FEDERAL COURT OF AUSTRALIA

Strategic Financial and Project Services Pty Limited v Bank of China [2012] FCA 445

THE COURT ORDERS THAT:

1.    The applicants provide additional security for the first respondent’s costs of and incidental to the proceeding in the sum of $700,000 in the form of a bank guarantee from an Australian trading bank, or in such other form as the Court deems fit, to be lodged with the Court in a form satisfactory to the Registrar and a copy of which is to be served on the solicitors for the first respondent, such that the total security for the first respondent’s costs of and incidental to the proceeding is $950,000.

2.    The bank guarantee required by order (1) be lodged with the Court by 21 May 2012.

3.    The proceeding be stayed as against the first respondent until the security for the first respondent’s costs have been provided in accordance with the order of the Court.

4.    The first respondent has liberty to apply on seven days notice to vary the amount of security for costs required to be provided in accordance with the order of the Court.

5.    Each of the applicants and the first respondent bear its own costs of the first respondent’s interlocutory application filed on 23 February 2012 and of the first respondent’s amended interlocutory application filed on 18 April 2012.

6.    The directions hearing listed at 9.30am on 16 May 2012 be vacated and re-listed at 9.30am on 30 May 2012.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Introduction

1    Each of the two respondents in this proceeding sought to increase the amount of security for costs. The issue between the second respondent and the applicants was resolved by consent orders handed up at the start of the interlocutory hearing yesterday, and I need say no more about that application.

2    In relation to the first respondent’s application, it is necessary to give my decision urgently in light of the proposed mediation in less than two weeks’ time.

3    On 5 June 2009, orders were made by Moore J as follows:

1.     The applicants provide security for the first respondent's costs of and incidental to the proceeding in the sum of $250,000 in the form of a bank guarantee from an Australian trading bank (or in such other form as the Court deems fit) to be lodged with the Court in a form satisfactory to the Registrar and a copy of which to be served on the solicitor for the first respondent.

2.     The proceeding be stayed as against the first respondent until security for the first respondent's costs has been provided in accordance with the order of the Court.

3.     The first respondent have liberty to apply, on seven (7) days' notice, to vary the amount of security for costs required to be provided in accordance with the order of the Court.

4.     The costs of the first respondent's notice of motion for security for costs be costs in the cause.

4    By interlocutory application filed on 23 February 2012 the first respondent sought an order that the amount of security for costs required to be provided in accordance with the order in paragraph 1 of the orders made by Justice Moore on 5 June 2009 be varied as follows:

The Applicants provide security for the first respondent's costs of and incidental to the proceeding in the sum of $1,485,739.08 in the form of a bank guarantee from an Australian trading bank (or in such other form as the Court deems fit) to be lodged with the Court in a form satisfactory to the Registrar and a copy of which to be served on the solicitor for the First Respondent.

An amended interlocutory application filed on 18 April 2012 made it clear, or clearer, that the total security sought for the first respondent’s costs was $1,735,739.08, being $1,485,739.08 in addition to the $250,000 ordered by Moore J.

5    The first respondent, by that amended interlocutory application, also sought an order that the proceedings be dismissed if the applicants did not provide the additional security by 29 June 2012.

6    It was common ground that there should be some increase in the amount of security. It was also common ground that a broad-brush approach, to which I will refer again later, was appropriate.

7    The evidence led by the first respondent was:

1.    The affidavit of Luke Bradshaw Hastings affirmed 26 August 2011;

2.    The affidavit of Luke Bradshaw Hastings affirmed 22 February 2012; and

3.    The affidavit of Valerie Edith Higinbotham sworn 17 February 2012.

For the applicants, the following evidence was led:

1.    The affidavit of Avendra Singh sworn 16 April 2012; and

2.    The affidavit of Kerrie-Ann Rosati affidavit sworn 20 April 2012.

There were also three or four documents tendered on each side.

Legislation

8    Section 56 of the Federal Court of Australia Act 1976 (Cth) provides:

(1)    The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her.

(2)    The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs.

(3)    The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given.

(4)    If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed.

(5)    This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.

9    The Federal Court Rules 2011 provide:

19.01 Application for an order for security for costs

(1)    A respondent may apply to the Court for an order:

(a)    that an applicant give security for costs and for the manner, time and terms for the giving of the security; and

(b)     that the applicant’s proceeding be stayed until security is given; and

(c)     that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed.

(2)    An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought.

19.02 Matters to be addressed by the respondent

The respondent’s affidavit should state the following:

(a)    whether there is reason to believe that the applicant will be unable to pay the respondent’s costs if so ordered;

(b)    whether the applicant is ordinarily resident outside Australia;

(c)    whether the applicant is suing for someone else’s benefit;

(d)    whether the applicant is impecunious;

(e)    any other relevant matter.

Note Section 56 of the Act deals with security for costs.

10    Section 1335(1) of the Corporations Act 2001 (Cth) provides:

Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that 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, require sufficient security to be given for those costs and stay all proceedings until the security is given.

The words in this section emphasised by the first respondent were “sufficient security”.

11    I was taken to Moore J’s reasons in Strategic Financial and Project Services Pty Ltd v Bank of China [2009] FCA 604, being the reasons for the orders I have set out above. At [48] his Honour stated that the order for security then made related only to the costs of preparing the matter for trial and that he would review the question of security as the trial approached or at an earlier stage if necessary. Justice Moore said:

It is appropriate in this case for the applicant to provide the security requested by the first and second respondents. In making an order for security the court does not set out to give a complete indemnity to a respondent (Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 at 175) nor is it to be assumed that the applicant will fail in the proceeding. I only propose to order, at this stage, security in relation to costs concerning the preparation of the matter for trial. I can review the question of security as the trial approaches or at an earlier stage if it is apparent that the security provided for the cost of preparation is not, having regard to the applicable principles, adequate. I propose to order that security in the sum of $250,000 be provided by the applicants in relation to the first respondent, and $200,000 in relation to the second respondent. In my view the quantum of costs I have ordered is reasonable in the circumstances given the factual complexity of the issues involved and the length of time that will need to be devoted to preparing the matter for the hearing.

First respondent’s evidence

12    Mr Hastings, in his affidavit affirmed on 22 February 2012, set out first the nature and history of the proceeding and in particular the costs as at a number of dates.

As at 17 February 2012

13    Mr Hastings said that as at 17 February 2012, the first respondent had incurred legal fees (exclusive of disbursements including counsel’s, experts’ and translators’ fees) of approximately $1,356,531 (exclusive of GST) representing approximately 3,239 hours of work. He referred to hourly rates that had been charged by Freehills since being retained by the first respondent from mid-April 2010 onwards.

14    Mr Hastings understood that the previous solicitors for the first respondent, Mallesons, performed a total of approximately 518 hours of work by solicitors and approximately nine hours of work by non-legal staff between December 2008 and April 2010, for which the first respondent incurred costs of approximately $241,869.

15    Mr Hastings then referred to certain costs associated with changing solicitors and stated that these costs did not form part of the costs for which the first respondent sought further security for costs.

16    He referred to discovery and inspection and said that Freehills’ solicitors spent approximately 326 hours undertaking those tasks for which the first respondent incurred costs of approximately $110,280.

17    Mr Hastings then referred to the applicants amending their statement of claim on a number of occasions and said that Freehills’ solicitors spent approximately 93 hours in relation to those matters for which the first respondent incurred costs of approximately $39,537.

18    He referred next to an unsuccessful application by the first respondent for summary judgment in respect of certain causes of action. He said that these costs did not form part of the costs for which the first respondent sought further security for costs. It was common ground, however, that the first respondent’s application did not take into account the (unquantified) costs order made by Emmett J in favour of the applicants in dismissing an application for summary judgment in respect of part of the statement of claim.

19    Turning to lay evidence, Mr Hastings said that Freehills spent approximately 847 hours undertaking the preparation and filing of lay evidence, 14 affidavits, for which the first respondent incurred costs of approximately $351,117.

20    In relation to expert evidence, Mr Hastings said that Freehills’ solicitors spent approximately 218 hours on tasks in connection with retaining experts, for which the first respondent incurred costs of approximately $93,794.

21    In relation to the further security for costs application, Mr Hastings said that Freehills’ solicitors had spent approximately 57 hours in undertaking the tasks, for which the first respondent incurred costs of approximately $23,866.

22    In relation to general case preparation, Mr Hastings said that Freehills’ solicitors spent approximately 806 hours undertaking these tasks, for which the first respondent incurred costs of approximately $350,605. Mr Hastings said that Freehills had not charged the first respondent for the work performed by paralegals or seasonal clerks (other than in connection with discovery). The Freehills team has comprised a partner, senior solicitor and one graduate solicitor.

23    Turning to disbursements, as at 17 February 2012 Mr Hastings said the first respondent has incurred disbursements including counsel’s, experts’ and translators’ fees of approximately $600,313.99. He said the total fees rendered by all counsel retained on behalf of the first respondent since the proceeding was commenced was $317,903.

24    Translators’ fees were approximately at $37,502 and experts’ fees approximately $41,475 in respect of an expert on the laws of the People's Republic of China (PRC) and there were fees of $111,853 in respect of a forensic handwriting expert.

25    Mr Hastings referred to travel and accommodation costs of approximately $33,059; costs of witnessing affidavits in the PRC of $4,346; and other case management costs, including photocopying and courier costs of approximately $38,999.

February 2012 to 30 April 2012

26    Mr Hastings then referred to the work Freehills’ solicitors will undertake between February 2012 and the date of the hearing of the application for further security for costs. He estimated that Freehills’ solicitors will spend approximately 67 hours undertaking work in connection with the further security for costs application, for which the first respondent will incur costs of approximately $30,000.

February 2012 to hearing

27    In relation to the period between February 2012 and the hearing, Mr Hastings estimated that Freehills’ solicitors will spend approximately 408 hours undertaking work in connection with preparation for the hearing, for which the first respondent will incur costs of approximately $180,000.

The hearing

28    Mr Hastings estimated that Freehills’ solicitors will spend approximately 300 hours in undertaking work in connection with the hearing (comprising work by one partner and one solicitor, completing approximately 10 hours of work each day for 15 days) for which the first respondent will incur costs of approximately $180,000.

Future disbursements

29    Between February 2012 and the end of the hearing, Mr Hastings estimated that the disbursements in the form of counsel’s fees will be approximately $285,000.

30    As to experts, Mr Hastings’ estimate was $30,000 in total.

31    As to transcripts, Auscript has quoted $22,792.

32    As to travel and accommodation costs for witnesses, Mr Hastings estimated approximately $20,000.

33    For general case management disbursements Mr Hastings estimate was $10,000.

Recovery of costs

34    Having regard to the report of Ms Higinbotham, a legal costs consultant, if costs were ordered in favour of the first respondent Mr Hastings expected that on taxation of the first respondent’s costs the first respondent would recover on a party/party basis approximately $1,735,739.08. This total recoverable amount was approximately 64% of the total estimated costs and disbursements which the first respondent had incurred and will incur to the end of the trial, being $2,716,090.08.

35    On this basis the first respondent sought additional security of $1,485,739.08 (being $1,735,739.08 less $250,000).

36    Ms Higinbotham was retained to provide a report setting out her expert view as to the costs incurred by the first respondent to date which on taxation on a party/party basis would be allowed by a taxing officer; and future costs to be incurred by the first respondent (up to and including the trial listed for hearing between 27 August 2012 and 14 September 2012) which on taxation on a party/party basis would be allowed by a taxing officer.

37    Ms Higinbotham appears to have approached the matter at a high level, by which I mean she looked at the hours spent and applied a percentage discount. She seems to have taken the same approach to costs and fees. On that approach the total of the professional costs, counsel's fees and disbursements to February 2012 which she considered was likely to be recovered on taxation was $1,165,547.48. Her estimate of future costs from February 2012 (to and including the hearing) likely to be recovered on taxation was $570,191.60. These bottom-line figures added together give a sum of $1,735,739.08. From this had to be subtracted the $250,000 security in accordance with the order of Moore J of 5 June 2009. The balance was $1,485,739.08.

Applicants’ evidence

38    Mr Singh said in his affidavit that a relatively small compass of issues was in dispute and he did not agree with Mr Hastings that complex factual issues arose in the proceedings.

39    He noted that notwithstanding the $241,869 in costs already incurred by the former solicitors (Mallesons) when Freehills were retained, Freehills proceeded to incur fees of almost $1 million before the application for increased security was made. He said that Mr Hastings had not provided any explanation for the delay.

40    Another point made by Mr Singh was that the activities he identified would have been included in Mallesons’ assessment, that is, that the costs of preparation would be approximately $304,000 on a solicitor and client basis before the commencement of the final hearing. It appeared that most of this estimate had already been expended by Mallesons before even the lists of documents had been exchanged but no explanation was provided. Mr Singh’s expectation would be that solicitors’ time spent in a matter such as this before lists of documents had been exchanged would total 121 hours. Mr Singh also made other criticisms of the claims made in relation to this period.

41    He next made the point that Freehills spent a further 326 hours carrying out the discovery process which Mallesons ought to have finished when they served the first respondent’s first list of documents. On this basis Mr Singh said there had been substantial duplication between the present and former solicitors.

42    Mr Singh then considered the amendments to the pleadings referred to by Mr Hastings and said that since the amendments were, from his perspective, minor, the total of 93 hours for consideration of the amendments was excessive, particularly as it seemed that both junior and senior counsel were engaged in this task.

43    Mr Singh also criticised the length of time and therefore the cost of the lay evidence. He said that if 847 hours were spent preparing the lay evidence, this equated to an average of 60.5 hours work per affidavit. In Mr Singh’s opinion none of the statements would warrant that much attention from the lawyers. In his opinion the statements should have taken approximately 273 hours which included an allowance of 21 hours for the preparation of statements relating to the translation of Chinese language.

44    Mr Singh then referred to the expert evidence the subject of paragraphs 73 to 77 of Mr Hastings’ affidavit.

45    He next referred to paragraph 50 of Mr Hastings’ affidavit which referred to approximately 57 hours of time being taken to prepare the notice of motion for security, his affidavit and a brief to Ms Higinbotham. Adding in the further 67 hours referred to as being required on this application in the future, Mr Singh said that the aggregate of 124 hours was excessive and disproportionate to the complexity of the issues involved. In Mr Singh's opinion it would be reasonable to allow the five hours claimed by Mr Hastings and a further 15 hours for one of the Freehills’ solicitors.

46    As to general case preparation Mr Singh gave a number of examples of where it appeared that duplication may have occurred. In his view 806 hours for general case preparation was excessive and unreasonable. In light of the other amounts of time claimed, in Mr Singh's view any allowance for general case preparation would be relatively small.

47    Mr Singh then referred to disbursements under the headings of counsel’s fees, travel to PRC and general disbursements.

48    As to future costs Mr Singh said the total claim was for 408 hours excluding the time and cost of the hearing itself. Mr Singh contended that this was excessive and provided detailed points to support this contention. He annexed his estimate of what would be a reasonable time for solicitors’ costs going forward.

49    Ms Rosati, the legal costs consultant retained on behalf of the applicants, agreed in many respects with Ms Higinbotham. Ms Rosati noted however that it did not appear that Ms Higinbotham had had access to the tax invoices that had been provided to her, Ms Rosati (Annexure KR3).

50    Principal points of difference between the two experts were that in relation to likely party/party costs incurred to 31 July 2011, Ms Rosati considered that the discount of 25% applied by Ms Higinbotham to exclude costs that may not be necessary or proper was insufficient in this matter. Ms Rosati gave detailed examples as to the basis on which she considered that there would be a lower than usual recovery by the first respondent for party/party costs. Ms Rosati applied a reduction of between 40% and 30%. These percentages gave figures of $362,526 and $422,947 respectively. Applying Mr Singh’s estimates of time reasonably spent for each category of work, the application of the attendance rates prescribed by the scale of costs in the former Federal Court Rules would lead to a significantly lower figure for party/party professional costs.

51    As to the period from 1 August 2011 to February 2012 again Ms Rosati applied a higher reduction than the 25% applied by Ms Higinbotham. Ms Rosati applied a reduction of between 40% and 35% of these costs. These percentages yielded figures of $251,580 and $272,545. Applying Mr Singh’s estimates of time would lead to a significantly lower figure.

52    As to counsel’s fees, Ms Rosati did not agree with Ms Higinbotham’s comment that it was more likely than not that counsel’s fees would be allowed as charged. Ms Rosati considered a reduction of 20% should be applied to the rates charged by each of senior counsel. Later in her report, having considered the position of junior counsel, Ms Rosati applied a reduction of 25%. She estimated that the likely amount that would be allowed on a party/party taxation of costs and fees incurred by counsel to February 2012 was $117,440.

53    As to experts’ reports, without further information Ms Rosati considered that it may be reasonable to make a reduction of up to 15% of the costs of those reports.

54    Similarly, in relation to travel to the PRC Ms Rosati, without further information, would make a reduction of 25%. In her opinion the amount that would be allowed on a party/party basis for incurred disbursements on a party/party basis was $211,243.08.

55    Based on Mr Hastings’ estimates of time, Ms Rosati considered the total of the professional costs, counsel’s fees and disbursements for work done to February 2012 that would be likely to be allowed on a party/party basis was between $924,789 and $1,024,175. Applying Mr Singh’s estimates, the total costs and disbursements to February 2012 likely to be allowed on a party/party basis was $606,923.

56    As to future costs, based on the estimates of time provided by Mr Hastings, the total of the professional costs, counsel’s fees and disbursements for work done after February 2012 that Ms Rosati considered likely to be allowed on a party/party basis was between $451,677.10 and $467,423.35. The equivalent figure using Mr Singh’s estimates of time was $396,887.10.

57    In each instance Ms Rosati had not made an allowance for the $250,000 paid by the applicants for security for costs in 2009.

58    The total, using Mr Hastings’ estimates, ranged from a lower figure of $1,376,466 to a higher figure of $1,491,598. The total figure using Mr Singh’s estimates was $1,003,810. Again, in each instance Ms Rosati had not made an allowance for the $250,000 paid by the applicants for security for costs in 2009.

Submissions

59    I briefly summarise the first respondent’s submissions:

    It was appropriate to include security for costs already incurred.

    The application was brought at a highly appropriate time and without requiring multiple applications.

    There was no evidence of prejudice to the applicants.

    Mr Singh’s evidence should be given little or no weight.

    The application was appropriately supported by evidence, including that of Ms Higinbotham.

60    The applicants submitted, in summary:

    By reason of the first respondent’s inordinate and unexplained delay, the appropriate order related only to the costs of the hearing.

    No application for increased security had, in fact, been made until some months after the matter was set down for hearing.

    The first respondent did not advise the applicants that the evidence before Moore J seriously understated the costs which were being incurred until, in effect, the present interlocutory application was filed.

    Specific criticisms were made of the costs of discovery and the lay evidence in terms of what would be recoverable from the applicants and the applicants also referred to the lack of set-off of the costs order of Emmett J.

61    Applying the broad-brush approach that I referred to in Strategic Financial and Project Services Pty Limited v Bank of China [2012] FCA 327 at [5] and the principles referred to by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514-5, I have assessed the following factors as relevant to the broad discretion to arrive at a figure for “sufficient security” in s 1335:

(i)    the issue is one of quantum only;

(ii)    the orders and other dates as follows;

Moore J - 5 June 2009

Emmett J - 2 March 2011

Application for increased security - 23 February 2012

Trial date - 27 August 2012

(iii)    that a substantial part of the present claim is in respect of past costs;

(iv)    the two expert reports and that Ms Rosati had available to her somewhat more detailed information than was available to Ms Higinbotham;

(v)    the relative complexity of the matter, which I assess as moderate rather than high;

(vi)    Mr Hastings’ estimates, and Mr Singh’s criticisms of those estimates. I have taken Mr Singh’s criticisms to be directed to the recoverability of the amounts to which Mr Hastings refers on a party/party basis;

(vii)    I note that there has been no set-off in respect of the unquantified costs order made by Emmett J;

(viii)    I have also taken into account the application is for an increase in security of $1,485,000 in relation to both past and future costs but at a time which is now four months before the hearing. In my view, it is not necessary in that context for the applicants to adduce specific evidence of prejudice;

(ix)    in my view there has been some delay in taking advantage of the reservation by Moore J in June 2009. I do take into account that there were indications from time to time that that reservation to apply would be pursued but also that, in fact, no such application was brought until February 2012.

62    Taking into account those factors, the orders that I make are as follows:

(1)    The applicants provide additional security for the first respondent’s costs of and incidental to the proceeding in the sum of $700,000 in the form of a bank guarantee from an Australian trading bank, or in such other form as the Court deems fit, to be lodged with the court in a form satisfactory to the Registrar and a copy of which is to be served on the solicitors for the first respondent, such that the total security for the first respondent’s costs of and incidental to the proceeding is $950,000.

(2)    The bank guarantee required by order (1) is to be lodged with the Court by 21 May 2012.

(3)    The proceeding be stayed as against the first respondent until the security for the first respondent’s costs have been provided in accordance with the order of the Court.

(4)    The first respondent has liberty to apply on seven days notice to vary the amount of security for costs required to be provided in accordance with the order of the court.

(5)    Each of the applicants and the first respondent bear its own costs of the first respondent’s interlocutory application filed on 23 February 2012 and of the first respondent’s amended interlocutory application filed on 18 April 2012.

63    I am not persuaded to make a guillotine order in light of the order setting a date for the giving of further security. In my view, it is not necessary to adopt the form of order 3 made by Jessup J in Thirteenth Corp Pty Ltd v State (2006) 232 ALR 491. For the form of the orders made by his Honour, see in particular at 509.

Associate:

Dated:    1 May 2012