ROSSDALE HOMES PTY LTD v TORRENS ROAD DEVELOPMENTS PTY LTD [2024] SADC 90

Applicant: ROSSDALE HOMES PTY LTD Counsel: MR C HUMBY - Solicitor: LYNCH MEYER Respondent: TORRENS ROAD DEVELOPMENTS PTY LTD Counsel: MR A BAILLIE - Solicitor: FENWICK ELLIOTT GRACE Hearing Date/s: 28/05/2024, 25/06/2024 File No/s: CIV-21-004028 B DISTRICT COURT OF SOUTH AUSTRALIA (Civil: Interlocutory Application) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated. ROSSDALE HOMES PTY LTD v TORRENS ROAD DEVELOPMENTS PTY LTD [2024] SADC 90 Reasons for Decision of her Honour Judge Thomas 30 July 2024 PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS - PLAINTIFF OR APPLICANT SUBSTANTIALLY IN POSITION OF DEFENDANT PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS - FACTORS RELEVANT TO EXERCISE OF DISCRETION - PLAINTIFF'S OR APPLICANT'S IMPECUNIOSITY PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS - AMOUNT AND NATURE OF SECURITY The Builder's application for security for costs against the Developer, a corporate trustee, for that part of its revised cross claim concerning new allegations is dismissed. Corporations Act 2001 (Cth) s 1335; Uniform Civil Rules 2020 (SA) r 115.1(1); Worker's Liens Act 1893 (SA); Building Work Contractors Act 1995 (SA) , referred to. Mannix Electrical Pty Ltd v Belport Pty Ltd [2019] SASC 159; Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd [2019] SASC 39; PS Chellaram and Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321; Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60; Gensco Laboratories LLC v Care A2 Plus Pty Ltd (receiver appointed) (No 2) [2024] FCA 23; ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd ) & Ors v Beauville Pty Ltd & Ors [2014] VSC 298; Letore Pty Ltd v Associated International Finance Pty Ltd (unreported VSC McDonald J, 28 May 1993 BC 9303883); In the matter of Torrens Constructions Pty Ltd [2023] SASC 25; Reschke v Trevor Reschke Nominees Pty Ltd; Reschke v Australian Executor Trustee Ltd [2020] SASC 60; Bosun Pty Ltd (in liq) v Makris (2003) 21 ACLC 666, considered. -- 1 of 23 -- -- 2 of 23 -- ROSSDALE HOMES PTY LTD v TORRENS ROAD DEVELOPMENTS PTY LTD [2024] SADC 90 [Civil] Introduction 1 The builder, Rossdale Homes Pty Ltd (the Builder) has brought an interlocutory application1 against the developer, Torrens Road Developments Pty Ltd (the Developer) seeking security for its costs up to first day of trial for part of the Developer’s amended cross claim in the amount of $88,000.2 2 The Builder brings its application under s 1335(1) of the Corporations Act 2001 (Cth)3 and rr 115.1(1)(a), (d) and (e) of the Uniform Civil Rules 2020 (SA).4 3 The application is opposed. 4 There are two features of the application of significant contention. 5 First, the Developer brings its cross claim by counter claim (Revised Cross Claim)5 as trustee for the Torrens Road Class Trust (the Trust), the capacity in which it contracted with the Builder under the relevant contracts. The Developer contends it does not follow in this case that because it is a corporate trustee, the Revised Cross Claim is brought for someone else’s benefit. The Builder disagrees and submits its status as a corporate trustee not only enlivens the Court’s discretion to make an order for security for costs under UCR 115.1(1)(a) but also informs the threshold test under s 1335(1) of the Corporations Act and the Court’s discretion in favour of an order for security for costs more generally. 6 Secondly, the application is confined to only that part of the Developer’s Revised Cross Claim concerning alleged breaches of the National Construction Code 2016 (NCC). The Builder submits the newly introduced NCC allegations extend the dispute well beyond the factual matrix of the issues joined on the Builder’s claim. Before these amendments, the Developer’s pleaded case concerned disputes about the operation of the relevant contracts and a claim in contract for an alleged defect in the external wall cladding. Further, the quantum of the Developer’s claims (although not quantified) is likely to be significantly higher than the Builder’s claim. 7 For these reasons, the Builder submits the Developer is in substance the applicant in the proceeding and its Revised Cross Claim is no longer purely defensive following the introduction of the NCC allegations. 1 FDN 44 dated 29 November 2023. 2 Including GST. 3 Referred to as the Corporations Act below. 4 Referred to as the UCR below. 5 Statement of Cross Claim – Revision 2 (FDN 49) filed on 7 March 2024. -- 3 of 23 -- [2024] SADC 90 2 8 The Developer disagrees and says the confinement of the Builder’s application to the newly introduced NCC allegations is a matter of importance favouring its position on this application. The only relevant part of the Developer’s Revised Cross Claim is the part concerning the NCC allegations and the merits of the Revised Cross Claim more generally are not a relevant consideration. Further, it submits the Builder accepts by its submissions6 and conduct in not advancing a security application earlier, that security for costs will not ordinarily be granted where the matters raised in the cross claim do not extend beyond the matters raised in the claim and defence. 9 While the Developer’s status as corporate trustee is a central issue, ultimately it is not determinative of the application. The Builder’s decision to confine its application to the NCC allegations is more fundamental and should be accepted as reflecting a tacit acceptance by the Builder that the issues joined on the earlier pleadings are purely defensive. This starting point informs the Court’s approach to the Builder’s security application and necessarily confines the question of characterisation of the Developer’s Revised Cross Claim to the NCC allegations. The Pleadings 10 It is therefore necessary to consider the pleadings in some detail to properly appreciate the nature of the NCC allegations and their context. 11 The dispute between the parties was precipitated by a fire on 18 September 2020 during Stage 2 of the construction of 22 townhouses on Torrens Road, Kilkenny. The fire damaged mainly one townhouse. It was rebuilt using a different external cladding, Hebel PowerPanel, with an allegedly different fire rating and resistance properties than the foam cladding used by the Builder. The rebuild of the damaged townhouse was the subject of a claim, assessment and indemnity under an insurance policy. 12 The Developer alleges that, as a result of the fire, it became aware that the upper external walls of all the townhouses had been constructed with foam cladding, and not Hebel PowerPanel as required by the contract specification. It alleges the foam clad upper external walls do not conform with the contract requirements and are therefore defects in the works that the Builder is required to remedy at its cost.7 13 In the context of this dispute about the foam cladding defect, the proceeding was instituted by the Builder on 23 April 2021. 14 By its statement of claim (Claim),8 the Builder claims payment of the outstanding contract price of $110,199.319 under a contract for construction of 6 Written Submissions of the Applicant (Revision 1) (FDN 57) (Builder’s Submissions). 7 Revised Cross Claim [24]-[38]. 8 Statement of Claim – Revision 2 (FDN 48). 9 Including GST. All amounts include GST unless otherwise indicated. -- 4 of 23 -- [2024] SADC 90 3 Stage 2 of the development for 11 townhouses. These works and the relevant contract are referred to in the primary pleadings as the Stage 2 Works and the Stage 2 Contract. The Stage 1 Works refers to the earlier construction of the other 11 townhouses on the same land under an earlier contract referred to in the primary pleadings as the Amended First Contract. Together they are the relevant building contracts (the Building Contracts). 15 The Builder also claims rectification of the wording in the Building Contracts for the omission of external foam cladding in the relevant specification documents and enforcement of a lien registered under the Worker’s Liens Act 1893 (SA).10 The sum of $110,199.31 was paid by the Developer to the Register-General to remove the registered worker’s liens to permit transfer of some of the Stage 2 townhouses. When it was paid is not known but it should be inferred that it was after 12 April 2021, the date of registration of the liens. 16 The outstanding contract price claimed by the Builder for the Stage 2 Works comprises two amounts. 17 The first amount of $86,119 was the subject of a set off made in a payment certificate issued by the contract superintendent in about December 2020 for estimated rectification costs to install new external cladding in the 11 townhouses comprising the Stage 2 Works in lieu of foam cladding that allegedly does not conform to the contract specification and is therefore a defect in the works under the contract.11 The second amount of $24,080.31 is for non-payment of the Builder’s invoice for a payment certificate issued later during the Stage 2 Works as a result of the unresolved dispute between the parties about the foam cladding defect more generally. 18 By its defence (the Defence),12 the Developer joins issue with the allegations made by the Builder in support of its claim that the contract specification mistakenly omitted the foam cladding product used in the works and should be rectified, the Developer alleging the Building Contracts specified the use of Hebel PowerPanel, not foam cladding. 19 In further answer to the Builder’s rectification claim,13 the Developer alleges the works using foam cladding are contrary to the NCC by reason of alleged “Fire Defects”.14 It alleges the Court should not rectify the Building Contracts because to do so would permit non-compliant works contrary to the NCC that are illegal and/or unenforceable to construct15 and rectification would be inconsistent with the 10 Referred to below as the Worker’s Lien Act. 11 Claim [8]. 12 Defence – Revision 2 (FDN 50). 13 Claim [9]. 14 As defined in Defence [9(e)]. 15 Defence [9(i)(i)]. -- 5 of 23 -- [2024] SADC 90 4 express terms of the Building Contracts because they require compliance with the NCC.16 20 Compliance with the NCC is also pleaded as an express term of the Building Contracts.17 21 The Developer further alleges it has a cross claim arising from the Builder’s failure to construct the Stage 1 and Stage 2 Works in accordance with the Building Contracts and contrary to the NCC because of the “Fire Defects”.18 The Developer claims a defensive set off for the reasonable costs of rectifying the “Fire Defects” in the alternative should the Court rectify the Building Contracts or not, referencing its more fully particularised claim in the Revised Cross Claim.19 The rectification costs are not quantified but alleged to exceed any amount otherwise payable to the Builder.20 22 The Builder emphasises that the newly introduced “Fire Defects” allegedly concern all works allegedly carried out contrary to the NCC: that is not only the external wall cladding but windows and balconies21 and apparently22 the separating walls between all the dwellings where an external wall is less than 900mm from an allotment boundary.23 23 The very same “Fire Defects” (although defined differently as “NCC Defects”) are pleaded in the Revised Cross Claim as breaches of the NCC and the Building Contracts24 entitling the Developer to damages and compensation under the Building Work Contractors Act 1995 (SA).25 The pleas as to loss, damage and relief concern the Developer’s alleged risk of current and future liability to the purchasers and transferees of the townhouses for the “Building Contract Defects” and the “NCC Defects”26 and for damages for the costs of bringing the Stage 1 and 2 Works into conformity with the Building Contracts and the NCC27 as well as other ancillary and alternative relief. Basis of Application 24 The primary basis on which the Builder brings its application is s 1335(1) of the Corporations Act and UCR 115.1(1)(d). The Builder further relies on UCR 115.1(1)(a) and (e) as alternate grounds. 16 Defence [9(i)(ii)]. 17 Defence [9(f)]. 18 Defence [13]. 19 Defence [18A]-[18B]. 20 Ibid. 21 It should be accepted that the balconies referred to in the pleas replicated in the Revised Cross Claim were omitted from the Defence by mistake. 22 That is presumably because they are not external walls. 23 Defence [9(e)]. 24 Defence [39]-[48]. 25 Referred to below as the Building Work Contractors Act. 26 [49]-[60]. 27 Defence, Prayer for Relief [1]. -- 6 of 23 -- [2024] SADC 90 5 25 The Builder relies on two affidavits made by its solicitor, Mr Moran. The first was made contemporaneously with the application on 29 November 202328 and the second on 27 May 2024.29 The Developer filed no evidence for the argument heard on 28 May 2024. 26 Both parties relied on written submissions30 in oral argument. During the course of argument, the focus of the Builder’s contentions shifted on the alternate ground of its application under UCR 115.1(1)(a). The parties were given the opportunity to file supplementary submissions.31 The Builder annexed the written Building Contracts and the deed of settlement for the Trust made on 16 March 2015 (the Trust Deed) to its further submissions and seeks to rely on inferences arising from those documents to bolster its position. 27 The Developer then filed an affidavit by its solicitor, Mr Grace, exhibiting a further solicitors’ letter dated 4 December 2020 upon which it seeks to rely.32 28 The Developer complains the Builder has made further submissions on the issue of impecuniosity for which leave was not given and submits that they should not be taken into account. Under cover of this objection, the Developer nevertheless addressed the issue in its further submissions. It is in the interests of justice to determine the application on all the material before the Court and consider fully both parties’ further submissions, despite the liberty taken by the Builder in having one more say. The Evidence 29 The Fourth Moran Affidavit deposes to and exhibits correspondence between the parties’ solicitors about the proposed expansion of the Developer’s pleadings to include the NCC allegations and raises the issue of security for costs about the proposed expansion of the Developer’s cross claim at an early stage. The Developer accepts there is no issue of delay to be considered as concerns the NCC allegations. 30 Also exhibited are two company searches (one for the Developer company and another for a related party, Torrens Road Residential Pty Ltd (TR Residential) and searches of South Australian real property for both the Developer and TR Residential. All searches were conducted on 27 November 2023. 31 The company search for the Developer shows it has nominal paid up share capital of $100 and its shares are beneficially owned by its sole director Mr John Higginson. The Developer company was registered on 2 March 2015 in Victoria, 28 FDN 45 (the Fourth Moran Affidavit). 29 FDN 61 (the Fifth Moran Affidavit). 30 The Builder’s Submissions; Written Submissions of the Respondent (FDN 58) (the Developer’s Submissions). 31 Further Written Submissions of the Applicant (FDN 63); Supplementary Written Submissions of the Respondent (FDN 66) (Developer’s Further Submissions). 32 Affidavit of Thomas Ramsden Grace made on 11 June 2024 (FDN 65). -- 7 of 23 -- [2024] SADC 90 6 a fortnight before the execution of the Trust Deed. Its principal place of business is in South Australia. 32 The company search for TR Residential shows it has nominal paid up share capital of $10 and its shares are non-beneficially owned by its sole director Mr John Higginson. It was registered on 22 May 2020 in South Australia. 33 The Fifth Moran Affidavit deposes to Mr Moran conducting a google search and being unable to locate a website for the Developer as well as conducting updated real property searches for the Developer in South Australia and Victoria. These searches show that as at 27 May 2024 the Developer is not the registered proprietor of any real property in either South Australia or Victoria. 34 It is common ground that the development is complete as far as the townhouses have been built, and the Developer is no longer the registered proprietor of any of them. From the Developer’s Revised Cross Claim, it is known that 12 of the 22 townhouses have been sold to third parties33 and nine transferred under the Trust Deed, including four to TR Residential.34 As at 27 November 2023, TR Residential remained the registered proprietor of four townhouses. There is no explanation as to why one (townhouse 8) is unaccounted for. 35 There are no financial statements of the Developer company or the Trust in evidence. 36 As mentioned, the Building Contracts and the Trust Deed are before the Court. 37 Nothing much is known about the affairs of the Trust, apart from the matters already mentioned. No one standing behind the Trust has offered any security or a personal undertaking to be liable for costs. 38 Finally, the Registrar-General holds $110,199.31 paid to discharge the liens. Whilst there was no evidence of this, the matter was uncontentious. 39 The fact that the Developer was able to pay this amount when it did carries little weight. The liens were discharged by this payment so the Developer could transfer some townhouses. 40 These monies cannot be regarded as an asset of the Developer if the Builder were wholly successful in its defence of the Revised Cross Claim because that would mean the Builder had succeeded on its cause of action under the Worker’s Lien Act secured by these monies and they would not be available for costs. However, there is the possibility that the Builder might succeed in answering the NCC allegations in the Defence and the Revised Cross Claim but otherwise fails on its primary claim and its cause of action under the Worker’s Lien Act. In that 33 Revised Cross Claim [49]. 34 Ibid [50]. -- 8 of 23 -- [2024] SADC 90 7 case, the lien monies would be an available asset of the Developer to satisfy an adverse costs order. Having regard to the quantum and that there are differing possible outcomes, the lien monies should be regarded as a neutral factor in considering the Developer’s alleged impecuniosity. The Parties’ Submissions Builder 41 As mentioned, the Builder submits an order for security for costs should be made for that part of the Revised Cross Claim seeking rectification costs for breaches of the NCC. It submits that by reason of the NCC allegations, the Revised Cross Claim is no longer purely defensive and these allegations extend the factual matrix of the Revised Cross Claim well beyond the issues arising on the Claim/Defence. 42 The Builder further submits that since the Developer brings its cross claim in its capacity as a trustee it brings its claim for someone else’s benefit, namely for the benefit of the Trust and its beneficiaries. The Court’s discretion under UCR 115.1(1)(a) is therefore enlivened. 43 The Builder submits the Developer’s status as a corporate trustee is also an important factor in assessing its capacity to meet an adverse costs order for the purposes of the threshold test under s 1335 of the Corporations Act. When its status as a corporate trustee is considered in combination with all the proven circumstances, the Court should infer that the Developer is unable to pay the Builder’s costs if successful in its defence. The Builder relies on the following matters. 44 First, the Building Contracts and the Trust Deed demonstrate the legal structure established to undertake the development and that there are persons standing behind the Developer. That the Developer is a corporate trustee created specifically to undertake the development is indicated by the dates of the instruments and its name (being the same as the street where the development is). The Court should find the sole purpose of the Trust as disclosed by the Trust Deed is the development. 45 Secondly, the development is complete. The Developer has sold or distributed all the townhouses. It owns no other real property in South Australia or Victoria and has no current website. The Court should infer from this evidence that the Developer is no longer trading and has no other business activities beyond the finalised development. 46 Thirdly, the Developer by its Trust Deed is obliged to receive and distribute to the Developer Members and the Unit Holders (both as defined) the income received by the Trust. 47 The Builder further relies on the solicitors’ correspondence as showing the Developer did not respond and refute any of the allegations made abouts its status -- 9 of 23 -- [2024] SADC 90 8 as a corporate trustee or impecuniosity and therefore its inability to satisfy an adverse costs order. 48 As to the merits of the cross claim, the Builder submits this is an important consideration since the Developer is seeking rectification costs due to an asserted risk of liability, a position unsupported by case law. Developer 49 The Developer submits the application should be dismissed for the following reasons. 50 First, there is a complete overlap and unity of the factual and legal issues arising from the NCC allegations between the Revised Cross Claim and the Claim/Defence and the quantum of the rectification costs claimed is not unique to the Revised Cross Claim. 51 Secondly, the Builder’s reliance on UCR 115.1(1)(a) is misguided. Whilst the Developer accepts that the Building Contracts were entered into in its capacity as trustee, it does not follow that its cross claim is brought for the benefit of the beneficiaries of the trust. Any future liability arising from claims brought by the current owners of the townhouses will be the Developer’s liability in its own capacity or in its capacity as trustee, and not liability of the beneficiaries. Furthermore, the Builder assumed the risk of dealing with a corporate trustee, both when it contracted with the Developer and when it instituted the proceeding. 52 Thirdly, the Builder has not discharged its onus for the threshold test for s 1335(1) of the Corporations Act and established by credible testimony that the Developer is unable to meet an adverse costs order. The evidence is not sufficient to support a finding that the Developer is impecunious. 53 Fourthly, it is not otherwise necessary in the interests of justice to make the order sought. 54 Finally, there are material issues with the quantification of the costs for which security is sought that preclude the Court from assessing what is an appropriate amount for security for that part of the Revised Cross Claim that concerns the NCC allegations. UCR 115.1(1)(a) – For Someone Else’s Benefit The Relevant Provision 55 UCR 115.1(1)(a) provides: (1) The Court may order that an applicant in an action provide security for costs if – (a) the applicant is bringing the claim or application for someone else’s benefit; -- 10 of 23 -- [2024] SADC 90 9 Consideration 56 It is uncontentious that the Developer contracted with the Builder in its capacity as trustee.35 57 However, the Developer submits it does not follow that the Revised Cross Claim is brought for the beneficiaries of the trust as distinct from being brought for the benefit of the Developer in its capacity as trustee or in its own capacity.36 The Developer refers to the liability the Developer seeks to avoid under the Australian Consumer Law that may be liability in its own capacity.37 It further submits that the Revised Cross Claim is not brought for the purposes of obtaining an award of damages that will find its way into the hand of the beneficiaries but is brought to protect the Developer from its own future liability. 58 The Developer’s submissions in this regard should be rejected. 59 It should be accepted that a corporate trustee may act in its own capacity and not only in its capacity as trustee as a matter of principle. However, in this case, the Developer brings a claim for damages for breach of contract for the costs of rectifying the upper external walls to bring the works into conformity with the Building Contracts and the NCC. The Developer therefore brings this claim in its capacity as trustee because that is the capacity in which it contracted. That it may by its conduct in relation to the development have an exposure to liability in its own right does not change the fundamental basis of the capacity in which it brings the claims in contract. 60 It must then follow that the Developer is bringing its claim for damages in contract and for compensation and other relief under the Building Work Contractors Act38 for someone else’s benefit: the Trust and ultimately the beneficiaries in whose interests the Developer acts as trustee. 61 Further, any compensation awarded to protect the Developer from third party liability for the “Fire Defects”/“NCC Defects” would necessarily benefit the Trust and its beneficiaries to the extent such recovery obviates the Developer relying on its right of indemnity against the Trust assets. This is a reasonable assumption to make in the absence of any suggestion of breach of trust by the Developer. 62 In these circumstances, the Developer’s status as a corporate trustee is a sufficient basis to enliven the Court’s discretion to order security for costs under UCR 115.1(1)(a). 35 Defence [2]; Revised Cross Claim Part 1. 36 Developer’s Further Submissions [3]. 37 Revised Cross Claim [57]. 38 Since these claims are founded on domestic building contracts. -- 11 of 23 -- [2024] SADC 90 10 UCR 115.1(1)(d) and Section 1335(1) The Relevant Provisions 63 UCR 115.1(1)(d) provides: The Court may order than an applicant in an action provide security for costs if – … (d) the order is authorised by statute; 64 Section 1335(1) of the Corporations Act authorises such an order. It 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. 65 The relevant legal principles are well established and uncontentious. It is their application in the circumstance of this case where the parties differ. Both parties rely on the judgment of Doyle J in Mannix Electrical Pty Ltd v Belport Pty Ltd39 as a contemporary and convenient summary of the relevant principles.40 It is therefore unnecessary to restate the law at length save to reiterate matters pertinent to the issues in this case. 66 First, that the discretion to order security for costs under s 1335(1) is conditioned upon satisfaction of the threshold requirement that it appears by credible testimony that there is reason to believe that the plaintiff corporation will be unable to pay the defendant’s costs if it is successful in its defence. 67 Secondly, satisfaction of the threshold requirement requires more than satisfaction of a risk that the plaintiff corporation will be unable to pay the costs of the defendant if successful. 68 Thirdly, the Court’s assessment of the threshold requirement will necessarily be preliminary by reason of the nature and timing of the application. 69 Fourthly, the onus of establishing the threshold requirement (that is, the onus of adducing “credible testimony” and establishing that the requisite “reason to believe” exists) is the defendant’s and remains on the defendant throughout the application. Whilst the defendant bears the onus, it is a relatively low threshold. The Parties’ Submissions 70 The Builder submits that the evidence shows the Developer and the Trust no longer retain any substantive assets because the townhouses have been sold, the 39 [2019] SASC 159. 40 Ibid [11]-[17] in particular. -- 12 of 23 -- [2024] SADC 90 11 Developer has ceased to trade and it should be presumed any benefit generated by the development has been returned to the investors.41 Furthermore, the Developer’s status as a corporate trustee and its failure to adduce any evidence about its right of indemnity to recover costs or its financial position more generally (despite the Builder’s request by its solicitors) are significant matters that permit a rational belief to be formed that it does not have the capacity to meet an adverse costs order, thereby favouring an order for security for costs. 71 The Developer disagrees. It submits the Builder has not discharged its onus of adducing credible testimony of sufficient persuasion to permit the formation of a rational belief that the Developer is unable to meet an adverse costs order for that part of the Revised Cross Claim that concerns the NCC allegations. Consideration 72 But for the evidence of the trustee status of the Developer, the evidence is not sufficient to establish the requisite reason to believe. There is a dearth of evidence about the Developer’s or the Trust’s financial position. There are no financial statements for either entity. There is no evidence about when the townhouses that were sold settled and when the net sale proceeds were paid to the Developer of the Trust and whether they were distributed or not. Under the Trust Deed, the Developer has a broad discretion to accumulate rather than distribute net income and distribute by book entry rather than dissipate cash assets.42 It would be mere speculation to find the Developer has distributed all the trust assets as the Builder contends. 73 Whilst it should be accepted that the legal structure established by the Building Contracts and the Trust Deed was for the specific purpose of the development, it does not follow that the Trust cannot be and is not being used for other purposes. The Developer’s submissions in this regard should be accepted. 74 However, it is a significant consideration that the Developer is bringing the Revised Cross Claim in its capacity as a trustee and one that alters the analysis as to its alleged impecuniosity in the absence of some step being taken to alleviate concerns about the Builder having to rely on the Developer’s right of indemnity out of trust assets. The weight of this consideration is all the more significant when there is uncertainty about whether there are any Trust assets. 75 As Doyle J said in Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd,43 it is not generally a sufficient answer to an application for security for costs for a corporate trustee to rely on its right of indemnity out of trust assets, even where there may be significant assets. The reason ordinarily given is that a successful defendant should not be subjected to the potential complexity, expense 41 Builder’s Submissions [31]-[32]. 42 Trust Deed clauses 2.29, 16.3, 16.4 and 16.8. 43 [2019] SASC 39 at [62]-[66]. -- 13 of 23 -- [2024] SADC 90 12 and uncertainty of resorting to derivative rights to recover costs. Accordingly, courts will not generally assume the availability of a right of indemnity. 76 In this case, other than the Trust Deed, there is no evidence about the Developer’s right of indemnity, either as to its availability and more importantly as to its value. No steps have been taken by the Developer to alleviate potential difficulties in the Builder relying on the Developer’s right of indemnity to recover its costs. This factor weighs heavily in favour of the Builder’s position for a security for costs order. 77 For these reasons, it has been established that there is reason to believe that the Developer will be unable to pay the Builder’s costs if it is successful in its defence of the claims arising from the NCC allegations. The Discretion to Order Security 78 Once enlivened, the Court’s discretion to order security is unfettered and must be exercised judicially. Exercise of the discretion requires a balancing of the relevant and often countervailing factors in all the circumstances of the case. The weight to be attached to a particular circumstance depends upon its intrinsic persuasiveness and its impact on other circumstances which have to be weighed.44 79 There is no disposition in favour of or against making an order for security for costs once the Court’s jurisdiction to make such an order is invoked. The Court must balance the hardship or injustice a successful defendant may suffer if there is no security for its costs against the hardship or injustice the plaintiff may suffer if required to give security.45 80 There are many well-established factors relevant to the determination of the application in addition to the matters informing the jurisdiction to make a security for costs order. The Developer’s apparent impecuniosity and its status as a corporate trustee are important discretionary factors, but they must be balanced and weighed with all other relevant circumstances. 81 In this case, two further factors weigh heavily. The first is, as already mentioned, whether the Developer is in substance an applicant and the relevant part of its Revised Cross Claim not purely defensive. The second is whether the Builder voluntarily assumed the risk of the Developer’s status as a corporate trustee and consequential financial position. Is the Developer in Substance an Applicant? 82 If this question were framed more widely than the Developer’s claims arising out of the NCC allegations, different considerations would apply, including that of 44 PS Chellaram and Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 at 323 per McHugh J. 45 Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60 at [12] per Doyle J. -- 14 of 23 -- [2024] SADC 90 13 delay in bringing the application given the previous cross claim (Previous Cross Claim) was filed on 25 October 2021.46 83 As a general principle, it is regarded as unfair to make an order against a party who is forced to defend itself. However, a respondent to a cross claim may bring an application for security for the costs of successfully defending it where the cross claim is not purely defensive and the cross applicant is in substance the applicant. Therefore, an order for security for costs will not ordinarily be made where a cross claim is in substance purely defensive. 84 In deciding whether a cross claim is purely defensive or not, the Court will have regard to the overall nature of the proceeding and the cross claim to see whether in fact it can be said the cross applicant is in substance the applicant. The case authorities have characterised cross claims as not purely defensive in varying circumstances with differing descriptions, such as where it appears to rise out of substantially different facts from the claim or opens a counterattack on a different front or seeks relief other than a dismissal of the claim or makes a cross claim that significantly exceeds the claim. 47 85 As already stated, the Builder submits in effect that the NCC allegations in the Revised Cross Claim should be properly characterised a separate and significant claim against the Builder that is not purely defensive. The Builder highlights as new issues not only whether the foam cladding is non-compliant under the NCC, but whether due to its use certain windows and balconies are non- compliant. These issues involve a new factual dispute about where the external walls are located by reference to allotment boundaries. The Builder submits these new allegations involve significant factual disputes beyond those arising on the Builder’s Claim. Further, the Builder anticipates the quantum of the claim now advanced will be significantly more than the Builder’s Claim. 86 Emphasising that the Builder’s security application is confined to the NCC allegations, the Developer submits there is an inextricable unity of issues between the Revised Cross Claim and the Defence/Claim. They cover the same factual and legal territory as regards that part of the Revised Cross Claim concerning the allegations to which the Builder’s security application is confined. 87 The Developer further submits that to order security for costs would both depart from general principle and be unfair. It would potentially prevent the Developer from pursuing the NCC allegations in the Revised Cross Claim yet require the Court to determine the NCC allegations (including quantum) as part of the Developer’s claim of a defensive set-off at a trial of the issues joined on the Claim and Defence and the balance of the Revised Cross Claim. 46 Cross Claim (FDN 9). 47 Gensco Laboratories, LLC v Care A2 Plus Ply Ltd (receiver appointed) (No 2) [2024] FCA 23 at [35]- [39]. -- 15 of 23 -- [2024] SADC 90 14 88 Having regard to the pleadings, the following conclusions result. 89 First, it should be accepted that save for one matter, there is a complete overlap and unity of the factual issues as regards the NCC allegations between the Revised Cross Claim and the Claim/Defence. The exception is the allegations made in [43] of the Revised Cross Claim as to the rear balconies that was not replicated in the corresponding paragraph 9(e) of the Defence. That this is a drafting error is demonstrated by express reliance on the particulars in the Revised Cross Claim in paragraph [18A] and [18B] of the Defence that make it plain all allegations made in the Revised Cross Claim are relied on as a defensive set-off. 90 The Builder accepted as much during the course of submissions.48 91 Secondly, whilst there is an inextricable unity of factual and legal issues arising between the Builder’s Claim and the Developer’s Revised Cross Claim, that is not a sufficient answer to the Builder’s contention the Developer is in the substance the applicant. 92 Properly analysed, it should be accepted that whilst the same building material (foam cladding) is the root of the alleged non-conformance with both the contract specification and the NCC, the NCC allegations are different and do raise additional issues which are joined in the Builder’s defence to the Revised Cross Claim.49 These issues concern the applicability of the wording of a single provision in the NCC and the location of external walls, balconies and windows and the specification of the balconies and windows. The balconies and windows are not otherwise in issue. 93 However, contrary to the Builder’s submissions, these additional issues do not otherwise extend the factual and legal issues the subject of the Builder’s Claim significantly. The relevant cladding products and their fire resistance properties and ratings are already in issue as are the relevant contractual provisions. The “Fire Defects”/“NCC Defects” are an alternate basis of contractual non- conformance and a substantive defence to the Builder’s rectification claim upon which the Builder’s entitlement to payment is defended. It cannot be said that the NCC allegations dominate the proceedings and will occupy a substantial part of the trial. 94 Thirdly, whilst it should be accepted that the quantum of the Developer’s claim exceeds the Builder’s, this is not because of the NCC allegations. This was already the case before the Revised Cross Claim was filed introducing the NCC allegations. Indeed, the Developer’s Previous Cross Claim sought the same compensation for rectifying the non-conforming external walls in all the Townhouses as is sought the Revised Cross Claim.50 Having regard to the allegations made about non-compliance of the balconies and windows under the 48 T26.13-19. 49 Defence – Revision 2 (FDN 52). 50 Ibid, Order 1. -- 16 of 23 -- [2024] SADC 90 15 NCC in the Defence and Revised Cross Claim, it would follow that rectification of the external wall cladding would render these parts of the works conforming. 95 Next, it is significant that the Builder’s security for costs application only concerns that part of the Revised Cross Claim concerning the NCC allegations. 96 If a security for costs order was granted for that part only of the Revised Cross Claim as regards the NCC allegations, the Court would be required to determine the NCC allegations (including quantum) as part of the Developer’s substantive defences at trial and the balance of the Revised Cross Claim but not the NCC allegations if security were ordered but not provided and the usual order that the part of the Revised Cross Claim concerning the NCC allegations be stayed pending provision of security. This is a powerful factor weighing against a security for costs order given the limited scope of the NCC allegations. 97 It should be accepted that whilst the NCC allegations involve additional issues beyond the scope of the issues joined on the Builder’s Claim in substance they involve a limited extension of the issues joined on the Builder’s Claim. It is likely there would be a significant overlap of the evidence required as to location and nature of the relevant works to prove the Builder’s Claim and the Developer’s claim. It should be borne in mind that the factual and legal issues arise in the same context, concern the same transaction and arise out of and are inextricably related to the dispute over the parties’ contractual rights and obligations for building works. In a building contract, a builder’s right to payment is inextricably connected to performance of the works in conformance with all the contractual requirements, including the specification and any relevant legislation. 98 On balance, it should be concluded that the NCC allegations are not sufficiently extraneous to the issues to be determined on the Builder’s Claim because that part of the Revised Cross Claim for which a security for costs order is sought is not purely defensive. Assumption of Risk Relevant Principles 99 It may be unfair to order security for costs where a defendant has voluntarily assumed the risk of a corporate plaintiff’s financial position in the dealings giving rise to proceedings. In Harrop,51 Derham AsJ referred to the decision in Letore Pty Ltd v Associated International Finance Pty Ltd 52 where it was found to be a relevant consideration that a defendant engaged in a voluntarily contractual relationship with the plaintiff and that contract had given rise to the proceeding. It was explained that the Court in Letore considered it reasonable to assume that at the time the parties contracted, the defendant considered it financially prudent and worthwhile to do business with the plaintiff. After reviewing authorities that 51 ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) & Ors v Beauville Pty Ltd & Ors [2014] VSC 298 (Harrop) at [11]-[16]. 52 Unreported VSC McDonald J, 28 May 1993 BC9303883 (Letore). -- 17 of 23 -- [2024] SADC 90 16 took this factor into account in refusing to grant security for costs, Derham AsJ concluded:53 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 [contracts] 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 [contracts], the defendants would be sued by impecunious plaintiffs. It is also relevant because it is out of the very [contracts] 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. The Parties’ Submissions 100 The parties concur that the relevant principles are as set out in Harrop. Again their disagreement is as to their application to this case. 101 The Builder submits it is for the Developer to establish there was in fact an assumption of risk by the Builder in dealing with it and that it weighs against a security for costs order. The Builder seeks to distinguish the position in Harrop by focussing on the defendant’s knowledge of the plaintiff’s impecuniosity at the time of contracting in that case and points here to the change in the Developer’s circumstances now the development is complete, the townhouses sold and it does not have a website. The Builder further submits the approach taken by Bochner J In the Matter of Torrens Constructions Pty Ltd54 is the proper one and should be taken here. 102 The Developer contends the relevant risk assumed by the Builder in choosing to deal with it is its capacity as a corporate trustee, there being no evidence of its financial capacity one way or the other. It points to the risk assumed at the time of instituting this proceeding in the circumstances of an existing dispute about the alleged foam cladding defect and at the time the Builder chose not to pursue a security for costs application on the filing of the Previous Cross Claim. In these circumstances, the Developer submits this factor weighs heavily against a security for costs order. Consideration 103 The Developer’s submissions should be accepted over those of the Builder. 104 True it is this is not a case where there was evidence of impecuniosity or financial difficulty at the time of contracting. However, in this case, what fundamentally informed the reason to believe that the Builder does not have the capacity to meet an adverse costs order is its status as corporate trustee, rather than positive evidence of impecuniosity or financial difficulty. Given the dearth of evidence about the financial position of the Developer or the Trust, it would be 53 Op cit at [22]. 54 [2023] SASC 25 (Torrens Constructions). -- 18 of 23 -- [2024] SADC 90 17 speculation to draw any inferences about the Developer or Trust’s financial position at any time. 105 As the Developer properly submits, what is relevant in this case is that the Builder contracted knowing the Developer’s status as a corporate trustee and sued on the Building Contracts in that knowledge in the circumstances of a dispute about the foam cladding defect and the likelihood of a potentially significant cross claim being brought. The Builder voluntarily assumed the risk that it would be sued by a corporate trustee. 106 It is therefore not open to find that the Builder did not turn its mind to the relevant issue (being the Developer’s status as corporate trustee), an important consideration in reasoning in Torrens Constructions. 107 Relevantly, the Builder again accepted the risk of the Developer’s status as a corporate trustee when it chose not to pursue a security for costs application for the claims made by the Developer in its Previous Cross Claim. Mr Moran’s email of 27 March 2023 shows the Builder considered the position and determined to put the Developer on notice that a non-party costs order would be sought after trial, rather than pursue a security for costs application. Other than the NCC allegations, the same issues arose then as now as to whether the Previous Cross Claim was purely defensive and its quantum significantly more than the Builder’s Claim. 108 Whilst not decisive, this assumption of risk factor weighs against a security for costs order. Merits of the Cross Claim 109 The Builder submits that whilst the Court need not form a view about the NCC allegations, it should have regard to the merits of the Developer’s case more generally in exercising its discretion to award security for costs. The Builder submits the Developer’s case is not supported by any known case law in circumstances where it no longer owns the townhouses and the measure of damages for the “Fire Defects” sought by the Developer is rectification costs due to an alleged risk of liability. The Builder makes further criticisms of the claims pleaded in the Developer’s Revised Cross Claim. 110 Three observations should be made. First, having confined the application to security for costs to the NCC allegations in circumstances where the Builder chose not to bring a security application for the Previous Cross Claim, it would be unfair to have regard to the Developer’s case more generally as a basis for seeking a security costs order for just a limited part of the Cross Claim. Secondly, the merits of the Developer’s claim as to an alleged risk of liability are not decisive because the Developer sues for damages in contract for the NCC allegations seeking the cost of making the works conform to the Building Contracts. Sale of the townhouses does not necessarily disentitle the Developer to the usual measure of damages for defective works. Thirdly, questions as to whether the Developer -- 19 of 23 -- [2024] SADC 90 18 has suffered a compensable loss and as to the appropriate measure of damages are complex questions of law and fact to be determined at trial. 111 Accordingly, the Court should not take a view about the merits of the Revised Cross Claim as concerns the NCC allegations or more generally. It certainly should not when it has not been demonstrated that claims based on the NCC allegations are without significant merit. 112 The merits of the Developer’s cross claim based on the NCC allegations is therefore a neutral factor in considering the Builder’s security for costs application. Necessary in the Interests of Justice Relevant Principles 113 The test for UCR 115.1(1)(e) was explained by Blue J in Reschke v Trevor Reschke Nominees Pty Ltd; Reschke v Australian Executor Trustee Ltd as follows:55 Paragraph (e) of subrule 194(1) is expressed in different terms to the specific paragraphs (a) to (d). Paragraphs (a) to (d) clearly import a two-stage test: first, has the defendant established the prerequisite contained in the relevant paragraph (for example that the plaintiff is ordinarily resident outside Australia in the case of paragraph (a)); secondly, should the Court exercise a discretion to make a security order in all of the relevant circumstances. By contrast, paragraph (e) only applies when the Court is satisfied that a security order is necessary in the interests of justice. Before the Court can so conclude, it must take into account all relevant circumstances. If the Court concludes that a security order is necessary in the interests of justice, there is no room for the exercise of a residual discretion. Accordingly, in the case of paragraph (e), the test involves only a single stage. In this respect, I agree with the following observations by Hinton J in Strazdins v ANZ Banking Group Ltd: If the Court arrives at the conclusion that an order is necessary in the interests of justice, what discretion is there then to be exercised? All factors relevant to the question of the order being necessary in the interests of justice will have been considered. If the order is necessary, it is necessary. I cannot think of a circumstance where a court, having arrived at a conclusion that an order for security for costs is necessary in the interests of justice, would then decline to make the order. What additional factor not considered as part of determining whether the jurisdictional fact is established would subsequently be considered and, potentially, justify a conclusion that no order be made? Absent any additional factor, the answer arrived at in determining whether the jurisdictional fact was satisfied must be decisive of the exercise of the discretion. 114 The Builder did not make any specific submissions as to why in the circumstances it would be necessary in the interests of justice to make an order for security for costs in its favour under UCR 115.1(1)(e) in all the circumstances. 55 [2020] SASC 60 at [43]. -- 20 of 23 -- [2024] SADC 90 19 115 Having regard to all of the relevant circumstances, I am not persuaded that there is anything further to consider in exercising the Court’s discretion as to security for costs. Quantum 116 In deciding what constitutes sufficient security for costs the Court as a matter of general principle should adopt a ‘broad brush’ approach and not undertake a precise mathematical calculation. The Court does not seek to provide a complete indemnity and its assessment of what is an appropriate amount in the exercise of its discretion is unfettered. Regard should be had to the difficulties of precisely estimating future costs and the likely contingencies that may affect the accuracy of a costs estimate. That said, it is incumbent upon the applicant for security to provide the Court with an evidentiary foundation that bears scrutiny as to the basis of the individual items claimed, although it is not necessary to do so at a level of detail akin to a taxation. 117 The Builder seeks an amount of $88,000 including GST up to the first day of trial.56 118 This amount is based on a costs estimate made by Mr Moran in his letter dated 10 November 2023.57 Whilst the letter identifies additional costs by reference to discrete steps towards trial, the descriptions are general and the estimated costs for each step, lump sums. The total is then discounted to factor in what is said to be an assessment of costs under the scale by 20%, even though “a lot of these costs will be expert and counsel fees” and therefore “100%” recoverable. 58 119 The Developer makes many criticisms about the quantum of security sought and the basis of its calculation. For example, no updated estimate has been given or deposed to since Mr Moran’s letter of November 2023. The dated estimate set out in Mr Moran’s affidavit is merely as it is described, the Builder’s position. Next, it is “extremely high level” and there is no explanation given to justify any of the numbers. Costs of past work has been included and it is overstated. Bearing all these difficulties in mind, the Court cannot properly determine the costs that will be incurred and referrable to the NCC allegations that are unique to the Revised Cross Claim. 120 The Developer’s criticisms are well made given the Builder’s failure to adduce a proper basis for its estimate. 121 At the very least, evidence in the form of an affidavit made by an experienced litigation solicitor should have been adduced setting out the basis for the ‘ballpark’ estimates set out in Mr Moran’s letter and how that work is unique to the NCC 56 The Builder conceded at the hearing on 28 May 2024 that this amount should be discounted in line with the statement made by Mr Moran in his letter. T49.12. 57 Ibid. 58 Comprising part of Exhibit “CGM5” at [25]. -- 21 of 23 -- [2024] SADC 90 20 allegations in the Revised Cross Claim. Assuming the estimated costs are to be incurred on the basis of time worked, no hourly rates or estimates of the time required to do the additional work have been disclosed. As far as an estimate of five days is given for additional pre-trial preparation, what that work will involve and how the costs are to be split between solicitors and counsel is not disclosed. 122 For these reasons, the Court is unable to scrutinise the estimate in any meaningful way to ensure it is proportionate to the reasonable and properly incurred costs of the necessary work and otherwise appropriate. 123 In circumstances where the security for costs application is confined to the additional costs of the NCC allegations, more specificity was required to demonstrate that the estimate is fair and reasonable. Conclusion 124 The Builder’s application is borderline in that there are significant factors weighing both for and against making a security for costs order for that part of the Developer’s Revised Cross Claim that concerns the NCC allegations in all the circumstances. 125 The starting point is of course the purpose of an order for security for costs. It serves the interests of justice by ensuring a successful defendant will receive its litigation costs and the unsuccessful plaintiff will pay them.59 This purpose must be balanced against all relevant countervailing factors. 126 Here the factor of most significance in favour of a security for costs order is the Developer’s status as a corporate trustee in circumstances where there is uncertainty as to whether the Developer or the Trust have any substantial assets because little is known about their affairs or financial position. 127 On the other hand, the Builder has confined its application to only part of the Developer’s Revised Cross Claim in circumstances where the Builder chose not to make a security application for the Previous Cross Claim and the NCC allegations are inextricably entwined with the issues joined on the Builder’s Claim and relatively confined by comparison to the other issues. Further, all the issues arising on the Revised Cross Claim will need to be resolved in defending the Builder’s Claim. 128 The assumption of risk factor also weighs against a security for costs order and weighs more heavily in the circumstances of the Builder’s institution of proceedings, knowing the Developer’s status as a corporate trustee and the ongoing dispute about the alleged form cladding defect. This factor is all the more relevant because the Builder has made this application for security for costs having chosen 59 Bosun Pty Ltd (in liq) v Makris (2003) 21 ACLC 666 at [14] per Finkelstein J. -- 22 of 23 -- [2024] SADC 90 21 not to make an application for security for costs for the Previous Cross Claim and confined the application to the NCC allegations, yet the very same risks remain. 129 A final important consideration against the application is the Builder’s failure to identify and properly quantify the likely costs incurred up to the first day of trial concerning the NCC allegations unique to the Revised Cross Claim. For the reasons previously stated, this weighs heavily against making the order for security for costs. 130 The result of weighing the countervailing factors is that the balance favours the Developer and is against making a security for costs order. The Builder’s application for security for costs should be dismissed with an order made in the Developers’ favour for the costs of and incidental to the application to be paid by the Builder in any event, on a standard costs basis, certified fit for junior counsel. -- 23 of 23 --