Reported Decision : 57 ACSR 122 New South Wales Supreme Court CITATION : ABB Service v Pyrmont Light Rail [2006] NSWSC 187 HEARING DATE(S) : 10 March 2006; 17 March 2006 JUDGMENT DATE : 17 March 2006 JURISDICTION : Technology & Construction List JUDGMENT OF : McDougall J at 1 EX TEMPORE JUDGMENT DATE : 03/17/2006 DECISION : See paragraph [52] of judgment CATCHWORDS : COSTS - security for costs of arbitration under s 1335 of the Corporations Act 2001 and s 47 of the Commercial Arbitration Act - where parties agree to amount and form of security - from what date security should operate - where cross-claims are defensive or seek indemnity on basis of matters alleged by claimant - where cross-claims involve same evidentiary dispute - whether security extends to costs of cross-claims - no question of principle LEGISLATION CITED : Commercial Arbitration Act Corporations Act 2001 CASES CITED : Johnson v Macri and Marcellino Pty Limited (8 June 1990; unreported; BC 9002978) Pacific Acceptance Corporation Ltd v Forsyth (No 2) [1967] 2 NSWR 402 PARTIES : ABB Service Pty Limited (Plaintiff) Pyrmont Light Rail Company Limited (Defendant) FILE NUMBER(S) : SC 55089/05 COUNSEL : F G Lever SC (Plaintiff) L V Gyles (Respondent) SOLICITORS : Abbott Tout (Plaintiff) Piper Alderman (Respondent) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY & CONSTRUCTION LIST McDOUGALL J 17 March 2005 Ex tempore (revised 17 March 2005) 55089/05 ABB SERVICE PTY LIMITED v PYRMONT LIGHT RAIL COMPANY LIMITED JUDGMENT 1 McDOUGALL J: The plaintiff in these proceedings (ABB) is the respondent in an arbitration in which the defendant in these proceedings (PLRC) is the claimant. The arbitrator is the Hon M L Foster QC. There are two cross-claims in that arbitration: one brought by ABB against PLRC and the other brought by ABB against Microelectronic (Aust) Pty Limited (Microelectronic). 2 In these proceedings, ABB seek an order for security for its costs in the arbitration. It relies on s 1335 of the Corporations Act 2001 and on the Court's power pursuant to s 47 of the Commercial Arbitration Act. It was not disputed that s 47 is a sufficient basis for this Court to order a claimant in an arbitration to give security for the costs of the respondent in that arbitration; clearly, it is. See, for example, the decision of Cole J in Johnson v Macri and Marcellino Pty Limited (8 June 1990 unreported; BC 9002978). 3 The parties have now agreed that security should be given and on the amount and form of that security. There are, however, a number of matters that require to be decided. The first is the date from which the security should operate. The second is whether or not it should extend to any costs incurred by ABB in relation to either or both of the cross-claims to which I have referred. The third is as to the costs of the proceedings in this Court. There is also some dispute as to the mechanism to be followed in the event that ABB makes an application for further, or "top-up" security. 4 Unfortunately, to deal with the issues that remain, it is necessary to have some understanding of the issues in the arbitration and of some matters of chronology. 5 In substance, the arbitration relates to an automated ticketing system (ATS) and an operational control system (OCS) installed as part of the light rail system operated by PLRC between Central Railway and Pyrmont. The ATS and OCS were said to have been installed pursuant to a contract between PLRC as principal and ABB as contractor. At least some of the works in respect of the ATS and OCS were the subject of a sub-contract between ABB and Microelectronic. 6 In its points of claim in the arbitration, PLRC allege, among other things, a number of defects in the ATS and the OCS. Whether or not those systems were defective, either in the manner alleged or at all, is very much in issue between PLRC and ABB. 7 After the arbitration between PLRC and ABB was commenced, ABB commenced its own arbitration against Microelectronic. In substance, by its points of claim in that arbitration, ABB sought to pass on to Microelectronic, pursuant to the sub-contract between them, responsibility for the defects alleged by PLRC against ABB to the extent to which those defects might be found to exist. Microelectronic's defence to those points of claim in substance repeats and relies upon ABB's defence to the claim by PLRC, and raises some questions of contractual limitation of liability. 8 The arbitrator ordered that the two arbitrations be consolidated. That was done on 4 July 2005. Thereafter, by some mechanism that I must say I do not quite understand, ABB's points of claim against Microelectronic have been treated as points of cross-claim, so that Microelectronic is a cross-respondent in the arbitration. 9 In addition, as I have indicated, ABB has cross-claimed against PLRC. The cross-claim is in substance, in my view, defensive. That may be seen from the relief claimed by ABB against PLRC: including declarations that it has no obligation or liability to PLRC, and that it was prevented by PLRC from completing its works in connection with the ATS and the OCS, and that PLRC interfered with ABB and Microelectronic in the performance of their works; an injunction restraining PLRC from claiming against ABB under the contract in connection with the OCS or the ATS; and an order that the security provided by ABB to PLRC under that contract be returned to ABB. 10 The arbitration between PLRC and ABB was commenced in about November 2004. The points of claim were served on 14 January 2005. The defence and cross-claim were filed on 8 February 2005. Thereafter, on 8 April 2005, ABB served its points of claim in its arbitration against Microelectronic. Although the date on which this latter arbitration was commenced does not appear in the evidence, the parties have agreed that it was commenced after the arbitration between PLRC and ABB. I infer that it would not have been commenced had there been no dispute between PLRC and ABB. 11 The first intimation of a claim for security for costs was given on 19 May 2005. On that day, ABB's solicitors wrote to PLRC's solicitors enclosing an extract from the Daily Telegraph of that date, which extract suggested that the ultimate holding company of PLRC might be insolvent. The article referred to the viability (perhaps a better phrase would be lack of viability) of the light rail system. Thus fortified, ABB's solicitors stated that the issue of PLRC's ability to satisfy a costs order was "squarely raised" and demanded that security for costs be provided. 12 PLRC replied stating that the media report was inaccurate and, categorically, that "no security will be offered". There was, thereafter, correspondence between the solicitors in which ABB sought, and PLRC declined to give, information as to PLRC's financial position. 13 ABB procured a report by a Mr Michael Potter, an accountant, as to the financial position of PLRC. The material available to Mr Potter was not particularly up to date. It included the audited accounts as at 30 June 2003 and what appear to be a half yearly financial statement (said to be as at 30 December 2004). Nonetheless, on the information available to him, Mr Potter concluded that "there is little prospect of recovery ... in full" of costs that might be incurred by ABB. 14 It would appear that Mr Potter had been instructed that those costs would be in the order of $2 million. On one view of his draft report, it could be thought that he was saying that costs in that sum might not be recovered in full. However, I think, it is clear on a reading of the whole of that report (and, in any event, clarified by further reports provided by Mr Potter) that he was saying that PLRC's financial position was such that no substantial costs order could be met in full. That is apparent from Mr Potter's construction of a notional return as to affairs (on the assumption that PLRC went into liquidation) from which he estimated, even taking assets into account at their book value, that there would be a significant deficiency of liabilities over assets and a return of significantly less than 100 cents in the dollar to unsecured creditors. 15 Nonetheless, ABB's solicitors thereafter focused for a while not on the basal question of the ability of their client to meet any costs order that might be made against it, but on the quantification of the figure of $2 million. I do not wish to be taken as suggesting that this was an entirely inappropriate inquiry. Clearly, on any application for security for costs, there are a number of matters to be considered. One is whether the foundation for an order is shown: that the plaintiff, if unsuccessful, would be unable to meet any costs ordered to be paid by it. Another is the quantification of the costs for which security should be given. Others relate to discretionary considerations which have been articulated by the courts over years. Nevertheless, I think it is significant to note that at no stage after Mr Potter's draft report (and subsequent reports) were served did PLRC take any appropriate step to refute the inferences drawn by him. It did take some steps; in my view, those steps were inadequate and inappropriate, and I shall return to them. 16 The debate as to the quantification of the sum of $2 million was fruitless. On 7 September 2005, PLRC undertook to provide financial information which would show that it "has the capacity to meet any order for costs should it be unsuccessful in the arbitration". On that basis, ABB delayed making the application to this Court. 17 On 20 September 2005, PLRC's solicitors provided some financial information to ABB. The information provided was bank certificates showing bank deposits at particular dates. They provided also an "assurance" that the shareholders in PLRC would not call in their loans "within the coming 12 months". Clearly, the certificates as to bank deposits were insufficient to show current ability to meet costs orders, let alone prospective ability to do so. That is because they related to the situation as at 1 July 2005: almost two months earlier. They gave no indication of the current cash position of PLRC, let alone as to the real issue: namely, its ability to meet any costs order against it. 18 Likewise, the indication, or "assurance", that the shareholders would not call in their loans within twelve months went no way towards meeting the legitimate concerns raised by ABB. That is because the assurance was not legally binding; and even taken at face value, did not mean that the shareholders would not prove in any liquidation of PLRC. It may be noted that the shareholders did not offer to subordinate their loans to any claim by ABB for costs. 19 Not surprisingly, ABB did not accept PLRC's response. On 23 September 2005, it sought further financial information. That request was unanswered, and was repeated on 6 October 2005. On 18 October 2005, PLRC furnished ABB with its audited accounts to 30 June 2004. It asserted, presumably upon the basis of those accounts, that there were not reasonable grounds to believe that it could not meet an adverse costs order. Frankly, I do not understand the basis on which that could have been said, having regard to the information revealed by these accounts as to the financial position of PLRC: in particular, its loss for the year in question and its accumulated losses (and deficiency of assets to liabilities) to the date to which those accounts were prepared. 20 There was further correspondence between the parties, arguing the position back and forth. On 21 October 2005, PLRC informed ABB that it was undertaking discussions with its shareholders with a view to making an offer for security: on that basis, it suggested an application to this Court would be premature; and on that basis, ABB agreed to withhold making its application. 21 On 1 November 2005, PLRC referred to "verbal in principle agreement to provide security" from its shareholders. On 7 November 2005, those proceedings were commenced. The summons was served the following day. 22 The nature of the "verbal in principle agreement" was revealed in a letter of 21 November 2005 from PLRC's solicitors to ABB's solicitors. That letter stated, relevantly, that "[e]ach shareholder will provide financial support to [PLRC] up to the aggregate limit of $1 million should [PLRC] be the subject of any adverse costs order". The letter referred to enclosed letters from the shareholders which were not, in fact, enclosed. They were provided shortly thereafter. Each shareholder agreed (although not by way of an acceptable offer addressed to ABB) that "in principle that it will provide financial support to [PLRC] to the aggregate limit of $1 million to be provided by all shareholders pro rata with their respective equity shares in order to pay any adverse costs order made against [PLRC] in the arbitration...". 23 On 29 November 2005, ABB pointed out the letters were not an offer in a form that ABB could accept. They suggested that a deed be entered into between ABB and the shareholders, and enclosed a draft deed. On 1 December 2005, PLRC's solicitors said that the shareholders would not enter into a direct arrangement with ABB. 24 Further correspondence between the parties went nowhere to resolving the dispute. Accordingly, the proceedings came on for hearing before me on 10 March 2006. On that date, Mr Lever SC, counsel for ABB, handed up an "open offer" whereby his client agreed to accept $1 million as security for its costs in the arbitration from 20 May 2005 in one of three alternative forms. The open offer contained provision for a stay, and provision for applications for further security. Both to enable PLRC to consider that offer, and to enable it to consider a further report prepared by Mr Potter based on management accounts to late January 2006, the proceedings were adjourned until today. 25 As I have said, when the proceedings came back before me, the issues for resolution were limited in the manner to which I have already referred. 26 What I have said is, I think, sufficient to enable me to turn now to the first issue: namely, the date from which the security should operate. ABB says 20 May 2005. PLRC says 7 November 2005. The former date is the date on which ABB first claimed security. The latter is the date of filing of the summons in these proceedings. 27 The question, whether security should be provided, is not always an easy one to resolve. Further, it is one which the parties are often able to resolve in a way that is more flexible than the mechanisms open to the Court. For these reasons, together with all the usual reasons, it is highly desirable that requests for security for costs be resolved by compromise if at all possible. It should only be in the case of inability to compromise that the Court is troubled by an application. If the order for security were to date from the date of filing of the summons then the effect would be to encourage parties to file first and negotiate later. In principle, I think, that is not something that the Court should do. 28 Further, as I have recounted, it is apparent that on several occasions, PLRC's solicitors suggested that it would be premature to make the application because of steps that they proposed to take. This happened first on 7 September 2005, when information was promised that would demonstrate that the basis for the order would be shown not to exist. I have already indicated that the information subsequently provided was inadequate to do that. 29 In circumstances where one party has suggested that an application is premature (because of steps that are to be taken by that party which, it is said, will make the application for security unnecessary), it would be contrary to common sense, as well as to common notions of what is just as between the parties, to allow that party to say later that, notwithstanding its position as advanced in correspondence, the security should be ordered to date from the date of filing of the application. That is so particularly when, as is apparent either expressly in some cases or by inference in others, the invitation to delay filing, on the basis of further information to be provided, was accepted. 30 Thus, I do not think that it is appropriate to order the security to date from, or to apply only in respect of costs incurred after, 7 November 2005. 31 That does not mean that it should, therefore, automatically or by default, date from 20 May 2005. It is certainly correct to note that a request for security was made on 19 May and rejected on 20 May. It is equally correct to note that, thereafter, PLRC resisted the provision of further financial information. However, it was not until 18 August 2005 that a basis, other than a newspaper report, was given for the application in relation to security for costs. In the meantime, further steps had been taken, including the filing by Microelectronic of its defence to what (in accordance with the parties' convention) I refer to as ABB's cross-claim against it and the consolidation of the two arbitrations. 32 After 18 August 2005, the inquiry focused for a while, as I have said, on the amount of the security that was sought. Nothing that was done by PLRC thereafter demonstrates any rational basis on which it could be suggested that PLRC would be able to meet an adverse costs order of any significance. Indeed, I think, the matters to which reference were made were manifestly inappropriate - either for the reasons I have already adverted to or because they appeared to rest on the misconception that cash flow, rather than the underlying financial position of the company, was the determining factor. 33 In those circumstances, and bearing in mind it was not until 18 August 2005 that a substantial (as opposed to newspaper report) basis for the application was given, I think it is appropriate that the security should relate to costs incurred on and from 22 August 2005. I pick that date because that was the date of the reply to the letter enclosing Mr Potter's draft report, and a date by which, in a broad brush sense, and without the application of any real science, I think PLRC had sufficient information to enable it to conclude that the jurisdictional foundation for an order for security was likely to exist. Indeed, if it were necessary for me to do so, I would regard the subsequent attempts made by PLRC, in a wholly inadequate way, to escape from that conclusion as confirming it must have recognised by no later than 22 August 2005 that the jurisdictional question was likely to be resolved against it. 34 On that date, it would have been open to PLRC to accept in principle it should provide security and to negotiate, or otherwise seek resolution of, the question of amount. It did not do so. 35 I therefore conclude that the first issue should be resolved by providing that security be given for costs incurred by ABB from 22 August 2005. 36 I turn now to the second issue: costs of the cross-claims. 37 The costs of the cross-claim by ABB against PLRC should clearly be caught by any order for security that is made. As I have said, that cross-claim is, in substance, responsive to the claim made by PLRC against ABB. It relies on the matters raised by way of defence to assert entitlements that may readily be seen to flow if those matters of defence are made out. It would be artificial in the extreme if those costs were not to be included in any security to be given. 38 At first blush, it might be thought that the cross-claim (as I shall continue to call it) by ABB against Microelectronic should be regarded in a different light. However, when one considers the nature of that cross-claim, I do not on reflection think that this is so. As I have said, it is a cross-claim whereby, in substance, ABB claims against Microelectronic that if the allegations made by PLRC against ABB are made out, then those matters necessarily reflect breach of the sub-contract made between ABB and Microelectronic, so that Microelectronic should indemnify ABB for the consequences. 39 In reality, looking at the points of claim (by ABB against Microelectronic) and the points of defence thereto, it is apparent that the issues are either issues raised in the proceedings between PLRC and ABB or issues as to the construction and application of the sub-contract between ABB and Microelectronic. In those circumstances, as a matter of practical reality, it is unlikely in the extreme that there will be any real evidentiary dispute between ABB and Microelectronic that is separate and distinct from the evidentiary dispute between PLRC and ABB. For those reasons, and because in a practical sense I think it would be difficult, if not a nightmare, to seek to disentangle the separate costs of ABB's cross-claim against Microelectronic (except for some, and I hope relatively insubstantial, amounts such as costs relating to the drafting of the cross-claim), I do not think it is appropriate to seek to limit the costs in respect of which security should be given by seeking to disentangle from them, so that the security is not applied to the cross-claim by ABB against Microelectronic. 40 In dealing with the question of the costs of the cross-claims, I should advert to the possible limitations on an order made under s 1335 of the Corporations Act. In s 1335(1) the entitlement to security arises if 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". In those circumstances, the discretion of the Court is enlivened to order that "sufficient security ... be given for those costs". 41 It might be thought that the words "those costs" refer only to the costs of the defence, and do not encompass the costs of a cross-claim. In contrast, UCPR Pt 42 r 42.21 refers to the defendant's "costs of the proceedings". Although PLRC at no time pressed me with that argument, it is one that I raised in the course of the argument with Mr Lever. Mr Lever said that, in the alternative, ABB would rely on the inherent power of the Court to order security for costs. 42 In addition, it may be noted that, in relation to a predecessor of s 1335, it was said that the power to order security is founded on the likely inability of the corporate litigant to satisfy any costs order made against it: Pacific Acceptance Corporation Ltd v Forsyth (No 2) [1967] 2 NSWR 402 at 407. That might suggest that the section is not to be construed as narrowly as a close reading might suggest. 43 In those circumstances, and bearing in mind the way in which the case was argued and ABB's reliance, if necessary, on the inherent power of the Court (which would equally be called up under s 47 of the Commercial Arbitration Act), I do not think that there is any, as it were, jurisdictional reason why an order for security as sought could not include the costs of the "cross-claim" between ABB and Microelectronic, even in circumstances where that cross-claim was commenced as a separate arbitration and somehow, either through the mechanism of consolidation or through some subsequent order of which the Court remains ignorant, became or can be regarded as a cross-claim. 44 The third matter in dispute is the costs of these proceedings. The question is a difficult one, because the application for security proceeds on the assumption that PLRC will fail in its arbitration against ABB, and be ordered to pay ABB's costs. That assumption may or may not be made good. If it is not made good – ie, if PLRC succeeds against ABB and is not ordered to pay ABB's costs - then there will be no costs to which the security should apply. In those circumstances, it might be thought to be an injustice to PLRC to order it to pay the costs of an application for security which, by hypothesis in those circumstances, was not required 45 Against this, there is the consideration that this is technically a proceeding separate to the arbitration. That follows from the lack of power in the arbitrator to order security, and the need for this Court to be involved pursuant to s 47 of the Commercial Arbitration Act. 46 Further, in this context, it is necessary to have regard to the opposition that was raised by PLRC to the giving of any security. As I have sought to indicate, many of the bases of opposition were, putting it neutrally, insufficient. Ultimately, there has been an acceptance of the obligation, and the dispute as to amount has been resolved. 47 Although the open offer was made only last Friday, it is, nonetheless, correct to observe that the question of provision of $1 million by way of security was raised as long ago as 21 November 2005, when the shareholders offered financial support up to that amount. It might be inferred that ABB accepted that amount (subject to its entitlement to apply for further security should it be necessary to do so) when, on 29 November 2005, it forwarded a draft deed providing for security in the sum of $1 million. 48 In all the circumstances, I think, it is possible to recognise that some degree of responsibility for the need to approach this Court should be attributed to each party. In PLRC's case, there was the consistent failure to recognise that the basis for an order for security was likely to be made out, coupled with the proffering of totally inadequate explanations and "evidence" intending to suggest the contrary. In the case of ABB, there was the apparent insistence on an amount of $2 million now recognised (albeit through the mechanism of compromise) to be somewhat excessive. 49 In all the circumstances, I think, when one weighs all the factors to which I have referred, the appropriate order as to costs is one which gives ABB its costs in the event that it recovers costs in the arbitration, but protects it from paying PLRC's costs in the event that it fails against PLRC in the arbitration. 50 I mentioned that there was another area of dispute as to the information to be provided by ABB to PLRC in relation to an application for further security. I indicated in the course of argument that if the parties could not agree on that, then it did not seem to me to be something that the Court could decide, in the sense that I saw, and I must say I still see, no basis on which I could impose a condition upon which an apparently unfettered entitlement to apply for further security might be exercised. 51 In those circumstances, Mr Gyles of counsel for PLRC, very properly indicated that PLRC would accept the form of condition proposed by ABB. That being so, and the parties being in agreement as to that, it is unnecessary for me to consider this issue further. 52 I therefore make orders in accordance with paragraph 1 (as amended) of the short minutes of order initialled by me and dated today's date. I note the agreement of the parties as set out in paragraphs 2, 3 and 4 (each as amended) of those short minutes of order. I order that the arbitration between the defendant as claimant and the plaintiff as respondent be stayed until security is provided in accordance with order 1. I order that the costs of this application be the plaintiff's costs in the arbitration. I reserve liberty to apply on 14 days' notice. I order that the exhibits be handed out. ****** 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.