Supreme Court New South Wales Medium Neutral Citation: The Trustee for Aqua Stop Trust v Mortlake Constructions Pty Ltd [2023] NSWSC 161 Hearing dates: 24 February 2023 Date of orders: 24 February 2023 Decision date: 24 February 2023 Jurisdiction: Equity - Technology and Construction List Before: Rees J Decision: Dismiss application for further security for costs. Catchwords: SECURITY FOR COSTS — additional security — claim for $745,000 – cross-claim for $27 million — undertaking not to press cross-claim if security not provided and proceedings stayed — undertaking does not entitle defendant to secure costs of cross claim — other discretionary factors to be considered – total security sought is 90% of plaintiff's claim –disproportionate – application dismissed. Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW), r 42.21 Cases Cited: Dalma Formwork Pty Ltd v Concrete Constructions [1998] NSWSC 472 Category: Procedural rulings Parties: Mortlake Constructions Pty Ltd (First Applicant/First Defendant) Upright Builders Pty Ltd (Second Applicant/Second Defendant) The Trustee for Aqua Stop Trust (Respondent/Plaintiff) Representation: Counsel: Ms A Cameron (Applicants/Defendants) Mr C Bolger / Mr G Kaylinger (Respondent/Plaintiff) Solicitors: Fortis Law (Applicants/Defendants) Solon Lawyers (Respondent/Plaintiff) File Number(s): 2019/270851 Judgment 1. HER HONOUR: This is an application by the defendants / cross-claimants (the builders) for additional security for costs. The plaintiff / cross-defendant (the subcontractor) was previously ordered by Hammerschlag J to provide security in the amount of $300,000. His Honour reserved to the builders leave to apply for additional security, should it become apparent that the security provided was materially inadequate. 2. In considering the application for additional security, it is necessary to understand something of the proceedings. From 2015 to 2019, the subcontractor was engaged by the builders to perform waterproofing at several residential apartment buildings in Sydney. In August 2019, the subcontractor commenced these proceedings in the District Court of New South Wales, seeking payment of unpaid invoices totalling some $754,000. The invoices largely relate to unreleased retention moneys. 3. In their defence of the subcontractor's claim, the builders deny that the invoices are payable for two reasons. First, the subcontractor is said to have overcharged. The builders rely on an affidavit of Wilkin Ho, who says that the subcontractor has been overpaid some $188,000. Second, the builders claim a set-off for damages pursuant to a cross-claim, by which they seek loss and damages caused by allegedly defective and incomplete work. 4. A Scott Schedule has since been filed in support of the cross-claim, claiming costs of rectification of some $16.8 million. The builders also rely on an expert report of David Madden, who puts the costs of rectification at some $26.85 million. 5. When the builders first requested security for costs in June 2020, the builders' solicitor advised that the cross-claim was "purely defensive" and, to make this good, was instructed to offer an undertaking not to press the cross-claim in the event that the proceedings were stayed or dismissed due to the subcontractor's failure to comply with any order to provide security. In doing so, the builders' solicitor referred to the judgment of Rolfe J in Dalma Formwork Pty Ltd v Concrete Constructions [1998] NSWSC 472, where his Honour observed that whether the claim and cross-claim arose out of the same, or essentially the same, factual matrix is a very important consideration. An order for security would not generally be made in such circumstances as: It is … a somewhat arid exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence. This situation can be overcome by a defendant if it unequivocally states that it will not pursue any claims against the plaintiff in the event of an order for security being made and not met. 1. The builders' solicitor suggested that Dalma Formwork was authority for the proposition that such an undertaking provided strong grounds for a defendant to apply for a plaintiff to provide security for costs, notwithstanding the claim and cross-claim traversed the same matters. 2. I understand that undertaking remains in place. 3. In August 2020, Hammerschlag J ordered the subcontractor to provide security of $300,000. As I understand it, the subcontractor is a $2 company. Security was provided by bank guarantee in November 2020, by which time the subcontractor had also served its lay evidence, comprising three affidavits. 4. The proceedings appear to have then simplified somewhat in May 2021, when the second plaintiff discontinued proceedings and the first plaintiff discontinued proceedings against the third defendant. In May 2021, the builders served their lay evidence, being the affidavit of Mr Ho. In September 2021, the proceedings appeared to have simplified further when the first and second cross-claimants discontinued the cross-claim against the second and third cross-defendant. 5. In February 2022, the builders began serving their expert evidence on liability, apparently on the cross-claim, comprising 11 reports by Mitchell Taylor of Building and Waterproof Reports Australia. The balance of the expert evidence on liability was served in April 2022, being four further reports by Mr Taylor and Scott Schedules. In June 2022, the builders served their expert evidence on quantum, being Mr Madden's report and an amended Scott Schedule. 6. In late June 2022, the builders' solicitor received Mr Madden's invoice for $74,250 and noted that the builders' legal costs now exceeded $300,000. Whilst the evidence of the builders' solicitor on this application does not address this issue, I infer from the procedural history that much of these costs related to the cross-claim. 7. In July 2022, the builders' solicitors advised the subcontractor's solicitors that the builders' costs now exceeded $300,000. In August 2022, the builders' solicitors estimated that the builders' costs would be some $680,000. The estimated figure did not distinguish between the costs of defending the subcontractor's claim and the costs incurred by the builders in respect of their cross-claim. 8. The sub-contractor's solicitor did not agree to provide further security and asked how it was that the initial security was considered materially inadequate, such that further security was now warranted. This motion was filed in November 2022, supported by an affidavit by the builder's solicitor, Christopher Nehme. 9. Whilst Mr Nehme did not distinguish between the costs in relation to the subcontractor's claim and those in respect of the cross-claim, it appears that the costs largely relate to the latter. Mr Nehme accepted that the scope of the builders' expert evidence and related legal costs had reduced by some $123,000 since the costs estimates considered by Hammerschlag J. Notwithstanding this, the builders' estimate of the costs for the hearing had increased overall by some $90,000. Mr Nehme considered that this matter will now require a five-day hearing, although only two of those days involve lay witnesses called in relation to the subcontractor's claim. 10. The subcontractor's solicitor, Konstantine Green, estimates that the hearing of the subcontractor's claim will take one to two days. Overall, it appears that the parties generally agree that the hearing of the subcontractor's claim will take two days. 11. Turning to the requirements of rule 42.21 of Uniform Civil Procedure Rules 2005 (NSW) (UCPR), the subcontractor accepts that the threshold for ordering security for costs continues to be satisfied. 12. The builders submitted that their cross-claim is 'purely defensive' as it is pleaded in answer to whole of the plaintiff's claim and by way of set-off. The builders have provided an undertaking as described in Dalma Formwork. The builders' costs as estimated by Mr Nehme indicate that the security provided by the subcontractor is materially inadequate. 13. It does not follow from Rolfe J's observations in Dalma Formwork that, on providing the undertaking described, a defendant is entitled to security for costs of the cross-claim. At best, the effect of the undertaking is to address one of the factors ordinarily militating against the making of an order for security for costs. Similarly, the fact that a defendant pleads a set off, being damages sought in a cross-claim, does not equate the costs of defending the plaintiff's claim with the costs of prosecuting the cross-claim. 14. Further, the fact that the Court has already ordered that security for costs be provided does not mean that the Court is no longer required to consider the criteria relevant to the exercise of its discretion in making an order for security, should further security be sought. In this case the following considerations are particularly relevant: 1. whether the plaintiff is effectively in the position of a defendant: UCPR, rule 42.21(1A)(e); 2. whether the security sought is proportionate to the importance and complexity of the subject matter in dispute: UCPR, rule 42.21(1A)(k); and 3. the timing of the application for security for costs: UCPR rule 42.21(1A)(l). 1. So far the evidence reveals, the additional costs which the builders have occurred, and are likely to incur, relate to the cross-claim not the subcontractor's claim. The cross-claim is now some $27 million and dwarfs the subcontractor's claim for some $754,000. I consider that the plaintiff is now effectively in the position of a defendant. 2. Where the total security for costs now sought comprises 90% of the subcontractor's claim, I consider the security to be disproportionate to the importance and complexity of the subject matter in dispute, being whether the subcontractor was entitled to charge as it did, apparently by reason of a variation to the contract, and whether it is entitled to the return of its retention moneys. Whilst I accept that the latter issue overlaps with the cross-claim, my focus remains on the issues and quantum of the claim. 3. This application is brought two and a half years after the subcontractor provided security in accordance with the orders made by Hammerschlag J. During that time, the subcontractor has continued to prosecute its claim, including by incurring additional legal costs. The directions for case management in this matter are presently at the stage of reply evidence. A hearing date is yet to be allocated. Presumably the matter will soon be listed for final hearing. If the subcontractor had been aware that it would be asked to provide further additional security, being in an amount more than double the security already provided, the subcontractor may well have made a different decision two and a half years ago when deciding whether to provide security of $300,000 and incur legal costs in prosecuting its claim. 4. For these reasons, I do not consider it appropriate in the circumstances to require the subcontractor to provide further security for costs. I make the following orders: 1. Dismiss the defendant's notice of motion filed on 10 November 2022. 2. Order the defendant to pay the plaintiff's costs of the motion. ********** 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 February 2023