Supreme Court New South Wales Medium Neutral Citation: Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL [2014] NSWSC 221 Hearing dates: 07/03/2014 Decision date: 07 March 2014 Jurisdiction: Equity Division - Commercial List Before: McDougall J Decision: Plaintiff to provide security for first and second defendants' costs. Catchwords: PRACTICE AND PROCEDURE - Security for costs - Application by insurer -Discretion - whether appropriate to analyse strength of claim - whether insurers are in a different position with respect to obtaining security for costs - whether proceedings would be stultified - Uniform Civil Procedure Rules 2005 (NSW), r 42.21(1)(d) - Corporations Act 2001 (Cth) s 1335. Legislation Cited: Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Advance Innovative Solutions Pty Ltd (in liquidation) v X-Dem Group (Aust) Pty Ltd [2012] NSWSC 1112 BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 Green (in his capacity as liquidator of Arimco Mining Pty Ltd (in liq)) v CGU Insurance Ltd [2008] NSWSC 449 Statewide Developments Realty Pty Ltd v The Owners, SP 77457 [2013] NSWSC 1750 Tenth Anemot Pty Ltd v Colonial Mutual General Insurance Co Ltd [1993] 2 VR 48 Category: Procedural and other rulings Parties: Nonox Australia Pty Ltd (Plaintiff) Certain underwriters at Lloyd's subscribing to contract No CV0263CGL (First Defendant) Berkley Insurance Company (Second Defendant) Marsh Pty Ltd (Third Defendant) Representation: Counsel: J Duncan (Plaintiff) D H Mitchell (First and Second Defendants) M Tsang (Third Defendant) Solicitors: Clayton Utz (Plaintiff) Moray & Agnew (First and Second Defendant) King & Wood Mallesons (Third Defendant) File Number(s): 2013/297111 Judgment (ex tempore - revised 10 mARCH 2014) 1HIS HONOUR: The plaintiff is a member of a group of companies whose business either is or includes the manufacture and sale of a product known by various names, including "Nonox". As I understand it, Nonox is a product that can be injected into the exhaust system of a diesel powered vehicle for the purpose of causing chemical reactions which will break down harmful or potentially harmful oxides of nitrogen to water and nitrogen in its pure or elemental form. 2The plaintiff supplied its product to operators of bus fleets in Hong Kong and Singapore. Those operators reported problems in their exhaust systems. Investigations showed that the problem may have arisen from some impurities in or other defect in the Nonox product that was supplied to them. 3The plaintiff and its associated companies have negotiated a policy of public and products liability insurance. For the policy in question the underwriters were the first and second defendants; certain underwriters at Lloyds and Berkeley Insurance company. The broker retained by the plaintiff (I will not continue to refer to the group of companies) to negotiate the policy, was the third defendant, Marsh. 4The underwriters have denied liability. They raise essentially two defences, although the defences appear to arise from a common factual substratum. 5The first asserted defence is that the cover offered by the policy does not extend to the particular business operations of the plaintiff that gave rise to the claim. 6The second asserted defence is that the plaintiff was guilty of material non-disclosure or misrepresentation, and that had the true and complete state of affairs been disclosed, the underwriters would have declined to accept the risk. 7The plaintiff says that the underwriters, with knowledge of relevant matters (on the plaintiff's view, all relevant matters) and after conducting and directing investigations and advising the plaintiff on settlement of the Hong Kong claims, agreed without any relevant reservation to accept liability for the Hong Kong claims. 8The plaintiff says that this either amounts to an agreement to compromise its claim under the policy or that it gives rise to some sort of estoppel. There are subsidiary disputes as to the legal integrity of these defences but it is unnecessary to go to those matters. 9I am concerned today with the underwriters' application for security for costs. As has often been observed, such applications involve three fundamental elements. The first is whether the ground on which security may be ordered has been established. The second is whether (assuming establishment of the ground) as a matter of discretion the order should be made. The third is the precise nature (including quantum) of any order to be made. 10The application is made pursuant to both s 1335 of the Corporations Act 2001 (Cth) and UCPR r 42.21(1)(d). In each case the requirements are that the plaintiff be a corporation, and that there be reason (or "credible testimony", in the case of s 1335) to believe that it would be unable to meet any costs order made against it. 11The question of security for costs was agitated in correspondence before the second defendant filed its notice of motion. I have to say that I do not regard the attitude taken by the plaintiff's solicitors, in their side of that correspondence battle, as particularly appropriate in commercial litigation. Their correspondence could be regarded as obfuscatory; and was certainly unhelpful. 12Of particular significance, the correspondence denied that a ground for ordering security existed (and at the same time maintained the plaintiff's refusal to produce appropriate documentation). However, as now appears from the affidavit of the plaintiff's solicitor (who I assume was responsible either directly or indirectly for the relevant correspondence), the plaintiff is not able to meet any order for security from its own means. It must follow, inevitably, that the plaintiff would not be able to meet costs if ordered to do so. 13On the basis of that and other material, which it is unnecessary to canvass, I conclude that the ground has been made out for ordering security to be paid. 14I turn to the discretionary issues. I start with the proposition that, as Mr Mitchell of counsel for the applicants accepted, I should assume that the plaintiff's claim is one brought in good faith and that it has reasonable prospects of success. 15For reasons that were unclear at the time and remain so, Mr Duncan of counsel, for the plaintiff, took me to much evidence, apparently with the intention of persuading me that I should regard the plaintiff's claim as something stronger; perhaps a claim that was bound to succeed. 16In general, I do not think that it is appropriate to undertake an analysis of the strength of a claim in the context of an interlocutory application such as this. I accept that there are decided cases which say that in some circumstances it may be appropriate to try to make some assessment of the strength of a claim. I will come to those cases in a moment, but the general position in my view is as I have stated it. It is necessary to refer only to the often cited decision of Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [37]. 17It has been said that where security for costs is resisted on the ground that it is the conduct of the defendant that has caused the plaintiff's impecuniosity, the apparent strength of the plaintiff's case should be assessed. White J said as much in Statewide Developments Realty Pty Ltd v The Owners, SP 77457 [2013] NSWSC 1750 at [20]. However, his Honour followed this up by observing, at [23], that the real reason for investigating the strength of the plaintiff's case arises only where it was said that, on the particular facts of the case, the grant of security would stultify the proceedings. 18That was the approach taken by the Full Court of the Supreme Court of Western Australia in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 346 (Anderson J, with whom Kennedy and Ipp JJ agreed). In that case Anderson J observed that the question of the defendant's contribution to the plaintiff's impecuniosity had to be considered in conjunction with the proposition that the effect of an order for security would be to stultify the action. Black J applied that principle in Advance Innovative Solutions Pty Ltd (in liquidation) v X-Dem Group (Aust) Pty Ltd [2012] NSWSC 1112 at, in particular, [19]. 19There are many cases that have looked at the discretion, and the factors that might bear upon its exercise. What is important, however, is that the factors that have been expounded in decided cases are no more than guides to relevant circumstances, on the facts of each case, which bear upon the exercise of the discretion. 20There is no verbal formulation of any limit upon the discretion. The only inherent limitation is that it be exercised judicially. That requirement comprehends, I think, that it be exercised rationally on the basis of (and only of) all relevant materials (to the extent the parties put them before the court) and in a way which can be seen, objectively, to give due respect to the purpose underlying the rule and the competing consideration of the desirability that disputes should be litigated where they have reasonable prospects of success. 21What is certainly correct, however, is that the conclusion that the ground for ordering security has been proved does not mean that security should be ordered. At most, it shifts to the plaintiff - the party resisting security - the persuasive burden of showing why, as a matter of discretion, security should not be ordered. 22In the present case, Mr Duncan identified a number of factors which, he said, "clearly militate against the making of any order for security". 23The first of those was that the proceedings had been commenced in good faith and that the plaintiff had good prospects of success. Save that I would say "reasonable" rather than "good" (and this does not involve any detailed evaluation on my part of the merits of the claim) I accept that proposition. 24The second discretionary factor advanced was that the plaintiff's impecuniosity resulted from the failure of the underwriters to meet the claim. That is a somewhat circular argument. If the underwriters prove to be correct in the view that they take, they are not (and never have been) obliged to meet the claim. 25I would, however, observe in respect of impecuniosity, that the evidence bearing on this point should not be described as full and persuasive. The plaintiff's solicitor gives evidence, on information and belief from a Mr Wolf, apparently a principal of the plaintiff and its related companies. The solicitor says, in a conclusory and unsubstantiated way, that the collapse of the plaintiff's business in Hong Kong (and Singapore, because the same sort of problems seems to have happened there) has caused significant problems for the plaintiff. 26I can understand that. However, the solicitor says also that the plaintiff's Australian operations remain largely unaffected, although their profitability has been reduced because they have lost the opportunity of obtaining supply from China. 27Be all that as it may, impecuniosity of itself is not the relevant consideration. The relevant consideration is whether the effect of that impecuniosity would be that the litigation would be frustrated, or stultified, if security were to be ordered. 28The solicitor has said, and for the purposes of the application I accept, that the plaintiff is not able to meet an order for costs "from its own means". What he does not say, and what is not otherwise apparent from the evidence, is that there are no other sources of financial support available to the plaintiff. 29In this context, it is to be observed as I have said that the plaintiff is a member of a group of companies. It may be that it is the only operating company; I am not sure that the evidence makes this good. But even on the assumption that it is, the evidence does make good the proposition that the only issued shares in the plaintiff are held by another company which holds them on trust for some unidentified trust. 30It is thus open to infer that the business activities of the plaintiff are carried on not for the benefit of its shareholder but for the benefit of those who are interested in the trust, on behalf of whom the shareholder holds the shares. There is no evidence as to who those interested parties are, what their means are, or what is their ability to assist the plaintiff to provide any security that may be ordered. 31Mr Duncan submitted, in effect, that it was really only the claimants in Hong Kong and Singapore who were likely to benefit from the litigation. I do not think that this is correct. It is open to infer from the solicitor's affidavit, and I do infer, that it is likely that the plaintiff's business will collapse if the claims are proved against it and if it does not have the benefit of indemnity under the policy. That would mean, among other things, that the plaintiff's Australian operations would collapse, and the revenues that they derive, and such profits as they make for the benefit of the trust, would be lost to the beneficiaries in the trust. 32Thus, as I have said, I think that there is a sound basis in the evidence for inferring that there are people standing behind the plaintiff, who will benefit from the continuation of its business, but whose ability or inability to meet any order for security has not been proved. 33Next, Mr Duncan referred to the fact that the underwriters had originally admitted an obligation to indemnify the plaintiff in respect of the Hong Kong claims. He submitted, correctly, that the evidence shows that the underwriters, through lawyers and others appointed by them, had undertaken the investigation of the claim, and had advised the plaintiff on settlement. 34However, Mr Mitchell responds that all this happened before the underwriters were informed of an essential ingredient. That essential ingredient is that the apparently defective product was supplied not from the plaintiff in Australia but from a company in Guangzhou, which is apparently itself a subsidiary of or related company to the plaintiff (and, thus, insured under the policy). 35Mr Duncan said that there was evidence to show that that the underwriters knew that the product had been supplied from a supplier in China. Again, that is correct. But what was not disclosed (whether deliberately or not) was that the supplier appears to have been a related company, a member of the group of which the plaintiff is a member. 36The underwriters say that that is a significant factor, unknown to them at the time they agreed to do whatever it was (and I am not sure that they accept Mr Duncan's characterisation of it) in relation to the Hong Kong claims. 37That is a matter for trial. However, to the extent that the attitude of the underwriters is a relevant factor, it cannot be said that the underwriters' decision to decline liability, on the basis that they have pleaded, is so manifestly irrational that it should be regarded as something done other than in good faith. 38Next, Mr Duncan submitted, the primary issue was an underwriting one, and thus the plaintiff could properly be seen to be a defendant. The subtlety of that submission is such that it escapes me entirely. The plaintiff is seeking indemnity under the policy. The underwriters have denied liability. The plaintiff has commenced proceedings to enforce what it says are its rights under the policy. The underwriters propose to defend those proceedings on the various bases that I have outlined. The underwriters do not seek any relief, whether by way of cross-claim or otherwise. They are defendants. The plaintiff is a plaintiff. 39This simply cannot be seen as some sort of "defensive" action which may mean that, as a matter of substance if not in form, the plaintiff is in truth seeking to defend itself against a claim made by the defendant. 40Next, Mr Duncan relied on what he said was the weakness of the non-disclosure case. He submitted that Marsh did contend that the essential matters said not to have been disclosed had in fact been disclosed. He took me to some material which was intended to make this proposition good. Undoubtedly, it was disclosed (and the policy reflects the disclosure) that the plaintiff and other insured companies carried on business both in Australia and overseas, and that their business was "principally international commodity trader of chemicals and other commodities for the... transport... industries... providing chemicals and other commodities for the transport industry...". 41To the extent that there is any question as to the degree of disclosure that underlay this recognition of the business, that is a matter for trial. But the underwriters' complaint is a very specific one: that it was not disclosed that, within the course of the business so identified, the insured companies between them both manufactured the Nonox product in mainland China and used that product for the purposes of their business operations in Hong Kong and elsewhere. 42In short, I do not think that it is any particular comfort to the plaintiff, on this application, that Marsh accepts that certain information disclosed to it was passed on by it to the underwriters through the underwriters' agent. The material that Marsh says it passed on (whether or not this will be proved is a different matter) is conceptually and significantly different to the material relied upon by the underwriters in their non-disclosure defence. 43Mr Duncan submitted that the very reason why the plaintiff had taken out the insurance in question was that it expected that if claims were made against it, it could not meet them without the benefit of indemnity under the policy. That may be accepted. Most people who take out insurance do so because they cannot afford to self-insure. Equally, it may be accepted that the underwriters were aware of this. But that is hardly a situation that is unique in the world of commerce. 44To the extent that Mr Duncan sought to advance the argument, underlying this ground on his submissions, that insurers are in some different category to other applicants for security for costs, I do not agree. Any such restriction would impose an immediate fetter on the power given by the sources to which I have referred, and on the discretionary considerations attending it, which is not supported by the language of the statute or the rule. 45I do accept that there was authority to the effect that insurers should be regarded as being in some different position. However, the cases dealing with that were reviewed at some length by McDonald J in Tenth Anemot Pty Ltd v Colonial Mutual General Insurance Co Ltd [1993] 2 VR 48 in particular at 53 to 57. 46His Honour concluded that there was no such inherent limitation on the right of an insurer to obtain, in an appropriate case, security for costs. I respectfully agree with his Honour's analysis. I might note that the same conclusion was reached by Einstein J in Green (in his capacity as liquidator of Arimco Mining Pty Ltd (in liq) v CGU Insurance Ltd [2008] NSWSC 449 at [32], [33]. Again, I respectfully agree with his Honour's analysis and conclusions. 47McDonald J did point out in Tenth Anemot that, in a particular case, it might be a factor for consideration that the applicant insurer had voluntarily entered into a contractual relationship with a proprietary company, in circumstances where it might be expected that refusal of indemnity would expose the insured proprietary company to the risk of insolvency. But that it seems to me is as far as it goes; and it again is not a unique situation. The same may be said of any supplier of goods or services who contracts with a small proprietary company. 48The balancing of the discretionary considerations is sometimes not an easy matter. This is one of those cases. Were there any evidence that could support the conclusion that the grant of security would stultify the litigation then, taking that into account the other matters relied upon by Mr Duncan (to the extent that I have accepted his submissions), I would be inclined to reject the application for security for costs. 49But in circumstances where there is no basis for concluding that the effect of ordering the security sought would be to stultify the litigation, and thus to prevent the plaintiff from advancing its claim, it does not seem to me that this is an appropriate case to reject the application for security. 50It is clear, on the evidence, that if the plaintiff is ordered to pay the costs of the underwriters, it is likely to be unable to do so. It is equally clear that both the claim and the defences are brought in good faith and that both can be seen to have reasonable prospects of success (it is not necessary to consider how opposing allegations can be considered to have reasonable prospects of success other than by noting that "reasonable" does not mean "more likely than not to succeed"). 51Thus, considering the discretionary considerations which were said to tell against the grant of security, I conclude that the plaintiff has not satisfied the persuasive onus that, by reason of my conclusion on the ground relating to the statutory precondition, it carries. 52The result is that in principle the underwriters are entitled to have some security for their costs. 53There was no challenge in evidence or written submissions to the quantification of the claim, nor to the proposal that it be paid by specified instalments. However, after that proposal was advanced, the plaintiff filed a notice of motion seeking an order that all questions of quantum be determined separately from and after all other issues in the proceedings. 54Since a decision on that application may have some impact on either the amount or the timing of security, it is appropriate (as I indicated some time ago in the course of argument) to deal with that before making orders on the application for security. ********** 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: 12 March 2014