FEDERAL COURT OF AUSTRALIA

National Biofuels Group Pty Ltd v Elbow River Marketing
[2009] FCA 613 

PRACTICE AND PROCEDURE –– security for costs –– defendant outside jurisdiction –– plaintiff’s claim for declarations that it terminated contract for sale of goods and consequential damages –– defendant’s cross-claim based on different contract for sale of same goods –– cross-claim sought large amount of damages for breach of contract –– plaintiff’s claim for declarations responsive to defendant’s possible damages claim that may have been brought in another jurisdiction –– whether defendant/cross-claimant is, in substance, the moving party

Held: defendant/cross-claimant to provide security

Federal Court of Australia Act 1976 (Cth) s 56

Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 applied

Neck v Taylor [1893] 1 QB 560 followed

Willey v Synan (1935) 54 CLR 175 applied

NATIONAL BIOFUELS GROUP PTY LTD v ELBOW RIVER MARKETING LTD PARTNERSHIP, BY ITS GENERAL PARTNER, ELBOW RIVER MARKETING CORP

NSD 1808 of 2008

RARES J

8 MAY 2009

SYDNEY

THE COURT ORDERS THAT:

1.                  The defendant/cross-claimant provide security for the costs of the plaintiff/cross-Defendant, in the following amounts:

(a)        $52,500.00 in respect of costs up to the commencement of the final hearing;

(b)        $52,500.00 in respect of the costs of the final hearing.

2.                  The cross-claim be stayed until security for the costs referred to in order 1(a) is provided by payment into a bank account of the Court.

3.                  Security for the costs referred to in order 1(b) be by payment into a bank account of the Court at least one month prior to the commencement of the final hearing, in default of which the cross-claim be stayed until further order.

4.                  Each of the amounts paid by the defendant in accordance with the terms of this order be placed in an interest-bearing account.

5.                  The defendant provide to the plaintiff a copy of the receipt issued by the Court in confirmation of each of the payments in order 1(a) and (b).

6.                  The defendant/cross-claimant pay the costs of the plaintiff/cross-defendant in respect of the plaintiff/cross-defendant’s notice of motion filed 27 March 2009.

7.                  The costs of the defendant/cross-claimant’s notice of motion filed 3 April 2009 be costs in the proceedings.

8.                  The time fixed by Order 10 made 27 March 2009 for the plaintiff to file and serve its evidence, including any experts’ reports, be extended to 15 June 2009

9.                  The time fixed by Order 11 Rares made 27 March 2009 for the defendant to file and serve its evidence, including any experts’ reports be extended to 14 July 2009.

10.              The directions hearing fixed for 12 June 2009 be vacated and the proceeding be listed for directions on 17 July 2009 at 9:30am.

11.              Either party have liberty to apply.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

(REVISED FROM THE TRANSCRIPT)

1                     This is an application for security for costs brought by National Biofuels Group Pty Ltd, the plaintiff/cross-defendant, against Elbow River Marketing Ltd Partnership, the defendant/cross-claimant.  Elbow River is a foreign corporation with no presence or assets in Australia.

2                     National Biofuels began these proceedings in November 2008 seeking declarations that, in effect, it was entitled to, and had validly, terminated an agreement made in September 2008 with the defendant, Elbow River concerning the importation into Australia from Canada of 3,500 metric tonnes of biodiesel fuel.  National Biofuels claimed that it was a term of its agreement with Elbow River that the shipment of the fuel under a c.i.f. contract would occur in circumstances where the fuel was isolated under a blanket of nitrogen from the time of its sampling for testing by an independent surveyor prior to its loading for shipment to Australia and during the voyage here.  Presumably, that was to prevent any possibility of contamination by extraneous substances including the contents of the fuel tanks, although there is no evidence of that purpose at the moment.

3                     The parties arranged that payment for the fuel would occur under a letter of credit established with HSBC Bank Australia Ltd.  They contemplated that Elbow River would present documents to the bank to enable it to be paid by demonstrating the conformity of those documents with the terms of the letter of credit.  Elbow River’s defence and cross‑claim expressly pleaded that a term in the letter of credit required the presentation of a certificate signed by an agent of the master of the vessel, on which the fuel was carried, to the effect that a nitrogen blanket would be applied and maintained for the duration of the voyage to the point of discharge.  But it asserted that this requirement was not a term of the contracts between it and National Biofuels.  As will appear, I am of opinion that the parties’ cases are centred on whether that assertion is correct.  I will now describe the pleaded cases.

The pleaded cases

4                     In its statement of claim, National Biofuels pleaded that it had made a contract for the sale of the fuel orally with Elbow River on about 11 September 2008.  It pleaded an alternative claim that a contract had been made around 17 September 2008, partly orally and partly in writing.  National Biofuels pleaded that this contract (in both versions) contained terms relating to the nitrogen blanket and the need for the cargo to be isolated from the time it had been sampled until it had been loaded.  It pleaded that the fuel had not been isolated at any relevant time and had not been protected by a nitrogen blanket, in accordance with its alleged pleading.  It asserted that the terms dealing with the isolation of the fuel and the nitrogen blanket were conditions of the contract, any breach of which entitled it to terminate and that, in the event, it did terminate because each of those terms had been breached.

5                     National Biofuels also pleaded that on about 5 November 2008, Elbow River presented documents to the bank seeking payment of USD4,263,000 under the letter of credit.  It asserted that by representing to the bank that it was entitled to be paid, Elbow River had engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 52 of the Trade Practices Act 1974 (Cth) or s 42 of the Fair Trading Act 1987 (NSW).  In addition, National Biofuels asserted that the breaches of the agreement caused it loss or damage and an amount of around AUD200,000 was claimed as damages.  However, in an open offer made in correspondence and repeated by counsel in court, National Biofuels asserted that it is prepared to forego its claim in its entirety if the cross‑claim to which I am about to come is not pursued.

6                     In addition, National Biofuels pleaded that around 4 November 2008 it received a copy of the asserted terms relied upon by Elbow River, which are at the heart of Elbow River’s case but which National Biofuels said formed no part of the contractual arrangements.

7                     In its defence and cross‑claim Elbow River denied that the agreement reached between the parties around 11 September 2008 contained terms requiring it to isolate the fuel or to provide a nitrogen blanket for it.  It asserted that the terms were contained wholly in writing, in effect, following substantially Elbow River’s standard form purchase and sale contract, together with certain incorporated terms from the Incoterms 2000 clauses for c.i.f. contracts.  Thus, at this point in the defence, a substantial issue arose as to whether the contract was as alleged by National Biofuels or as alleged by Elbow River, albeit that it is common ground that the parties had some transaction relating to the sale of the fuel. 

8                     In addition, Elbow River asserted that the terms relied on by National Biofuels, which are disputed, were mere warranties or innominate terms not amounting to conditions, breach of which gave rise to no entitlement to terminate.  Next in its defence, Elbow River asserted that, having learnt of the possibility of inadequacies in the nitrogen blanket, Elbow River with National Biofuels’ prior knowledge and consent, incurred expenses in procuring additional nitrogen to be supplied to the vessel and applied to the cargo during the course of the voyage.  It asserted that this amounted to a waiver by National Biofuels of any right to terminate.  Elbow River also asserted other acts of affirmation by National Biofuels which, if established, would deny its ability to terminate.  There is no doubt that Elbow River’s defence puts in issue any title for National Biofuels to seek relief based on its claim.

9                     Elbow River then pleaded its cross‑claim.  It repeated the contractual terms on which it had relied in its defence and set out a number of important terms on which it relied.  Most significantly, in the cross‑claim it pleaded that the contract had been made between the parties, as National Biofuels had alleged, on about 11 September 2008 but that on about 17 September 2008, in performance of the agreement, National Biofuels established a letter of credit with the bank.

10                  Elbow River then alleged in the cross‑claim that the letter of credit conformed with the agreement, “save and except” that it included an additional requirement (acceptable to Elbow River) to the effect that a certificate signed by an agent or master of the vessel would be provided to the effect that a nitrogen blanket will be applied and maintained for the voyage to the point of discharge.  In other words, Elbow River asserted that there was no term of its contract with National Biofuels that included any requirement for a nitrogen blanket.  And for that reason, although Elbow River had accepted that it was a condition of it being paid under the letter of credit that it produce documents to the bank evidencing the provision of the nitrogen blanket, yet in some way Elbow River contended that it owed no contractual obligation to National Biofuels, in fact, to provide such a nitrogen blanket.

11                  Elbow River also pleaded in the cross‑claim acts of waiver by National Biofuels.  These included the incurring of further expenses by Elbow River to which I have referred, and a further conversation on about 17 October 2008 between officers of the companies, in which, according to the particulars, National Biofuels waived any additional requirement for the nitrogen blanket by saying that if the product conformed with the specifications, it would be accepted.  Elbow River also relied on a further telephone conversation in early November 2008 in which it, again, asserted that National Biofuels had waived conformity with the requirement for the nitrogen blanket.  Elbow River pleaded that on 8 November 2008 in reliance on the waivers, it presented documents to the bank for payment but the bank refused to honour the letter of credit for nonconformity with the requirement relating to the nitrogen blanket.

12                  Elbow River pleaded that it was at all material times ready and willing to perform the contract alleged by it but that by reason of National Biofuels’ wrongful rejection of the cargo and its failure to pay the price, Elbow River accepted National Biofuels’ repudiation and resold the cargo in Malaysia, suffering a loss of approximately USD1,900,000.  Next, Elbow River pleaded that on 12 November 2008 National Biofuels instructed the bank that it would not accept any departure from the terms of the letter of credit, notwithstanding, so the pleading alleged, the waiver that had previously taken place.  Elbow River alleged that that amounted to unconscionable conduct in contravention of s 51AA(1) of the Trade Practices Act and caused it to suffer loss and damage.

The Application for Security for Costs

13                  National Biofuels has brought a notice of motion seeking security for its costs of the proceedings.  The parties’ positions as to quantum are substantially these.  Elbow River said that in substance it is a defendant involuntarily brought to the jurisdiction and, being here, has been required not only to defend itself but, by reason of any issue and other estoppels that might arise were it not to do so, has been obliged to bring its cross-claim for damages in this jurisdiction.  In those circumstances, it contends that it should not be required to provide security.  Alternatively, to the extent that its claims add any extra issues, their cost can be assessed for the purposes of security at the sum of $10,000.  There is no dispute between the parties as to that assessment.  In addition, Elbow River made an open offer to provide $15,000 as security for that purpose, if National Biofuels did not seek any other sum.

14                  National Biofuels, seeks and the parties have agreed that if National Biofuels is successful is entitled to, security for what it says its costs of the proceedings would be.  The parties have agreed for the purposes of this motion only that those costs would be taxed about 65% of the estimate of about $116,000 as the total estimate of solicitor/client costs made by National Biofuels’ solicitor.

Consideration

15                  The jurisdiction of the court to order security is conferred in s 56 of the Federal Court of Australia Act 1976 (Cth), as well as O 28 of the Federal Court Rules.  First, s 56(1) provides that the Court or a judge may order an applicant in a proceeding in the Court, relevantly, to give security for the payment of costs that may be awarded against him or her.  Secondly, O 28 r 3(1)(a) provides that when considering an application by a respondent for an order for security for costs under s 56 the Court may take into account, relevantly, that the applicant is ordinarily resident outside Australia.  That is the basis upon which this present application has proceeded.  There is no suggestion that Elbow River would be required to provide security for costs under provisions such as s 1335 of the Corporations Act 2001 (Cth).

16                  The gravamen of the position revealed on the pleadings is that Elbow River contends that the parties made a contract that did not require it to comply with, and so, relieved it of, the obligation to meet the terms of the letter of credit relating to the nitrogen blanket either from the time of the formation of the contract or by reason of a waiver.  Thus, it will claim it is entitled to substantial damages.

17                  The parties debated the proper characterisation of their respective positions.  Elbow River argued that because, in substance, its participation in the proceedings is defensive and responsive to a substantive claim made by National Biofuels, the power to order it to provide a substantive amount of security has not been enlivened.

18                  The word ‘applicant’ used in s 56 of the Act has for many years in various statutory analogues and under the Federal Court Act been accepted as referring to the party against whom security for costs is sought, whether in legal form a plaintiff or initially moving party in the proceedings or a defendant or respondent who brings a cross-action or cross‑claim:  see eg Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 at 306 per Street CJ.

19                  In my opinion, the authorities establish that where a foreign defendant counterclaims or cross‑claims, it will be ordered to provide security for costs if, in substance, what it puts forward is not simply a defence to the claim, but a distinct claim in itself, provided that on an overall assessment by the Court it is just and fair that such an order be made.  In Neck v Taylor [1893] 1 QB 560 at 562 Lord Esher MR identified the applicable principles (see also at 563 per Lindley LJ and per Lopes LJ).  Those principles were applied by Street CJ in Buckley 1 ACLR at 307;  see too  Bev Wizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399 at [12]-[18] where Brereton J summarised a number of the authorities.  Lord Esher MR said (Neck [1893] 1 QB at 562):

“Where the counterclaim is put forward in respect of a matter wholly distinct from the claim, and the person putting it forward is a foreigner resident out of the jurisdiction, the case may be treated as if that person were a plaintiff, and only a plaintiff, and an order for security for costs may be made accordingly in the absence of anything to the contrary.  Where, however, the counterclaim is not in respect of a wholly distinct matter, but arises in respect of the same matter or transaction upon which the claim is founded, the Court will not, merely because the party counterclaiming is resident out of the jurisdiction, order security for costs;  it will in that case consider whether the counterclaim is not in substance put forward as a defence to the claim, whatever form in point of strict law and pleading it may take, and, if so, what under all the circumstances will be just and fair as between the parties and will act accordingly.”

20                  In Willey v Synan (1935) 54 CLR 175 at 184, Dixon J, with whom Rich J expressly agreed, identified the principle as follows:

“… a party to judicial proceedings, who resides beyond the jurisdiction,should not be required to give security for costs unless, however the parties were arranged upon the record, he is the person invoking or resorting to the jurisdiction for the purposes of establishing rights or obtaining relief.  If he does avail himself of the remedies the jurisdiction provides in order to obtain affirmative relief or redress, he may be ordered to give security, although he becomes a defendant in the action.”

21                  There, Dixon J analysed the substantive positions of the parties.  He held that the foreign plaintiff had assumed the position of a defending party principally because he was compelled to do so by the provisions of the legislation under which his goods would otherwise be condemned.  He characterised that position as being one in which the foreign plaintiff had assumed the burden of commencing the proceedings in order to defeat the true moving party’s claim, being that of the Collector of Customs to be entitled to condemn and forfeit the plaintiff’s goods.

22                  As a matter of impression, in substance the real issue in the present proceedings involves Elbow River establishing positively that the terms of the letter of credit dealing with the nitrogen blanket, which were vital to its right to be paid in a commercially efficient way, reflected no part of the contract and National Biofuels’ reliance on them as terms either was wrong or the terms were inessential.  Next, Elbow River is seeking to establish its entitlement to a very substantial claim for damages.  While National Biofuels also has a claim for damages and does seek some relief, in substance its position is defensive.  It seeks to resist what, at the time the proceedings were brought and subsequently has eventuated, was anticipated to be Elbow River’s substantive claim for damages for breach of contract.

23                  I am of opinion that the pleadings reveal that in reality the substance of the case and the substantial claim is that brought by Elbow River to recover damages for the breach of the version of the contract on which it relies.  Moreover, it seems to me that the evidentiary burden, albeit in a formal sense, borne by each of the parties equally to establish the respective contracts on which they rely, is really created by Elbow River’s positive denial that the terms of the letter of credit, requiring production of documentary proof to the bank that there was a nitrogen blanket, form part of any contract between the parties.  In my opinion, that will be a heavy burden to discharge, having regard to the commercial arrangement the parties evidently have accepted on the pleadings.  The substance of that arrangement arose out of dealings and conduct in negotiations between businessmen for the payment of a very large sum of money under a c.i.f. contract using a letter of credit.

24                  Prima facie, it would be odd that the letter of credit would contain an additional requirement, albeit one which Elbow River said was acceptable to it, that formed no part of the contract whatsoever concerning the way in which the goods were to be carried.  Again, that prima facie view is simply a matter of impression based on my reading of the pleadings and the fact that this case arises because the bank, presumably justifiably, rejected the tender of the documents on which Elbow River’s entitlement to be paid depended.

25                  For these reasons, I am of opinion the real plaintiff or moving party in these proceedings is Elbow River.

26                  That leaves the question of what order I should make for security.  There is substance in Elbow River’s contention that some additional costs will be incurred because of National Biofuels’ claim.  I recognise the reality that there are seriously competing factual and legal contentions open to both parties in the matter.  But, security should be ordered for the costs that National Biofuels is likely to recover, were it to succeed defending in the proceedings in substance brought against it.  I will reduce the amount of security for those costs to recognise that National Biofuels also has a substantive claim that, at present, it seeks to pursue in its own right.  Although it may be an unsatisfactory yardstick, the evidence is that Elbow River contends that the additional issues it wishes to raise would add about $10,000 to National Biofuels’ costs.  I am of opinion that the amount of $116,000, agreed to be 65% of what National Biofuels would recover in costs if successful should be reduced by about that sum.  That will take account of the fact that while National Biofuels’ claim is principally defensive, it includes a relatively small claim for damages.

27                  I will order Elbow River to provide $105,000 by way of security for the costs of the proceedings.  The parties should bring in short minutes to provide for the manner in which security will be provided and a further timetable to prepare the matter for hearing.

Associate:

Dated:         9 June 2009