Seeking security for costs? Be quick, and ask the right questions
The Court of Appeal in Australian Dream Homes Pty Ltd v Stojanovski recently considered an application for security for costs.[1] The Court’s decision provides some guidance for parties seeking to make such applications, highlighting in particular:
the value in enquiring about the financial health of the party against whom the application is sought; and
the relevance of delay as a factor in determining such applications, notwithstanding recent changes to Victoria’s civil appeals regime.
History of the dispute
The dispute between the parties concerned a claim for debt under a standard form domestic building contract. The contract entitled the owners of land on which a dwelling was being constructed to terminate in certain circumstances, including where there had been a ‘substantial breach’ of the contract.
Part-way through construction, the builder issued the owners with a progress bill for work performed. The owners disputed the bill, alleging that the builder had committed a substantial breach of the contract due to defective works. The builder disputed the defects, and insisted that it remained ready, willing and able to perform under the contract.
The builder took the dispute to VCAT, claiming the debt or alternatively damages for the fair value of the building work. The Tribunal held that the builder was not entitled to the debt amount, but a lesser amount on the basis of a quantum meruit. The owners appealed to the Supreme Court on a question of law, with the judge in the Trial Division allowing the appeal and remitting the matter to VCAT. The builder then applied for leave to appeal the Supreme Court’s decision.
Security for costs application
In December 2015, the owners obtained a title search demonstrating that the builder did not own any property in Victoria. The owners also obtained a company search showing that the builder company had only nominal share capital. The owners’ solicitors wrote to the opposing solicitors requesting security for costs. The letter cited the results of the investigations into the financial health of the builder, and sought confirmation that security for costs would be given. The builder’s solicitors refused the request on behalf of their client.
In January 2016, the owners filed an application for security for costs pursuant to rule 64.38(2) of the Supreme Court (General Civil Procedure) Rules 2015, having applied for leave to appeal in September the previous year.
The Court’s determination
In a joint decision, Santamaria and McLeish JJA dismissed the owners’ application for security for costs. Their Honours articulated the task before the Court as being one of:
‘[I]dentifying a risk, which is unacceptable in all the circumstances, that the respondent to the appeal may be put to the expense of defending the judgment or decision in its favour without the benefit of expecting that, in the usual course, if it is successful in doing so, the unsuccessful appellant will be required to pay the respondent’s costs of the appeal’.[2]
Impecuniosity
Their Honours held that, in the present case, the evidence about the builder’s impecuniosity was ‘equivocal’.[3] The Court found it relevant that there was no evidence of ‘external intervention, actual or threatened, or any difficulty in the conduct of the builder’s business’.[4]
It was also apparent that the letter requesting security did not go far enough, particularly in circumstances where the Court might have drawn an inference from any failure of the recipient to respond satisfactorily. The Court held that the letter:
‘[D]id not, in terms, ask the builder to affirm the availability of funds to meet an adverse costs order … . Nor did the owners’ solicitor ask for financial statements or other evidence of the builder’s financial position. Refusal to provide such evidence when requested might, although it need not always, found an inference that together with other evidence helps establish a case of impecuniosity’.[5]
Delay
Also going against the application for security was the element of delay. Historically, delay has been considered relevant to the determination of an application for security.[6] In the present case, delay as a factor was scrutinised against changes to the civil appeals regime introduced in 2014. Under the new regime, an application for leave is commenced upon filing the application itself and after preparation of all written material relevant to the application for leave. This is distinct from previous practice where an application was initiated upon service of a notice on the respondent.
In a previous decision, McLeish JA considered that delay remains a relevant consideration because a party who succeeded at trial could ‘stand by and take steps towards seeking security only after the unsuccessful party has performed the work necessary to prepare the appeal for hearing’.[7]
It was relevant, in the present case, that the application for security had not been made until after the builder had filed written materials in response to the owners’ notice of contention about the appeal, and even after the parties agreed upon a leave application book index. The effect of this was that the applicants for security had allowed the builder to carry out ‘considerable work’ in preparation for the appeal.[8]
The Court noted the proposed appeal was of public importance given its potential impact on the Victorian building industry. This, together with the quality of evidence about the builder’s finances and the delay in bringing on the security application, gave the Court reason to dismiss the application for security.
Conclusion
The decision in Australian Dream Homes highlights the importance, when applying for security for costs, of making sufficient enquiries about the financial condition of one’s opponent. The Court’s comments suggest that it is prudent for an applicant to ask its opponent clearly about the availability of funds to meet a costs order.
The decision also demonstrates that, notwithstanding changes to the civil appeals regime, delay can still be a relevant factor in tilting the scales one way or another when determining whether to order security for costs.
[1]: [2016] VSCA 38.
[2]: Ibid [40].
[3]: Ibid [41].
[4]: Ibid [42].
[5]: Ibid (emphasis added).
[6]: See, eg, Smail v Burton (1975) VR 776, 777 (Gillard J).
[8]: [2016] VSCA 38 [43].