plaintiff’s assets and apart from which the plaintiff would have had a deficit of assets over liabilities, had the value attributed to it by the plaintiff.
[9](1985) 1 NSWLR 114 at 120.
[10][2004] NSWSC 1222 at [65], [70] and [79].
[11][2002] QSC 435.
[12][2002] ACTSC 99.
Buck points to yet another disturbing feature of the evidence as to Perception’s financial position. On 7 April 2006 there was an announcement to the Australian Stock Exchange that Digital and Voice Media Ltd (“DVM”) had entered into heads of agreement with the shareholders of Perception to take over 100% of the share capital of Perception, subject to a due diligence investigation. On 7 June 2006 DVM announced that it would not be proceeding with the proposed acquisition. Presumably, after analysis, DVM was not satisfied as to Perception’s financial affairs.
On the very morning of the hearing on 29 September 2006, Perception handed up, over Buck’s objection, a third affidavit of Mr Lenzo, sworn that day. Buck complained, justifiably, that it had not had sufficient time to consider or seek instructions about the contents of the affidavit. However, upon reading the affidavit and the exhibit to it and hearing submissions about it, I formed the view that the material was of little or no weight and that therefore Buck would not be prejudiced significantly by its late receipt, and so I formally received it in evidence. Mr Lenzo deposes that, on 28 September 2006, Perception had entered into an agreement to acquire a European company known as Coldwood Interactive AB, subject to Perception completing due diligence and giving a notice of confirmation by 27 October 2006. The agreement is exhibited to the affidavit. Mr Lenzo says that, based on draft accounts he has seen, Coldwood Interactive AB apparently made a profit of about AUD $900,000 in the year to April 2006; and that Coldwood owns two video games which are ready for release “soon” on a worldwide basis and is working on a third one. The vendor of the shares would receive from Perception:
“(a)cash payments, over a period beginning no later than January 1st 2007 and ending no later than January 1st 2008, which are intended to be self funding from the titles; and
(b)a conditional cash payment which is dependent on certain revenue targets by December 31st, 2007 being met by Coldwood Interactive AB from the titles, and if fulfilled is to be paid no later than January 31st, 2008.” (my emphasis)
Finally, Mr Lenzo says that Perception is actively planning a European public listing.
I note that nothing in the affidavit or the agreement suggests that Perception is required, or has the capacity, to fund the purchase of Coldwood Interactive AB from Perception’s own resources; nor is there any detail as to what net benefit, if any, might reasonably be expected to accrue to Perception, or when. The evidence about the Coldwood proposal does not persuade me that Perception’s financial position is significantly better than it would otherwise appear to be.
Buck asks me to take into account, also, what it describes as selective concealment of relevant information by Perception in relation to a prior application for security before Master Evans made by Buck by summons filed on 7 December 2004. Perception denies that it was guilty of any such selective concealment. It is unnecessary for me to enter into this debate. On the basis of the other evidence before me and the submissions I have heard, I am satisfied not only that there is “credible testimony” by which it appears that there is reason to believe that Perception will be unable to pay Buck’s costs (at least from its own resources), but also that the evidence to that effect is very strong. In fact I think that there is only a negligible chance that Perception would be able to pay Buck’s costs from Perception’s own resources.
Despite this, Perception does not submit that an order for security would stifle its counterclaim, even if the security ordered were of the magnitude sought by Buck.[13] I note again that Perception’s accountants said in the Notes to the 2005 accounts that Mr Lenzo had provided a guarantee of continued financial support and believed that such financial support would continue to be made available. Perception has led no evidence about the resources of the persons standing behind it.
[13]There was a passing reference in Mr Gronow’s written outline of submissions to the possibility of stifling the counterclaim, but Mr Gronow expressly conceded in his oral submissions that he had not adduced any evidence of the kind normally required to support such a contention.
In any event, Perception’s own financial position appears to be so poor that there is every reason to believe that it would not be in a position to meet an order to pay Buck’s costs.
Overlap of substantive issues
It is true that there is some overlap between the issues raised by Buck’s claim and those raised by Perception’s counterclaim. However the overlap is not of much significance for present purposes. Buck’s own claim (for work and labour done) could be presented in a matter of hours, or less: see paragraph 40 of Mr McAdam’s affidavit of 3 July 2006. Perception’s defence to it, including cross-examination of Buck’s witnesses, may take longer, perhaps even a few days. But Mr McAdam estimates that the trial as a whole will take 20 days and Perception has not challenged this estimate. The vast bulk of this time would be occupied in presenting and testing Perception’s complex, technical case as to its alleged losses, in relation to both causation and quantum. Pre-trial work on both sides would presumably be apportionable in a similar fashion. In paragraph 39 of his affidavit of 3 July 2006, Mr McAdam deposes that the pre-trial work which he estimates will be required “will overwhelmingly be in the defence to the counterclaim”. I accept that evidence.
As mentioned above, Buck seeks security for past costs, future pre-trial costs and future trial costs. However, for reasons I will explain below, I am only prepared at this stage to order security for future pre-trial costs. Mr McAdam gives a breakdown of the outstanding anticipated pre-trial work in paragraph 38 of his affidavit of 3 July 2006. That evidence was not contradicted by any evidence adduced by Perception. I accept it. I see no need to discount Buck’s claim to any great extent in respect of pre-trial costs on account of the (limited) commonality of the substantive issues.
The suggestion in Mr Gronow’s written outline that it would be impracticable to stay the counterclaim separately from Buck’s claim is rejected on two bases: first, that the issues of causation and quantum raised by the counterclaim are largely independent of the issues raised by Buck’s claim and are overwhelming in their magnitude; second, that, in any event, on Perception’s own case, the order sought would not stultify or stifle the counterclaim, so that there should be no occasion for any stay to actually come into operation.
Delay
At least as far as Buck’s future costs are concerned, there is little merit in Perception’s argument based on alleged delay. Very soon after the counterclaim was lodged in 2002, Buck applied for security for costs, and obtained an order in relation to costs incurred up to the stage of mediation. There was a mediation in November 2004, which was wholly unsuccessful.
Within a month, Buck applied again for security for costs. There is much conflicting evidence about what happened in relation to that application. Buck claims, with the benefit of recently revealed information, that Perception’s response to the second application was dishonestly misleading. In the absence of cross-examination, and a much more detailed examination of the evidence than is warranted on this application, I am not in a position to make findings on that issue. However I note that Perception unduly delayed making any real response to Buck’s claim until just before the application was due to be heard in February 2005. The evidence as to Perception’s financial position which was then filed by Perception induced Buck to withdraw its application in March 2005, but Buck nevertheless obtained an order in its favour for the costs of the withdrawn application.
Since March 2005 there has been a substantial amount of interlocutory skirmishing. Perception has been forced to give further and better discovery. In the first half of 2006, information became available to Buck which caused it once again to have concerns about whether Perception would be able to meet an order for costs. My conclusions about that issue show that Buck’s concerns were fully justified. Buck moved promptly, in June 2006, to seek further security. I do not think that Buck has been guilty of any delay that should deprive it of security for future costs.
Insurance
Perception points out that there is evidence that Buck is insured in relation to the counterclaim. That is true, although there is no evidence as to any limitations on the extent of the relevant cover (ie as to the size of any excess or as to any cap on liability). Perception says that the onus was on Buck to lead evidence as to any such limitations.
There are conflicting statements in the authorities as to the significance, if any, of the fact of insurance where the party seeking security is insured against the other party’s claims or where the party seeking security is itself an insurance company being sued on the policy.[14] However, in the present case, even assuming that Buck is completely insured against Perception’s counterclaim, I do not think that Buck should be deprived of security on that account. In my view, insurers are not wholly outside the protection of the provisions relating to security for costs; rather, the matter is entirely within the discretion of the Court.[15] In a particular case, for example where there is a stark choice to be made between stifling a claim and denying a party protection against an impecunious claimant, a Court might give significant weight to the fact that the party seeking security is insured. However, there is no claim of “stifling” in the present case, and in all the circumstances I do not think it is significant that Buck is apparently insured (to a greater or lesser extent) against the counterclaim.
[14]See Williams, Supreme Court Practice, [62.02.55] and cases there cited.
[15]See especially Quichorn Pty Ltd v Victor Board and G L Phillips & Co Ltd, unreported, SCV, Hayne J, 24 January 1994, BC9406622 at 48.
The quantum of Buck’s costs
Mr Gronow submitted that I should not make any order for security at all because Buck had not adduced any admissible or useful evidence as to the likely quantum of its costs. He submitted that the “bald assertions” in Mr McAdam’s affidavit of 3 July 2006 (eg at paragraphs 21, 25 and 39) as to the likely amounts of the taxed costs were of no use to the Court, unaccompanied by any evidence about –
(a)how the amounts were calculated;
(b)what components are said to make up the global amounts of costs claimed;
(c)to what items of work each component of costs is said to relate; and
(d)how it is said that the costs will be taxed on a party-party basis in the amounts claimed.
I reject Mr Gronow’s submission. Mr McAdam gives substantial supporting detail in paragraphs 38 and 40 of his affidavit. Further, he gives unchallenged evidence in paragraph 24 of his affidavit about his extensive experience as a commercial litigator, including in relation to the taxation of costs. Moreover, in his detailed letter to Perception’s solicitors of 1 June 2006, Mr McAdam set out his estimates of the likely costs in the same level of detail as is contained in the affidavit. Perception’s solicitors have made various objections since 1 June 2006 to the claim for security, but at no time prior to the hearing on 29 September 2006 did Perception’s representatives make or foreshadow any suggestion that Mr McAdam’s estimates as to the past costs or future likely costs were inaccurate or excessive.
The issues raised by Perception’s counterclaim are obviously complex. The sums claimed by Perception are very large. Perception’s solicitors might well have concluded that the estimates given by Mr McAdam were modest.
Mr Gronow contrasted the lack of detail in Mr McAdam’s affidavit with the evidence considered by Habersberger J in Saint-Gobain RF Pty Ltd v Maax Spa Corporation Pty Ltd, supra[16]. But in that case, for all that appears, the respondent to the application may have raised timely objections to the applicant’s estimates before the hearing.
[16][2004] VSC 335.
Since I am minded to grant security only in respect of future pre-trial costs at this stage, there is even less force in Mr Gronow’s objection to Mr McAdam’s estimates.
I am satisfied that Mr McAdam’s estimates are reasonable. I would not be surprised if they proved to be on the light side. I would not discount Buck’s claim on account of any lack of detail in Mr McAdam’s affidavit.
Past costs/trial costs
Buck acknowledges that, for obvious reasons, courts are generally reluctant to order security in relation to costs incurred prior to the application for security. However, Buck says that an exception should be made in this case because of Perception’s conduct in relation to the last application for security before Master Evans to which I have already referred.
Buck claims that Perception’s evidence before Master Evans was deliberately misleading. Perception denies this. On the evidence before me on this interlocutory application, and without the benefit of cross-examination, I could not satisfactorily determine that issue. In any event, Buck was served with Perception’s evidence towards the end of February 2005. Buck then apparently took some four weeks to consider its position. It decided to withdraw its application. I am not prepared, at this late stage, to proceed on the basis that Buck has been “kept out of” security to which it was entitled in February 2005.
Nor would I, at this stage, accede to the claim for security in relation to the trial costs. There is still a significant amount of work to be done before the case will be ready for trial. The case may settle in the meantime, despite Buck’s pessimism in that regard. The trial costs would apparently be very high. I think it is better that Buck should make any further claim for security in relation to the trial costs at a time much closer to the trial.
Security for costs: conclusion
I have weighed up all of the considerations relied on by the parties. In the end I think that this is a clear case for the grant of security. Perception appears to be quite impecunious. Nevertheless, it does not claim that an order for security would stifle its counterclaim. The counterclaim is huge in comparison to Buck’s claim. In my view, Mr Lenzo and any others standing behind Perception should share in the risks of the counterclaim if they are to have the prospect of benefiting from it. However, for the reasons I have given, I would at this stage order security only in relation to future pre-trial costs. Buck has not been guilty of any undue delay in seeking security for that component of its costs. The amount claimed for future pre-trial costs is $108,500. (This claim does not include any allowance for counsel’s immediate pre-trial preparation.) Making some allowance for possible overlap of substantive issues and for possible overestimation of Buck’s future pre-trial costs (although I think that there is little likelihood that estimate will prove to be excessive) I would order that Perception provide security in the sum of $100,000 in relation to Buck’s costs of the counterclaim up to the commencement of the trial. Buck will be free to apply for further security at a later stage in relation to trial costs (including counsel’s preparation). I would order a stay of the counterclaim in default of compliance with the order for security. I will hear counsel as to the precise form of the orders to be made.
Strike-out application
By letter dated 6 September 2006 Buck’s solicitors applied for an order “pursuant to Rule 23.02, alternatively Rule 23.01”, that subparagraph 32A(b), subparagraphs 35(d)-(f) and Section B of Appendix A of the Further Amended Counterclaim dated 12 May 2006 be struck out. Those parts of the pleading (“the impugned allegations”) relate to losses allegedly suffered by Perception in consequence of the alleged delay in obtaining the deal sheet for the MGM licence and in entering into the JoWooD contract. As presently pleaded, the calculations of loss involved in the impugned allegations are premised on the continued existence and future implementation of the MGM licence and the JoWooD contract. However, Perception now admits that both the licence and the contract have been terminated. It follows that the impugned allegations must be struck out as embarrassing or vexatious. In the end, Mr Gronow did not seriously dispute this.
At the hearing, Mr Dixon initially submitted that the appropriate Rule under which the Court should deal with the impugned allegations was rule 23.01 (as distinct from rule 23.02). However, rule 23.01 is only appropriate for consideration where the applicant submits that the proceeding as a whole or a claim in the proceeding should be stayed generally or that judgment should be given in the proceeding generally or in relation to any claim. By contrast, rule 23.02 provides for the striking out of pleadings. In the end, I did not understand Mr Dixon to be submitting that Perception should be forever shut out from claiming damages based on or calculated by reference to the alleged delay in obtaining the deal sheet for the licence or in entering into the JoWooD contract. Rather, he submitted that, in their present form, the impugned allegations were embarrassing or vexatious because they involved calculations of loss premised on the continued existence of the licence and the contract. Of course, in any proposed new pleading, Perception will need to omit any allegation or assumption that the MGM licence and the JoWooD contract are still on foot. Beyond that, the question whether leave to replead should be given would be entirely a matter for the Court hearing the application.
Costs
I will hear counsel on the question of costs. My tentative view is that Perception should pay Buck’s costs of both the application for security for costs and the strike-out application. In its correspondence in respect of the strike-out application, Buck foreshadowed an application for indemnity costs. However, an order for indemnity costs is an extraordinary order and should not be made lightly.[17] I agree with Mr Dixon’s submission that it was highly unsatisfactory that Perception included the impugned allegations in the (amended) counterclaim dated 12 May 2006. By that time, Perception well knew that the JoWooD contract had been terminated in August 2005 and that the MGM licence had been terminated in January or February 2006. Nevertheless, my tentative view is that indemnity costs are not appropriate here taking into account that –
·The two applications were heard together;
·Buck did not obtain all of the relief it sought in the security for costs application;
·Buck did not make out a case for an order under rule 23.01 as distinct from an order under rule 23.02.
[17]Masha Nominees Pty Ltd v Mobil Oil Australia Pty Ltd (No 2) [2006] VSC 56 at [9], [11]-[12].
Orders
Subject to anything counsel may say as to the form of the orders, I propose to make orders to the following effect:
1.The defendant/plaintiff by counterclaim provide further security in the sum of $100,000 for the costs of the counterclaim in respect of the period up to the commencement of the trial (excluding counsel’s trial preparation), by payment into Court to the Senior Master or in a form acceptable to the Prothonotary by 4.00 pm on 8 November 2006.
2.If such security is not provided by the time specified, the counterclaim shall be stayed until it is provided.
3.The parties have liberty to apply for additional security for costs as they may be advised.
4.Subparagraph 32A(b), subparagraphs 35(d) to (f) and Section B of Appendix A of the Further Amended Counterclaim dated 12 May 2006 be struck out pursuant to Rule 23.02 of the Rules of the Supreme Court as vexatious or embarrassing.
5.The defendant/plaintiff by counterclaim pay the costs of the plaintiff/defendant by counterclaim of and incidental to the application for further security for costs made on notice by letter to the Court dated 3 July 2006 and of and incidental to the application to strike out parts of the counterclaim made on notice by letter to the Court dated 6 September 2006.
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