rtf - Fenwick Elliott Grace.rtf by liningnvp


                                              (Civil: Application)

                             [2008] SASC 337 Reasons of Judge Lunn a Master of the

                                       Supreme Court 3 December 2008

       Admissibility on interlocutory application for security for costs of a letter written in an
       attempt to settle the dispute - held no mutual consent to its use or any other ground under s
       67C(2) of the Evidence Act for it to be admissible.

       Application for security for costs under 6R 194(l)(b) by third party against defendants
       residents overseas - consideration of enforcement of any costs order in USA - order for
       security to be given.

Hearing Date/s: 24/11/2008
File No/s: SCCIV-08-171
                    INTERNATIONAL LLC & ORS [2008]
                              SASC 337

    Reasons on the third party's application for security for costs.

1          JUDGE LUNN: This action concerns the construction of major bridges to span the Port
    River at Pt Adelaide. The plaintiff is the head contractor for the building of the bridges. It
    engaged the first and third defendants ("the defendants") to design the opening spans of the
    bridges (For the purposes of the present application it is not necessary to distinguish between
    the first and the third defendants. The second defendant has no role in the application.) The
    plaintiff also engaged the third party to design other parts of the bridges.

2         In this action the plaintiff has sued the defendants on several causes of action arising out
    of the design and construction of the bridges. One cause of action is that the defendants did
    not properly design rest piers so that they would withstand ship impact ("the ship impact
    claim"). The defendants have pleaded various defences which, if successful, would absolve
    them of all responsibility for the ship impact claims. The plaintiff has not sued the third party
    in respect of the ship impact claim.

3          The defendants have served a third party notice on the third party. It claims contribution
    to the extend of an indemnity against the ship impact claim on the grounds that the third party
    was in breach of its duties to the plaintiff in the matters giving rise to the ship impact claim. It
    is not pleaded that the third party owed any duty directly to the defendants relating to the ship
    impact claim. The third party by its defence has denied any liability for the ship impact claim.

4         By an application issued on 20 October 2008 the third party has sought an order for
    security for costs under R 194(l)(b). It was agreed that I should first determine whether any
    security should be ordered before dealing with its amount and how and when it should be

    Admissibility of the letter of 4 November 2008

5          The defendants sought to put before me a letter of 4 November 2008 from the third
    party's solicitors to the defendants' solicitors, but the third party objected on the grounds that
    its tender was precluded by s 67C of the Evidence Act. The letter comes within s 67C(1) as it
    is "a communication made in connection with an attempt to negotiate a settlement of a civil

6         In Chapman v Allan (1999) 74 SASR 274 at [81] the Full Court held that a document
    which was within subs (1) was not admissible unless it came within one of the subparagraphs
    of subs (2). It is not necessary for me to consider the authorities relied on by the defendants
    about the common law privilege for "without prejudice" communications as that has been
    superseded by s 67C.

7          The defendants' counsel submitted that the letter came within subs (2)(a) on the basis
    that the parties to the dispute had consented to its admissibility. In Chapman v Allan (above)
    at [89] it was held this must be the mutual consent of all parties existing at the time of its
    tender. This is not the case here as the third party objects to its tender on this application.
    Paragraph 7 of the letter, quoted below, is not a current consent by the third party to the use of
     the letter on this application. In any event in its context "the question of costs" in paragraph 7
     does not extend to an application for security for costs.

8         Although they were not referred to in argument, I have considered whether two other
     subparagraphs of s 67C(2) might make the letter admissible.

9          The first is subpara (2)(d) which provides:

           (d)   The communication or document included a statement to the effect that it was not to be treated as

     Paragraph 7 of the letter reads:

           7 ...... DSC (ie the third party) will rely on this letter on the question of costs, including in
           support of any submission that DSC ought to be entitled to its costs of the action from your clients on an
           indemnity basis pursuant to the reasoning set out Calderbank v Calderbank.

     It is unclear whether subpara (2)(d) extends to a limited waiver of confidentiality for a
     specific purpose or whether it only operates where the whole letter is made an open
     communication for all purposes. Even if it can operate where the waiver of confidentiality is
     limited to a particular purpose, it could only be admissible in the context of that purpose.
     Here, paragraph 7 is referring to a post-judgment determination of which party should pay
     what costs to the other party. On its proper construction it does not extend to a pre-trial,
     interlocutory issue of security for costs. It also only reserves the right for the third party to
     rely on the letter, and not the defendants.

10         The other possibility is subpara (2)(g) which provides:

           (g)   The making of a communication, or the preparation of a document, affects the rights of a party to
                  the dispute.

     In Mair v Mazzitti (No 1) (2003) 231 LSJS 186 I held that subpara (2)(g) operates on rights
     affected by the making of the communication or the preparation of the document, and not on
     rights affected by its contents. The right of the third party to security for costs is not affected
     by the writing or sending of the letter, although, if the letter was admissible, its contents may
     be relevant on the exercise of the Court's discretion for the security. I am not aware of any
     rights of the defendants, in the context of the present application, which could be affected by
     the writing or the sending of this letter.

11         I am not determining that s 67C precludes the operation of a Calderbank letter. That is a
     different issue which can be left for another occasion.

12         Accordingly, I rule that the letter of 4 November 2008 is not admissible. It will be
     returned to the defendants' solicitors. (I have endeavoured in these reasons not to disclose
     indirectly its contents).

     Application for security for costs.

13         The third party brings the application under 6R 194(l)(b) on the undisputed ground that
     the defendants are ordinarily resident outside of Australia (and in the United States of
     America). The older authorities are to the effect that if plaintiffs are ordinarily resident
     overseas they will be ordered to give security unless there are special circumstances to the
     contrary: Re Pretoria Pietersburg Railway Co (No 2) [1904] 2 Ch 359 at 361; Waters v
     Waters [1907] SALR 133, but more modern authorities seem to suggest that the discretion is
     at large with no particular presumption in favour of security being ordered against an overseas
     resident: Limberis v Limberis & Sons Pty Ltd, Gray J, 25 June 2004 [2004] SASC 186.

14         Based on the submissions of counsel the following factors are to be considered in the
     exercise of the Court's discretion.

     Ship Impact Claim

15         The ship impact claim is only part of the action. There are significant other claims and
     counterclaims pleaded between the plaintiff and the defendants which do not affect the third
     party. Justice Gray has refused an order for the preliminary trial of certain issues, but that is
     under appeal to the Full Court. Subject to any special directions to be given by the trial Judge,
     the third party will be locked into a long trial where it will not be involved in some of the
     issues to be litigated. If the defences pleaded by the defendants to the ship impact claim
     succeed, the third party claim will be dismissed because there will be no liability of the
     defendants on the ship impact claim towards which the third party could be ordered to
     contribute. In that event, it is likely that the Court would make either a Sanderson or a Bullock
     order for the costs of the third party which would mean that they should be ultimately met by
     the plaintiff. However, while there is no evidence to suggest that the plaintiff could not satisfy
     an order for such costs, it is impossible to know what the financial position of the plaintiff
     will be at that future time. There is at least a possibility in that event that the defendants
     themselves could be liable to satisfy those costs.

     Reasonable basis for the third party claim.

16          It is neither appropriate nor practical for me to assess at this stage of the action the
     likely strength of the third party claim. On the documents there is some uncertainty about
     whether the relevant design of the rest piers was the responsibility of the defendants or the
     third party. However, the defendants do have a reasonable basis of claim against the third
     party which is not fanciful or specious. There are many possible reasons why the plaintiff did
     not sue the third party for the ship impact claim and it would be speculation on my part to
     infer from this that there was no reasonable basis for such a claim.

     The effect of an order for security on the third party claim being able to proceed.

17         It was not suggested that the defendants or their insurer could not meet any order for
     security and that if the order was made the third party action could not proceed. I accept that
     the requirement to give security in a substantial amount would be oppressive to a degree for
     the defendants, but this may be able to be ameliorated to some extent if the security does not
     have to be given by the payment of money into Court.

     The likelihood of the defendants not satisfying any costs order made against them.

18         The defendants' counsel submitted that the defendants as a large firm of international
     professional engineers could be expected to satisfy any order for the costs of the third party
     proceedings which was ultimately made against them. I am not aware of such a factor having
     been taken into account in any other decision on security for costs. I accept that the
     defendant's professional reputation indicates that they are likely to act honestly and
     responsibility if such an order for the costs of the third party is made against them, but it is no
     guarantee that prompt and expeditious payment of those costs will be made. It could be that
     there would be a dispute between the defendants and their insurers which could impede ready
     recovery of any costs order against the defendants.

     Alleged financial difficulty of the defendants.
19          The third party pointed to some difficulty which the defendants had experienced in
     satisfying a previous order involving the provision of a bank guarantee. That does not indicate
     that the defendants are in any financial difficulties. The tax returns of the defendants put into
     evidence show them to be in a sound financial position.

     Assets of the defendants in Australia.

20          At present, the defendants have a credit of $516,000 in a bank account in New South
     Wales. This was created as a condition imposed by their bankers when giving a guarantee to
     the plaintiff for the repayment of moneys claimed in the counterclaim. If the defendants are
     unsuccessful on certain other issues in this action, the plaintiff will call up that guarantee and
     in that event it is highly likely that the bankers will exercise rights as a chargee over those
     moneys. Thus they would not be available in that event to satisfy any subsequent order for
     costs in this action if the defendants were unsuccessful on the third party claim. While the
     moneys on deposit could be available to satisfy readily a subsequent order for costs in the
     action in favour of the third party against the defendants, it would only be if the plaintiff, on
     the result of other issues in the action, cannot enforce the guarantee. There is a substantial risk
     that those moneys will not be available for that purpose.

         Difficulty in enforcement of any costs order in the USA.

21         The rationale behind the power to order security for costs against a party overseas is that
     the other party, if successful in obtaining an order for costs, should not be put to the
     substantial expense and delay in recovering those costs by having to enforce the order
     overseas. Such difficulties are one fact to be weighed by the Court in the exercise of the
     discretion: Limberis (above) at [33]. There is a line of cases where security has been ordered
     against overseas parties, but it has been limited to the costs likely to be incurred in enforcing
     the costs order overseas: Connop v Varena Pty Ltd [1984] 1 NSWLR 71; Barton v Minister
     for Foreign Affairs (1984) 54 ALR 586; Southern Cross Commodities Pty Ltd v Martin, 3
     October 1985, Judgment No 8546; Bethune v London Properties Ltd [1990] 1 WLR 562;
     Shackles v The Broken Hill Proprietary Company Ltd [1996] 2 VR 427; Soh v The
     Commonwealth (2006) 231 ALR 425. As far as I am aware all of the cases in which such a
     limited security has been ordered are cases where there have been reciprocal arrangements in
     place between Australia and the overseas country in question which enabled an Australian
     judgment for costs to be registered and enforced in a superior Court of the overseas country.
     The United States of America is not a country proclaimed for the registration of judgments
     under either the South Australian Foreign Judgments Act 1971 or the Commonwealth Foreign
     Judgments Act 1991. Accordingly, I presume there is no corresponding right for the third
     party to be able to enforce any costs order against the defendants by registering that judgment
     for costs in an appropriate Court in the United States. The only evidence which I have on the
     point is the following passage from the affidavit of the defendants' solicitor:

               12 What would be the prospects of DSC enforcing an order for costs against H&H's assets in the
                    United States? In light of the foregoing, this question piles unlikelihood on to of
                    unlikelihood, but there would be no procedural difficulty in
                    such enforcement proceedings in the United States ................. I estimate that the cost of
                    enforcing such a cross guarantee would be no more than a couple of thousand dollars.

         No basis is given for how the South Australian solicitor is able to speak about the
         available procedures for enforcing a judgment in the United States or how the costs
         would be no more than "a couple of thousand dollars". I have no evidence about whether
         such a judgment could be enforced by a process of registration, even though there is
         apparently no reciprocal legislation for that purpose, or whether it will be necessary for
         the third party to sue on the Australian judgment in new proceedings in the United States
         against the defendants. I do not know whether a Court in the United States would
         recognise the Australian judgment and whether it would allow the defendants to
         challenge there the basis on which it was made. There is a significant risk that the third
         party could be substantially delayed and put to considerable cost to enforce in the United
         States any judgment for costs which it obtains here against the defendants.


22         There will be significant prejudice to the third party if it is forced to defend the third
     party claim, and then, if successful in that defence, or if the Court decides the ship impact
     claim in the defendants' favour and it cannot recover its costs from the plaintiff, being likely
     to face substantial delay and expense in recovering a costs order in its favour in the United
     States of America. I accept that the order for security will be oppressive to a degree to the
     defendants, but that may be ameliorated to some extent if the security is given by some form
     of guarantee. On balance, I consider that the justice of the case requires that the defendants
     should provide security for the third party's costs of defending the action.

23          I will hear the parties further on Friday 12 December 2008 at 9.30 am on the amount of
     the security and how and when it should be given. I will also then give directions about what
     is to happen to the copy of the letter of 4 November 2008 which I am holding.

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