FEDERAL COURT OF AUSTRALIA Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643 PRACTICE AND PROCEDURE – application for security for costs – factors relevant to exercise of Court's discretion Federal Court of Australia Act 1976 (Cth) s 56 Corporations Act 2001 (Cth) s 1335 Federal Court Rules O 28 r 3 Drumdurno Pty Ltd v Braham (1982) 42 ALR 563 referred to Equity Access Ltd v Westpac Banking Corporation and Ors (1989) ATPR 40-972 referred to KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 cited Commonwealth v Cable Water Skiing (Aust) Ltd (1994) 14 ACSR 760 cited Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 referred to Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634 referred to Jodast Pty Ltd & Ors v A & J Blattner Pty Ltd & Ors (1991) 104 ALR 248 referred to Bryan E. Fencott & Associates Pty Ltd v Eretta Pty Ltd & Ors (1987) 16 FCR 497 referred to James v Australian and New Zealand Banking Group Limited (1985) 9 FCR 442 referred to Pearson v Naydler [1977] 1 WLR 899 referred to THE STAFF DEVELOPMENT AND TRAINING CENTRE PTY LTD v COMMONWEALTH OF AUSTRALIA No QUD 126 of 2003 SPENDER J 15 NOVEMBER 2005 BRISBANE IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD 126 OF 2003 BETWEEN: THE STAFF DEVELOPMENT AND TRAINING CENTRE PTY LTD APPLICANT AND: COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SPENDER J DATE OF ORDER: 15 NOVEMBER 2005 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The application be dismissed. 2. Costs be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QUD 126 OF 2003 BETWEEN: THE STAFF DEVELOPMENT AND TRAINING CENTRE PTY LTD APPLICANT AND: COMMONWEALTH OF AUSTRALIA RESPONDENT JUDGE: SPENDER J DATE: 15 NOVEMBER 2005 PLACE: BRISBANE REASONS FOR JUDGMENT 1 By notice of motion filed on 30 September 2005, the Commonwealth of Australia ("the Commonwealth") seeks an order for security for costs against The Staff Development and Training Centre Pty Ltd ("Staff Development Centre"), the applicant in proceedings QUD 126 of 2003 brought against the Commonwealth. 2 The motion for security for costs is based on s 56 of the Federal Court of Australia Act 1976 (Cth); O 28 r 3 of the Federal Court Rules; and s 1335 of the Corporations Act 2001 (Cth) ("the Corporations Act"). 3 Section 1335 of the Corporations Act provides: '(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. (2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.' 4 Section 56 of the Federal Court of Australia Act 1976 (Cth) provides: '(1) The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him. (2) The security shall be of such amount and given at such time and in such manner and form, as the Court or Judge directs.' 5 Subsection 56(5) provides: '(5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.' 6 Order 28 rule 3 of the Federal Court Rules provides for a number of specified cases in which an order for security for costs can be made. That rule is not an exhaustive statement of the cases in which an order for security for costs can be made. The present is not one of the cases specifically referred to in O 28 r 3. 7 The notice of motion by the Commonwealth seeks that: '1. The Applicant provide, within 60 days of the order, security for the respondent's costs of the proceedings to the satisfaction of the District Registrar in the sum of $250,000.00 or such other sum as the court considers appropriate. 2. If the Applicant fails to comply with the above order within 60 days, the proceeding be dismissed. 3. The applicant pay the respondent's costs of and incidental to this motion to be taxed. 4. Such further or other orders as the court may deem appropriate.' 8 The chief matters to be considered in an application for security for costs were referred to in Drumdurno Pty Ltd v Braham (1982) 42 ALR 563 ("Drumdurno") and Equity Access Ltd v Westpac Banking Corporation and Ors (1989) ATPR 40-972 ("Equity Access"). More recently, in 1995, Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 ("KP Cable Investments") listed a number of well-established guidelines which a court might take into account in determining an application for security for costs. 9 Hill J in Equity Access listed six matters as being appropriate for consideration in determining whether to exercise the discretion to order security for costs, namely: (a) The quantum of risk that a costs order will not be satisfied; (b) Whether the making of an order would be oppressive in that it would stifle a reasonably arguable claim; (c) Whether any impecuniosity of the applicant arises out of the conduct complained of; (d) The prospects of success; (e) Whether there are aspects of public interest which weigh in the balance against such an order; (f) Whether there are any particular discretionary matters peculiar to the circumstances of the case. 10 In addition, there is the further consideration that if an application for security for costs is to be made, it should be made promptly: Commonwealth v Cable Water Skiing (Aust) Ltd (1994) 14 ACSR 760 at 763 and Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71 ("Crypta Fuels"), and the observations of Beazley J in KP Cable Investments, above. 11 The extent to which the strength of an applicant's case may be taken into account has been the subject of not wholly consistent observations in the cases. 12 Pincus J observed in Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634 that at the stage of hearing an application for security for costs there will usually be no information on which the Court can possibly assess the merits of the applicant's claim. Accordingly, at the hearing of such an application, detailed investigation by the parties into the likelihood or otherwise of the success of the action will not be the right course to adopt. However, Hill J in Jodast Pty Ltd & Ors v A & J Blattner Pty Ltd & Ors (1991) 104 ALR 248 suggested that the situation might be otherwise where the case for the applicant appeared on the face of the pleadings to be merely frivolous or vexatious. French J observed in Bryan E. Fencott & Associates Pty Ltd v Eretta Pty Ltd & Ors (1987) 16 FCR 497 at 514: 'It is consistent with authority and the existence of a broadly based discretion that the bona fides and merits of the claim be taken into account where there is material from which some assessment can be made.' 13 It is clear that an application for security for costs should be made promptly after proceedings have been initiated. Otherwise, a party exposed at a later stage to an order for security for costs will have been lulled into expending money on prosecuting its claim. Equally a consideration relevant in the circumstances of the present case, an application for security for costs is not an application for summary judgment or a variant of it. In particular, it is not the occasion for detailed argument as to the sufficiency of evidence, what conclusions might result from a detailed consideration of the evidence, or even for a determination of whether, on analysis of the proposed evidence, the applicant's case is unlikely to be successful. 14 The background to the principal application is that the Staff Development Centre operated for some years on a commercial basis prior to entering into contracts with the Commonwealth. It began contracting with the Commonwealth in the early 1990s in relation to labour market programme services. From 1 July 1994 to the middle of 1998, there was a large volume of services provided under contracts with the Commonwealth, and a large component of those services was what are termed "Job Club contracts", which were an intermediate level of job-seeker assistance. Under those contracts, there was an obligation upon the contractor, in the present case the Staff Development Centre, to confirm to the Commonwealth by returning a document called an acquittal, that funds that had been advanced to the contractor had been expended on the services for which the contract provided. 15 The submissions by the Staff Development Centre to the motion for security for costs outline its contentions as to the history of the events on which its claims in the principal proceedings are grounded: '… 11. In or about August 1997 the Respondent publicly invited tenders for the provision of employment services pursuant to contracts to be awarded under the new Job Network labour market program for the period 1 May 1998 to 30 March 1999. 12. A document described as the "Employment Services Request for Tender 1997 – Tendering Conditions and Draft Contract" was sent by the Respondent to SDTC [Staff Development and Training Centre Pty Ltd] setting out the tendering conditions for this tender. 13. It was clear that the financial viability of tenderers was an important aspect of the tender process. 14. Mr Jos Van Putten a director oversaw the preparation of the tender by SDTC. He attended at several seminars conducted by DEETYA [Department of Employment, Education, Training and Youth Affairs] relating to the introduction of the new system and personally expended approximately 150 hours in preparing it. In doing this he worked closely with another existing employment provider called Bave Pty Ltd who submitted a very similar tender. Bave Pty Ltd ended up successfully securing Flex 2 work in the Redcliffe area under the new system. 15. SDTC had performed well under the pre-existing system and was externally audited by the Employment Services Regulatory Authority ("ESRA") under the terms of the employment services contracts then in existence. It had few debts, and had been trading profitably with an annual turnover of approximately $900,000.00. It had access to a bank overdraft facility of $80,000 drawn down by a minimal extent which was secured by a mortgage. 95% of its work had been as a result of various contracts with DEETYA. 16. SDTC lodged a tender to provide Flex 3, Flex 2 and Flex 1 services in the Brisbane and Moreton regions broadly comparable to those services that it was providing under the existing system. 17. The financial information provided with the tender included the last 3 years of taxation returns together with balance sheets and projections audited by the accountant for SDTC. Statutory declarations were completed by the directors and the accountant which supported the tender. 18. The tender was submitted on time with the knowledge that once a tender was in it could not easily be supplemented. SDTC received confirmation that the tender had been lodged. 19. The upfront payments under the new Job Network were far more lucrative than under the old system. Participation in the new Job Network by SDTC would not require any set up costs and it had a profitable business under the old system which would be boosted by the greater upfront payments. 20. In preparing the tender it appeared to SDTC that there had been a continuity of funding under the acquittals system for the Job Club Contracts. That is the CES which oversaw the system had provided uninterrupted funds to SDTC under the Job Club acquittals system in the period 1995 to 12 September 1997. The CES did not make demand for the delivery up of any overdue acquittals from SDTC for this period. SDTC believed that at the time the tender was lodged it had no overdue acquittals, that it had fully accounted for it's [sic] expenditure of Job Club funds to the CES, that it had completed and returned all acquittals forwarded to it by the CES and was not indebted to the CES in respect of unaccounted for Job Club funds or otherwise. 21. In or about March 1998 SDTC received a letter from DEETYA which indicated that it had been unsuccessful in the tender process. As a result of the failure to successfully tender for the Job Network SDTC lost the bulk of its business and was forced [to] put off all its staff and to close down. 22. Mr Van Putten then requested a meeting with DEETYA to determine why SDTC had failed in its tender. 23. He attended at a tender debriefing session conducted by Mr Ian Campbell a senior official from the Department in April 1998. He was told by Mr Campbell that SDTC had failed on financial viability grounds. Carmel Connors who had carried out one of the assessments in relation to delivery capacity was present at that meeting and said nothing about delivery capacity. The failure of the tender on financial viability grounds was later confirmed in writing by the Respondent. 24. The directors were convinced that [SDTC] would have succeeded under the new scheme given that it had a proven record under the old scheme. They also wished to know why SDTC failed on financial viability grounds. 25. As a consequence SDTC sort access to certain documents of the Respondent under the Freedom of Information Act 1982 (Cmth) and so began time consuming and expensive litigation.' (Emphasis added) 16 The directors of the Staff Development Centre rely on a history of litigation concerning access to documents, which was both time-consuming and costly, and claim that the company's resources and their resources were eroded during the lengthy litigation and because of the closure of the business. The contention relied on by the Commonwealth for the failure of the Staff Development Centre to obtain the contracts for which it tendered, namely, that there were outstanding acquittals, is said by the Staff Development Centre to be at odds with the fact that no notice had been received from the Employment Services Regulatory Authority, or from the Commonwealth Employment Service as to any outstanding acquittals, and no recovery action had been commenced in relation to the same, or has been commenced subsequently. 17 It is common ground that the applicant in the principal proceedings is impecunious, and that the condition in s 1335 of the Corporations Act that there is a risk that a costs order against the Staff Development Centre would not be satisfied is made out. It is also plain that the making of any order for security for costs would stifle the claim by the Staff Development Centre. 18 There is a dispute as to whether the impecuniosity of the applicant arises out of the conduct of the Commonwealth of which complaint is made. The Commonwealth points to what it says is the financial history of the applicant. A solicitor for the Commonwealth provided a "SUMMARY OF FIGURES FROM FINANCIAL STATEMENTS" which summary asserts that the operating profit before income tax for the years ending 30 June 1992 to 30 June 1999 were in the following table, as were the net assets and gross fees for those financial years: 'Total Assets Total Liabilities Net Assets Gross Fees Operating Profit Before Income Tax 30-Jun-92 $29,626 $33,643 -$4,017 $180,790 $7,969 30-Jun-93 $50,106 $61,495 -$11,389 $136,637 -$7,372 30-Jun-94 $79,749 $48,160 $31,589 $212,510 $61,706 30-Jun-95 $81,162 $81,009 $153 $363,219 -$6,969 30-Jun-96 $177,105 $167,890 $9,215 $628,513 $16,769 30-Jun-97 $232,924 $212,914 $20,010 $712,145 $16,868 30-Jun-98 $122,235 $146,994 -$24,759 $698,907 -$316 30-Jun-99 $93,248 $52,583 $40,665 $208,797 $102,047' 19 This material is put before the Court, amongst other reasons, to indicate that the operating profit of the Staff Development Centre, until June 1999 at least, was modest, and that there have to be severe reservations in the claim by the applicant in the principal proceedings that its impecunious state and its inability to meet any order for costs that might be made against it, is as a consequence of the conduct of the Commonwealth in not awarding the tenders. 20 In my opinion, it cannot be said on the present state of the material that the impecuniosity of the applicant arises out of the conduct complained of. There is no doubt, nonetheless, that the applicant is impecunious and the imposition of any order for security for costs would stifle the litigation. 21 There are, in my view, no aspects of public interest which affect the making of an order one way or the other and the only particular discretionary matter peculiar to the circumstances of the case is the important one that the application for security for costs was filed only on 30 September 2005, although it was foreshadowed in correspondence in May 2005. 22 The application was filed on 29 August 2003. 23 The Staff Development Centre contends that the Commonwealth has unreasonably delayed in putting it on notice that it requires the provision of security for costs. On 19 December 2003 the Commonwealth filed a defence which asserted that the matter which caused the Staff Development Centre to fail in its tender was the issue of delivery capacity, and not on the basis of an assessment of its financial viability. On 19 January 2004 the Staff Development Centre requested further and better particulars of the defence. On 6 February 2004 it delivered its list of documents to the Commonwealth. On 21 April 2004 the Commonwealth filed an amended defence, and on 19 August 2004 the Commonwealth delivered its list of documents to the Staff Development Centre. On 31 March 2005 and 21 April 2005, there was an unsuccessful attempt at mediation. On 4 August 2005 the Staff Development Centre filed an amended statement of claim, and on 25 August 2005 the respondent filed a further amended defence. 24 The Commonwealth contends that it was appropriate to wait until the pleadings had closed before bringing its application for security for costs, and that in 2005 there were threats to make further amendments to the statement of claim and controversy between the parties as to what proposed amendments might occur. The Commonwealth, through its counsel Maurice Swan, submitted that: '… the existence of other grounds in the statement of claim, other causes of action, could make a difference to whether security for costs ought to have been ordered and … where it is apparent that other causes of action may be raised, it is appropriate to wait until the issue is resolved before coming to the court to suggest that there are no reasonable prospects of success. …' 25 In Crypta Fuels (supra), Lehane J said at 71: 'Without referring in any greater detail to those authorities, my conclusion from a consideration of them is that there is first and foremost a proposition accepted in every one of the cases which is that if an application for security for costs is to be made it must be made promptly.' 26 Delay is not of itself a disentitling factor, but there is in my opinion in the present case, such a delay between the initiating proceeding by the Staff Development Centre and the application by the Commonwealth for security for costs, that the delay is a factor which ought properly to be taken into account in whether to order security for costs. 27 The evidence before me from the Commonwealth includes an affidavit by James McClelland, a legal costs consultant. Mr McClelland deposes that the costs that in his opinion have been incurred in these proceedings, and which will be allowed against the applicant on a taxation as between party and party on the basis that the respondent obtains an order for costs in its favour against the applicant, would be $155,975.03. (My emphasis.) Further, Mr McClelland estimates that the future costs likely to be incurred, and which would be allowed against the applicant on a taxation on a party and party basis if the Commonwealth obtained an order for costs in its favour against the applicant, would be $180,600.75. 28 What this shows, in my opinion, is that the Commonwealth has already incurred substantial costs on its own behalf in respect of which it is now seeking that the respondent provide security for costs. It is to be expected that the respondent has already itself incurred quite significant costs, even if those costs would not be of the order that Mr McClelland indicates the Commonwealth has already expended. 29 There is, in my opinion, no satisfactory explanation as to why the application for security for costs was postponed until after a substantial part of the $155,000 costs had been incurred, and where the costs for the other side in respect of that same work had also been incurred. 30 The primary argument for the Commonwealth as to why security for costs should be ordered is its contention that the Staff Development Centre has no reasonable prospects of success in relation to any part of its claim. 31 I turn now to consider in detail this aspect of the Commonwealth's motion. 32 The Staff Development Centre claims four main heads of relief, as well as interest and costs. They are: - damages for breach of fundamental terms of an alleged pre-tender contract in the amount of $2,700,000; or, in the alternative - damages in negligence in the amount of $2,700,000; or, in the alternative - a declaration that the contracts or relevant parts of them entered into by the Respondent with employment service providers under the Job Network scheme for the provision of Flex-3 services are void on the grounds of an ultra vires exercise of executive power; - damages in the amount of $2,700,000 consequent upon such declaration against the Respondent to compensate the Applicant for the effects of the aforesaid ultra vires acts upon it. 33 The Commonwealth acknowledges that there is a general rule that 'poverty is no bar to a litigant.',referring to James v Australian and New Zealand Banking Group Limited (1985) 9 FCR 442 where Toohey J at 445, speaking of natural persons, quoted the observations of Megarry V-C in Pearson v Naydler [1977] 1 WLR 899 at 902: 'The basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well established. As Bowen LJ said in Cowell v Taylor (1885) 31 Ch D 34 at 38, both at law and in equity, "the general rule is that poverty is no bar to a litigant".' 34 In relation to corporations, Sweeney J in Drumdurno at 565 referred to the comments by Megarry V-C in Pearson v Naydler (supra) at 904: 'In relation to security for costs, there seems to me to be an essential distinction between natural persons and limited companies as plaintiffs. For a natural person, the basic rule is that he will not be ordered to give security for costs, however poor he is. To that basic rule there are certain exceptions, originally evolved in case law but now set forth in the rules of the court … In the case of a limited company, there is no basic rule conferring immunity from any liability to give security for costs. The basic rule is the opposite.' 35 The primary contention by the Commonwealth, as indicated above, is that the case for Staff Development Centre in respect of the alleged negligence and alleged breach of contract must inevitably fail. Mr Swan submitted that this was because, insofar as the negligence claim and the breach of contract claim are concerned, the financial viability assessment had no causal role in the Commonwealth's decision not to award the applicant a contract, and that further, even if that assessment had a causal role, there was no negligence demonstrated in arriving at that assessment. There is much of an application for summary judgment in the contentions on behalf of the Commonwealth on this application for security for costs, but even if the matter be viewed on that basis, it is clear in my opinion that the Commonwealth would fail. 36 The applicant in the principal proceedings contended that it failed in its tender because the Commonwealth erroneously and negligently assessed its financial viability as such to deny it any contract. This contention does have the support of a document relating to a debriefing session on 1 April 1998 by Mr Ian Campbell, an officer of the Commonwealth with a director of the applicant which, amongst other things, included the statement on behalf of the Commonwealth: 'Your tender was judged for the purpose of this tender as not meeting the financial viability parameters.' The Commonwealth, in its voluminous material going to the issues in the proceedings, and in particular this issue, contends that 'Mr Campbell's statements do not reflect the complete picture', and that 'the conclusion that the applicant would seek to have you draw from that statement is totally contradicted by every shred of contemporaneous evidence.' 37 The Court was invited to conclude that, in the face of this other material, the Court should conclude that the statement by Mr Campbell 'is barely palpable evidence because of its hearsay nature and the distance between it and the events to which it relates. And … all the contemporaneous evidence is to the opposite effect.' 38 The resolution of this conflict is clearly not appropriate on an application for security for costs. What it does in fact demonstrate is that there is a basis in the Commonwealth's own material, which provides an arguable basis for the claims in contract and negligence advanced in the statement of claim. It may be that at the trial the Commonwealth will succeed in overcoming the embarrassment that the statement by Mr Campbell to a director of the applicant causes to its case. The material indicates, in my opinion, that the claim of the applicants is not properly to be characterised as vexatious or frivolous, or without arguable prospects of success. 39 That reason, coupled with the impecuniosity of the applicant company, the fact that an order for security of costs would kill the litigation, and the further consideration that the Commonwealth has delayed until after it has expended nearly $155,000 in its own costs before bringing an application for security for those and future costs, lead me to conclude that in the exercise of the discretion conferred on the Court in respect of security for costs, it is not appropriate in the circumstances of this case to make any such order. 40 The application is dismissed. I will reserve the question of costs. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender Associate: Dated: 15 November 2005 Solicitor for the Applicant: Mr Peter Black Counsel for the Respondent: Mr Maurice Swan Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 4 November 2005 Date of Judgment: 15 November 2005