Australian Commercial Research & Development Ltd v Commonwealth of Australia [1994] QCA 421

IN THE COURT OF APPEAL [1994] QCA 421 SUPREME COURT OF QUEENSLAND Appeal No. 98 of 1994 Brisbane [Australian Commercial Research & Development v. Commonwealth] BETWEEN: AUSTRALIAN COMMERCIAL RESEARCH AND DEVELOPMENT LIMITED Respondent AND: COMMONWEALTH OF AUSTRALIA Appellant Macrossan CJ McPherson JA Mackenzie J Judgment delivered 14/10/1994 The Chief Justice and Mackenzie J delivering joint reasons. McPherson JA delivering separate concurring reasons. Appeal allowed and the Orders made below set aside. It is ordered that the respondent give security for the costs of the appellant in defending Action No. 858 of 1993 to the satisfaction of the Registrar in the sum of $4m and that unless such security is given within one month of the date of this order the respondent's action will be stayed until the security ordered is given. The respondent is to pay the appellant's taxed costs of the proceedings below and of the Appeal. CATCHWORDS: SECURITY FOR COSTS - alleged breach of contract - anticipated party and party costs $4.5m on one estimate - plaintiff unable to pay if unsuccessful - action likely to be stifled if security ordered - persons behind company offered no contribution - relevance of appellant's capacity to fund action. -- 1 of 16 -- Counsel: Mr P.R. Dutney QC, with him Mr R. Maguire, for the Appellant Mr D.G. Mullins for the Respondent. Solicitors: Australian Government Solicitor for the Appellant. Messrs Bell Rapp & Partners for the Respondent. Hearing Date: 09/09/1994 -- 2 of 16 -- THE COURT OF APPEAL SUPREME COURT OF QUEENSLAND Appeal No. 98 of 1994 Brisbane [Australian Commercial Research & Development v. Commonwealth] Before Macrossan CJ McPherson JA Mackenzie J BETWEEN: AUSTRALIAN COMMERCIAL RESEARCH AND DEVELOPMENT LIMITED Respondent AND: COMMONWEALTH OF AUSTRALIA Appellant JOINT REASONS FOR JUDGMENT THE CHIEF JUSTICE and MR JUSTICE MACKENZIE Judgment delivered 14/10/1994 This appeal is brought against the refusal of a judge to order that security be provided by a plaintiff company (the respondent) in an action brought for damages against a defendant, the Commonwealth of Australia (the appellant). The allegation made by the respondent in the action was that the appellant breached an agreement which had been entered into between them. The agreement was to operate for a period of ten years and there was about three years of that -- 3 of 16 -- 2 term still to run. The application for the provision of security was made pursuant to s.1335 of the Corporations Law. The principal document constituting the agreement between the parties was called a Principal Projects Deed. The effect of its provisions became a matter of dispute between the parties. In its amended Statement of Claim delivered on 19 November 1993 the respondent set up the interpretation of the Deed upon which it relied and it pleaded also in support of its claim, the common intention of the parties, estoppel by conduct both pre and post execution and the background facts which were submitted to be relevant to its interpretation. We were taken through a number of the terms of the Deed. One of the most important provisions, although it was by no means to be construed in isolation, was clause 1.4 which was as follows: "In respect of all projects or technologies for which the [appellant] requires commercial funding for development within its defence research laboratories for non-defence use of such projects or technologies, the [respondent] shall have first -- 4 of 16 -- 3 right of refusal both for provision of such funding pursuant to this Deed and the Research and Development Deed attached here to, and subsequent to the research and development phase, the non- defence commercial development pursuant to the Commercialisation Agreement attached here to for that project or technology." Broadly speaking it could be said that the agreement provided that the respondent would have the option of providing funding for non-defence utilisation of projects within the appellant's defence laboratories (under the umbrella of the Department of Defence) and subsequently for the non-defence development of those projects. The benefit which the respondent would obtain in return for the funding was the right to commercial exploitation of the resultant product of the research. The area of dispute between the parties was widened by the broad claim made by the respondent for the meaning of the phrase, "commercial funding" appearing in the agreement. In paragraph 21 of its amended Statement of Claim the respondent submitted that the concept of "commercial funding" extended to involve third party arrangements entered into by the Department when they resulted in the making of payments to the Department. There was an issue raised also concerning the meaning of "development within its defence research laboratories", a phrase found within -- 5 of 16 -- 4 the agreement. Effectively, the respondent was claiming the benefit of a first refusal right but a debated question was the circumstances in which that right applied, that is, in what factual situations involving the Commonwealth agency. It is unnecessary for present purposes to examine the area of dispute between the parties in further detail. It is sufficient to say that the area is extensive and the action as framed both generally and particularly, as well, in respect of the amount of damages recoverable if the respondent otherwise succeeds, is broad indeed. The scope of the agreement in the Deed depended, in part, on where the border line was to be drawn between what was described as defence use and non-defence use. Definitions of those terms were provided. Defence use meant, in effect, any use by the Australian Defence Department and other entities local and foreign with the objective of national defence. "Non-defence use" meant any use other than defence use. The respondent's claim is that in breach of the agreement and ignoring the respondent's prior right, the appellant entered into agreements with third parties to develop projects and exploit technologies. To prove that it suffered loss as a result, the respondent wished to point to the profit or potential for profit of these arrangements. -- 6 of 16 -- 5 Largely for this reason it has come about that massive and costly operations involving discovery of relevant documents are in contemplation. Material which has been filed shows the extent of discovery presently envisaged. So far, orders have been made in the course of judicial management of the action which envisage its being tried in a single extended hearing, that is deciding the disputed questions of construction of the agreement and its scope and, on the assumption that the plaintiff succeeds on that aspect, then determining also the quantum of the respondent's loss which will result from its loss of opportunity. During the hearing of the appeal, the Court suggested that now that the extent of the task involved in making full discovery had been revealed by the course of the proceedings so far, it would be particularly advantageous and could be expected to cut costs substantially if an order were made for the determination as a preliminary issue of the question of liability, leaving the matter of quantum to be determined subsequently if the respondent should be initially successful. The appellant declared that it would welcome that course but the respondent rejected the suggestion and stood on its entitlement, as it currently took it to be, for a hearing of all matters in dispute together. The respondent's Counsel was unable to support on any -- 7 of 16 -- 6 rationally convincing basis its declared preference for a single determination of all matters in dispute. The impression was left that the respondent might think that there was some tactical advantage to be gained by it if the matter proceeded in the fashion which it said it preferred. As things stood, this Court was loath to force a re-opening of orders made in the course of past management decisions which had at the time been accepted or at least to this point had not been made the subject of appeal. The Court is thus asked to consider the merit of the appellant's appeal which seeks an order for security and will do so having in mind the likely costs of the action including the extent to which those costs will be increased by adherence to the course which the respondent desires. It is necessary for this purpose to indicate broadly the costs that will be involved for the appellant in defending the action. The amount of the documentation involved in making discovery is so vast that one source to which the appellant referred put its cost as high as $33m. This was arrived at by multiplying the number of folios involved by a standard rate per folio. However, the basis on which the appellant made its application relying for that purpose on Mr Garrett, was that the party and party costs for the appellant would be approximately $4.5m. The bulk of this sum, almost $3.5m, would be costs associated with discovery involving as it did the necessity to peruse a number of pages estimated at more than eight million amounting to about twenty four million -- 8 of 16 -- 7 folios. More specific perusal was estimated to be necessary for 10 per cent of the total bulk of that material. The primary judge in his reasons does not appear to have dissented from the costs estimates put forward by Mr Garrett. Further costs beyond those mentioned above were estimated by Mr Garrett to be involved for the duration of the trial after the first day. In rejecting the application for an order for security, the judge referred particularly to the observations of Waddell J. in Southern Cross Exploration NL v. Fire and All Risks Insurance Co. Ltd. (1985) l N.S.W.L.R. 114. There two questions for consideration are identified. The first, described as a threshold question, was whether there was reason to believe that a plaintiff would be unable to pay a defendant's costs if the defendant should succeed in the suit, and if so, the next question was, whether it was a proper case in which to order the plaintiff company to provide security. The judge determined both questions against the present appellant. In the present case, there is reason to think that the judge took an unduly favourable view of the financial circumstances of the respondent company. Mr Palmer, on behalf of that company, generally accepted the analysis of the respondent's net asset position and liquidity carried out by a Mr Heffernan on behalf of the appellant. The judge -- 9 of 16 -- 8 has stated that he had no reason to disbelieve that analysis. Clearly, then, it will provide a proper perspective from which to view the financial condition of the respondent company. Mr Heffernan concluded that the net asset position of the plaintiff at 31 December 1993 was some $1.77m which should be reduced to some $1.66m if the respondent's costs of litigation were incorporated and of that sum, $511,613 was estimated as liquid funds. These figures were reducing at an overall rate of $20,000 per month. While the judge placed some reliance on a statement of Mr Palmer on behalf of the respondent that it would continue to trade profitably, Mr Heffernan's analysis shows that over the years of its operation including the first five of them, it had only traded profitably for two years and had done so only by capitalising certain of its expenditure. In 1992 the plaintiff had a trading loss of $2m apart and an additional extremely large loss which was described as abnormal. The respondent's funds which, at an earlier time, had stood at some $20m as a result of public subscription had over six years dwindled to the level at 31 December 1993 of $1.77m as mentioned above. The only income that the plaintiff had earned was from interest on deposited funds. It had not earned anything from its venture agreements. Certain generally supportive statements which were made on behalf of the respondent claiming a capacity to trade -- 10 of 16 -- 9 profitably and a potential to raise further funds by public subscription, do not carry conviction in the face of these figures. It is not easy to believe that investors would find the respondent company in its circumstances to be an attractive proposition. It should be respectfully concluded that the judge below has made some uncritical and unjustifiable assumptions about the capacity of the plaintiff to meet the appellant's costs if unsuccessful in its action. It may be added that just before the respondent issued its writ it sold its core undertaking. The receipt by it of a tangible consideration in exchange was not assured under the terms of the sale agreement. Also at an earlier time in the course of the suit when the appellant had viewed the total costs of defending as being more modest and had suggested the provision of $600,000 by way of security, Mr Palmer, on behalf of the respondent, had sworn that an order even for that amount would stifle the litigation. The respondent's capacity to pay the much larger sum which now appears to be involved in the appellant's defending the matter thus appears more doubtful than ever. If on the issue of the respondent's capacity to pay the costs of the appellant if successful, the judge's assessment is rejected, then the way is opened to reconsider the exercise of the discretion to order security. Here again, it should be concluded that the view formed by the judge -- 11 of 16 -- 10 unduly favoured matters affecting the respondent. These views should not be allowed to stand. We are left with a case where a plaintiff company, very unlikely to be able to meet a defendant's costs, wishes to be free to continue its action in a mode likely to prove particularly expensive yet not suggesting that its own directors and shareholders should be involved in financial responsibility for any deficiency in its ability to meet the defendant's costs. It did not indicate why a contribution from those who stand behind the plaintiff company should not be offered. It is not persuasive for the respondent in these circumstances to say simply that the making of an order for security would stifle the action (cf. Impex Pty Ltd v. Crowner Products Ltd and Others 13 A.C.S.R. 440) or that the respondent's interests should be allowed to dominate those of the appellant in having its costs, if unsuccessful, secured. There has been no undue delay by the appellant in bringing its application for security. The action still remained at the pleading stage when the application was made. The primary judge does not appear to have given sufficient weight to the relevant considerations which call for attention. It also appears from some statement in his reasons that he may have given weight to irrelevant factors such as the capacity of the appellant to fund its own action and, rather mysteriously, to the "precedent value of the -- 12 of 16 -- 11 decision" should he order security. The appeal should be allowed and the orders made below set aside. It should be ordered that the respondent give security for the costs of the appellant in defending the action No. 858 of 1993 to the satisfaction of the Registrar in the sum of $4m and that unless such security is given within one month of the date of this order the respondent's action be stayed until the security ordered is given. The respondent should be ordered to pay the appellant's taxed costs of the proceedings below and of the appeal. -- 13 of 16 -- 12 IN THE COURT OF APPEAL SUPREME COURT OF QUEENSLAND Appeal No. 98 of 1994 Brisbane Before Macrossan C.J. McPherson J.A. Mackenzie J. [Australian Commercial Research & Development Limited v. Commonwealth of Australia] BETWEEN AUSTRALIAN COMMERCIAL RESEARCH AND DEVELOPMENT LIMITED Respondent AND COMMONWEALTH OF AUSTRALIA Appellant REASONS FOR JUDGMENT - McPHERSON J.A. Judgment delivered the 14th day of October 1994 I agree with what the Chief Justice and Mackenzie J. have said in their reasons for judgment and with the orders they propose. If the application for separate determination of the issues of liability and quantum had come before this Court, I should have been strongly disposed to favour making an order having that result. The powers conferred in that behalf by O.39, r.12 are ample for the purpose and recent practice favours such a course, particularly where substantial savings in time and costs may be effected by adopting it : see Ashmore v. Corporation of Lloyds [1992] 1 W.L.R. 446, 448. The present appeal does not, however, afford an opportunity for directing that course, the more so as there is some difficulty in identifying either the -- 14 of 16 -- 13 occasion or the circumstances in which it was determined that separate trials of those issues should not be had. The result in the present case is that a very large outlay in costs will be incurred by the defendant in attending to discovery of documents that may, in the end, prove not to have been needed in order to resolve the dispute between the parties. There is plainly something amiss with a procedure that enables a party to litigation, by the simple expedient of delivering a notice in Form 147 in the Schedule to the Rules, to oblige the other party to incur expenditure amounting, on one estimate of it, to some $33,000,000 in order to provide discovery. In the past, a court of equity would have been prone to regard such use of its procedures as excessive to the point of oppression. It is to be hoped that the recent revision of O.35 will restrict some of the worst abuses of that procedure; but in the present instance the plaintiff was shrewd enough to anticipate the advent of the new procedure by giving the requisite notice on the day before the new rule was due to take effect. Even so, it ought not to be wholly beyond the reach of judicial power acting under existing rules of court to require a party who insists on discovery of this order of magnitude to pay or provide in advance for the costs in which the party who is obliged to discover will be involved. These considerations, in addition to those mentioned by the Chief Justice and Mackenzie J., all in my opinion combine to compel the conclusion that an order for security for costs is called for here. The amount of $4 million is -- 15 of 16 -- 14 unusually large, and it may prove beyond the means of the plaintiff to provide it, particularly if, as the material strongly suggests, its financial position is precarious. But if ordering the provisions of security in that amount has the consequence of "stifling" the litigation, then that may fairly be said to be the outcome of the plaintiff's own invocation of procedures for which, on the evidence, it will not be able to pay if it fails in the action. In striking a proper balance in a matter like this, there is in my mind no doubt what the result should be. The orders should go in the terms proposed by the Chief Justice and Mackenzie J. -- 16 of 16 --