FEDERAL COURT OF AUSTRALIA

Ovalglen Holdings Pty Ltd (in liq) v Viewnorth Investments Pty Ltd [2020] FCA 889

ORDERS

THE COURT ORDERS THAT:

1.    The plaintiffs' interlocutory application dated 9 December 2019 is dismissed.

2.    The plaintiffs and the fifth defendant must briefly state their respective positions on the costs of the application by correspondence with the Chambers of Justice Jackson within five days of the date of publication of these reasons.

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

REASONS FOR JUDGMENT

JACKSON J:

1    The plaintiffs, Ovalglen Holdings Pty Ltd (in liq) and its liquidator, claim against five defendants in relation to alleged breaches of duty by the directors of the company. The fifth defendant, LegalWest Pty Ltd trading as Lawton Gillon, is alleged to be liable to the plaintiffs by reason of involvement in claimed breaches of duty. These reasons concern an application by the plaintiffs for the return of bank guarantees they gave to Lawton Gillon by way of security for costs.

2    The question arises in the following way. Lawton Gillon is an incorporated legal practice. It is representing itself in the proceeding. The general rule is that a self-represented litigant may not obtain any recompense for the value of his or her time spent in litigation. But there was thought to be a long established exception to this, known as the Chorley exception, by which the rule did not apply to a self-represented litigant who happened to be a solicitor. The plaintiffs say that security for costs was, accordingly, provided on the assumption that Lawton Gillon would be able to claim for legal costs associated with work done on its behalf by its legally qualified principals and employees. But after the bank guarantees were provided, the High Court handed down a decision in which a majority held that the Chorley exception does not form part of the common law of Australia: Bell Lawyers Pty Ltd v Pentelow [2019] HCA 29; (2019) 372 ALR 555. The plaintiffs say that as a result, the assumption that Lawton Gillon would be able to recover for time spent in its own defence was incorrect. The plaintiffs say that the guarantees should therefore be returned.

3    The proceeding was commenced in 2016. Lawton Gillon has been a defendant since that time. In 2017 it entered into negotiations with the solicitors for the plaintiffs, Jackson McDonald, about the provision of security for costs by Ovalglen. The terms on which a first tranche of security was provided were agreed in subsequent correspondence between Jackson McDonald and Lawton Gillon. In a letter from Lawton Gillon dated 25 July 2017, Lawton Gillon said '[w]e hereby undertake to hold the Bank Guarantee on the following terms and conditions'. The Bank Guarantee was defined as a bank guarantee in the amount of $15,000 with no expiry date. The first term was that '[t]he sum of $15,000 will be as security for the costs of the Fifth Defendant in the Proceedings up to and including mediation'. A mediation conference had been proposed at around that time. Lawton Gillon would be entitled to make a claim under the guarantee only if authorised by the plaintiffs in writing, or if the plaintiffs failed to pay an adverse costs order within a certain time. Lawton Gillon was required to return the bank guarantee 28 days after determination or discontinuance of the proceeding or the determination of any application for costs made within that time, provided that there were no outstanding costs orders. Numbered paragraph 7 of the letter said:

The Fifth Defendant's acceptance to the initial tranche of security for costs as set out in this letter is without prejudice to the Fifth Defendant's right to bring an application for security for costs for a further amount after the conclusion of the mediation conference in the Proceedings.

4    The bank guarantee was then provided to Lawton Gillon to be held on these terms. The court-facilitated mediation conference that had been proposed was subsequently vacated (although the parties are currently in the process of conducting a private mediation).

5    In correspondence in March 2018 the plaintiffs and Lawton Gillon agreed to the provision of a further bank guarantee in the sum of $25,000 for Lawton Gillon's 'costs in the proceedings up to and including the filing of a defence'. This was to be held on the same basis as the letter of 25 July 2017, 'mutatis mutandis'.

6    In April 2019, Jackson McDonald indicated that their client would provide a further bank guarantee for $15,000 for preparation by Lawton Gillon of an amended defence. The terms of the letter of 25 July 2017 were not expressly incorporated by reference in relation to that bank guarantee, but no alternative terms were stated.

7    In August 2019 Jackson McDonald confirmed in an email that their clients agreed to provide a bank guarantee for $12,500 as security for Lawton Gillon's costs of conferring about and giving discovery in the action. The letter stated that the bank guarantee would be provided subject to the conditions set out in the 25 July 2017 letter, with an additional condition that Lawton Gillon would, on completion of discovery, provide an itemised bill of its costs of conferring about and giving discovery. That condition stated that conferral about further security would take into account any difference between the amount shown in the bill and $12,500, but would also take into account Lawton Gillon's total costs and the total amount of security provided. The parties have subsequently agreed that Lawton Gillon will not be required to provide discovery.

8    Each of the bank guarantees proposed in the above correspondence has been provided. The total amount of bank guarantees held by Lawton Gillon is $67,500. The guarantees record that the bank has provided them for Pretium Litigation Funding Pty Ltd.

9    Bell Lawyers v Pentelow came down in September 2019. Jackson McDonald then wrote demanding the return of the bank guarantees, contending that there was no basis on which Lawton Gillon was entitled to an order for security for its costs incurred in the proceeding, or to retain the bank guarantees. The plaintiffs accept that Lawton Gillon will still be entitled to claim disbursements but say that, since there is no evidence of what those disbursements will be, the guarantees should be returned and Lawton Gillon should be required to make an application for security for costs based on evidence. The plaintiffs also claim that in any event, the fact that Lawton Gillon was not required to provide discovery means that the last guarantee in the amount of $12,500 should be returned because another assumption on which it was based has not eventuated.

10    Lawton Gillon does not agree. It concedes that professional costs for the time spent by its employed lawyers would not be allowable on a taxation of costs: see United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15 at [119]-[121]; and Guneser v Aitken Partners (Cross Appeal On Costs) [2020] VSC 329. It is not clear whether Lawton Gillon also has legal practitioner principals who are not employees, but neither party takes a point of that kind. So it may be accepted that on a taxation of costs, Lawton Gillon will not be able to recover costs in respect of the time spent on its defence by its legal practitioner principals and staff. But, it says that if a costs order is made in its favour, it will still be entitled to recover the costs of external lawyers such as barristers, expert witnesses and other allowable disbursements. So there is no justification for the return of the bank guarantees.

11    Directions were made for the determination of the interlocutory application on the papers. The submissions of the parties did not identify the basis on which this court has power to order the return of the bank guarantees or the principles on which it should act. If the bank guarantees had been provided pursuant to an order of the court, the power to order their return could not be doubted, but that is not what has occurred. The submissions filed by Lawton Gillon pointed that out, and used the terminology of 'agreement' and emphasised the terms of the letter of 25 July 2017. But they did not expressly frame the issue in terms of a legally binding agreement, governed by the law of contract.

12    If that were the correct way to frame the issue, then questions of the court's jurisdiction to determine any dispute arising under the contract would arise. Speaking broadly, this court has no jurisdiction over claims in contract that are not associated with a claim of a federal nature. It is true that the present proceeding involves a matter over which the court does have jurisdiction, pursuant to the Corporations Act 2001 (Cth). But while there is obviously a close connection between that matter and the question of the return of the bank guarantees, it does not follow that they arise out of a 'common substratum of facts', to use one formulation of the test for when two claims can be part of the same federal matter (see e.g. Philip Morris Inc v Adam P Brown Male Fashions Pty Ltd (1981) 148 CLR 457 at 512). It could be said that one arises out of the alleged misconduct of a director, and the other arises out of a contract alleged to have been made between the plaintiffs and Lawton Gillon. The fact that the contract was made in the course of litigation about the alleged misconduct may not be enough to make them part of the same controversy.

13    But it is not necessary to resolve such questions here. Despite the references to agreement in Lawton Gillon's submissions, both parties' submissions appeared to proceed on the assumption that the court has power to order the return of the bank guarantees. In my view that assumption is correct. The bank guarantees were provided by way of compromise of a potential interlocutory dispute in this proceeding and for the purposes of securing against the risk that Lawton Gillon is successful in its defence of the claim and cannot recover costs, in particular from Ovalglen, which is in liquidation. It would be odd if, in those circumstances, the parties intended that, in order to determine their respective rights in relation to the bank guarantees, they could commence litigation in another court, or perhaps would even be compelled to do so in view of the possible doubts over the jurisdiction of this court. On analysis of the letter of 25 July 2017 and the subsequent correspondence that relied on it, the intended mechanism for enforcement was not a legally binding contract, but rather the 'undertaking' of Lawton Gillon to claim on, or return, the bank guarantees on certain terms. That undertaking gave rise to professional obligations on Lawton Gillon's part which no doubt gave the plaintiffs confidence that the bank guarantees would only be dealt with on the terms of the letter of 25 July 2017. Viewed objectively, I do not consider that the parties had the necessary intention to create legal relations to give rise to a binding contract so that their rights in relation to the bank guarantees must be determined under the law of contract.

14    Rather, I consider that their intention was that the relationship was to be subject to the supervisory and procedural powers of the court in relation to the litigation. As a result, there is no obstacle to exercise of the power of the court, under s 23 of the Federal Court of Australia Act 1976 (Cth) to make orders of such kinds, including interlocutory orders, in relation to matters in which it has jurisdiction as the court thinks appropriate, or its power under s 37P(2) of that Act to give directions about the practice and procedure to be followed in relation to the proceeding, or any part of the proceeding. The matter in relation to which the court has jurisdiction is comprised of the claims made by the plaintiffs in the proceeding, and any order for the return of the bank guarantees would bear a close relation to that matter.

15    It follows that the principles on which the court will act in relation to the bank guarantees are not governed by the law of contract. The court has a discretion to be exercised judicially in the interests of justice on the basis of all relevant circumstances, although clearly the express terms on which the bank guarantees have been provided will be relevant. I would add that if the question were to be determined under the law of contract, the plaintiffs would face significant obstacles to obtaining the return of the bank guarantees, because it seems they would need to proceed on the basis of the doctrine of common mistake, which has rarely formed the basis of relief ordered by the Australian courts: see Svanosio v McNamara (1956) 96 CLR 186; and Schwartz Family Co Pty Ltd v Capitol Carpets Pty Ltd [2019] NSWSC 238 at [91]-[115].

16    Approaching it instead as a question of discretion, I am not persuaded that it is necessary or desirable to order the return of the bank guarantees. They were provided by way of compromise of Lawton Gillon's rights to claim security for costs. Lawton Gillon gave up its opportunity to obtain security in a greater amount, or on better terms, in return for the plaintiffs giving up their ability to resist giving security in the amount in fact given, or to resist giving any security at all. The fact that the High Court has subsequently declared the law in such a way as to mean that Lawton Gillon's rights to security were more limited than the parties might have thought them to be does not remove the fundamental basis for that bargain. The risk that the plaintiffs were giving security for a greater sum than their ultimate liability for costs was present at the time of the bargain, including as a result of doubts about the Chorley principle which the High Court had previously raised in Cachia v Hanes (1994) 179 CLR 403.

17    In any event, this litigation raises potentially complex issues of fact and law which will require, on the estimate of the parties, a trial of two weeks in duration. The possibility that Lawton Gillon will incur significant costs which it would be entitled to recover from the plaintiffs remains a real one. The plaintiffs have filed an expert's report about the value of Ovalglen's former business as at certain dates and based on certain assumptions, and Lawton Gillon may need to adduce expert evidence in response. There is also a real possibility that Lawton Gillon will need to engage the services of (at least) an independent barrister to represent it the trial. Security for costs is a way of mitigating costs exposure of that kind. The total amount of the bank guarantees is not excessive when assessed against the magnitude of the exposure.

18    I do not accept the plaintiffs' submission that the appropriate course is to return the bank guarantees and require Lawton Gillon to make application for security on the basis of evidence. That would only lead to further costs. And without suggesting that any formal notion of onus of proof is applicable here, it is the plaintiffs who must persuade the court to disturb the status quo. They have led no evidence of any prejudice they may suffer if the bank guarantees are not returned. For that reason and for the reasons expressed above, I am not persuaded that they should be.

19    The written terms on which the bank guarantees are provided do not dictate any different outcome. They do not require the return of the guarantees in the present circumstances, either expressly or by implication. It is true that each guarantee was provided by reference to a certain step in the proceeding, such as the mediation, the filing of a defence and an amended defence, and discovery. But the security provided is not expressed in the letter of 25 July 2019, or anywhere else, to be confined to the costs of taking those particular steps. In my view the intention of the parties, objectively ascertained, is that each step in the proceeding was linked to a tranche of the security provided so that only once that step had been taken could Lawton Gillon apply for further security. So much appears from paragraph 7 of the letter of 25 July 2019, which is quoted above. But if, at the conclusion of the proceedings, Lawton Gillon obtains an order in its favour in respect of the costs of any step or task, the bank guarantees can be drawn on to meet those costs.

20    A mutual intention to that effect is especially clear from the added term that was agreed in respect of the bank guarantee of $12,500 that was referrable to discovery. Even though Lawton Gillon was to provide an itemised bill of its costs of discovery, if those costs were less than $12,500 the result would not be a corresponding reduction in the amount of the bank guarantee. Rather, conferral about further security would take into account the shortfall, but also Lawton Gillon's total costs and the total amount of security provided. This provides confirmation in the case of the final bank guarantee that it provides security against all Lawton Gillon's claimable costs, regardless of when or why they were incurred. For that reason, I do not accept that the fact that Lawton Gillon will not be required to give discovery is an independent basis for the return of that bank guarantee.

21    The application will be dismissed. Prima facie, costs should follow the event, but in their submissions the plaintiffs indicated that they wished to be heard on the question of costs. Also, there is nothing to suggest that Lawton Gillon has incurred costs in respect of the interlocutory application for which they could claim. I will direct the plaintiffs and Lawton Gillon to each briefly state their position on the costs of the application to my Chambers. After considering their respective positions, an order as to costs will then be made.

Associate:

Dated:    25 June 2020