Strike out application in the Supreme Court of Queensland requires breach of construction contract claims to be re-pleaded

In brief

The case of Earthtec Pty Ltd v Livingstone Shire Council [2023] QSC 22 concerned an application in the Supreme Court of Queensland (Court) by the Livingstone Shire council (Council) to strike out a statement of claim (Strike Out Application) in the substantive proceeding commenced by Earthtec Pty Ltd (Plaintiff) seeking a declaration in respect of amounts paid by the Council to the Plaintiff and claiming amounts alleged to be payable by the Council to Earthtec under various contracts, as well as an application by the Council seeking security for costs (Security for Costs Application).

The Strike Out Application was commenced under rule 171 (Striking out pleadings) of the Uniform Civil Procedure Rules 1999 (Qld) (UCPR) and the Security for Costs Application was commenced under rule 670 of the UCPR (Security for costs) of the UCPR and section 1335 (Costs) of the Corporations Act 2001 (Cth).

The Court relevantly considered the following issues:

• Whether the statement of claim complied with rule 149(1) (Statements in pleadings) of the UCPR and whether on the basis of that non-compliance particular paragraphs ought to be struck out.

• Whether specific paragraphs in the statement of claim ought to be struck out because they formed part of the without prejudice communications between the parties.

• Whether there is reason to believe that the Plaintiff will not meet an adverse costs order if one is made and whether the exercise of the Court's discretion warrants an order for security for costs.

The Court found that the statement of claim does not fulfil the function of a pleading under the UCPR (at [220]) for reasons including that a number of paragraphs comprised immaterial facts or evidence, required the drawing of unestablished inferences, and lacked clarity (see [38] and [219]).

The Court held that allowing the proceeding to continue on the basis of the statement of claim would risk a larger dispute than is justified and would require the Council to speculate about the case it is required to meet (at [220]). Accordingly, the Court held that a number of the paragraphs of the statement of claim ought to be struck out.

The Court held that relevant communications between the parties complied with the following and thus the without prejudice privilege was engaged to protect those communications:

• There is a dispute in which litigation might be reasonably contemplated.

• There is communication between the parties to that dispute, which is genuinely aimed at negotiating or settling the dispute or part thereof.

• The communication was stated to be "without prejudice", although this is not necessarily required for the privilege to be engaged.

​The Court observed that the without prejudice privilege is a matter of right and not a matter of discretion (at [253]). The Court was unwilling to find against the privilege in circumstances where the Plaintiff's submission that the Council engaged in misleading or deceptive conduct in the communications and therefore an exception to the privilege applied was so flawed that it ought to be struck out (at [253]). The Plaintiff did not establish that there was a public interest in favour of permitting evidence of the without prejudice communications that outweighed the public interest in protecting the privilege (at [257]).

The Court was satisfied that security for costs ought to be granted because the Plaintiff did not produce any evidence of its assets which may be used to satisfy any adverse costs order, those standing behind the Plaintiff did not come out from behind the corporate veil, no evidence was put before the Court to suggest that "…security for costs would be oppressive or stifle the litigation", and the proceeding is broad in its scope with a broad level of costs (at [269]).

The Court observed that the quantum of security for costs involves a "broad-brush" approach (see [273] to [274]). The Court held it appropriate to make a staged order for security for costs because of the number of issues in the statement of claim and assessing the costs likely to be incurred up to the first day of trial would be onerous and involve a number of uncertainties (at [285]).

The Court ordered that the statement of claim be struck out and leave be granted for the Plaintiff to re-plead, as well as that the Plaintiff give security for the Council's costs of the proceeding up to a proposed mediation in the amount of $550,000.

Background

The Council in 2016 had sought expressions of interest relating to the construction of part of the Scenic Highway near Yeppoon (at [5]). The construction work comprised a "down-slope component" and an "up-slope component". The down-slope component related to the construction of a new road and all works required under that road, including the construction of a revetment wall. The up-slope work related to stabilising the rock-face above the road (at [7]).

The Plaintiff submitted an expression of interest for the down-slope work and the parties engaged in a tender process negotiating terms until the parties reached agreement (see [8] to [9]). The Plaintiff commenced design work for the down-slope work in October 2016 and the parties executed a deed comprising the written contract for the down-slope work in February 2017 (DS Contract) (at [11]).

The Plaintiff submitted a tender for the up-slope work and the parties engaged in negotiations between November 2016 and May 2017 (at [12]).

The superintendent of the project notified the parties in February 2017 that clay had been discovered in locations where the DS Contract provided for rock to be encountered. The parties engaged in negotiations and entered into a deed for the completion of the down-slope work (Transition Deed), which included a clause that if the parties could agree on a contract price for the up-slope work a new contract covering both the down-slope work and up-slope work would be prepared (at [13]).

After entering the Transition Deed, the Council accepted the Plaintiff's tender for the up-slope work (at [14]). Thus, under the Transition Deed a contract consolidating the down-slope work and up-slope work was required to be prepared (Consolidated Contract) (at [15]).

Plaintiff's claim

The Plaintiff's claim relevantly includes that the Council breached the Transition Deed by not preparing the Consolidated Contract and claims under the DS Contract, Transition Deed, or the Consolidated Contract for a declaration in respect of an amount of $1.9 million paid to the Plaintiff and for loss suffered by or money owed to the Plaintiff of approximately $4.7 million (see [15] to [31] and [293]).

Requirements of a statement of claim

The Court identified the following principles in respect of a statement of claim:

• A statement of claim identifies material facts in support of the claims made in the claim (at [33]). Material facts are those comprising the elements of the cause or causes of action or the defence, and "…do not comprise the law, argument, reasons, theories or conclusions" (at [35]) or mere facts that are alleged to be relevant (at [59]).

• The objective of a statement of claim is to reduce a case to its "factual skeleton". A statement of claim that pleads something other than material facts, requires a response from the defendant which results in false issues and unnecessary arguments between litigants (see [34] and [78]).

• Factors to be considered in determining if a statement of claim is deficient includes "…whether it fails to fulfil the function of pleadings, which is to state with sufficient clarity the case that must be met and so define the issues for decision, ensuring procedural fairness; whether it is ambiguous, vague or too general, so as to embarrass the opposite party who does not know what is alleged against them; and whether the pleader's case is not advanced in a comprehensible, concise form appropriate for consideration by both the court, and for the purpose of the preparation of a response" (at [37] citing Barr Rock Pty Ltd v Blast Ice Creams Pty Ltd [2011] QCA 252 at [27] to [28]).

• Rule 149(1)(c) of the UCPR requires a pleading to "state specifically any matter that if not stated specifically may take another party by surprise". The Court held that the objective of this "no surprise" exception is to put a party on notice as to the case they are required to meet, but this does not mean that the pleader is required to guarantee that the opposing party will not encounter something unexpected at trial and it is not an "open licence" for the pleader to plead immaterial facts or evidence (see [46] to [48] and [67]).

Statement of claim to be struck out

In respect of the Strike Out Application, the Court was satisfied that a number of the paragraphs in the statement of claim ought to be struck out primarily on the following bases (see [51] to [218]):

• A number of paragraphs related to pre-contractual negotiations and there was no clear link between those negotiations and the Plaintiff's claim which was a contractual claim.

• Particular paragraphs related to documents prepared by a third party engineering service in circumstances where the engineering service was not a party to the proceeding and there was no clear reliance on the documents in support of the Plaintiff's claim.

• A number of paragraphs were not material facts, and a party is not permitted to plead immaterial facts or evidence.

• Particular paragraphs sought for the Court to draw an inference, but failed to identify the facts and circumstances which would entitle the Court to make the inference.

• Particular paragraphs were unclear and did not have an obvious connection to the Plaintiff's claim, nor did they allege a false or misleading representation or a loss or damage suffered.

• Allegations that the superintendent "did not act honestly and fairly" are serious allegations and ought to be pleaded with "…a high degree of precision and particularity", which the Plaintiff's pleading lacked.

• Parts of the statement of claim make alternative allegations, which the Court considered to be often pointless.

• The Plaintiff has not, in particular paragraphs, made clear the term of the contract alleged to have been breached, and the Court and parties before the Court should not be required to speculate as to the real case being pursued by the Plaintiff.

The Plaintiff also alleged that the Transition Deed included an implied term that the parties would cooperate to give each other the benefit of the Transition Deed or the Consolidated Contract or alternatively not conduct themselves so as to preclude the other party from the benefit of the Transition Deed or the Consolidated Contract, which it alleged included an implied term requiring the Council to provide specific designs to the Plaintiff (see [91] to [93]).

In respect of this allegation, the Court held that the general rule that each party to a contract agrees, by implication, to do all things necessary to enable each other party to have the benefit of the contract, is not a means for additional or extraneous obligations to be imposed on a party to the contract (at [197]). There was no express term in the Transition Deed that required the designs to be provided by the Council to the Plaintiff and there were no facts pleaded to demonstrate this obligation. The Court held that paragraphs of the statement of claim comprising this allegation required review.

Whilst the Court ultimately struck out the statement of claim, the Court did not strike out a number of paragraphs sought by the Council to be struck out on the basis that some paragraphs involved disputed issues that were inappropriate for determination as part of the Strike Out Application because they related to alleged misleading or deceptive conduct (at [118]) or issues of estoppel (at [145]) and the Plaintiff had satisfactorily amended its pleading in respect of some issues raised by the Council (see [134], [149], and [155]).

Court exercised discretion to make an order for security for costs

The Court observed that its discretion to make an order for security for costs is unfettered and is to be exercised having regard to all relevant facts and circumstances of a case, without any predisposition for or against awarding the security (at [266]).

The Court having regard to the factors it may take into account under rule 672 (Discretionary factors for security for costs) of the UCPR was satisfied that security for costs ought to be given (see [269] to [270]).

An additional factor the Court often considers which may weigh against an order for security for costs is where there is a counter-claim arising from the same facts and circumstances, such that the costs be incurred in any event (at [271]). The Court held that the counter-claim by the Council in this proceeding is defensive in nature and therefore the Court did not give weight to the counter-claim (see [292] and [293]).

Quantum of security for costs

In determining the quantum of security for costs, the Court considered whether a discount ought to be applied because of the risk of over-estimation or to cater for the probability that the proceeding may end early, whether a staged order for security for costs was appropriate in the circumstances, and any delay by the Council in bringing the application (see [284], [285], and [287]).

The Court relevantly held as follows (see [284], [285], [291], [299], and [300]):

• Whilst a discount may be applied, there is also a commensurate risk that costs are under-estimated and applying a discount disregards that a staged order for security may be given.

• This is an appropriate case for a staged security for costs up to a proposed mediation, because of the uncertainties associated with assessing the costs up until the first day of trial.

• There has not been, on the facts and circumstances relevant to the case, any delay by the Council which the Court in the exercise of its discretion ought to consider as a matter against awarding security for costs.

• An order for security for costs ought to be for the quantum of likely future costs and costs already incurred.

• It is a near-impossible task to assess costs that may be incurred in the future when the proceeding is in an embryonic stage, but applying a "broad-brush" approach security of $550,000 comprising approximately $200,000 for standard costs incurred and $350,000 for standard costs up to a proposed mediation ought to be provided.

Conclusion 

The Court struck out the Plaintiff's statement of claim and granted the Plaintiff leave to re-plead and made an order that the Plaintiff provide security for costs in the amount of $550,000.