FEDERAL COURT OF AUSTRALIA

Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103

THE COURT ORDERS THAT:

1.    The application for security for costs is dismissed.

2.    The Respondents pay the costs of the application.

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

REASONS FOR JUDGMENT

introduction

1    The respondents, Industrial Energy Pty Ltd (“IEPL”) and HRL Limited (“HRL”) (“the IEPL parties”), seek an order for security for costs pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”) and s 1335 of the Corporations Act 2001 (Cth) (“Corporations Act”). The applicant, Mecrus Energy Pty Ltd (“Mecrus”), opposes the application.

The factual background

2    Mecrus’ claims arise against the backdrop that in December 2003 a briquette plant in Morwell, Victoria owned by Energy Brix Australia Corporation Pty Ltd (a related party to the IEPL parties) (“Briquette Plant”) was destroyed by fire. In 2004 Mecrus entered into a written agreement with the IEPL parties (“Agreement”) and sub-leased the Briquette Plant from IEPL. In broad terms the Agreement provided that Mecrus undertake a $3,000,000 rebuilding and reinstatement of the plant and commence manufacturing briquettes for supply to IEPL. The plant is located adjacent to a coal-fired power station owned and operated by a subsidiary of HRL.

3    The Agreement obliged IEPL to supply coal and ancillary services to Mecrus on specified terms and conditions, and to pay an annual “Service Fee” to Mecrus. The “Minimum Service Fee” payable per Contract Year (as defined) was the fee payable for delivery of 80,000 tonnes of briquettes. IEPL is a subsidiary of HRL, and HRL agreed to guarantee the performance of IEPL’s obligations.

4    Mecrus alleges that in 2004 the parties also entered into a collateral contract in which IEPL agreed that the coal it provided would be sourced from Loy Yang and would be of a composition and quality to enable Mecrus to manufacture briquettes in accordance with the terms of the Agreement. It alleges that it rebuilt and reinstated the plant specifically to receive and process coal sourced from Loy Yang. It also says that in 2006 the collateral contract was varied to provide that the coal would be comprised of a mixture of coal sourced from Loy Yang and Morwell, and Mecrus would be paid reasonable compensation for the additional costs and increased risks of loss arising as a result. It alleges that in January 2014 the parties agreed that the rate of compensation payable to Mecrus for the supply of coal that was not 100% Loy Yang coal was $750 per day of manufacture. From January 2014 IEPL paid that amount to Mecrus.

5    On 25 March 2009 the Agreement was extended for a further term. It is uncontroversial that the parties understood that the Agreement would come to an end on or about 31 August 2014.

6    Mecrus makes seven claims in its Amended Fast Track Statement for breach of the Agreement, breach of the collateral contract, misleading or deceptive conduct, unconscionable conduct and estoppel. IEPL denies each of the claims in its Fast Track Response and has filed a Fast Track Cross-Claim making five cross-claims.

7    The issues for determination in the present application are:

(a)    whether the discretion to order security for costs should be exercised in favour of the IEPL parties; and

(b)    if so, the quantum of security that should be ordered.

For the reasons I set out below, in the exercise of my discretion I refuse the application for security for costs.

The evidence

8    Both sides adduced affidavit evidence which goes to the exercise of the discretion to order security for costs, and as to the party-party costs and disbursements the respondents will incur.

9    The IEPL parties rely on three affidavits of Gina Wilson, a partner of Maddocks (the solicitors for the IEPL parties), sworn on 3 November 2014, 17 November 2014 and 3 February 2015 respectively. Ms Wilson attaches the correspondence between the parties regarding security for costs, and Mecrus’ preliminary accounts for the financial years ended 30 June 2013 and 30 June 2014 together with its audited accounts for the year ended 30 June 2012. She deposes that Mecrus is unlikely to be able to meet the IEPL parties’ costs if it is unsuccessful in the proceeding.

10    Ms Wilson does not estimate the overall party-party costs which the respondents will incur in defending the proceeding, but she estimates that the respondents’ party-party legal costs to the end of the first day of trial will be $126,000. She estimates a six day trial. I accept Ms Wilson’s estimate of the respondents’ party-party legal costs to the end of the first day of trial and, for the purposes of the application, I infer that the respondents’ party-party costs overall will be at least $250,000.

11    The respondents also filed a report of Jennifer Young, costs lawyer, dated 27 January 2015. Ms Young provides a higher estimate of the respondents’ party-party legal costs to the end of the first day of trial. This report was served only a few days prior to the hearing, well outside the timetable set, and Mecrus had no opportunity to respond to it. Mecrus objected to its admission into evidence, and the respondents do not rely upon Ms Young’s estimates. I have used the report only to check my acceptance of Ms Wilson’s estimate of party-party legal costs to the end of the first day of trial.

12    The respondents also rely upon an affidavit of Geoff Ternes, the Financial Controller of IEPL, sworn 9 December 2014, responding to an affidavit of Shay Madzikanda filed on behalf of Mecrus regarding a telephone conversation on 8 July 2014 about non-payment of some Mecrus invoices. This issue is not material to my decision.

13    Mecrus relies on:

(a)    an affidavit of Michael Hazell, a director of Kelly Hazell Quill (the solicitors for Mecrus) sworn 12 November 2014. He criticises Ms Wilson’s estimate of the respondents’ party-party costs, and suggests that the respondents’ estimate of $126,000 is overblown. As I have said, I accept Ms Wilson’s estimate;

(b)    an affidavit of Barry Richards, the Managing Director of Mecrus, sworn 13 November 2014. His evidence goes to the background to the Agreement including the fact that at the relevant times Mecrus and IEPL had a joint director, the terms of the Agreement, and the nature of the claims. He attaches Mecrus’ preliminary accounts as at 30 September 2014 and deposes that Mecrus is trading profitably and will be able to meet the respondents’ costs if it is unsuccessful in the proceeding; and

(c)    an affidavit of Shay Madzikanda sworn 13 November 2014 regarding the telephone conversation with Mr Ternes to which I earlier referred.

The legislative framework

14    Section 56 of the Federal Court Act 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.

15    Section 1335(1) of the Corporations Act 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.

16    Rule 19.01 of the Federal Court Rules 2011 (“the Rules”) provides:

(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.

(3)     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.

17    Section 56 of the Federal Court Act, unlike s 1335(1) of the Corporations Act, does not expressly require credible testimony that there is reason to believe that the corporation will be unable to pay the respondent’s costs. However, as is usually the case in security for costs applications, the primary basis of the application before me is that Mecrus will be unable to pay the IEPL parties’ costs if it is unsuccessful in the proceeding. In these circumstances the approach to be taken under either provision is essentially the same: see Soul Pattinson Telecommunications Pty Ltd v Subex Americas Inc [2009] FCA 651 at [6] per Perram J; Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 at [5] per Yates J.

Relevant legal principles

18    The discretion conferred by s 56 is broad. Many attempts to set limitations upon the discretion have been rejected by the Courts, and the only limitation is that it must be exercised judicially: Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3 per Sheppard, Morling and Neaves JJ. It is a discretion to be exercised according to the particular merits and circumstances of each case and without any particular predisposition: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd and Others (1987) 16 FCR 497 (“Fencott”) at 511 per French J; Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd and Others (1992) 8 ACSR 405 at 411, per Cooper J. The weight to be attached to a particular circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: P S Chellaram and Co Ltd v China Ocean Shipping Co and Another (1991) 102 ALR 321 at 323 per McHugh J.

19    Notwithstanding the broad discretion there are a number of well established guidelines which the Court typically takes into account. In Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50,635 per Hill J, his Honour identified the following six factors:

(a)    the chances of success of the applicant;

(b)    whether the applicant’s claim is bona fide or a sham;

(c)    the quantum of risk that the applicant cannot satisfy a cost order;

(d)    whether use of the power would shut out a small company from making a genuine claim against a large company (i.e. whether the power is being used oppressively);

(e)    whether the impecuniosity arises out of the act in respect to which relief is sought;

(f)    whether there are aspects of public interest which weigh in the balance against the making of an order; and

(g)    whether there are any particular discretionary matters peculiar to the circumstances of the case.

20    In KP Cable Investments Pty Ltd v Meltglow Pty Ltd and Others (1995) 56 FCR 189 (“KP Cable”) at 196–198 Beazley J referred to the following additional matters:

(a)    security for costs applications should be brought promptly;

(b)    having regard to the strength and bona fides of the plaintiff’s case, as a general rule, where a claim is regular on its face and discloses a cause of action, in the absence of evidence to the contrary the Court should proceed on the basis that the claim is bona fide with a reasonable prospect of success;

(c)    whether the respondent’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate;

(d)    whether there are any persons standing behind the company who are likely to benefit from the litigation. An issue related to this is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking; and

(e)    security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate.

21    The authorities point to two further factors which are relevant in the present case, namely:

(a)    whether the respondents voluntarily assumed the risk of a corporate plaintiff’s financial position: see ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) as Trustee for Harrop Family Trust v Beauville Pty Ltd [2014] VSC 298 (“Harrop Engineering”); and

(b)    whether there is such a significant overlap between the matters raised by the plaintiff’s claim and the defendant’s counterclaim that it would be unfair to oblige the plaintiff to put up security: see B L O’Shea Pty Ltd v Australian Mutual Provident Society Ltd (Unreported, Supreme Court of Victoria, Hedigan J, 15 February 1994, BC9400983) (“B L O’Shea”).

Onus of proof

22    Because the purpose of an order for security for costs against a corporate plaintiff is to protect the defendant against the risk of being deprived of the benefit of a costs order made in the defendant’s favour, the plaintiff’s unsatisfactory financial position triggers the Court’s discretion and is also a substantial factor in the exercise of the discretion: Fiduciary Ltd and Others v Morningstar Research Pty Ltd (2004) 208 ALR 564 (“Morningstar Research”) at [35] to [36] per Austin J; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 (“Idoport”) at [56] per Einstein J.

23    Once it appears by credible testimony that there is reason to believe that a corporate plaintiff will be unable to pay the costs of the defendant if successful in its defence, the evidentiary burden shifts to the plaintiff to establish a reason why security should not be granted: Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [30] per Beazley JA; Idoport at [60]-[62]; Morningstar Research at [36].

24    Even so, the burden rests on the defendant, from first to last, to persuade the court that the order for security should be made: Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [21] per Maxwell P and Buchanan JA. The plaintiff does not bear the ultimate burden of proof in the application for security but it must raise for consideration the matters that favour it if it wishes them to be taken into account in the determination of the case. The evidential burden to raise such matters is distinct from the legal onus of proving entitlement to an order for security for costs, which rests with the defendant: Cornelius and Others v Global Medical Solutions Australia Pty Ltd and Others (2014) 98 ACSR 301 at [18]–[20] per Macfarlan JA.

Consideration

25    The IEPL parties were prompt in bringing their application for security. There is no suggestion that Mecrus’ claim is not bona fide. Mecrus contends only that it will deepen its existing cash flow problems if it is ordered to provide security and there is no evidence that an order of security will stultify the litigation. There is no evidence of any person standing behind Mecrus that stands to benefit from the litigation, including any litigation funder. These factors are not relevant.

The evidence as to Mecrus’ ability to meet an adverse costs order

26    I approach this question on the basis that the respondents’ party-party legal costs at the conclusion of the trial will be at least $250,000. The respondents contend that there is credible testimony such that the Court has reason to believe that Mecrus will be unable to pay the respondents’ costs if it is unsuccessful in the litigation. Mecrus denies that it will be unable to pay and it argues that the evidence as to its financial position falls short of the threshold of “credible testimony”.

27    I respectfully adopt the explanation of Lee J in Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union and Others (1993) 12 ACSR 1 at 5 where his Honour said that credible testimony amounts to an obligation:

…to show that the material before the court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings.

28    In Beach Petroleum NL v Johnson and Others (1992) 7 ACSR 203 at 205 von Doussa J explained the requirement ins 1335 in the following terms:

In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would then be taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.

See also Stelmag Pty Ltd v Tifferly Manufacturing Pty Ltd [2002] ACTSC 99 per Connolly M; Meni’s Tailoring & Alterations Pty Ltd v Jeanswest Corp Pty Ltd [2003] FCA 1108 per Merkel J.

29    Mecrus relies on its preliminary accounts for the financial years ended 30 June 2013, 30 June 2014 and 30 September 2014. The preliminary balance sheets state that Mecrus had net assets of $5.35 million as at 30 June 2013, $7.07 million as at 30 June 2014, and $9.47 million as at 30 September 2014.

30    Mecrus argues that its preliminary accounts show that it has a strong net asset position and it notes that its strong net asset position at 30 September 2014 represents the position after it was required to pay about $1.516 million in redundancies in September 2014. Mr Richards deposes that Mecrus has continued to trade profitably following the expiration of the Agreement on 31 August 2014, even though revenue generated through the Agreement was approximately 70% of Mecrus’ total revenue and profit. He also points to the adverse effects on Mecrus’ financial position that were caused by the IEPL parties’ failure to pay for a large briquette stockpile which Mecrus manufactured at the respondents’ request and to pay its outstanding invoices as and when they fell due. In effect, he says that Mecrus is being financially squeezed by the respondents’ refusal to pay amounts which are plainly due.

31    The respondents contend that there is credible evidence that Mecrus will be unable to pay the respondents’ costs if it is unsuccessful in the case.

32    Firstly, they note that Mecrus has no real property in Australia and has total share capital of $116,002.

33    Secondly, they rely on Mr Richards’ admission that Mecrus’ financial position is substantially altered with the closure of the Briquette Plant from which it had derived 70% of its revenue and profit.

34    Thirdly, they raise some questions about Mecrus’ preliminary accounts as at 30 September 2014. These were addressed by Mecrus’ counsel in the hearing and counsel informed the Court that:

(a)    $1.482 million of Mecrus’ total net profit before tax of $1.077 million in the period ended 30 September 2014 is an estimate of its accrued claims against IEPL. This entry must be reversed when assessing Mecrus’ ability to meet an adverse costs order in the litigation. Mecrus must therefore be treated as having suffered a loss of approximately $400,000 in that year. There is some force however to Mecrus’ argument that this is an understandable result when the large redundancy payments are taken into account;

(b)    $2.9 million of the debtors recorded in the preliminary balance sheet relate to its claims in the proceeding. This entry too must be reversed and this substantially reduces Mecrus’ net asset position.

35    Fourthly, the respondents raise questions about the 30 September 2014 preliminary accounts which were not fully addressed by Mecrus’ counsel in the hearing, namely that:

(a)    $2.8 million of Mecrus’ current assets are intercompany loans. The respondents argue that there is no evidence as to the entities to which loans have been made, whether the loans are capable of being recalled and whether any of the entities has the wherewithal to pay the loans if Mecrus calls for repayment; and

(b)    $3.3 million of its non-current assets are investments in its subsidiaries. The respondents argue that there is no evidence as to the entities in which investments have been made or whether or not the investment is capable of being called in or sold if Mecrus is required to meet an adverse cost order.

The respondents sought information from Mecrus in this regard but it was not forthcoming. There is force to the respondents’ concerns as the intercompany loans and the investment in subsidiaries total $6.1 million, and if those assets are “backed out” of the calculation of Mecrus’ net asset position a different picture emerges.

36    Fifthly, the respondents point to a note to Mecrus’ audited accounts for the financial year ended 30 June 2012, which related to post-balance date events in the period ended 30 June 2013. The note states that:

(a)    the Mecrus Group incurred a net loss of $1.9 million;

(b)    the Group’s current liabilities exceeded current assets by $1.1 million; and

(c)    the Group breached its covenant with its financier and was dependent upon the continued financial support of its financier.

In the auditor’s view there existed a “material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern and therefore, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business, and at the amount stated in the financial report.” I note however that Mecrus did continue as a going concern and it did not cease operations until the Agreement came to an end on 31 August 2014.

37    There are difficulties in assessing the likelihood that Mecrus will be unable to meet an adverse costs order that may be made in late 2015 or early 2016 when the only audited accounts in evidence relate to the year ended 30 June 2012(when Mecrus was still operating the Briquette Plant). However, the respondents adduced sufficient evidence to shift the evidentiary burden in relation to its financial capacity to Mecrus, and in my view Mecrus did not do enough to demonstrate that it is likely to be able to pay the respondents’ costs should it be unsuccessful in the litigation. I am satisfied there is a real chance that Mecrus will be unable to do so.

38    Even so, I do not presently see the risk that Mecrus will be unable to pay adverse costs as high. The questions about Mecrus’ net asset position are just that, and the party-party legal costs likely to be incurred by the respondents are low relative to the assets that appear to be available. The position may be different when Mecrus produces its audited accounts for 2013 and 2014 which Mecrus’ counsel informed the Court will be available in about three months.

The strength of Mecrus’ claims in the proceeding

39    Mecrus makes seven claims in the Amended Fast Track Statement which may be broadly summarised as follows:

(a)    a claim for breach of agreement, misleading or deceptive conduct and unconscionable conduct in that in the year ended 30 June 2013 IEPL failed to supply Mecrus the quantity of coal necessary for it to meet IEPL’s forecast of its briquette needs. Mecrus fell short by 108,552 tonnes and IEPL deducted the sum of about $780,000 from the payments due to Mecrus under the Agreement (“the Coal Deficiency claim”);

(b)    a claim for breach of agreement and negligence on the basis that in July, August and September 2013 IEPL supplied more highly combustible coal sourced from Yallourn which was blended with coal sourced from Morwell. The Yallourn coal is alleged to have increased the risk of fire at the Briquette Plant, and as a result in July and August 2013 some plant items required maintenance or failed causing Mecrus losses of about $73,000 (“the Equipment Failure claim”);

(c)    a claim for breach of agreement and negligence on the basis that IEPL’s supply of coal sourced from Yallourn caused a fire at the Briquette Plant on 10 August 2013, causing Mecrus losses of about $392,000 (“the Fire claim”);

(d)    a claim for breach of the agreement on the basis that between June 2006 and December 2013 IEPL failed or refused to pay compensation to Mecrus of $750 per day of manufacture for the supply of coal which was not 100% sourced from Loy Yang (“the Failure to Pay Compensation claim”);

(e)    a claim for breach of agreement on the basis that IEPL was obligated to pay a Service Fee that is not less than the Minimum Service Fee for each contract year of the Agreement. The final year of contract only ran for two months, July and August 2014. Mecrus manufactured and delivered 13,914 tonnes in that period but it claims the Minimum Service Fee, less the amount it received, being a total of about $5.75 million (“the Minimum Service Fee claim”);

(f)    a claim for breach of agreement, misleading or deceptive conduct, unconscionable conduct, as well as a claim in estoppel, on the basis that IEPL requested Mecrus to establish and maintain a long-term stockpile of briquettes, and in reliance on this Mecrus built up a stockpile of about 44,043 tonnes. When the Agreement came to an end on 31 August 2014 Mecrus sought payment of the Service Fee for these briquettes but IEPL refused to pay and claims the right to use the briquettes. Mecrus claims about $3.73 million (“the Stockpile claim”); and

(g)    a claim for breach of agreement in that Mecrus had built a stockpile of 100,000 tonnes of grus, being the detritus or residue from the briquette manufacturing process, by the end of the Agreement. Mecrus claims ownership of the grus. IEPL has commenced to convert the grus to its own use and Mecrus claims loss and damage accordingly. The Agreement expressly provides that property in the grus remains with IEPL, but Mecrus contends that provision is a mistake (“the Grus claim”).

40    Mecrus also disputes the respondents’ refusal to pay some outstanding operational invoices, which is the subject of a set off claimed by the respondents (“the Outstanding Invoices claim”).

41    There is no issue as to whether the applicant’s claims are bona fide and the only question concerns the strength of its claims. The authorities provide that where the claims in a proceeding are prima facie regular and disclose a cause of action the Court may assume the case has reasonable prospects of success: see Fencott at 514; KP Cable at 197; Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd [2012] FCAFC 57 at [15] per Jacobson, Besanko, and Perram JJ. The respondents do not contend that Mecrus’ claims are not regularly made, or that they do not disclose a cause of action. On this basis I may assume the case has reasonable prospects of success.

42    The authorities show that the Court is not obliged to assess the merits of the claims at length as to do so would ordinarily be a waste of resources: Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 at 441 per Pincus JA. Some authorities indicate that the Court should not go into the merits of a claim in detail unless it can be clearly demonstrated that there is a high degree of probability of success or failure: Keary Developments Ltd v Tarmac Construction Ltd and Another [1995] 3 All ER 534 at 540 per Gibson LJ; Porzelack KG v Porzelack (UK) Ltd [1987] 1 All ER 1074 at 1077 per Sir Nicholas Browne-Wilkinson V-C; Harrop Engineering at [8].

43    Counsel for the respondents submits that the Court should not make any assessment of the strength of the claims at this preliminary stage. I do not accept this contention. Whether an attempt should be made may well depend upon the complexity of the case, but it is common for the court to undertake a preliminary assessment of the strength of the applicant’s claim in considering a security for costs application. As Finkelstein J said in Bray v F Hoffman-La Roche Ltd and Others (2003) 130 FCR 317 at [252], “the court should not shy away from undertaking a preliminary evaluation of the merits. That task is not as difficult as it might seem.”

44    Mecrus contends that its Stockpile claim, Minimum Service Fee claim, and Outstanding Invoices claim have a high probability of success.

45    Both the Stockpile claim (for about $3.73 million) and the Minimum Service Fee claim (for about $5.75 million) are significant claims and if Mecrus succeeds in either of these claims it will enjoy substantial success in the proceeding. I will not assess the strength of the Outstanding Invoices claim as it is not significant in the proceeding.

The Stockpile claim

46    In this claim Mecrus alleges that:

(a)    in about January 2013 IEPL represented that it had contractual obligations to continue to supply customers with briquettes, and that it wanted to develop a long-term stockpile to enable it to continue to supply briquettes to customers after the expiry of the Agreement;

(b)    in about January 2013 IEPL notified Mecrus in writing that it required Mecrus to substantially increase briquette production to 240,000 tonnes per annum;

(c)    on 18 July 2013 IEPL wrote to Mecrus providing a forecast which incorporated a long-term stockpile of at least 22,000 tonnes. Being in addition to the “working stockpile” this meant a stockpile of at least 30,000 tonnes;

(d)    on 5 August 2013 IEPL wrote to Mecrus advising that it would pay for any briquettes made in excess of the volume indicated; and

(e)    on 5 June 2014 IEPL wrote to Mecrus stating that 15,000 tonnes of the existing stockpile would be incorporated into the briquette quantity for the calculation of the annual Minimum Service Fee for the 2013/2014 year. The letter stated that the 15,000 tonnes “will also be deemed to be a pre-payment to Mecrus for the final stockpile calculation. (i.e. long term stockpile).”

47    Mecrus alleges that in June 2014 IEPL provided a forecast of 39,000 tonnes of briquettes to be purchased in July and August 2014, which Mecrus met. It alleges that IEPL only collected 13,914 tonnes, and the balance went into the stockpile. When the Agreement expired on 31 August 2014 Mecrus had built up a long-term stockpile of 44,043 tonnes, doing so at IEPL’s request and in reliance upon its representations. Mecrus alleges that IEPL has failed or refused to call upon the long-term stockpile to be sold to it, or to pay the price of $84.66 (exclusive of GST) per tonne for the stockpile.

48    In their Fast Track Response the respondents do not deny the existence of the letters upon which Mecrus relies, but it contends they are to a different effect. The respondents dispute Mecrus’ allegations as to the volume of briquettes produced and the size of the stockpile but only at the edges. Their defence seems to boil down to the contentions:

(a)    that IEPL paid for the long-term briquette stockpile. This appears to be based upon a construction of the Agreement rather than on a contention that IEPL actually paid Mecrus for the 44,043 tonnes of briquettes in the stockpile. However counsel did not clearly articulate the construction point;

(b)    that ownership and title in the stockpile remained with IEPL at all material times in accordance with cl. 13(a) to (c) of the Agreement; and

(c)    that Mecrus’ sub-lease for the Briquette Plant and yard expired on 31 August 2014 and the land on which the stockpile was situated reverted to IEPL. IEPL is therefore entitled to possession and control of the stockpile.

49    As the respondents allege, cl. 13 provides that ownership and title in the stockpile remained with IEPL. Putting to one side Mecrus’ claim that this clause is a mistake, cl. 13 goes to ownership of the stockpile rather than to whether IEPL acted in a way that was misleading or deceptive or unconscionable by requesting Mecrus to manufacture 44,043 tonnes of briquettes for a stockpile and then refusing to pay for it, or whether because the stockpile was created at its request it is now estopped from refusing to pay for it. The same might be said about the argument turning on the expiration of the sub-lease.

50    While the respondents’ counsel contends that there are good counter-arguments to those advanced by Mecrus they were not clearly articulated, or supported by the materials provided. There is an air of commercial unreality to the proposition that Mecrus was required by IEPL to manufacture a briquette stockpile for IEPL’s use but IEPL is not required to pay for it. IEPL may well have a good defence to this claim and I have no final view, but for the purposes of this application my preliminary assessment is that the prospect of success in the Stockpile claim are better than reasonable.

The Minimum Service Fee claim

51    Mecrus alleges that the final year of the Agreement commenced on 1 July 2014 and ended on 31 August 2014. It is uncontentious that cl. 1 of the Agreement defines “Contract Year” as follows:

“Contract Year” means the 12 months commencing on 1 July and terminating on 30 June next provided that:

(a)    the first Contract Year will commence on the Commencement Date and end on 30 June 2005; and

(b)    the final Contract Year will commence on 1 July 2008 and end on the fifth anniversary of the Commencement Date.

The “Commencement Date” is defined as “the Commencement of Commercial Production”. As I have said, the Agreement was extended so as to expire on 31 August 2014.

52    Clause 14.1(c) of the Agreement provides:

The Customer [IEPL] agrees that, in each Contract Year, the aggregate of the Service Fees payable under this Agreement shall be not less than the Minimum Service Fee except in circumstances where the Manufacturer [Mecrus] does not, during the relevant Contract Year, manufacture and deliver the Minimum Briquette Level to the Customer as a consequence of the act or omission of the Manufacturer.

53    The “Minimum Service Fee” is defined to mean “a service fee equivalent to that which would be payable in the event that the Manufacturer Manufactured and delivered the Minimum Briquette Level in the relevant Contract Year”. The “Minimum Briquette Level” is defined to mean 80,000 tonnes of briquettes or such other amount as the parties agree.

54    In reliance on cl. 14.1(c) Mecrus alleges that it delivered 13,914 tonnes in July and August 2014 and its failure to deliver 80,000 tonnes was not caused by any act or omission on its part.

55    Mecrus alleges that the Minimum Service Fee in the relevant Contract Year is about $7.45 million inclusive of GST, from which about $1.7 million paid by IEPL may be deducted. Mecrus therefore claims approximately $5.75 million.

56    In their Fast Track Response the respondents deny that the Agreement entitles Mecrus to payment of the Minimum Service Fee for a full Contract Year when, in fact, the final year only ran for two months. They argue that the written Agreement does not reflect the parties’ intention at the time of negotiating the Agreement. They contend it was the common intention of the parties at the time that if, in the final contract year, briquettes were not manufactured for an entire 12 month period the Minimum Service Fee would be pro-rated to take into account the shortened period of operation. They note that when the Agreement was varied on or about 14 September 2007 the parties agreed to adjust the Minimum Service Fee on a pro-rated basis, and allege that the Briquette Plant would be physically incapable of producing 80,000 tonnes of briquettes in a two month period. They argue that the Agreement should be rectified so that it provides that the Minimum Briquette Level in the final Contract Year is limited to one sixth of 80,000 tonnes.

57    The authorities indicate the heavy evidentiary burden to be imposed on a party seeking to persuade a court that the parties intended an agreement different to that which is recorded in writing. As J W Carter notes in Carter on Contract (LexisNexis, as at 19 February 2015) at [22-450]):

It is a ‘question of fact and degree what weight of evidence is needed to overcome the inherent probability that the parties meant what they wrote and to establish that contrary to it the parties did not mean what they wrote’…

The plaintiff’s onus of proving that an instrument assented to which differs from the form which, according to the parties’ common intention, it was meant to take, is a heavy one, usually expressed in a requirement of ‘convincing proof’, or proof in clear and precise terms. The Restatement (2d) Contracts (1979) states that ‘clear and convincing evidence’ is required. (Citations omitted)

58    In submissions Mecrus denies the existence of a common intention to pro-rate the Minimum Service Fee in the final Contract Year. Mecrus submits that it intended that the final Contract Year be for only a two month period because it knew it would incur substantial exit costs at the end of the Agreement, including significant redundancies. Again, while I have no final view as to the merits of the claim, the respondents’ heavy evidentiary burden points towards a preliminary assessment that Mecrus enjoys better than reasonable prospects of success in the claim.

59    The strength of these two claims is a factor pointing away from an order for security.

The overlap between the applicant’s claims and the respondent’s cross-claim

60    Where there is a significant overlap between the matters raised by the plaintiff’s claim and the defendant’s counterclaim it may be unfair to oblige the plaintiff to put up security. For example in B L O’Shea at 9 Hedigan J said that where there is such a significant overlap between the matters raised by the plaintiff’s statement of claim and the defendants’ defence and counterclaim that there is an inextricable unity of issues, it would be unfair to oblige the plaintiff to put up security, even if other criteria were fulfilled.

61    In Interwest Ltd v Tricontinental Corporation Ltd and Another (1991) 5 ACSR 621 at 625–626, Ormiston J explained:

The other significant issue is the overlap between the plaintiffs’ claims and the defence to the defendants’ counterclaims, as well as the defendant Tricontinental’s proceedings to enforce the guarantees and to wind up three of the plaintiff companies …

The authorities on the effect of counterclaims and cross-claims are by no means satisfactory. In my experience counterclaimants are rarely required to provide security and the existence of a counterclaim frequently dissuades defendants from pursuing an application for security, but there is no doubt that the jurisdiction exists to grant security and is “unfettered” in the sense described. Perhaps it may be said that the authorities support the proposition that security will only ordinarily be ordered against a party who is in substance the plaintiff, and that an order ought not to be made against parties who are defending themselves and thus forced to litigate. That would appear to be an overstatement, but the fact that a plaintiff, or counterclaimant, has instituted essentially defensive proceedings, must be a significant factor in the exercise of the court’s discretion. (Citations omitted)

62    In Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289 at 300 Smart J explained that “[t]he court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action governing substantially the same factual area proceeds.”

63    IEPL makes five cross-claims in its Fast Track Cross-Claim Statement. In broad terms it alleges that:

(a)    Mecrus negligently failed to take timely steps to address and/or manage or control the August 2013 fire in the briquette stockpile which caused IEPL losses of approximately $220,000 (“the Fire cross-claim”);

(b)    in breach of the Agreement Mecrus failed to make good the Briquette Plant at the conclusion of the sub-lease which caused IEPL losses of about $2.3 million (“the Make-Good cross-claim”);

(c)    in breach of the sub-lease Mecrus failed to maintain IEPL’s Extec stacker machine in proper working order which, together with Mecrus’ poor housekeeping, caused a fire on 4 November 2008 which damaged the machine. IEPL claims the value of the machine at about $77,000 (“the Extec Stacker cross-claim”);

(d)    in about August 2012 IEPL and Mecrus entered into a contract under which Mecrus was engaged by IEPL to design, supply, install and commission a Grus Injection Plant capable of carrying grus/briquette material with a bulk density of 830kg/m3 at an approximate delivery rate of 5 to 15 tonnes per hour. The plant did not perform at the level specified and/or failed to operate at all. IEPL claims repair costs or alternatively the cost of the plant in the sum of about $265,000 (“the Grus Injection Plant cross-claim”); and

(e)    the common intention of the parties at the time negotiating the Agreement was that the Minimum Service Fee would be pro-rated to take into account the short period in the final contract year. The respondents seek rectification of the Agreement (“the Rectification cross-claim”).

64    In my view there is substantial commonality between several of Mecrus’ claims and IEPL’s cross-claims. I say this, firstly, because in general terms the proper construction of the Agreement, the existence and terms of the alleged collateral contract, and the quality and combustibility of the coal supplied, are common themes in a number of the claims and cross-claims.

65    Secondly, the respondents’ Rectification cross-claim is the same as its defence to the Minimum Service Fee claim.

66    Thirdly, there is a substantial unity of issues between the respondents’ Fire cross-claim and Mecrus’ Fire claim, and those claims are likely to occupy a significant amount of hearing time.

67    The unity of issues between some of the claims and cross-claims is a factor pointing away from an order for security for costs.

Whether IEPL assumed the risk of Mecrus’ poor financial position

68    Where it may be said that a defendant voluntarily assumed the risk of a corporate plaintiff’s financial position it may be unfair to order security for costs: see Letore Pty Ltd v Associated International Finance Pty Ltd (Unreported, Supreme Court of Victoria, McDonald J, 28 May 1993, BC9303883); Denward Lane Pre-Cast Panels Pty Ltd v Cornerstone Constructions Australia Pty Ltd [2008] VSC 144 at [26] per Hansen J; Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd [2012] VSC 588 at [140]–[145] per Robson J; Coca-Cola Amatil Victoria Ltd v PAA Enterprises Pty Ltd [2003] VSCA 135 at [6]-[9] per Buchanan JA; Harrop Engineering at [11]-[16], [22] per Derham AsJ.

69    In Harrop Engineering at [12]-[16] Derham AsJ reviewed the authorities and explained:

[12] In Letore, McDonald J considered it a relevant consideration that the defendant had engaged in a voluntary contractual relationship with the plaintiff and that it was that contract which gave rise to the proceedings. His Honour considered it reasonable to assume that at the time the defendant entered into the contract it considered it was financially prudent and worthwhile to do business with the plaintiff. This factor weighed against an order for security for costs.

[13] In Denward Lane, Hansen J identified this factor in the following terms (although it appears not to have been given much weight in the circumstances of that case):

It may be assumed that the defendant considered the plaintiff to be an appropriate company to engage for these purposes, which must have included an assessment of the plaintiff’s financial and managerial ability to perform the agreement. Having done so it is relevant that it is under the very agreement thus entered into that this litigation arises.

[14] In Industrial Conveying Robson J took this factor into account in refusing to grant security for costs.

[15] In Coca-Cola Amatil, the plaintiff (below) had submitted that as Coca-Cola Amatil had chosen to deal with a company, it should be limited to the resources of the company to satisfy any order for costs it might obtain. The judge who heard the application accepted this ground, saying:

Now, that falls fairly and squarely within the principle of what Justice McDonald was talking about in the Letore case. It seems to me that the defendant voluntarily entered into a commercial arrangement with a corporation. Well, here even more so. Not only did they enter into this arrangement, they induced this arrangement. But for this arrangement they would have been dealing with a natural person because the exact same services were being provided as I understand it by Mr Andrew through the corporate structure. And if it weren’t for that and there had been a similar contractual arrangement for these sorts of services and there had been an alleged breach, it would be Mr Andrew alone who would now be the plaintiff and there wouldn’t be an opportunity for the defendant to seek security for costs.

[16] The Court of Appeal (Callaway, Buchanan and Eames JJA) concluded that a refusal by the primary judge to order security for the defendant’s costs on the basis that included this factor did not disclose any error of principle in the exercise of the judge’s discretion.

(Citations omitted.)

70    Derham AsJ concluded at [22]:

On the other hand, the assumption of risk factor weighs against the ordering of security, and weighs, in my view, heavily. It weighs heavily because when the defendants entered into the Sale and Purchase Agreements they knew of the impecuniosity of the plaintiffs and should be taken to have assumed the risk that if proceedings were commenced by the plaintiffs to enforce the Agreements, the defendants would be sued by impecunious plaintiffs. It is also relevant because it is out of the very Agreements under which the businesses were acquired that the plaintiffs sue the defendants, and do so in circumstances where they, the defendants, have effectively restrained the principal of the plaintiffs from conducting business through the plaintiffs.

71    The respondents did not argue against the principle underpinning this line of authority only that arguing it does not apply on the facts of the present case. I accept that the facts in Harrop Engineering (and those of the cases referred to) are different to the facts in the present case. In Harrop Engineering the defendant was aware of the plaintiff’s financial difficulties prior to entry into the relevant contract, and the defendant’s conduct and the nature of the transaction meant that the plaintiff was completely unable to continue its business as a going concern. In comparison, as the respondents contend, Mecrus was established in or around 1999 and until 2004 it operated a steam plant and bottling operation. Mecrus does not suggest that it was in financial difficulty at the commencement of the Agreement, and in 2004 it had other business interests which were not related to or dependent on the IEPL parties. Mecrus still has other business interests and Mr Richards deposes that it continues to be profitable, although its revenue is only 30% of what it was when the Agreement was on foot.

72    Against this, I note that the IEPL parties are substantial and Mecrus is a much smaller company. The Agreement, which has some features of a joint-venture, involved Mecrus taking a sub-lease of the Briquette Plant for the limited term of the Agreement, rebuilding the Plant at a cost of $3 million to the ultimate benefit of the IEPL parties, and then manufacturing briquettes for IEPL for the fixed term of the Agreement. It is significant that throughout the relevant period, including at the time of negotiation of the Agreement, Gordon Carter was a director of Mecrus and each of the IEPL parties.

73    I infer that the IEPL parties knew Mecrus’ financial position, including that it was required to borrow approximately $3 million to rebuild the Briquette Plant and that 60 to 70% of Mecrus’ revenue and profit would come from its operation of the plant. They must have known that once the Agreement came to an end Mecrus would be unable to manufacture briquettes, and that it would lose in the order of 70% of its revenue at the same time as it would be forced to pay substantial redundancy payments. The respondents submit that they had good grounds to believe that Mecrus was a diversified and financially stable corporation with substantial financial backing, but in my view they sought to overstate Mecrus’ financial position at the time. It is likely that they understood some of the difficulties that Mecrus would face at the end of the Agreement.

74    I assume that when the respondents entered into the Agreement with Mecrus they considered it was financially prudent and worthwhile to do so. The claims in the proceeding arise directly out of the Agreement and a relevant factor to be taken into account is the IEPL parties’ assumption of a risk that if Mecrus commenced proceedings to enforce the Agreement it might have difficulties in meeting an adverse costs order. While in all the circumstances I do not see this as a strong factor, it points away from an order for security for costs.

Whether IEPL’s wrongful actions have materially contributed to Mecrus’ lack of means

75    Mecrus also contends that its impecuniousity arises out of the respondents’ action, as their actions have materially contributed to its current cash flow difficulties. It carries the onus of establishing this: Jazabas Pty Ltd and Others v Haddad and Others (2007) 65 ACSR 276 at [94] per McClellan CJ (Mason P and Basten JA agreeing). At [95], his Honour cited the following passage from G E Dal Pont, Law of Costs (LexisNexis Butterworths, 2003):

[T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant’s conduct is merely a contributing factor – it must be the material contributor to or cause of the plaintiff’s impecuniosity. [(at [29.96]) emphasis added]

I respectfully agree.

76    If Mecrus was paid for the stockpile as it sought in September 2014 its financial position would be improved by about $3.7 million, and there would be no question that it was able to satisfy an adverse costs order if it was unsuccessful in the litigation. As I have said, my preliminary view is that Mecrus enjoys better than reasonable prospects of success in its Stockpile claim. It may therefore be said that the IEPL parties have materially contributed to Mecrus’ impecuniosity.

Conclusion

77    The factor in favour of an order for security for costs is the credible evidence of Mecrus’ inability to meet an adverse costs order if judgment is given against it in the proceedings. There is no other factor of significance in favour of an order.

78    The strength of some of Mecrus’ claims, the unity of issues between some of Mecrus’ claims and some of the cross-claims, the respondents’ assumption of risk, and the fact that IEPL’s actions have materially contributed to Mecrus’ financial position weigh against an order for security.

79    In my view the balance weighs in favour of Mecrus and against an order for security for costs. The respondents had the onus and in my view they failed to discharge it. I have dismissed the application and ordered the respondents to pay the applicant’s costs.

Associate:

Dated:    23 February 2015