Australian Commercial Research & Development Ltd v Commonwealth of Australia [1994] QSC 93

TRANSCRIPT OF PROCEEDINGS (Copyright in this transcript is vested in the Crown. Copies thereof must not ·be made or sold without the written authority of the Director, State Reporting Bu:-eau.) SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION SHEPHERDSON J No 858 of 1993 AUSTRALIAN COMMERCIAL RESEARCH AND DEVELOPMENT LIMTED ~----------------~ REVISED COPiES lSSUED f oat:taz ':e;;;g :yu;;_au J Plaintiff ·\ and. __) COMMONWEALTH OF AUSTRALIA Defendant BRISBANE .. DATE 22/04/94 JUDGMENT 1 I 4th ~/~or, T~e Law ~~urts, George Street, Brisbane, Q. 4000 Telephone: (07) 227 4360. Facsimile: (07) 227 5532 -- 1 of 16 -- 220494 tgc (Shepherdson J) HIS HONOUR: In this matter I order the application be dismissed with costs to be taxed. I publish my reasons. 10 i c20 30 40 50 60 JUDGMENT 2 -- 2 of 16 -- ,. IN THE SUPREME COURT OF QUEENSLAND No. 858 of 1993 Brisbane Before Mr Justice Shepherdson [Aust. Commercial Research & Development Ltd v. Commonwealth] BETWEEN AUSTRALIAN COMMERCIAL RESEARCH AND DEVELOPMENT LIMITED Plaintiff and COMMO~THOFAUSTRAL~ Defendant JUDGMENT - SHEPHERDSON J. judgment delivered 22 April 1994 CATCHWORDS: COUNSEL: SOLICITORS: HEARING DATE: Security for Costs - Section 1335 Corporations Law - plaintiff solvent and trading profitably- defendant anticipates extraordinary costs of its discovery c. $33.8 million for perusals only. Defendant a powerfully funded litigant Southern Cross Exploration N.L. v ·Fire & All Risks Insurance (1985) 1 NSWLR 114 followed Harour v. Ariadne Australia Ltd (1984) 2 Qd.R 523 followed Dutney O.C. for applicant Mullins for respondent Australian Government Solicitor Bell Rapp & Partners for plaintiff 6 April 1994 -- 3 of 16 -- ) ) ) ) IN THE SUPREME COURT OF QUEENSLAND BETWEEN No. 858 of 1993 AUSTRALIAN COMMERCIAL RESEARCH AND DEVELOPMENT LIMITED Plaintiff and COMMONWEALTH OF AUSTRALIA Defendant JUDGMENT - SHEPHERDSON 1 J udgrnent Delivered 22 April 1994 On 25 February 1994, the defendant applied for an order that the plaintiff give the defendant security for costs of this action. I heard the application on 6 April 1994. This action began on 9 June 1993 when the plaintiff filed a Writ of Summons in which it sought (inter alia):- 1. A declaration that clause 1.4 of a Principal Projects Deed dated 16 July 1987 betweeh the plaintiff and defendant requires the d~fendant to submit all projects and technologies for which it requires commercial funding for development with its defence and research laboratories to the plaintiff. 2. A declaration that the term "commercial funding" in clause 1.4 bore a special meaning. In July 1993, settlement negotiations began- the parties proceeded to mediation but no settlement resulted. -- 4 of 16 -- 2 On 19 July 1993, the defendant filed a Construction Summons and on 4 August 1993, the Honourable Mr jUstice Dowsett ordered (inter alia) that the action be listed on the "A" list commercial causes and that the plaintiff deliver a statement of claim by 24 August 1993 to be verified on oath. The statement of claim was delivered on 24 August 1993, and one week later the affidavits .verifying it were delivered. The plaintiff later amended this statement of claim the latest edition being delivered on or about 19 November 1993. The plaintiff also delivered certain particulars. c An interlocutory application concerning particulars was heard by the Honourable Mr justice Thomas who on 21 February 1994 handed down his decision. On 16 March 1994, the ( defendant appealed that decision. By its latest amended statement of claim the plaintiff has basically maintained its claims made in the writ. These claims include damages for breach of contract. There appears to be no dispute but that the parties did enter into a deed styled "Principal Projects Deed" dated 16 July 1987. Clause 1.4 of that deed reads:- "1.4 In respect of all projects or technologies for which the Commonwealth requires commercial funding for development within its defence research laboratories for non-defence use of such projects or technologies, the Company shall have first right of refusal both for provision of such funding pursuant to this Deed and the Research and Development Deed attached ·hereto, and subsequent to the research and development phase, the non defence commercial development pursuant to the Commercialisation Agreement attached hereto for that project or technology." In its amended statement of claim the plaintiff seeks a declaration that that clause 1.4 confers upon the plaintiff a first right of refusal and a further declaration that the ·phrase "commercial funding" in clause 1.4 has a meaning pleaded at some length in paragraph 21(a) of the amended statement of claim. c c -- 5 of 16 -- 3 In paragraph 22 of the amended statement of claim the plaintiff has alleged that the defendant has breached clause 1.4 in that:- (a) it has entered agreements with parties other than the plaintiff for the provision of commercial funding for the development within the defendant's defence research laboratories of projects or technologies for non-defence uses; (b) the plaintiff was not provided with an opportunity to exercise its first right of refusal prior to the defendant entering any such agreements. ) Particulars have been provided in schedule A to the amended statement of claim. These particulars list projects which it is alleged the defendant has entered into with third ) parties in alleged breach of its agreement with the plaintiff._/ The action has reached the stage where discovery should take place although the chronology exhibited before me does not show any defence yet delivered . .,.. Mr Dutney Q.C. who appeared for the defendant has argued that the wide extent of the meaning which the plaintiff seeks to place on the phrase "commercial funding" ) combined with the particulars in Schedule "A" to the statement of claim will result in the defendant being put to huge expense. This huge expense is said to arise from the need of ) the defendant, in complying with its obligations on discovery to refer to thousands of projects of the type pleaded and in which it has been involved. An affidavit of Ian David Ridgway the Director Science Commercialisation in the ·Central Office of the Defence Science and Technology Organisation ("DSTO") has deposed to information from which he believes that "the total volume of material in respect of the annexure A projects to the further Amended Statement of Claim only, if converted to paper records equates to about 2,000 metres of shelf space. On the basis of those calculations, there are estimated to be in respect of this limited survey only, 8,052,123 pages. Assuming -- 6 of 16 -- -- ----~~~~~- 4 an average of 3 folios per page, I calculate there will be of the order of 24,156,000 folios to be perused. I am informed by Alexander Friedrich Bernoff the solicitor having the conduct of this action on behalf of the Commonwealth and verily believe that the party and party costs of such perusal will amount to the order of $33,818,400." An affidavit by Alexander Friedrich Bernoff who describes himself as the Principal Solicitor in the Brisbane office of the Australian Government Solicitor and an exhibit thereto confirms this later figure. Mr Dutney, in his argument, conceded that, discovery costs aside, the costs of this action would. not be unusually significant, such as to justify the present application. As I c understood his argument, it is the defendant's anticipated discovery costs which will make ( this action unusually expensive and which have precipitated the present application. The defendant has spared no expense in obtaining evidence to support its application. Apart from an affidavit of Mr Bernoff the defendant has an affidavit of Ivan Anthony Garrett a member of the firm of Hickey and Garrett who have specialised in the area of legal castings since about June 1982. Mr Garrett has exhibited to his affidavit a copy of an eight page letter_ dated 28 February 1994, which Mr Bernoff wrote him and in which Mr Bernoff estimated the above party and party costs of perusal at $33,818,400. Mr Bernoff sought Mr Garrett's estimate of likely party and party costs in the action. Mr Garrett provided a draft itemised bill of costs at $4,536,132.40 up to and including the first day of the trial and a draft itemised bill of $206,213.50 for the ensuing 29 days of the estimated 30 day trial. The above figure of $4,536,132.40 included $3.36 million representing a perusal charge for 10% only of the discovered documents. Mr Garrett restricted this item to 10% "being relevant for perusing specifically." c c -- 7 of 16 -- '. 5 The defendant also retained Peter Ronald Heffernan a partner in the accountancy firm of Ernst and Young, Brisbane office, and a member of the Corporate Advisory Services Division for Ernst and Young in Queensland. Mr Heffernan swore an affidavit on which the defendant has relied in this application. Mr Heffernan has sworn that on 22 November 1993 his firm received instructions from the Australian Government Solicitor as solicitor for the defendant "to evaluate the financial position of . . . the plaintiff in these proceedings, based on the available public records · · ) including the annual returns of the company lodged with the Australian Securities Commission and also certain Supreme Court documentation and to provide the ) Commonwealth with a report." Mr Heffernan relied on information contained in documents which are quite voluminous exhibits to his affidavit. These exhibits included:- · (a) .documents obtained by Mr Bernoff from O.S. 879 of 1990. filed in this Court · when the plaintiff sought "the reversal of a previous issue of capital from the ) plaintiff's asset revaluation reserve"; (b) copies of documents which Mr Bernoff had extracted from the Australian ) Securities Commission including returns for the plaintiff- for most of the accounting periods from the "period to 31 May 1986" to the year· ended 31 December 1992. Mr Heffernan obtained other material and ultimately furnished to the Australian Government Solicitor a report dated 1 March 1994. This report contains a number of appendices each bearing on the financial position of the plaintiff. -- 8 of 16 -- ------------ 6 The latest financial statements for the plaintiff available to the defendant were those for the year ended 31 December 1992. According to Mr Heffernan's report these showed net assets of $9,878,564 and trade creditors and accruals of $312,167. Mr Clive Frederick Palmer, the plaintiff's director in his affidavit has referred to Mr Heffernan's affidavit and in particular top. 23 of report dated 1 March 1994 which is the exhibit marked "PRH1" to that affidavit and says that while there are some matters of Mr Heffernan's analysis with which he does not agree he is content, for the purpose of the present application, to adopt Mr Heffernan's conclusions as to the plaintiff's net asset position and liquidity as derived from the information on which Mr Heffernan has relied. . ' ' c Mr Palmer went on to say, after referring to Mr Heffernan's analysis of the financial ( statements for the year ended 31 December 1992 with the result which I have just mentioned that "on any fair assessment of those financial statements it could not be concluded that the plaintiff is in anything other than a currently sound financial position with the clear capacity to raise additional capital and funds either by borrowings or the issue of additional shares .... Mr Heffernan does not argue otherwise". c In the plaintiff's 1992 financial statements filed with the Australian Securities Commis$ion (see Ex PRH2 to Mr Heffernan's affidavit) the following item appears in the ( Director's report under the heading "Events Subsequent to Balance Date". "On 7th June 1993 Australian Commercial Research & Development Limited executed a licence agreement with Bells water Pty Ltd- which upon the successful development of the group's intellectual property will be required to pay a royalty of 10% of the profits derived by Bells water Pty Ltd from the commercial exploitation of the technology. Also if cumulative royalties over the period, set out in the agreement do not amount to eight million dollars ($8,000,000) Bellswater Pty Ltd will issue eight million shares at $1.00 par value ($8,000,000) in the capital of Bellswater Pty Ltd at the end of ten years from the date of this agreement. The agreement also provides that if Bellswater Pty Ltd wants to acquire control of the group's patents it can do so at any time by way of a cash settlement of twenty-one million dollars ($21,000,000) and thereafter be released from further royalty payments." -- 9 of 16 -- 7 The Director's report forming part of the 1992 financial statements is dated 9 June 1993 - one day before the writ in this action. was issued .. Actual information in relation to the plaintiff's operations for the year ended 31 December 1993 is not yet available- the statutory time for that information to be provided has not yet expired. Mr Dutney relied on Mr Heffernan's criticism, in appendix 3 of his report, of the above transaction with Bellswater Pty Ltd. Mr Dutney also submitted that the transfer to ) Bellswater Pty Ltd of the intellectual property assets of the plaintiff in exchange for what he called a right to receive income and shares, in effect lessened the plaintiff's ability to ) pay costs which might be ordered against it at a trial. The application before me is made under s. 1335 of the Corporations Law which reads: "1335(1) 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. (2) The costs of any proceeding before a court under this Law shall be borne by such party to the proceeding the court, in its discretion, directs." ) The section requires me to answer two questions.· In Southern Cross Exploration N.L. v. Fire and All Risks Insurance Company Limited (1985) 1 N.S.W.L.R. 114 Waddell j. described them thus:- "The first may be described as a threshold question. It is, whether, having . regard to the whole of the evidence before the court, there ·is credible testimony by which it appears that there is reason to believe that the plaintiffs will be unable to pay the costs of the defendants if successful in their defence. If this question is answered, yes; the second question arises which is whether, in the exercise of the discretion given to the court by the subsection, the relief sought should be granted wholly or in part or should be refused." -- 10 of 16 -- 8 Both counsel have addressed the first of these questions. Mr Mullins for the defendant has submitted that the defendant has failed the threshold test. It is not unimportant to note that Mr Heffernan's evidence on which the defendant relies demonstrates that the plaintiff is not in liquidation or insolvent, ·and in fact is solvent, trading, has no borrowings and has the ability to raise substantial capital either through fresh borrowings or share issues and what is perhaps more important, as at 31 December 1992 had net assets of approximately $9.8M. Mr Dutney relied on the above Bellswater transaction in support of his argument that I should order security. In my view, I should be slow to draw from the Bellswater c agreement any sinister conclusion adverse to the plaintiff on this present application. While ( the agreement might appear to raise some cause for concern it really goes no further than that; It is a factor which I take into account in the exercise of my discretion. I note also the applicant did not seek to cross-examine Mr Palmer on his affidavit read before me to establish Mr Palmer's own worth orthe reason for the agreement with Bellswater. I note too that as to Mr Heffernan's conclusions as to the plaintiff's liquidity (with which c conclusions Mr Palmer has generally agreed), the plaintiff's liquidity as at 31 December 1988 had risen to some $12M and since then had gradually reduced until at 31 December ( 1992 it had liquid assets of $1,053,433. This latter figure ignored the plaintiff's costs of this litigation. At this stage I point out that the contract on which the plaintiff has sued had a term of ten years from 16 July 1987. There appears to be no doubt that on Mr Heffernan's analysis the plaintiff was a solvent company at the date on which the \vrit was issued.· In his report dated 1 March -- 11 of 16 -- 9 1994, Mr Heffernan in speaking of the plaintiff's net asset position at 31 December 1993 has said:- "Based on the assumptions outlined in appendix 4 we estimate that the net asset position of ACRD [the plaintiff] at 31 December 1993 is $1,771,640. When the advised costs of litigation are incorporated into the calculation, the net assets at 31 December 1993 are estimated to be $1,658,640 of which, as mentioned above, some $511,613 is estimated as liquid funds." If the plaintiff's claim succeeds it appears that any damages awarded will be very substantial indeed, as Mr Mullins said during his argument - millions and millions of dollars. ) It is apparent to me that if this action proceeds to trial the trial will be a lengthy and costly one. Part of the plaintiff's claim is that the diminution in its profitability is due to ) the defendant's alleged breaches of the contract. The contract still has some three years to run. If the plaintiff fails in its claim for breach of contract then there is reason to believe that it will..be unable to pay the costs of the defendants if the defendants are.successful in their defence and its costs are some $33 million. ,It is apparent from the evidence that the ) funding by the plaintiff of the action to date has placed some strain on the plaintiff's profitability. ) Mr Palmer's affidavit deposes to the name of the plaintiff's parent company and identifies a number of corporate shareholders said to be substantial financial institutions · in the United Kingdom and Australia and also said to have the present financial capacity to subscribe to further share issues. Mr Palmer deposes to his belief that the plaintiff will in its current financial year continue to trade profitably and will do.so for the foreseeable future. What has concerned me in dealing with the threshold question is the disparity between Mr Bernoff's apparent reliance on $33.8m for perusal of its estimated discovered documents -- 12 of 16 -- 10 and Mr Garrett's itemised bills in which he estimates at $4.742m the defendant's likely party and party costs of a 30 day trial. Mr Garrett 's itemised bill is drawn on the basis that perusal of only 10% of the discovered documents will be chargeable as party and party costs. I do not believe that the estimate of $33.8m is to play a major role in deciding the threshold question. Section 1335 is concerned in part, with "costs of the defendant if successful in its defence." These costs will usually be costs on a party and party basis and there is no reason to suspect that the usual basis will not apply. Thus, Mr Garrett's bill is c a much better guide than Mr Bernoff's estimate of $33.8m which, on Mr Garrett's figures is very largely not recoverable on a party to party basis. c On the evidence, and I do not suggest for a moment that Mr Heffernan is not credible, but I do take into account his evidence along with that of Mr Palmer. I do not have reason to believe that the plaintiff will be unable to pay the costs of the defendant if the defendant is successful in its defence. I therefore do not answer the threshold question "yes". c However, if I should be wrong in declining to answer "yes", I now consider the second question which involves the exercise of the discretion whether or not to order security for ( costs. It is a discretion to be exercised in all the circumstances of the case and there is no burden one way or the other (see Harpur v. Ariadne Australia Limited (1984) 2 Qd.R. 523 at p. 529). That case dealt with the predecessor to s. 1335. In Ariadne Mr justice Connolly, with whose reasons the other members of the Court agreed, said (at p.529):- "... no gloss should be put upon the legislative provision and indeed it needs none. For practical purposes once the legislature has made it legitimate to regard the lack of means of the plaintiff and its likely inability to need an order -- 13 of 16 -- ... ' ' 0 J J 11 for costs, this must always be a consideration of great weight and it will frequently be the determining factor". Other relevant principles which I must take into account in the exercise of this discretion are:- 1. Impecuniosity of a plaintiff should hot deny him his day in court (Harpur v. Ariadne (supra) at p. 527-28. 2. As a matter of law any one factor is not to predispose the court to a decision one way or another (Harpur v. Ariadne p. 530). 3. The object of the section is to protect the party who is brought to court against the possibility that the plaintiff, if unsuccessful, will be unable to meet an order for costs. Mr Palmer, in his affidavit has sworn that any order for security for costs, of the nature of $600,000 to $33M would "clearly stifle and otherwise stultify the litigation". Among the circumstances which I take into account is the fact that the plaintiff's ) claim is a substantial one- there is not the slightest suggestion by the defendant that it is vexatious or other than bona fide. The defendant in its material has not attempted to ) evaluate its prospects of successful defence. Here the plaintiff is confronted by arguably the most powerfully funded litigant in Australia. Mr Muliins has in effect submitted that in this particular case I should be derelict in my duty if I permitted any order for security for costs to be made which order would effectively stifle or terminate the litigation. If this case is not permitted to come to trial because of my order for security for costs a dangerous precedent may well be set. There is another factor which I mention and which I take into account and that is this - the defendant did not mention to the plaintiff or its representatives any question of security for costs until 14 January 1994 although in June 1993 it had begun investigating -- 14 of 16 -- ~-~---~~-~----··-·· -··---- 12 associated companies of the plaintiff. When the question of security for costs was first raised an amount of $600,000 was sought. Now, because of the alleged width of the discovery that figure has been increased to some $33.8M. The agreement on which the plaintiff sues has been the subject of comment in the Commonwealth Auditor-General's report to Federal Parliament dated 14 October 1992 and ex. B to Mr Palmer's affidavit contains true copies of some extracts from that report. That report includes the following statements:- "Only one project has been formally submitted to ACR & D for funding under that agreement since it was signed in July 1987 (a number of others have been identified without proceeding to a formal submission). It was noted in the chapter 3 that a working capital advance has not been sought by the DSTO '~ "The other alternative approved by the Government decision in 1986 was for the DSTO to make use of an intermediary technology broker. This option was pursued by the Department and following a request for tender, a 10 year agreement was signed by the Commonwealth and Australian Commercial Research and Development (ACR & D) in July 1987 ... The agreement with ACR & D was intended to provide funding to the DSTO to enable further development of DSTO technology considered to have commercial potential. The agreement provides the ACR & D the first right of refusal to technology in certain circumstances. The agreement has been interpreted differently by the DSTO and ACR & D and has been the cause of some disagreement that may result in legal action to resolve the contractual dispute." "A major area of concern to the ANAO was the management of the agreement with ACR & D. In almost all areas this has been inadequate. In view of these problems the ANAO considers that there are some major areas of concern that need to be reviewed. In particular, the role of the DSTO central with reference to the laboratories needs to be clarified. It is pointless having a policy orientated section if the laboratories are then at liberty to ignore or observe policy as they wish." c c c c -- 15 of 16 -- . . . /) 13 It seems to me that one inference to be drawn from the above extracts from the report is that this action really must be permitted to come to trial. I interpret ANAO as meaning Australian National Audit Office. On all the evidence before me I find that this is not a proper case in which to exercise the discretion in favour of the defendant and assuming my answer to the threshold question should have been "yes" then, in the exercise of my discretion I would refuse the defendant's application. ) I therefore order that the application be dismissed with costs to be taxed. ) -- 16 of 16 --