FEDERAL COURT OF AUSTRALIA

Prodata Solutions Pty Ltd v South Australian Fire and Emergency Services Commission [2018] FCA 1665

ORDERS

THE COURT NOTES THAT:

1.    The applicant has provided the first respondent security for costs in the form of an irrevocable bank guarantee issued by an Australian financial institution dated 11 September 2018 in the amount of $100,000.00.

2.    The applicant has provided the second respondent security for costs in the form of an irrevocable bank guarantee issued by an Australian financial institution dated 12 September 2018 in the amount of $100,000.00.

THE COURT ORDERS THAT:

1.    On or before 23 November 2018 the applicant is to provide additional security for the first respondent’s costs to the conclusion of the first day of the trial in the amount of $75,000.00.

2.    On or before 23 November 2018 the applicant is to provide additional security for the second respondent’s costs to the conclusion of the first day of the trial in the amount of $55,000.00.

3.    The security referred to in paragraphs 1 and 2 is to be provided in each case in the form of:

(a)    an irrevocable bank guarantee issued by an Australian financial institution; or

(b)    payment of the sums into court.

4.    The proceedings be stayed until the expiry of 23 November 2018.

5.    By this order, in the event of the applicant’s non-compliance with the order in paragraph 1, the originating application is, as against the first respondent, dismissed.

6.    By this order, in the event of the applicant’s non-compliance with the order in paragraph 2, the originating application is, as against the second respondent, dismissed.

7.    The first respondent has liberty to apply with no less than two business days’ notice for a declaration to the effect that the proceedings against the first respondent have been dismissed by the operation of the order in paragraph [5].

8.    The second respondent has liberty to apply with no less than two business days’ notice for a declaration to the effect that the proceedings against the second respondent have been dismissed by the operation of the order in paragraph [6].

9.    Any application by the respondents for the payment of security for their costs beyond the first day of the trial is to be filed and served not sooner than 60 days and not later than 30 days prior to the first day of the trial.

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

REASONS FOR JUDGMENT

CHARLESWORTH J:

1    This is an application for an order that the applicant in the proceeding, Prodata Solutions Pty Ltd provide security for the costs of the two respondents, South Australian Fire and Emergency Services Commission (SAFECom) and SMS Consulting Group Limited.

2    The issue arises in circumstances where Prodata has voluntarily provided security to each of the respondents in substantial amounts in the form of two irrevocable bank guarantees issued by BankSA. The terms of the guarantees and the circumstances in which they were provided will be detailed elsewhere in these reasons. The respondents argue that the amount of security provided by the bank guarantees is not sufficient.

3    Prodata’s primary contention is that the power of the Court to make an order for security for costs is not enlivened. In support of that contention it relies in part on the provision of the bank guarantees.

4    For the reasons given below, I am satisfied that an order for security for costs can and should be made so as to require Prodata to provide additional security.

PRINCIPLES

5    The Court’s power to make an order for security for costs may be drawn from s 1335 of the Corporations Act 2001 (Cth), s 56 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and r 19.01 of the Federal Court Rules 2011 (Cth). It is convenient to determine the application by reference to the Corporations Act and FCA Act provisions, on which the parties focused their submissions. They respectively provide:

1335 Costs

(1)    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.

56 Security

(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.

6    If there be differences between these provisions they are not differences upon which the present application turns.

7    Two issues arise. The first is whether the jurisdiction to make the order is enlivened. The second is whether and how the discretion to make the order should be exercised.

8    The power to make the order under s 1335 of the Corporations Act will be enlivened “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”. As Lee J said in Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 at 5, the word “credible” suggests a requirement that the evidence relied upon by the applicant for security have some “characteristic of cogency”. The threshold requirement has otherwise been the subject of varying judicial opinions. They are neatly summarised by Yates J in Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438:

5    Unlike s 1335(1) of the Corporations Act, s 56 of the Federal Court Act does not require ‘credible testimony that there is reason to believe that the corporation will be unable to pay the costs of [the respondents]’. The differences between the two provisions have been considered by decisions of this Court: see, for example, Instyle Contract Textiles Pty Ltd v Good Environmental Choice Services Pty Ltd (2009) 181 FCR 360 at [6]-[8]; MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Limited [2002] FCA 821 at [8]-[9]. However, given that the applicant’s impecuniosity was the cornerstone of their motion, the respondents submitted that the Court’s jurisdiction under both provisions was, in this case, relevantly identical. They proceeded on the basis that they were required to satisfy the threshold requirement of s 1335(1) in order to succeed on the motion. This approach is understandable. Where the only asserted basis for an order for security relates to the alleged inability of the applicant to meet a future costs order, it is difficult to see in practice a difference between the operation of the two provisions: see the observations of Perram J in Soul Pattinson Telecommunications Pty Ltd v Subex Americas Inc [2009] FCA 651 at [6].

6    In light of the way in which the respondents have put their motion, it is appropriate to say something further about the threshold requirement of s 1335(1) of the Corporations Act.

7    The nature of the requirement was described by von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205 as follows:

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 be fairly 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 be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.

8    This approach has been applied many times but has been criticised. In Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [13]-[14] the Court of Appeal in Victoria said that it was wrong to substitute a judicial exposition for the words of the statute itself: see Central Bayside General Practice Association Ltd v Commissioner of State Revenue (2006) 228 CLR 168 at [84]. The Court of Appeal said that the statutory test was clear: Is there reason to believe that the corporation will be unable to pay the costs of the defendant if successful?

9    The Court of Appeal at [15] continued as follows:

The phrase ‘reason to believe’ is the touchstone of jurisdiction. It requires a rational basis for the belief – and no more. The wording adopted may be contrasted with other familiar formulations such as ‘if the court is satisfied that’ or ‘if in the view of the court it is likely that’. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a ‘real risk’.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation’s financial affairs.

10    This approach was favoured in Smart Co Pty Ltd v Clipsal Australia Pty Ltd [2009] FCA 1253 at [43].

11    It may be a matter of debate whether in Beach Petroleum von Doussa J did place an impermissible gloss of the words of s 1335(1): Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liquidation) [2003] FCA 803 at [12]-[21]. Be that as it may, I propose to follow the approach in Livingspring and Smart, by focussing on the words of the statutory provision itself.

9    I will follow the same approach.

10    The discretion to make the order is unfettered. It is to be exercised without any disposition in favour or against making the order, although the party moving for the order bears the onus of satisfying the Court that relief should be granted in the terms sought. As Murphy J said in Mercus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103; (2015) 327 ALR 523:

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; 66 ACSR 455; [2008] VSCA 93 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 v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; [2014] NSWCA 65 at [18]–[20] per Macfarlan JA.

11    The principles guiding the exercise of the discretion are well settled. They are discussed, non-exhaustively, by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (at 196 – 198) in a passage that need not be extracted here. This application will be decided having regard to those considerations upon which the parties relied in their evidence and submissions, from which the four broad topics emerge:

(1)    the inferences that can and should be drawn from the available evidence of Prodata’s financial position;

(2)    the timing of the respondents’ applications;

(3)    the sufficiency of the security already provided; and

(4)    the reasonableness of the additional amounts sought.

12    As I initially understood the evidence (and particularly the party-party correspondence), it appeared that orders for security in the amounts sought by the respondents might, according to Prodata, stultify the action. It also appeared that Prodata considered SAFECom responsible for any financial difficulties it had experienced. Neither position was advanced on behalf of Prodata in oral argument. Indeed, the prospect of stultification was unequivocally disavowed by Prodata. Its principal position is that there is no reason to believe that it will be unable to pay the respondents’ costs if the respondents are successful in the action.

13    Although the written submissions filed on behalf of SMS assert weaknesses in Prodata’s case against it, it was not suggested that the case against SMS was not bona fide nor was it suggested that Prodata’s case was bound to fail. I do not consider this application should turn upon any assessment of the parties’ relative prospects of success in the proceeding. I am in no position to make a meaningful assessment on the information before me in any event. The merits of Prodata’s claim will be regarded as a neutral matter: Jazabas Pty Ltd & Ors v Haddad & Ors [2007] NSWCA 291 at [84]; Litmus Australia Pty Ltd (in liq) v Paul Brian Canty & Ors [2007] NSWSC 670 at [28]; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [37] - [39].

CREDIBLE TESTIMONY

14    Prodata was formerly party to a series of contracts with SAFECom for the provision of information technology services. The services involved the design and maintenance of a database, known as the ESOTAS system, in which information said to be critical to the functioning of fire and emergency services in South Australia is stored, organised and retrieved.

15    The most recent contract between Prodata and SAFECom is that dated 17 September 2014 titled “SOFTWARE LICENCE MAINTENANCE AND SUPPORT AGREEMENT - ESOTAS SYSTEM” (the 2014 Agreement). As the expiry date for the 2014 Agreement approached, SAFECom decided to put the procurement of a new contract out to tender. Prodata was unsuccessful in the tender process. It subsequently became aware that SAFECom had engaged SMS to provide a Microsoft-based solution to replace the ESOTAS system previously licensed by Prodata to SAFECom.

16    On 7 December 2017 Prodata commenced this proceeding by way of an urgent application for an interlocutory injunction restraining SAFECom and SMS from engaging in certain activities pending judgment. It alleged that SAFECom had engaged in conduct in breach of the 2014 Agreement and in breach of certain intellectual property rights subsisting in the ESOTAS system, particularly in relation to the software “source code”. In circumstances of urgency, the Court set a compressed timetable for the filing of evidence and submissions by the parties with a view to hearing and determining the application before the impending Christmas period.

17    The Court made orders on 21 December 2017 dismissing Prodata’s interlocutory application. The reasons for judgment given orally on that day were to the effect that there was a serious question to be tried, including as to whether SAFECom was in breach of the 2014 Agreement. However, the balance of convenience favoured the respondents, particularly having regard to the availability of monetary remedies and the potential disruption that might otherwise have been caused to the process of migrating data from one system to another.

18    On 29 January 2018 I made orders to the effect that Prodata pay the respondents’ costs of its unsuccessful interlocutory application. There is no order requiring those costs to be paid forthwith. The costs forming the subject of that order are yet to be assessed.

19    On 21 August 2018 Prodata filed a notice of change of solicitor. The new solicitors have engaged different counsel for the preparation and conduct of the trial.

Evidence of Prodata’s financial position

20    There are no financial statements before the Court detailing Prodata’s current financial position. Each party invites the Court to draw inferences on the limited information that is available. For Prodata it is submitted that the paucity of evidence is fatal to the respondents’ applications for security because they cannot satisfy the Court that the precondition for making the orders is met.

21    A recent extract from the Australian Securities and Investments Commission database shows that Prodata is an Australian proprietary company limited by shares with its principal place of business in Hackney, South Australia. Mr David Mifsud is its sole director and secretary. It has issued share capital of $2.00. Mr Mifsud is the sole legal and beneficial owner of the two issued shares in the company. The assets of the company do not appear to be subject to any unsatisfied charges.

22    Prodata is not the registered proprietor of any real property situated in South Australia. The registered owner of its principal place of business is Mr Mifsud.

23    In support of its urgent interlocutory application, Prodata relied (relevantly) upon two affidavits sworn by Mr Mifsud on 7 December 2017 and 19 December 2017. In the first of those affidavits, Mr Mifsud said (at [132]):

SAFECOM is Prodata’s largest client. It accounts for about 60 per cent of Prodata’s business. If Prodata loses SAFECOM as a client without any payment for Prodata’s source code, and without any transitioning-out phase, Prodata may fold. If it does not, I will very likely need to let my employees go. They have been working at Prodata for about 20 years. If Prodata were to get back on its feet later, it would, in my experience, be nearly impossible to find employees of equivalent skill in Adelaide.

24    To the other affidavit, Mr Mifsud annexed (at DM 30) a document titled “Assets & Liability Statement as at today” (19 December 2017)). It contains information, in the form of a simplified table, concerning the financial position of Prodata and of Mr Mifsud personally as at that date. It indicates, and for present purposes I accept, that the net assets of Prodata were, at that time, $155,663.00. As the title to the document suggests, it is concerned with the assets and liabilities of Prodata and Mr Mifsud and so is in the nature of a crude balance sheet. It does not constitute a profit and loss statement in respect of Prodata.

25    Nothing on this application depends upon the net asset position of Mr Mifsud personally. He has not personally given an undertaking to satisfy any costs order that may be made against Prodata and he is not the BankSA customer standing behind the guarantees. He is not otherwise liable to pay any costs order made against Prodata in the proceedings to date and there is nothing to suggest that an order for costs should be made against him personally in the future course of the proceedings.

26    It is submitted that concerns about Prodata’s financial position also arise from a report procured by SAFECom and completed in May 2017 in relation to Prodata’s creditworthiness at that time. It concludes that Prodata had “marginal financial capacity to undertake contracts of $1,000,000.00 annually”. I place little weight on the report. I was not taken to it in oral submissions. The methodology used in the report and the significance of its conclusions for the present application are not adequately explained. Furthermore, the report relates to a period in which Prodata remained contracted to perform valuable services for SAFECom and was competing in a tender process for a successive agreement. Its financial position at that time is not a reliable indicator of its present financial position nor as to its predicted financial position at the time when any adverse costs orders against Prodata might be made. Information said to have been inserted into the report from financial statements for three preceding financial years is redacted, at least in the copy that is before the Court.

27    On 20 August 2017, the solicitors for SAFECom wrote to the solicitors for Prodata foreshadowing the present application. The letter contained assertions that Prodata was impecunious. By letter dated 23 August 2018 (the August letter), Prodata’s solicitors responded in the following terms (footnotes omitted):

Our client does not accept the assertion that it is impecunious on the grounds expressed in your letter, or at all. It is, rather, a trading company with a substantial revenue stream, not merely a shell or ‘2 dollar company’ as suggested. Our client is not insolvent and·is capable of meeting its debts as and when they fall due: there is no credible evidence to the contrary.

Paragraphs 1-3 of your letter point to the financial hardship suffered by our client, being the direct result of your client’s conduct: alleged impecuniosity caused by the respondent/defendant is a significant factor against the exercise of the discretion, should it arise.

Should your client pursue its application, our client will bring evidence to establish that the financial hardship identified in your letter arises from your client’s conduct which has deprived our client of the fees to which it was entitled under its contract with the first respondent. Your client’s conduct is the relevant cause of the first respondent’s failure or refusal to pay its debts as and when they fall due. Had the first respondent satisfied our client’s claim to outstanding fees, our client would not have suffered the financial hardship recounted in your letter.

At a minimum, our client would have received additional revenue of $261,594.66, based on the invoice presented to the first respondent on 6 April 2018. We note that the first respondent has not challenged our client’s entitlement to the sum claimed in that invoice, which involves a simple debt claim, independent of the broader issues in dispute. With the revenue from that invoice our client would have recorded a net profit in excess of $400,000 during the last financial year.

The instances of financial hardship suffered by our client, set out in your letter, have been exacerbated by your client’s conduct in this litigation.

28    In my view the assertion that Prodata is a trading company with a substantial income stream is somewhat undermined by the assertions that SAFECom is responsible for Prodata’s financial difficulties and so should not have the benefit of a security for costs order.

29    In an affidavit sworn on 13 September 2018, Prodata’s solicitor deposes that between the conclusion of the unsuccessful injunction application and up to and including 7 August 2018, Prodata paid legal costs and disbursements to its own legal representatives totalling $207,205.00. The reference in that affidavit to Prodata having paid the costs and disbursements was said in submissions to mean that Prodata had directly drawn from its own resources to do so. I consider the evidence to be equivocal in that particular respect. However, as the solicitor was not cross-examined, I will proceed on the basis that Prodata has, to date, been able to meet its own legal expenses and that it has been able to do so without the assistance of third parties. I should add that Prodata’s own legal fees are considerable, especially having regard to the stage at which these proceedings are at.

30    The bank guarantees given in favour of the respondents were unsolicited in the sense that, although demands for the payment of security had been made, the parties were, at the time (and remain) in dispute as to whether security should be provided and, if so, in what amount.

31    Initially there was an error in expression in the each guarantee, but those errors are now rectified. As rectified, the guarantee provided to SMS is expressed as follows:

In consideration of you at the request of NATURAL RESOURCE SERVICES PTY LTD ABN 49 063 296 695 (the Customer) and BANKSA, A Division of Westpac Banking Corporation ABN 33 007 457 141 (the Bank) agreeing to accept this undertaking, the Bank unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by you to a maximum aggregate sum of One Hundred Thousand Dollars, ($100,000.00) (the said sum) in connection for Bank unconditionally undertakes to pay on demand any sum or sums which may from time to time be demanded by you pursuant to a final costs order made in Federal Court Proceedings SAD 338 of 2017 in favour of SMS Consulting Group Limited T/A SMS Management & Technology ACN 006 515 028 to a maximum of One Hundred Thousand Dollars ($100,000.00), notwithstanding the provisions of any agreement between you and the Customer.

32    The guarantee in favour of SAFECom is expressed in the same terms, although the customer standing behind that guarantee is Ivan John Paul Mifsud (who I presume to be a relation of Mr Mifsud).

33    There is no evidence as to the funding arrangements (if any) that exist between Prodata and the two the customers referred to in the guarantees. Nor is there evidence as to the interests (if any) that the two customers may have in the outcome of the action.

Conclusions

34    In light of the provision of the irrevocable bank guarantees, the appropriate question is whether there is reason to believe that Prodata will be unable to pay that part of the respondent’s assessed costs that exceeds (in each case) $100,000.00. That involves a prospective assessment, both of Prodata’s likely financial position at the conclusion of the trial, and of the respondents’ likely recoverable costs should they successfully defend Prodata’s claim.

35    Estimates of the respondents’ costs up to and including the first day of the trial and to the conclusion of the trial are provided elsewhere in these reasons. On those estimates, I conclude that the security, as presently furnished, will likely be insufficient to discharge Prodata’s liability to pay the assessed costs of both SAFECom and SMS.

36    I consider the evidence of Mr Mifsud concerning Prodata’s financial position in December 2017 to be reliable and genuine. Although expressed as a pessimistic prediction, the prediction was premised on certain events occurring which have since in fact occurred. Prodata has lost SAFECom as a client and has not received any payment for its source code in the ESOTAS system. It was these feared events that informed Mr Mifsud’s genuine concern that Prodata “may fold”.

37    The more recent August letter fortifies me in the view that there has been no significant event in Prodata’s trading or other activities so as to put it in a significantly different financial position than that predicted by Mr Mifsud. The letter serves only to confirm Prodata’s dependence on the revenue it received from SAFECom pursuant to the now-expired 2014 Agreement.

38    As I have said, the respondents have the burden of satisfying the Court that the precondition for making the orders is met. I consider they have discharged that burden by the credible testimony to which I have referred, considered in light of the evidence as a whole.

39    The circumstance that Prodata has not in fact “folded” does not discount a reasonable belief that it may yet do so prior to trial or that it may do so by reason of a significant costs order being made in the respondents’ favour. The scenario to be assessed is not the present scenario in which Prodata is obliged to meet only its own legal expenses. The relevant future scenario is one in which Prodata is obliged to compensate two other parties for their own significant cost burdens, after a trial in which it will incur its own considerable costs.

40    The circumstance that Prodata has to date paid its legal expenses from its own resources is, to my mind, a double edged sword. Whilst those payments indicate that Prodata has to date been able to pay its debts as and when they fall due, if Prodata paid those debts by having recourse to the limited assets referred in Mr Mifsud’s affidavit sworn on 19 December 2017, it may be inferred that it is presently in an overall worse financial position than it was in at that earlier time. In the absence of direct evidence as to how Prodata was able to pay such a significant expense from its own resources, the circumstance that Prodata has in fact paid the expenses is of limited forensic assistance.

41    It was submitted on behalf of Prodata that the provision of the bank guarantees of itself rebuts any inference that might otherwise be drawn about its likely incapacity to pay the respondents’ costs. I reject that submission. The bank guarantees are not founded upon Prodata’s own resources but upon the resources of third parties to the action who will have no obligation to pay any ultimate shortfall in the respondents’ costs and no obligation to indemnify Prodata in respect of any such liability. While the bank guarantees show that Prodata has access to resources other than its own, Prodata could not be compelled to have recourse to those resources to pay any outstanding costs liability owing to the respondents once the bank guarantees are exhausted.

DISCRETION

42    At least to the extent that orders are sought pursuant to s 56 of the FCA Act, the discretion is to be exercised in a manner that best promotes the overarching purposes of the civil practice and procedure provisions identified in s 37M of the FCA Act. The circumstance that Prodata has already provided substantial security for the respondents’ costs in the form of the bank guarantees is itself a relevant consideration in the exercise of the discretion as to whether to make orders for further security to be provided.

43    A good part of the argument on the respondents’ applications was devoted to the issue of delay, the applications having been filed on 24 August 2018, some seven months and 17 days after the commencement of the proceedings.

44    However, I do not consider the delay in bringing the applications to be without adequate explanation, nor do I consider the delay to be productive of unfairness.

45    The explanation for the delay is to be found in the history of the proceedings which began, as I have indicated, in a pre-Christmas rush. A feature of the urgent application was the very short notice given to the respondents for its commencement and the very short period of time available to them to prepare their affidavits and submissions in response to it. The respondents cannot be criticised for failing to bring, or even threaten, an application for security for costs in the midst of the urgent application for interlocutory relief. Nor are the respondents to be criticised for not taking any further step in the proceeding over the Christmas recess.

46    The subject of security was first raised by SAFECom in correspondence dated 20 December 2017. In that correspondence, SAFECom proposed minutes of order for what was expected to be a case management hearing to be conducted upon delivery of judgment on Prodata’s interlocutory application. Paragraph 4 of the proposed minutes was to the effect that SAFECom file and serve any application for security for costs by 10am on 16 January 2018.

47    The Court made no substantive orders on 21 December 2017, except to dismiss Prodata’s urgent application for interlocutory relief and to fix a case management hearing for late January 2018.

48    By letter dated 19 January 2018, SAFECom’s solicitors wrote to Prodata’s solicitors proposing that the matter be stayed. The letter again raised the subject of security for costs. It continued “Obviously if the proceeding is stayed by consent at this point then security for costs will not arise at this time”. In response, Prodata proposed alternative minutes of order which included an order that the action be stayed until a court ordered mediation was completed.

49    At a case management hearing on 29 January 2018, the Court made orders by consent referring the action to a Registrar of the Court for meditation and staying the proceedings against SAFECom. At that time SMS advised the Court that it was obtaining instructions as to whether or not to bring an application for summary judgment. SMS was granted liberty to apply at short notice. SMS ultimately made no summary judgment application.

50    The mediation between SAFECom and Prodata was unsuccessful. The Registrar then conducted a further mediation in which all parties participated. It, too, was unsuccessful. After the conclusion of the second mediation in early July, the matter was set down for a further case management hearing on 27 July 2018. On that day, orders were made for the completion of pleadings by 7 September 2018. By [4] of the orders, the respondents, if so advised, were to file and serve any applications for security for costs on or before 24 August 2018. At that hearing, Prodata made no submission to the effect that a security for costs application should be filed, set down for hearing and determined before any further step was taken in the proceedings.

51    Prior to 24 August 2018, the respondents wrote to Prodata detailing their positions with respect to security. Their applications were subsequently filed on 24 August 2018.

52    In light of that history, I do not consider Prodata could reasonably be under any impression that the application for security for costs, foreshadowed as early as 20 December 2017, would not be made. As the letter from SAFECom dated 19 January 2018 stated, the security for costs issue would not be agitated if the matter were to be stayed with the consent of the parties so that meaningful settlement discussions could occur. Prodata took no issue with that. At the first case management hearing after the conclusion of the mediation in July (and therefore upon the expiry of the stay), the respondents sought orders for the filing and service of their applications and for the progression of that application to a hearing.

53    The Court was taken to a number of authorities in which lapses of time (including lapses of time of a similar length to that of the present case) proved fatal to a security for costs application. The authorities show that delay can be productive of unfairness in a number of respects: see generally Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 at 308 (Street CJ), 309 (Moffitt P); Trility Pty Ltd v Ancon Drilling Pty Ltd [2013] VSC 577 at [55] - [60] (Croft J); Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176 at [20] (Newnes JA with Murphy JA agreeing at [39]); Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Limited (No 5) [2011] FCA 1041 at [16] - [20] (Cowdroy J); Fencott (Bryan E) and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514 - 515 (French J); Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 125 (Waddell J); KP Cable Investments at 197 (Beazley J); Electrona Carbide Industries Pty Ltd v Tasmanian Government Insurance Board [1985] Tas R 68 at 73 (Cox J). In some cases, the prejudice to a party may be inferred from the mere fact and length of the delay. In other cases it may not. This case falls into the latter category.

54    Viewed objectively, I do not consider a litigant in Prodata’s position, knowing all of the circumstances just described, could reasonably assume that the early threat to bring an application for costs was either empty or forgotten. The objective circumstances do not support an inference that Prodata has incurred considerable expenses in the wrongly induced belief that no security would be sought. There is no evidence to support a finding that Prodata, through its sole director, subjectively formed and acted upon any such belief in any event.

SUFFICIENT SECURITY

55    The purpose of a security for costs order is to ensure that the primary purpose for having costs orders can be achieved and the orders of the Court complied with. The order protects a defending party “against the risk that a costs order obtained at the end of the day may turn out to be of no value by reason of the impecuniosity of the plaintiff”: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [52]. The amount of security should be sufficient to advance that purpose, although the Court does not set out to give a complete indemnity: Menhaden Pty Ltd v Citibank NA (1984) 1 FCR 542 at 547 (Toohey J). It is necessary to evaluate the successful party’s likely assessable costs and to account for the possibility that the dispute might resolve before or shortly after the commencement of the trial.

56    In respect of the last-mentioned consideration, the parties have already submitted to mediation processes and yet the matter has not settled. Ordinarily I would consider the prospects of settlement to be grim. The Court is nonetheless assured by Prodata’s incoming solicitors and counsel that settlement discussions will continue and so I will proceed on the basis that there remains some possibility of an out of court resolution.

57    The task of predicting the respondents’ costs is not an exercise in precision. The estimate may proceed from the assumption that any costs awarded in favour of the respondents will be assessed on a party-party basis and that the trial will proceed for about ten days. The costs actually incurred by the respondents may be readily identified, although the inclusion of past costs is a point of contention and the manner in which past costs might be assessed is also disputed.

SAFECom’s actual and estimated costs

58    SAFECom initially sought an order for the payment of security in the amount of $340,000.00 to judgment or, alternatively, $230,000.00 to the end of the first day of trial.

59    I do not presently consider it appropriate to make an order for security for costs beyond the conclusion of the first day of the trial, at least while there remains some prospect of the matter settling. I nonetheless consider it appropriate to ensure that any application for further security be filed and served within 30 days of the commencement of the trial so that, if made, it may be heard and determined without disruption to the trial process.

60    In support of its application, SAFECom relied on the report of a costs practitioner, Mr William Marcus Ericson, dated 24 August 2018.

61    Mr Ericson identified SAFECom’s past and future costs to the end of the first day of the trial as:

    past costs ($150,000);

    future pre-trial solicitor costs ($42,740); and

    future counsel costs ($39,696).

62    The past costs were identified by reference to actual costs billed to SAFECom up to and including 27 July 2018 totalling $259,096.00 excluding GST, as evidenced by its solicitor’s invoices. Some of the entries on the invoices were redacted to protect claims for legal professional privilege. Mr Ericson disregarded the amounts charged against those entries (totalling $54,393.50). Mr Ericson made no deduction to hourly rates by reference to the applicable costs scales because the hourly rate charged by SAFECom’s solicitor did not exceed the hourly rate specified in the applicable scale. He nonetheless applied a “solicitor client” deduction of 30% (having regard to some indication that the scope of work permissible on the scale might otherwise be exceeded) and then offset that deduction by a 5% “care and consideration” loading.

63    The estimate of SAFECom’s future costs took into account the costs of discovery, the preparation of expert reports, the preparation of affidavits, attendances at interlocutory hearings and other pre-trial preparation. That is an appropriate summary of the tasks likely to be undertaken.

64    Counsel costs to end of first day were estimated on the basis that pre-trial preparations for the first day of trial would be $10,488.00 for junior counsel, $27,000.00 for senior counsel and $2,208.00 for an instructing solicitor.

65    Prodata relied on an expert report of Mr Timothy Nicholas Cogan. Mr Cogan criticised the methodology employed and assumptions made by Mr Ericson. Among other things, Mr Cogan took issue with the inclusion of past cost items that, it was said, had been charged in excess of the applicable scale.

66    Prodata submitted that SAFECom should not have an order for security which includes past costs at all. It especially took issue with SAFECom’s claim for security for that part of its costs falling within the costs order made on 29 January 2018 in respect of Prodata’s unsuccessful application for interlocutory relief. To include those costs, Prodata submitted, was to impermissibly provide a means of enforcement of an existing liability rather than to protect SAFECom from the event of a future costs order not being paid. I do not accept that submission. The costs order made on 29 January 2018 is not immediately enforceable. Whether an amount representing the likely assessed costs of that part of the proceeding should be included in an order for security is a matter for the Court’s discretion. I have already determined that it was not unreasonable for SAFECom to delay making this application, especially having regard to the urgent circumstances in which the proceedings were commenced and the submission of the parties thereafter to a mediation process concluding in early July. I am satisfied there is a risk that if the order for security did not include an amount fairly representing the costs that will later become payable pursuant to the order of 29 January 2018, there is an unacceptable risk that the costs order would not be satisfied.

67    Prior to the hearing of its application, SAFECom advised Prodata that it has revised its position so as to seek security in the amount of $175,000.00 to the end of the first day of the trial. Counsel for SAFECom explained to the Court that the revision recognised that Mr Ericson’s identification of past costs had included an amount of $16,700.00 attributable to the first mediation on 22 March 2018. The remainder of the conceded amount makes allowance for (without necessarily conceding) the criticisms made of the scope of work charged, and a further allowance to ensure that security was not sought on a solicitor/client basis. The latter concession was in addition to the 30% reduction already factored in by Mr Ericson.

68    There remains some question as to whether or not Prodata and SAFECom agreed to bear their own costs of the mediation on 22 March 2018. It is not necessary to determine that question, a deduction having been made to ensure that security is not provided for that part of SAFECom’s costs whether or not they would be payable if an adverse costs order were made.

69    In all of the circumstances am satisfied that an order for additional security in favour of SAFECom should be made in the amount of $75,000.00. An order in that amount reflects the provision of the irrevocable bank guarantee in the amount of $100,000.00 which remains enforceable in accordance with its terms and stands independent of the Court’s order.

70    The order will permit the additional security to be provided in the form of an additional irrevocable bank guarantee in the same terms as the bank guarantee already provided, or by way of payment into court.

SMS’s actual and estimated costs

71    SMS seeks an order for security in the amount of $270,000.00, calculated to the end of the trial.

72    SMS relies on a further report of Mr Ericson dated 24 August 2018. It contains the same assumptions and employs the same methodology as the report adduced by SAFECom.

73    For the reasons given in relation to SAFECom’s application, I do not presently consider it appropriate to make an order for the payment of security for SMS’s costs beyond the first day of the trial. I will make provision in the orders for SMS to make an application for additional security within a reasonable period in advance of the trial. I also consider it appropriate to have regard to the estimated costs that may be payable in satisfaction of the costs order made in favour of SMS on 29 January 2018.

74    Mr Ericson’s estimate of SMS’s assessable costs to the conclusion of the first day of trial is $155,000.00, comprising a rounded-down sum of past costs ($65,000.00), future pre-trial costs ($53,085.00) and the costs of the first trial day ($37,500.00).

75    I am satisfied that the methodology employed by Mr Ericson in respect of SMS’s costs is appropriate, having regard to the broadly evaluative nature of the exercise he has undertaken. Whilst the invoices for past work contain entries which would exceed the scale in respect of some significant items, that circumstance has been adequately accounted for by a 20% overall reduction in the actual costs charged. Such a broad brush approach may be inappropriate on an actual assessment of costs, but it is not inappropriate in the present pre doctrine context.

76    It is appropriate to make an order that Prodata provide SMS with additional security in the amount of $55,000.00. As in the case of SAFECom, the bank guarantee in the amount of $100,000.00 remains enforceable independent of the Court’s order.

77    I will hear the parties as the costs of these applications.

Associate:

Dated:    2 November 2018