New South Wales Supreme Court CITATION : Wattyl Australia Pty Limited v GBP Enterprises Pty Ltd [2005] NSWSC 289 HEARING DATE(S) : 31/03/05 JUDGMENT DATE : 8 April 2005 JUDGMENT OF : Newman AJ DECISION : Appeal dismissed with costs. CATCHWORDS : Appeal from Master - Discretion of Master - Security for costs Supreme Court Rules Part 53 Rule 2 (1(e)) LEGISLATION CITED : Corporations Act 2001 (Cth) S1335(1) Beach Petroleum NL v Johnson 7 ACSR 203 Buckley v Bennel Design & Constructions Pty Ltd (1974) 1ACLR 301 Erolen v Baulkham Hills Shire Council 10 ACSR 441 CASES CITED : House v King (1936) 55 CLR 499 Micallef v ICI Australia Operations Pty Ltd (2001) CA 274 (24 August 2001) Sir Lindsay Parkinson & Co Ltd v Triplan Limited (1973) 2 AER 273 Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 11 ACLR 616 Wattyl Australia Pty Limited (Appellant) PARTIES : GBP Enterprises Pty Ltd (Respondant) FILE NUMBER(S) : SC 11815/03 A.Spencer (Appellant) COUNSEL : S.Burchett (Respondent) Deacons Lawyers (Appellant) SOLICITORS : Jason Li Lawyers (Respondant) LOWER COURT JURISDICTION : Supreme Court (Master) LOWER COURT FILE NUMBER(S) : 11815/03 LOWER COURT JUDICIAL OFFICER : Master Harrison IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION NEWMAN AJ Friday 8 April 2005 11815/03 WATTYL AUSTRALIA PTY LIMITED v GPB ENTERPRISES PTY LTD JUDGMENT 1 NEWMAN AJ: This is an appeal against that part of a decision made by Master Harrison in which the learned Master declined to order the respondent to the appeal to furnish security for costs. 2 The Grounds of Appeal are as follows :- 1. The Master erred in law in holding (if she did so hold) that the Respondent's financial position had been contributed to by the conduct of the Appellant. 2. In the absence of evidence that the Respondent's financial position had been contributed to by the conduct of the Appellant the Master should not have concluded (if she did so) that it had. 3. The Master erred in law in holding (if she did so hold) that there was no reason to believe that the Respondent would be unable to pay the costs of the Appellant if ordered to do so. 4. Having found that the accounts of the Respondent for the years ended 30 June 2002 and 30 June 2003 were accurate, the Master should have found: (i) that there was reason to believe that the Respondent would be unable to pay the costs of the Appellant on the Cross Claim if ordered to do so; and/or (ii) that it appeared from credible testimony that there was reason to believe that the Respondent will be unable to pay the costs of the Appellant if the Appellant succeeds in its defence to the Cross Claim. 5. The Master erred in law in the exercise of her discretion in that each of the matters relevant to the exercise of her discretion to order the Respondent to furnish security for costs either supported the making of such an order or were equivocal. 3 Before the learned Master, by way of Notice of Motion, the appellant's sought orders pursuant to Part 53 Rule 2 (1(e)) of the Supreme Court Rules or alternatively, pursuant to Section 1335 (1) of the Corporations Act 2001 (Cth), for the defendant / cross claimant in the action to give security for costs of the Plaintiff / cross defendant of and incidental to the cross claim and that the cross claim be stayed until such security is given. By its Notice of Motion before the learned Master the Appellant sought other orders, but they are not the subject of this appeal. 4 Litigation between the parties commenced on 10 January 2003 when Wattyl filed a Statement of Liquidated Claim in the District Court claiming the sum of $371,613.85 plus interest and costs. The basis of the action was for goods sold and delivered and services provided. The products involved, not surprisingly having regard to the Appellant's business, were mainly paint. The action was then transferred to this court. GBP, in its defence, plead that the products sold to the defendant were sold pursuant to an agreement between the parties whereby a running account was established between them. It further alleged that there was a breach of the agreement and the goods were not fit for the purpose and the defendant is entitled to a set-off against monies owed in respect of the claim for deficiencies in quality arising. 5 The cross claim, which was the subject of the application for security for costs, is in the sum of $913,318.16. It alleges loss and damage occasioned to the respondent by the supply of paint products between October 1998 and mid 2000. Damages are sought for loss of payments for re-sale and loss of profits. Essentially, the respondent alleges that the products supplied were not fit for the purpose and not of merchantable quality, thus giving rise to breaches of implied terms and conditions. There was also an allegation of negligent misrepresentation. 6 Before the learned Master, as I have said, the appellant relied, in part, upon the Supreme Court Rules. Relevantly, Part 53 Rule 2 of those Rules is as follows :- 2 Cases for Security (1) Where, in proceedings, it appears to the Court on the application of a defendant: (e) that there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so, the Court may order that plaintiff to give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given. 7 Section 1335 of the Corporations Act is in similar terms to the Supreme Court Rules. 8 It may be seen that the courts power, under the Supreme Court Rules or the Corporations Act, to order security for costs be given is predicated, in cases such as this, on the court finding that there is reason to believe that the plaintiff, being a body corporate, will be unable to pay the costs of the defendant if ordered to do so. One of the reasons why Ground 3 of the Notice of Appeal is in the form which it is, is that the learned Master did not, at any stage in her judgment, specifically hold that there was either reason or no reason to believe that the respondent would be unable to pay the costs of the appellant if ordered to do so. In her judgment the learned Master, having set out the terms of Part 53 Rule 2 of the Supreme Court Rules, and having observed correctly that Section 1335 of the Corporations Act was in similar terms to the Rule, then went on to state that the power to order security for costs is discretionary. This is true once the court has made the finding relating to the ability of the defendant to pay the costs of the proceedings which it has commenced. In the appeal the appellant conducted its case on the basis that, because the learned Master dealt with questions of discretion in her judgment, it is to be inferred that she made a finding adverse to the respondent in terms of Part 53 Rule 2(e) of the Supreme Court Rules and the corresponding part of Section 1335 of the Corporations Act. On the other hand, the respondent contended that the learned Master had not made an adverse finding and had dealt with the matters of discretion as ancillary to what, in its submission, was plainly her primary finding. 9 The appellant rightly submitted that, the proceedings before the Master being interlocutory in nature, this appeal is governed by the principles expressed by the High Court in House v King (1936) 55 CLR 499 at 504­5. Again correctly, the appellant submitted that those principles have been restated by the Court of Appeal in this state in Micallef v ICI Australia Operations Pty Ltd (2001) CA 274 (24 August 2001) per Hayden JA at 45 in the following terms :- "Any attack on decisions of that character must fail unless it can be demonstrated that the decision maker: (a) made an error of legal principle; (b) made a material error of fact; (c) took into account some irrelevant matter; (d) failed to take into account, or gave insufficient weight to, some relevant matter; or (e) arrived at a result so unreasonable or unjust as to suggest that one of the foregoing categories of error had occurred, even though the error. in question did not explicitly appear on the face of reasoning." 10 Furthermore, the appellants submitted that, in so far as either the application of Section 1335 of the Corporations Law or Part 53 Rule 2 of the Supreme Court Rules involves the exercise of the discretion of the courts, the courts discretion is not unfettered, but one which must be exercised in accordance with established principle. Reliance in this regard was placed upon what had fallen from Powell J in Erolen v Baulkham Hills Shire Council 10 ACSR 441 per Powell J. In his judgment Powell J held that, although under section 1335 of the Corporations Law the making of an order for security for costs lies in the discretion of the court and despite statements in a number of authorities to the effect that the discretion is unfettered, the relevant discretion was not an unfettered one, but must be exercised in accordance with established principle. In so holding, Powell J relied upon that which had fallen in Sir Lindsay Parkinson & Co Ltd v Triplan Limited (1973) 2 AER 273 and Buckley v Bennel Design & Constructions Pty Ltd (1974) 1 ACLR 301. Funnily enough, Powell J, in Erolen's case, expressly did not follow that which had fallen from von Doussa J in Beach Petroleum NL v Johnson 7 ACSR 203, a case relied upon by the appellant on another point. 11 That point went to the basis of the power of the court to make an order under s 1335. In the Beach Petroleum case von Doussa J observed as follows at p 205 :- "In my opinion the power of the court under s1335 arises if credible evidence establishes that there is reason to believe that 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:" 12 In terms of the exercise of discretion under s1335, the learned Master referred to the decision of Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 11 ACLR 616. At pp626-627 his Honour set forth matters which he held to be relevant to the exercise of the discretion: "1. Whether the plaintiffs claim is made bona fide and has reasonable prospects of success; 2. Whether the plaintiffs lack of funds has been caused or contributed to by the conduct of the defendant; 3. Whether the plaintiffs proceedings are merely a defence against "self help" measures taken by the defendant; 4. Whether the making of an order would unduly stultify the plaintiffs ability to pursue the proceedings; 5. The extent to which it is reasonable to expect creditors or shareholders to make funds available to satisfy any order for security which is made; 6. Whether the defendant has delayed in making the application for security; 7. Whether the company is a "true plaintiff'; 8. Whether substantially the same facts are likely to be canvassed in determining the action and the cross­action." 13 The learned Master's failure to make a specific finding in relation to the threshold matter arising under either the Rules or the Corporations Law has led me to give consideration to referring the matter back to her so that she can make a specific finding one way or another. However, as a result of the conclusion I have reached as to the learned Master's exercise of her discretion, I have determined that it is not necessary for me so to do. 14 It must be firmly borne in mind that the matter in which the appellant seeks security for costs is the cross-claim brought by the respondent. Before the learned Master evidence was adduced as to the nature of the claim brought by the respondent and the evidence it proposed to call in support of its claim. In my view, that evidence is sufficient to support the learned Master's finding that the cross-claim is bona fide and has reasonable prospects of success. In so-determining the learned Master did not fall into any of the five errors adverted to by Heydon J in Micallef v ICI, which I have set out above. It also falls squarely within the concept of the exercise of discretion as described by Powell J in Erolen v Baulkham Hills Shire Council. Accordingly, as I am of the view that the learned Master's discretion was not improperly exercised in determining that matter, it follows that I am of the view that this appeal cannot succeed. Accordingly, I have determined that it is not necessary for me to return the matter to the learned Master for further findings and that the appeal against her decision should be dismissed. 15 The order of the court will be appeal dismissed with costs. ********** 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.