Hirsch Rees and Associates Pty Limited v The Trustees of the Moriah College Building Fund and Ors Matter No 55029/91 [1998] NSWSC 638 (23 September 1998)

Last Updated: 17 December 1998

HIRSCH REES & ASSOCIATES PTY LIMITED v THE TRUSTEES OF THE MORIAH COLLEGE BUILDING FUND & ORS

55029/91

23 September 1998

Rolfe J

The Supreme Court of New South Wales Common Law Division Construction List

Name of Case: HIRSCH REES & ASSOCIATES PTY LIMITED v THE TRUSTEES OF THE MORIAH COLLEGE BUILDING FUND & ORS

Proceedings: 55029/1991

Date of Hearing: 18 September 1998

Date of Judgment: 23 September 1998

Solicitor for Plaintiff: Mr K J Tapsell

Solicitors for Plaintiff: Watkins Tapsell

Counsel for First Defendant: Mr M D Young

Solicitors for First Defendant: Cowley Hearne

Application for Security for Costs

Application granted.

On discretionary matters: Macplan Logistics Systems Pty Limited v Baxter Health Care Pty Limited (1996) 39 NSWLR 324 applied in relation to admissibility of "without prejudice" negotiations on such an application.

On the issue of stultification of the proceedings: Bell Wholesale Co Pty Limited v Gates Export Corporation [1984] FCA 34; (1984) 52 ALR 176 and Readair Pty Limited v Monarch Aviation Pty Limited (Giles J - 1 September 1989 - unreported) followed, particularly as to where the onus lay of proving the worth of those standing behind the impecunious company.

I N D E X

PAGE

Introduction 1

Submissions On Behalf Of HRA 3

A Consideration Of Those Submissions 4

Conclusions 8

Orders 9

HIRSCH REES & ASSOCIATES PTY LIMITED v THE TRUSTEES OF THE MORIAH COLLEGE BUILDING FUND & ORS

JUDGMENT

HIS HONOUR:

Introduction

The plaintiff, Hirsch Rees & Associates Pty Limited, ("HRA"), which was the company through which Mr Theodoor Jacobus Hirsch carried on his profession as an architect, commenced these proceedings as long ago as 23 August 1991 claiming to recover from the first defendants, being the Trustees of the Moriah College Building Fund, architectural fees in the sum of $539,081.96. These fees were allegedly incurred in the performance of architectural work for the Trustees in respect of the Moriah College High School at Queens Park, Sydney. A number of cross-claims were instituted in the proceedings, all of which have now been settled, so that the only outstanding issue is between HRA and the Trustees.

Extensive attempts have been made to resolve that issue without success. In March 1998 the Trustees made an application for security for costs on the basis that there is reason to believe that HRA, being a body corporate, will be unable to pay their costs if ordered to do so: s.1335 of the Corporations Law and Part 53 of the Supreme Court Rules. When the Motion came on for hearing it was submitted on behalf of HRA that there was a concluded agreement between it and the Trustees, which was specifically enforceable. The parties agreed that this issue should be determined before the others raised, because if it was decided favourably to HRA that would be an end of the matter. On 2 June 1998, I gave judgment in which I held that there was no concluded agreement. An application for leave to appeal to the Court of Appeal was granted and the appeal was dismissed.

By its Further Amended Notice of Motion, which was filed in Court on 18 September 1998, the Trustees sought the following orders:-

"1. HRA provide security for the Trustees' costs of these proceedings in the sum of $768,904 by 5 pm on 25 September 1998 by providing a Deed in accordance with SCR Part 53 rule 6A from a bank or similar institution.

2. In the alternative to prayer 1, HRA provide security for the Trustees' costs of these proceedings in the sum of $622,624 by 5 pm on 25 September 1998 by providing a Deed in accordance with SCR Part 53 rule 6A from a bank or similar institution.

3. In default of compliance with the Court's orders the proceedings be stayed."

The Trustees also sought ancillary relief.

The directors and shareholders of HRA are Mr Hirsch and his wife. Each holds one of the two issued shares in the capital of the company. The solicitor for the Trustees has annexed to his affidavit of 17 April 1998 HRA's annual returns for the financial years ended 30 June 1993 to 1996 respectively, which show operating losses for the first three of those years of $67,439.24, $99,633.53 and $27,093 respectively. They also show deficits in shareholders' equity of $55,549.44, $155,182.97 and $182,276 respectively. The solicitor has stated that the annual return for the 1996 financial year does not have "the pertinent detail", and that for the 1997 financial year has not been filed. These matters were not in issue. Indeed it was not in issue that the financial position of HRA is such that there is reason to believe that if it is ordered to pay the Trustees' costs it will be unable to do so, and part of the evidence of Mr Hirsch, paragraphs 22 and 23 of his affidavit of 8 May 1998, makes it clear that if an order for security for costs is made "HRA would not be able to continue to prosecute its claim". Accordingly, prima facie, the Trustees are entitled to an order for security for costs.

Submissions On Behalf Of HRA

It was submitted on behalf of HRA that there were four discretionary reasons why an order for security for costs should not be made. Firstly, it was submitted that the Trustees had delayed in bringing the application and that the failure by a defendant to bring an application within a reasonable time disentitles the defendant to an order for security. Secondly, it was submitted that the Trustees' claim lacked bona fides because there had been a commercial settlement of the matter or "a substantial commercial compromise". As a matter of law there was no settlement of the matter for the reasons I have stated. Thirdly, it was submitted that if an order for security is made HRA will not be able to pursue the claim. Fourthly, it was submitted that the conduct of the Trustees was such as to disentitle them to an order on the basis that an impression had been given to the Court that HRA was not prepared to exchange the Deed of Settlement, which was contrary to the fact.

A Consideration Of Those Submissions

On the issue of delay there are, in my opinion, a number of matters to be taken into account. Firstly, the solicitor for the Trustees deposed that it was not until 1998 that he learnt that HRA may not be able to meet the costs' orders, which had already been made and which may be made in the future. This evidence was not challenged. It should be noted at this stage that HRA has already been ordered to pay the Trustees a substantial amount by way of costs. On 14 June 1996 costs were assessed in respect of one aspect of the proceedings at $152,810.50. This amount has not been paid and interest has accrued, so that the amount outstanding as at 18 September 1998 is $189,944.54.

The solicitor for the Trustees also gave evidence, which was not contested, that costs already incurred in the proceedings, after the sum to which I have just referred, amount to $203,460, and that future costs are estimated at $375,500 with $281,625 being recoverable on assessment and certification. The sum of these three amounts, viz $189,944.54, $203,460 and $281,625, is $675,029.54.

So far as the alleged delay is concerned it is necessary to have regard to the fact that the solicitor for the Trustees has stated that it was not until 1998 that he became aware of the financial position of HRA, which evidence was not challenged; that at the time the proceedings were instituted and for several years thereafter HRA's financial position was not such as to justify the making of such an order; and that in any event since at least 1995 there have been continuing attempts to resolve the litigation. An application for security for costs in those circumstances would have been inimical to the attempts to achieve that result.

In all cases it is necessary to consider the question of any delay in an overall consideration of the appropriate way in which to exercise the discretion. On all the facts of this case I am not satisfied that it would be a proper exercise of discretion to decline to grant security because of the time when the application was brought forward. It is more correct to say, in my view, that the application was brought forward when the settlement negotiations failed, and at a time when it was appreciated that HRA's financial position justified it.

The second attack made related to the bona fides of the Trustees' claim on the basis that they were prepared to consider entering into a commercial settlement of the matter. In this regard reference has been made to various of the documents, which were before me when I was asked to decide the question as to whether or not there had been a concluded settlement including, in particular, a letter of 30 April 1998 from the solicitors for HRA to the solicitors for the Trustees, which stated that HRA was prepared to exchange the Deed of Settlement.

The fact is that the matter was not settled. In the hearing before me the evidence is that the Trustees did not waive any entitlement to client professional privilege nor to "without prejudice" discussions or communications relating to the settlement. For these reasons alone I am satisfied that there has not been demonstrated to be any lack of bona fides on the part of the Trustees. The fact that a substantial degree of agreement was reached, although it never became a concluded agreement, is not, in my opinion, a matter which should be taken into account, in the particular circumstances of this case. If that were so parties would be dissuaded from attempting to settle a matter, lest those attempts should result, if unsuccessful, in their being deprived of an opportunity to apply for security for costs. That was a point I was seeking to make in Macplan Logistics Systems Pty Limited v Baxter Health Care Pty Limited (1996) 39 NSWLR 324. Although a submission was made on behalf of HRA that there had been a partial disclosure pursuant to s.131(2)(b) and (c) of the Evidence Act, I do not consider, on the facts of this case, that that had occurred. Nor do I consider that it is open to HRA to raise this matter when it has sought to have determined, as a separate issue, the question of the existence of a concluded settlement agreement.

It was nextly submitted on behalf of HRA that it would not be able to pursue the claim if an order for security is made. That may well be so but, in the absence of any evidence that anyone standing behind it is able to finance the litigation, of which there is none, that is the consequence of the application. In the present case the directors and shareholders of HRA have not sought to lead any evidence, which would establish that those standing behind HRA could finance the litigation. The onus in this regard was clearly on HRA: Bell Wholesale Co Pty Limited v Gates Export Corporation [1984] FCA 34; (1984) 52 ALR 176 at p.179 and Readair Pty Limited v Monarch Aviation Pty Limited (Giles J - 1 September 1989 - unreported) at p.4. No attempt was made to discharge it. The terms of the relevant legislation and rule have, accordingly, been satisfied.

Finally it was submitted on behalf of HRA that the conduct of the Trustees, in giving an impression to the Court that HRA was not prepared to exchange the Deed, disqualified them, in some way, from obtaining an order for security for costs. In my view, even if such impression had been given, that would not lead to that conclusion. It is not shown, in any way, that in consequence of the giving of any such "impression" HRA was in any way prejudiced in its present application, nor that it was misled about the Trustees' intentions.

I should also note that no submission was made on behalf of HRA that any conduct on the part of the Trustees caused it to be in a position of impecuniosity, whereby it is unable to provide security for costs. Not only was no such submission made in chief but, when counsel for the Trustees raised the fact that no such submission had been made and I confirmed that that accorded with my notes of the submissions on behalf of HRA, the issue was not sought to be argued.

Conclusions

In this case the Trustees not only have unsatisfied orders for costs against HRA, which is clearly impecunious, but they will incur substantial costs in the event of the matter proceeding which costs, as the evidence presently stands, will be irrecoverable. This led to the submission on behalf of the Trustees, which in my view is wholly valid, that notwithstanding their view that they have a good defence they may be forced to make an offer to compromise rather than to pay out costs in a case in which they have confidence, but in which they cannot be successful without final litigation. In my opinion, to allow that situation to exist in the face of the evidence in this case would be to place the Trustees in an intolerable situation.

When one has regard to all the discretionary matters, which were raised in the present application, they demand, in my view, the making of an order of the type sought by the Trustees.

As I have said the evidence establishes that amounts payable and likely to become payable are in the order of $675,000. I think I should make a discount from that amount, notwithstanding that it was not the subject of any challenge as it may be reduced by assessment or by the way in which the litigation is conducted, to provide an amount sufficient to secure the Trustees' costs for the time being and having regard to the fact they will always have the opportunity to apply for further security if that appears to be necessary. I propose to order HRA to give security for the Trustees' costs in the sum of $600,000.

Orders

I order that:-

(a) the plaintiff provide security for the first defendants' costs of these proceedings in the sum of $600,000 by 5 pm on Thursday, 8 October 1998 in a form satisfactory to the Registrar of the Court;

(b) the plaintiff pay the first defendants' costs of the Notice of Motion for security for costs; and

(c) the matter stand over for mention on Friday, 9 October 1998.

In the event of security for costs not being provided I propose that on 9 October 1998 the proceedings be stayed until there is compliance with this order.