Worldwide Coatings IP Pty Limited v Freeworld Coatings Australia Pty Limited

[2009] NSWDC 314

CITATION:	Worldwide Coatings IP Pty Limited v Freeworld Coatings Australia Pty Limited [2009] NSWDC 314
HEARING DATE(S):	20 November 2009, 8 December 2009
JUDGMENT DATE:	8 December 2009
EX TEMPORE JUDGMENT DATE:	26 November 2009
JURISDICTION:	District Court - Civil
JUDGMENT OF:	Sidis DCJ
DECISION:	1) The plaintiff is to provide security for the defendant's costs by no later than 4:00pm on 11 December 2009 by paying into Court the sum of $70,000 or by delivering to the Registrar of the Court a bank guarantee for the payment of that sum issued by an Australian Bank. 2) In the event that security is not provided as ordered, the defendant shall be at liberty to apply to the Court in Sydney to have the plaintiff’s claim dismissed. 3) The defendant may apply on 7 days notice to vary the amount of the security provided. 4) The affidavits and other material provided in respect of the motion are returned. 5) It is noted that the matter is listed for directions on 21 December 2009. 6) The plaintiff is to pay the defendant's costs of the motion.
CATCHWORDS:	Security for costs - Proportionality - Overstatement of expected costs - Impecuniosity of plaintiff company - Defendant not entitled to security for costs of substantial cross-claim
LEGISLATION CITED:	Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005
CASES CITED:	Sydmar Pty Limited v Statewide Developments Pty Limited 1987 5 ACLC 480
PARTIES:	Worldwide Coatings IP Pty Limited (Plaintiff/Respondent) Freeworld Coatings Australia Pty Limited (Defendant/Applicant)
FILE NUMBER(S):	1367/2009
COUNSEL:	P Menadue (Plaintiff/Respondent) M Cleary (Defendant/Applicant)
SOLICITORS:	A J Law & Co (Plaintiff/Respondent) Corrs Chambers Westgarth (Defendant/Applicant)

JUDGMENT OF 26 NOVEMBER 2009

1 The defendant, Freeworld Coatings Australia Pty Limited, seeks security for costs in the sum of $350,000. The application is made in respect of proceedings brought by the plaintiff, Worldwide Coatings IP Pty Limited, to recover $525,115.36 and interest claimed to be owed for minimum royalties payable under a licence agreement entered into by the parties in April 2002. The application for security is brought pursuant to s 1335(1) of the Corporations Act 2001 or rule 42.21 of the Uniform Civil Procedure Rules 2005.

2 It was conceded by the plaintiff that its financial position was such that it will be unable to meet a costs order made against it. The determination of the application, therefore, depended upon the court’s being persuaded to exercise its discretion either to decline to make the order sought or to reduce the quantum of costs to be secured.

3 The plaintiff resisted the application on the following grounds:

1) The amount sought by way of security was out of proportion to the amount of its claim;

2) The defendant accepted that it had not paid the royalties claimed by the plaintiff;

3) The defence could relieve the defendant of only part of its liability;

4) The defendant pleaded a set off and brought a cross claim so that, in relation to the matters raised in that part of its defence and in the cross claim, it effectively became the plaintiff and was not entitled to seek security for costs;

5) The defendant delayed in seeking security for costs;

6) The plaintiff had a strong claim on the merits and the bases for the defendant’s claimed set off and cross claim were weak;

7) The defendant’s failure to pay the royalties due under the agreement was the cause of the plaintiff’s impecuniosity;

8) The defendant’s estimate was an extravagant overstatement of the costs it was likely to incur.

4 I was referred to a number of authorities said to support the arguments for and against the relief sought. In considering the issues I noted that the defendant did not dispute that it had not paid the royalties provided for in the agreement. I am not in a position in this interlocutory application to consider the relative merits of the claim and the cross claim.

5 Having regard to the evidence of the time taken by the plaintiff to provide the material requested by the defendant in relation to its financial position, I did not consider the time lapse between the commencement of the proceedings and the filing of the application for security was sufficient to disqualify the defendant from receiving an order for security for its costs.

6 No evidence was put before the court to support the claim that the non payment of the claimed royalties was the cause of the plaintiff’s impecuniosity. The agreement sued upon was dated April 2002. The plaintiff alleged that only one royalty payment was made, that is, in July 2002 in the sum of $20,064. The plaintiff continued to trade notwithstanding non payment of royalties between 2002 and 2009. The evidence did suggest that the plaintiff traded at a loss in the 2007 and 2008 financial years but there was no evidence of its trading position in the other years referred to. There was no evidence that failure to make the minimum payments was the cause of substantial losses in 2007 and 2008.

7 This left for consideration the issues arising out of the cross claim and the quantum of the provision for security sought.

8 In respect of the set off and cross claim, it was apparent from material before the court that the major part of the time involved in preparation and hearing of the disputes between the parties would be occupied by the issues raised in the set off and cross claim. The defendant’s estimate of the time required for hearing was five days. The issues involved technicalities concerning the properties and effectiveness of the product for which the royalties were to be paid and issues of misleading and deceptive conduct based on s 52 of the Trade Practices Act 1974.

9 Those issues necessarily involved evidence of individuals involved in negotiation of the licence agreement.

10 On this aspect the plaintiff relied upon the decision of Smart J in Sydmar Pty Limited v Statewide Developments Pty Limited 1987 5 ACLC 480 where his Honour came to the conclusion that the set off and cross claim comprised the substantial proportion of the proceedings and he rejected the application for security for costs. It was apparent from the reasons that this was not the only factor taken into account by Justice Smart in reaching his conclusion. He noted that the plaintiff did in fact have a surplus of assets over the liabilities, although modest, and that it had been prejudiced by the delay in bringing the application for security. He was further persuaded that the provision of security would reduce the funds available to the plaintiff to defend the cross claim.

11 The latter consideration was relevant to the current situation. The evidence was that the plaintiff was not only trading at a loss in 2007 and 2008, it also had a substantial shortfall in assets over liabilities. This leads to a very strong inference that in bringing the current proceedings there are parties standing behind the plaintiff who are funding the litigation. No evidence was provided by those parties.

12 Taking that factor into consideration I considered it appropriate that the plaintiff provide security against the prospect of an order of costs in favour of the defendant.

13 I accepted three propositions that substantially reduced the amount that should in justice be provided by way of security.

14 Firstly, the amount claimed in my view was out of proportion to the sum claimed by the plaintiff in its proceedings. Secondly, the issues raised in the set off and cross claim do place the defendant in the position of attacker or plaintiff and it is, therefore, inappropriate that the plaintiff provide security in respect of costs at that portion of the litigation. I have estimated that portion of the litigation at 60 per cent. Thirdly, I am satisfied that the estimate of recoverable costs was overstated. Mr Mattis who prepared the estimate clearly did so on the basis of assumptions that at this stage were so difficult to support that they must be regarded as speculative.

15 Other questions related to the necessity to retain senior counsel in respect of a relatively simple factual scenario arising out of the plaintiff’s claim, the extent to which the estimate of the work to-date was based on actual time spent or on reconstruction and the extent to which the estimate of the work required in the future involved an overstatement of the time required to prepare for hearing or duplication of effort between the defendant’s solicitors and its counsel.

16 The result was that I considered it appropriate that the plaintiff provide security for the defendant’s costs of the plaintiff’s claim against it in the sum of $70,000.

ORDERS

17 The orders that I make are as follows:.

1) The plaintiff is to provide security for the defendant’s costs by not later than 4pm on 11 December 2009 by paying into court the sum of $70,000, or by delivering to the registrar of the court a bank guarantee for the payment of that sum issued by an Australian bank;

2) In the event that security is not provided as ordered, the defendant shall be at liberty to apply to the court to have the plaintiff’s claim dismissed;

3) The defendant may apply on seven days’ notice to vary the amount of the security provided;

4) The affidavits and other materials provided in respect of the motion are returned;

5) It is noted that the matter is listed for directions on 21 December 2009;

6) The parties have liberty to approach my associate within seven days to arrange a time for argument in respect of costs. If no contact is made then the court will order that each party pay their own costs of the motion.

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JUDGMENT OF 8 DECEMBER 2009

1 In this matter the defendant sought security for costs against the plaintiff. The motion was heard in Sydney on 20 November 2009 and a decision given in Newcastle on 26 November 2009. The matter has been re-listed today on the issue of costs.

2 The defendant, having secured an order for costs albeit in an amount substantially less than requested, seeks costs of the motion. The plaintiff opposes that application, arguing that correspondence that passed between the parties prior to the making of the application, if answered in the manner the plaintiff suggested, might have avoided the application altogether. I doubt that that would have been the case. The plaintiff resisted disclosure of its parlous financial position until very shortly prior to the hearing of the application.

3 It is said that without some indication of the assessment of the security sought by the defendant, the plaintiff was not in a position to make an offer and that when it became known that the defendant was seeking $350,000 by way of security it was unrealistic to make an offer.

4 I do not accept either of those arguments. The matter could have been dealt with at a much earlier stage by disclosure of the plaintiff’s financial position. The plaintiff’s argument on the hearing of the application was that the majority of the costs to be involved in the proceedings related to the defendant’s cross-claim and therefore security for those costs ought not to be granted. It could have made an offer on that basis.

5 In the circumstances, the defendant having succeeded in securing at least partially the relief sought, the plaintiff is to pay the defendant’s costs of the motion.

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