New South Wales Supreme Court CITATION : Laderma International v Taurean Systems [2009] NSWSC 905 HEARING DATE(S) : 19 August 2009 JURISDICTION : Equity Division Commercial List JUDGMENT OF : McDougall J at 1 EX TEMPORE JUDGMENT DATE : 19 August 2009 DECISION : See paragraphs [29] and [30] of the judgment. CATCHWORDS : COSTS - security for costs of cross-claim - whether cross-claim offensive in nature - whether delay sufficient to disentitle claimant - whether to order security for total amount claimed. LEGISLATION CITED : Corporations Act 2001 Uniform Civil Procedure Rules CATEGORY : Procedural and other rulings Citadel Property Group v Capital Finance Australia [2008] NSWSC 1470 CASES CITED : Citadel Property Group v Capital Finance Australia [2008] NSWCA 196 Neck v Taylor [1893] 1 QB 560 PARTIES : Laderma International Pty Ltd (Plaintiff) Taurean Systems Limited (Defendant) FILE NUMBER(S) : SC 50187/07 COUNSEL : M A Ashhurst SC (Plaintiff) P C Silver (Defendant) SOLICITORS : Thomson Playford (Plaintiff) Holman Webb (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST McDOUGALL J 19 August 2009 (ex tempore – revised 21 August 2009) 50187/07 LADERMA INTERNATIONAL PTY LIMITED (ACN 096 901 674) v TAUREAN SYSTEMS LIMITED JUDGMENT 1 HIS HONOUR: These proceedings concern an exclusive distributorship agreement made between the plaintiff and the defendant on 6 September 2001. The plaintiff terminated, or purported to terminate, the agreement on about 16 October 2007. The defendant denies that the plaintiff did validly terminate the agreement. Nonetheless, it says, in the events that I have described, the plaintiff repudiated the agreement. By letter of 24 October 2007 the defendant accepted that repudiation. On any view, therefore, the agreement has come to an end. 2 The plaintiff commenced these proceedings seeking a declaration that the agreement had been terminated and seeking relief consequent upon that termination. Although Mr Ashhurst SC, for the plaintiff, submitted that the declaration sought did not raise the validity of the termination, I do not accept that submission. The declaration sought was that the agreement "terminated on 16 October 2007". That could only have happened if the notice given by the plaintiff on that date was effective to bring the agreement to an end. If, as the defendant contends, the agreement came to an end some eight days later, the plaintiff would not be entitled in terms to the declaration sought. 3 The consequential relief sought by the summons has in substance been attended to by the parties. Thus, to the extent that the summons remains alive, what is in issue is the declaration to which I have referred and the question of costs. 4 The defendant has brought a cross-claim. It asserts that the plaintiff's conduct was repudiatory and that the defendant accepted that repudiation. It claims damages. 5 The proceedings are fixed for hearing for some eight days commencing on 14 September 2009. On 4 August 2009, the plaintiff filed a notice of motion seeking security for costs. That notice of motion has been amended, although in no material respect, by an amended notice of motion filed in court today. It appears common ground that, when the matter was fixed hearing (which occurred in the directions list on 28 July 2009) the plaintiff flagged its intention to seek security for costs. 6 The plaintiff seeks security either pursuant to UCPR r 42.21(1)(a) or (d) or pursuant to s 1335 of the Corporations Act 2001. 7 In his written submissions in support of the application for security, Mr Ashhurst accepted that the primary reason for seeking security was that the defendant is ordinarily resident outside of New South Wales. To state the obvious, that has been the situation at all material times, including when the summons was filed on 19 October 2007. 8 However, Mr Ashhurst says, the motivation, or trigger, for the application was the plaintiff's discovery, in the course of 2009, that the financial position of the defendant had deteriorated. It was that, he said, which caused the plaintiff to make its application. 9 The affidavit evidence shows that as at least 13 August 2009, the defendant has had net assets of (in round figures) £216,000, of which £149,000 is cash on deposit. On the basis of an exchange rate of roughly $A2 to £1 those figures may be understood as $432,000 and $298,000. 10 The security sought by the plaintiff is in the sum of $250,000 odd for its costs to date and $290,000 odd for its costs in the future. The affidavit evidence, taken at its highest, would suggest that the likely recoverable costs incurred by the plaintiff to date are of the order of $178,000, and its likely recoverable costs to be incurred are of the order of $213,000. 11 The parties' submissions focused on three principal matters. The first was who is the effective plaintiff in the proceedings as they are now being fought. The second related to the question of delay. The third related to the amount sought. 12 I turn to the first of those matters: who is the effective plaintiff? 13 Mr Silver of counsel, for the defendant, submitted that the validity of the termination remained a live issue on the summons. Mr Ashhurst submitted that there was no substantive relief claimed by the plaintiff (at least, since the parties adjusted matters consequential upon termination, and leaving aside costs) as a result of the remaining prayer for declaratory relief. Thus, he submitted, in real and commercial terms the validity of the termination was an essential matter for the defendant, as cross-claimant, to establish. 14 As I have said, I regard the issue of the validity of the termination as being necessarily inherent in the declaratory relief sought by the plaintiff. The plaintiff has not sought to discontinue its proceedings, although Mr Ashhurst indicated that it would give consideration to doing so. If the proceedings were to be discontinued then, prima facie, the plaintiff would be liable for the costs to date (UCPR r 42.19). In that hypothetical circumstance, and assuming that costs did follow the event of discontinuance, there would be no real question of security for costs because any costs payable in those circumstances would be offset against any costs payable by the defendant to the plaintiff pursuant to the cross-claim. However, at this stage, that is hypothetical. 15 It seems to me that on any view the cross-claim has both defensive and offensive aspects. Insofar as it involves the issue of liability, it revolves around the validity of the termination. That, as I have said, is an issue that is still alive on the plaintiff's case. To that extent, what the defendant says in its capacity as cross-claimant is entirely reflective of what it would say in its capacity as defendant. 16 However, if there were no cross-claim, there would be no claim for damages. To the extent that the defendant goes further, and seeks damages, it seems to me that the cross-claim has an offensive aspect. I note that this analysis is not one unsupported by authority: see my decision in Citadel Property Group v Capital Finance Australia [2008] NSWSC 1470, and the decision of the Court of Appeal dismissing an application for leave to appeal [2009] NSWCA 196. I will return to the significance of this. 17 The question of delay is one of obvious importance. Normally, delay is significant not in itself but because it causes prejudice to the other party. In this case, it has not been said (as was said in Citadel Property Group) that if the application for costs had been brought promptly, the defendant would not have continued with its conduct of the proceedings, and would not have incurred substantial costs (as, on the unchallenged evidence of its solicitor, it has; of the order of $183,000 to date). 18 Nonetheless, delay is relevant because, as I have said, the security sought by the plaintiff includes security for its past costs. In my view, the delay in bringing the application is such as to disentitle the plaintiff to any security for costs up to the date when the application was flagged. The plaintiff, as I have said, has always known that the defendant was resident outside New South Wales. It has always said that it is that fact which is the primary motivation, or reason, for bringing the claim. In circumstances where an application was delayed, and accepting for the moment that the deterioration in the defendant's financial position might have been the trigger for the application, I see no reason as a matter of justice and fairness between the parties (see the analysis of Lord Esher MR in Neck v Taylor [1893] 1 QB 560 at 562) for the defendant now to be burdened with an order for security for past costs. 19 Is the delay a reason for refusing out of hand the application for further security? In my view that question cannot be considered in the abstract. It needs to be looked at in conjunction with the previous question: namely, the extent to which the cross-claim is defensive and the extent to which it is offensive. 20 When one puts all those matters together, and accepts the proposition that there is no suggestion that the giving of some security would stifle the cross-claim, it might be thought that there is some basis on which security should be ordered. As I have said, the defendant's financial position is that it has effectively net assets of $432,000 of which some $298,000 is available in cash. Its solicitor has estimated that its costs, from here to conclusion of the hearing, would be of the order of $120,000. It would follow that the defendant would have available, after paying for such costs, residual net assets of the order of $312,000 of which approximately $178,000 would be available in cash. On that basis, I think, it could not be said that some order for security would necessarily stifle the proceedings. 21 Further, if the security to be given should reflect only the offensive nature of the cross-claim, then that analysis is strengthened. 22 There are two other points to be made in this context. The first is that the defendant asserts that the deterioration in its financial position is substantially the result of what it says is the plaintiff's wrongdoing. As a matter of arithmetic analysis the evidence seems to support that position. However, in circumstances where it is not said that requiring it to give security, in circumstances where its financial position has been depleted by the alleged wrongdoing, would stifle the litigation, that seems to me to be of less than significant impact. 23 The other matter ought not be so regarded. It suggests that, even if the plaintiff were to become entitled to all its costs going forward (as they have been estimated) the defendant has sufficient net assets to meet them. This analysis applies a fortiori if security should be given, or the real question at issue, relates only to the costs of the offensive aspect of the cross-claim. 24 Mr Ashhurst submitted that whereas before the defendant's financial position was extremely healthy, its ability to meet a costs order is now marginal. There is, I think, considerable support for that proposition, particularly where (as appears from the evidence) the principal of the defendant resorts to it for dividends as his source of income. There is no guarantee that the present net asset and net cash position would be maintained (or maintained subject to paying for its own legal expenses) until the conclusion of the hearing and delivery of judgment. Thus, I think, there is still some, although not a major, question over the defendant's ability to meet an order for costs. 25 That then turns back inevitably to what I have said as to the dual character of the cross-claim, and to the third issue, namely, quantification. The plaintiff's application is supported by an affidavit of its solicitor, and an affidavit of an experienced cost assessor, who gave it as her opinion that the amounts to which I have referred would be recovered on the ordinary basis for costs to date and likely costs in the future. I do note however, with some surprise, that those amounts are almost twice the amounts estimated by the defendant's solicitor as his client's costs to date and in the future. 26 I note also that the defendant's solicitor said, and in this as in all other aspects the evidence was unchallenged, that his client's costs going forward would be reduced by approximately $54,000 if the trial proceeded only on the plaintiff's claim. Using his figures for costs to be incurred, that suggests a percentage reduction of the order of 45%. If one applies that to the plaintiff's evidence of its recovery costs going forward it produces a figure of approximately $96,000. In my view, that figure would mark the upper limit of any security that the defendant should provide. 27 Included within that figure are costs for the defendant's expert of attending at court and in a conclave (said to require three days at eight hours a day) and the expert's costs of some $15,000 for preparing a joint report. Although the costs expert retained by the plaintiff was prepared to allow those amounts in full, they do seem to me to be somewhat excessive. 28 There is also the problem that a party obtaining security for costs is not necessarily entitled to have security for all its costs (or, in this case, for all the relevant part of its costs). 29 Balancing all those matters as best I can, and taking into account in particular the late stage at which the application is brought, it seems to me that doing justice between the parties, or achieving what will be fair as between the parties, requires the defendant to give some security but nowhere near the amount sought by the plaintiff. In my view, an appropriate order is that the defendant give security for the plaintiff's further costs for the proceedings in the sum of $60,000. Clearly enough, some time will have to be allowed for that to happen; and, equally clearly, there will need to be a stay until it does happen. I would expect the parties to be able to agree on a mechanism for implementing the order so that the preparation of the hearing is not threatened and the hearing date can be maintained. Counsel addressed on costs 30 I think in all the circumstances costs of the Notice of Motion should be costs in the proceedings. I reserve liberty to apply in respect of implementation of the order for security and any stay. ********** 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.