Supreme Court New South Wales Medium Neutral Citation: Equa Building Services Pty Ltd as trustee for The Equa Trust v KLG Trading Pty Ltd [2022] NSWSC 997 Hearing dates: 22 July 2022 Decision date: 28 July 2022 Jurisdiction: Equity - Technology and Construction List Before: Ball J Decision: (1) The plaintiff provide security for the defendant's costs in the sum of $300,000 by way of payment into Court or the provision of a bank guarantee in a form which is acceptable to the defendant or approved by the Court; (2) The security be provided in the following three tranches: (a) $100,000 within 21 days of the date of this judgment; (b) $100,000 within 21 days after the date on which the proceedings are set down for hearing; (c) $100,000 at least 14 days before the date on which the final hearing is scheduled to commence; (3) The proceedings be stayed if security is not provided in accordance with order (2) until such time as the amount of security then due is provided; (4) The plaintiff pay the defendant's costs of the notice of motion filed on 24 February 2022 and amended on 22 July 2022; and (5) Matter stood over for directions on 5 August 2022. Catchwords: COSTS — Security for costs — Relevant factors — Whether plaintiff's claim is properly classified as defensive where it relates to its rights under a contract the subject of a prior adjudication determination under the Building and Construction Industry Security of Payment Act 1999 (NSW) — Whether plaintiff's impecuniosity was brought about by the defendant's conduct Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW) Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Equa Building Services Pty Ltd v KLG Trading Pty Ltd [2021] NSWSC 167 Perform (NSW) Pty Ltd v Mev-Aus Pty Ltd [2008] NSWSC 1329 Procorp Civil Pty Ltd v Napoli Excavations & Contracting Pty Ltd (No 2) [2006] NSWCA 147 Category: Procedural rulings Parties: Equa Building Services Pty Ltd (ACN 623 416 571) as trustee for The Equa Trust (ABN 60 323 953 136) (Plaintiff | Respondent) KLG Trading Pty Ltd (Defendant | Applicant) Representation: Counsel: DJ Byrne (Plaintiff | Respondent) DS Weinberger with Z Carrigan (Defendant | Applicant) Solicitors: HWL Ebsworth Lawyers (Plaintiff | Respondent) Chedid Storey Legal (Defendant | Applicant) File Number(s): 2021/353378 Publication restriction: Nil JUDGMENT 1. By an amended notice of motion filed in court on 22 July 2022, the defendant, KLG Trading Pty Ltd (KLG), seeks security for its costs of these proceedings from the plaintiff, Equa Building Services Pty Ltd (Equa), in the sum of $834,093. In the alternative, KLG seeks a declaration pursuant to s 73 of the Civil Procedure Act 2005 (NSW) that on or about 17 June 2022, the parties, through their legal representatives, reached an agreement that Equa would provide security in the sum of $300,000. Is KLG entitled to the declaration it seeks? 1. It is convenient to consider first the question whether KLG is entitled to the declaration it seeks. 2. Section 73 of the Civil Procedure Act provides: 73 Power of court to determine questions about compromises and settlements (1) In any proceedings, the court— (a) has and may exercise jurisdiction to determine any question in dispute between the parties to the proceedings as to whether, and on what terms, the proceedings have been compromised or settled between them, and (b) may make such orders as it considers appropriate to give effect to any such determination. (2) This section does not limit the jurisdiction that the court may otherwise have in relation to the determination of any such question. 1. There is a question whether this provision applies to interlocutory agreements. However, in this case it is not necessary to reach a conclusion on that question since, in my opinion, no binding agreement was reached between the parties in relation to security. 2. KLG relies principally on an exchange of correspondence between the parties' respective counsel on 17 June 2022, the day the original notice of motion was before the Court. 3. At 8.33 AM Mr Byrne, who appeared for the plaintiff, sent an email to Mr Weinberger, who appeared for the defendant, saying: Draft orders attached reflecting my understanding of agreement below. Just need title details to finalise. 1. Mr Weinberger replied at 8.34 AM saying that he could not open the attachment. 2. Mr Byrne replied at 8.35 AM relevantly saying: … Try the attached. If that doesn't work: By consent, the Court: 1. ORDERS that by 22 July 2022, the Plaintiff provide security for the Defendant's costs up to a value of $300,000 by the provision of a charge in registrable form over Lot [#] in SP [#] (the Property). 2. ORDERS that costs of the Defendant's notice of motion dated 24 February 2022 (Motion) be reserved. 3. ORDERS that the Motion be otherwise dismissed. 4. ORDERS that the proceedings be listed for directions on 29 July 2022. 1. The attachment contained proposed consent orders which were marked "Draft" and which were in the form set out in the text of Mr Byrne's email. 2. At 9.15 AM on 17 June 2022, Mr Weinberger informed the Court that the application for security "has been resolved" and that "The parties, however, would need some time to formulate the orders …". 3. It is unclear whether, following the hearing, there was any discussion between the parties on the precise form of the orders and, in particular, what property was to be inserted in order 1. In any event, on 30 June 2022 the plaintiff's solicitor, Mr Jury, sent an email to the defendant's solicitors which relevantly said: Our instructions to agree to security have now been withdrawn. We are now asked to put on additional evidence that will go to whether your client is entitled to security. 1. In my opinion, the evidence is not sufficient to demonstrate that an agreement was reached. The primary difficulty is that the parties never identified a property over which a charge was to be granted. It is common ground that Equa itself owns no real property. Consequently, it was necessary for the parties to identify the property of a third party (most likely of an entity related to Equa) which was acceptable to both of them. That was critical because Equa needed to be satisfied that there was a property over which security could be granted and KLG needed to be satisfied that there was sufficient equity in the property for the security to have a value of at least $300,000. That never happened. That explains why Mr Weinberger did not formally purport to accept the offer of security and why the Court was informed that the parties needed some time to formulate the orders. 2. Mr Jury's email dated 30 June 2022 does not alter the position. The reference to "[o]ur instructions to agree to security" must be read as a reference to instructions to seek to reach agreement in relation to security. It cannot be read as an admission that an agreement had been reached. Should security be ordered? 1. The application for security is made under Uniform Civil Procedure Rules 2005 (NSW) r 42.21 and s 1335(1) of the Corporations Act 2001 (Cth). Both provisions have a threshold requirement that there be reason to believe that the corporate plaintiff will be unable to pay the costs of the defendant if successful in its defence (to paraphrase s 1335(1)). If that threshold requirement is satisfied, the Court has a discretion whether to order security and, if an order is made, a discretion concerning the amount to be ordered. 2. Before addressing the question of security directly, it is necessary to say something about the proceedings. 3. KLG had been engaged by Equa to supply and install aluminium windows, cladding and façade elements of a medium-rise residential complex in Miranda (the Project) for an amount of $1,596,000 (excluding GST). Equa is a member of a group of companies, one of which was the developer of the Project. 4. It is Equa's case that on 15 March 2021, KLG abandoned the Project site in circumstances where the work was incomplete and a substantial number of defects with its work remained unrectified. On 14 May 2021, Equa served a notice under the relevant sub-contract requiring KLG to show cause why the work should not be taken out of its hands and why Equa should not suspend payment or alternatively why Equa should not terminate the contract. Notwithstanding that notice, KLG did not return to the site and on 28 June 2021 Equa served a notice to the effect that it would engage third parties to complete the work and claim the costs of doing so from KLG. On 27 August 2021, it also served a notice claiming liquidated damages in the sum of $255,000 for delay of 102 days. 5. On 3 September 2021, KLG submitted a payment claim for $454,757.60. In response, Equa served a payment schedule in the amount of -$232,961.16. There was an adjudication determination in KLG's favour under the Building and Construction Industry Security of Payment Act 1999 (NSW) in the sum of $394,148.39. The determination was the subject of a challenge in this Court, which was dismissed on 17 December 2021: Equa Building Services Pty Ltd v KLG Trading Pty Ltd [2021] NSWSC 1674. 6. In these proceedings, Equa claims: 1. The costs of rectifying defects in the work performed by KLG, which are said to total $949,630.07, $170,830.07 of which has already been paid by Equa and the balance of which is the estimated costs of the remaining work; 2. Consequential losses of $4,281,870.90 which are said to include management costs of $254,550.39, overheads of $76,365.12, land tax of $51,446.54, rescinded contract costs of $283,275.71, additional interest of $1,784,999.35 and preliminaries and management costs for project management of $1,824,982.22. In addition, or in the alternative to consequential loss, Equa claims liquidated damages of $159,600. 1. It appears to be common ground that the threshold requirement for an award of security is satisfied in this case. However, Equa submits that the Court should not in the exercise of its discretion order security for two reasons. First, it submits that in substance it should be regarded as the defendant in these proceedings. Second, it submits that its impecuniosity has been brought about by KLG's conduct. 2. Equa is said in substance to be the defendant in the proceedings because in effect it is seeking a determination on the merits of KLG's claim for payment. I do not accept that submission. As I indicated during the course of the hearing, a submission along those lines has been rejected in other cases: see Procorp Civil Pty Ltd v Napoli Excavations & Contracting Pty Ltd (No 2) [2006] NSWCA 147 at [10] per Hodgson JA; Perform (NSW) Pty Ltd v Mev-Aus Pty Ltd [2008] NSWSC 1329 at [28] per McDougall J. Here, the position is clear. Equa claims that the work performed by KLG was defective. It seeks damages on that basis. There is no basis for saying that that claim is essentially defensive in nature. 3. Equa submits that its impecuniosity has been brought about by KLG's conduct because it has lost the whole profit it would have earned on the Project because of KLG's defective work. In my opinion, the evidence does not establish that. There is reason to believe that Equa will not be able to pay KLG's costs if KLG is successful because searches undertaken by KLG indicate that Equa has no assets. However, Equa has chosen not to lead any evidence of its financial position, and it is simply unclear whether its financial position, whatever precisely it is, could be said to have been brought about by KLG's defective work, assuming that can be proved. Although Equa claims that the costs of rectifying the defects will be in excess of $900,000, it appears that it has only actually paid approximately $170,000 of that amount. Mr Derek McCartney, the director of Equa, swore an affidavit stating that Equa had incurred other costs totalling approximately $90,000 as a consequence of KLG's alleged breaches. However, none of those costs are substantiated by objective evidence. Moreover, Mr McCartney's principal point is that once Equa has paid all the amounts it is or will be liable to pay, it will make no profit on the Project. But that does not establish that Equa does not currently have cash to provide security, or that it is not entitled to obtain cash from related companies for work that it has done or through the repayment of inter-company loans in order to provide security. Similarly, if Equa itself is unable to provide security, it is not possible on the evidence to say whether that arises from KLG's alleged defective work or, for example, as a consequence of the financial arrangements that exist between Equa and other companies in the group. 4. During the course of the hearing of the motion, KLG accepted that an appropriate amount of security was $300,000. That amount was not substantially greater than the quantum accepted by Equa as being appropriate ($264,000). The amount proposed by Equa was based on evidence given by its solicitor, Mr Jury. Some of the assumptions made by Mr Jury to arrive at a figure of $264,000 appear to be overly conservative. For example, KLG's original claim for security was based on evidence given by its solicitor, Mr Chedid. Mr Chedid used his firm's actual charge-out rates to calculate the estimated costs of the proceedings. Those rates, which appear to me to be reasonable, were $600 per hour for a principal, $370 per hour for an associate and $320 per hour for a solicitor. Mr Jury, however, assumed lower recoverable charge-out rates than those used by Mr Chedid. Mr Jury made significant reductions for the time taken to complete certain tasks compared to the estimates made by Mr Chedid. He also reduced the estimated solicitors' fees by 35 percent to arrive at an estimate of recoverable party/party costs. Although many of the reductions made by Mr Jury to the estimated hours that it would take to complete certain tasks appear to be reasonable, it seems to me to be overly conservative both to make those reductions and to reduce the total costs by 35 percent to arrive at a figure for party/party costs. Taking those matters into account, in my opinion, KLG's proposal to accept $300,000 was a very reasonable one. Costs and orders 1. KLG has been successful in obtaining an order for security. Equa submitted that nonetheless it should not have to pay KLG's costs because KLG agreed to an amount of security that was far less than the amount for which it asked. However, Equa resisted providing any security. It also resisted (unreasonably, in my opinion) providing security in the amount of $300,000 if the Court was minded to make an order for security. In those circumstances, in my opinion there is no reason to displace the normal principle that costs should follow the event. 2. The parties agreed that it was appropriate that security be provided in tranches. 3. Accordingly, the orders of the Court are: 1. The plaintiff provide security for the defendant's costs in the sum of $300,000 by way of payment into Court or the provision of a bank guarantee in a form which is acceptable to the defendant or approved by the Court; 2. The security be provided in the following three tranches: 1. $100,000 within 21 days of the date of this judgment; 2. $100,000 within 21 days after the date on which the proceedings are set down for hearing; 3. $100,000 at least 14 days before the date on which the final hearing is scheduled to commence; 1. The proceedings be stayed if security is not provided in accordance with order (2) until such time as the amount of security then due is provided; 2. The plaintiff pay the defendant's costs of the notice of motion filed on 24 February 2022 and amended on 22 July 2022; and 3. Matter stood over for directions on 5 August 2022. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 July 2022