FEDERAL COURT OF AUSTRALIA

Loxias Technologies Pty Ltd v Curacel International Pty Ltd

[2002] FCA 753

PRACTICE & PROCEDURE – Pleadings – strike out application – whether breach of duty as a director properly pleaded – whether pleadings fail to distinguish between section 52 claim and negligence claim – whether nature of the loss suffered and how it is linked to the unlawful conduct of the respondents properly pleaded.

PRACTICE & PROCEDURE – security for costs – whether applicants should provide security for costs based on the respondents’ estimated legal costs up to and including any final hearing – where evidence of the applicants’ impecuniosity inconclusive – where respondents have not yet filed a defence – where applicants’ impecuniosity, if proved, is alleged to result from respondents’ unlawful conduct

Federal Court of Australia Act 1976 (Cth) s56

Corporations Act 2001 (Cth) s 1335

Federal Court Rules O 28 r 3

Daniels v Anderson (1995) 37 NSWLR 438 referred to

Sheahan (as liquidator of SA Service Stations) (in liq) v Verco (2001) 37 ACSR 117

referred to

Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 referred to

LOXIAS TECHNOLOGIES PTY LTD AND CURATHERAPY DISTRIBUTION PTY LTD AND SCOTT FRANCIS TYNE v CURACEL INTERNATIONAL PTY LTD and BILL ELLIOT CHAM

N166 of 2001

MOORE J

14 JUNE 2002

SYDNEY

THE COURT ORDERS THAT:

1.         Scott Francis Tyne be removed as a party.

2.         Paragraphs 21, 56, 57, 58 and 62 of the fourth further amended statement of claim be struck out.

3.         The applicants have leave to replead.

4.         Any further amended statement of claim be filed and served by 4pm 5 July 2002.

5.         Any further submission on the question of costs to be made at the next directions hearing.

6.         The matter be stood over for directions to 23 July 2002 at 9-30am.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

Introduction

1                     This judgment concerns an application to strike out a statement of claim in proceedings brought by Loxias Technologies Pty Ltd (“Loxias”) and Curatherapy Distribution Pty Ltd (“Curatherapy”) (collectively “the applicants”).  The proceedings were commenced on 23 February 2001.  The applicants allege they entered an agreement on 15 January 1999 with the first respondent, Curacel International Pty Ltd (“Curacel”) to distribute a number of products.  They included Curaderm, a product for the treatment of skin cancers. They also included other products referred to collectively as the “therapeutic products” and the “skin care products”.  The products were manufactured by Curacel either directly or indirectly.  The second respondent, Mr Cham was a director of Curacel and a director of Loxias from 14 June 2000 to 8 December 2000.  Leave was granted to join Mr Tyne as an applicant on 16 November 2001.

2                     The applicants’ claim concerns a number of alleged misleading representations made by the respondents about the products. They included misrepresentations as to the ingredients of Curaderm, the therapeutic products and skin care products, the efficacy of these products compared to like products in the market and misrepresentations concerning whether they were manufactured and packaged in compliance with relevant legislation and regulations.  The applicants say they have been unable to continue to distribute some of these products as to do so would be in contravention of the Therapeutic Goods Act 1990 (Cth) (“the TGA Act”) and relevant regulations.  The applicants allege misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (“the Act”).  The applicants also allege negligence against both respondents, breach of warranty by Curacel, breach of common law and fiduciary duties by Mr Cham as a director of Loxias and fraud by Mr Cham.  The applicants claim they have suffered loss and damage including losses incurred in acquiring, marketing and packaging the products.

History of the proceedings in the Court

3                     The strike out application was filed on 19 July 2001.  The motion was heard on 3 September 2001 and leave was granted to the applicants to file a second further amended statement of claim.  Orders were made by consent requiring the respondents to identify further complaints concerning the second further amended statement of claim and to file any further notice of motion.  The applicants were ordered to pay the respondents’ costs of and incidental to the motion. The issue of indemnity costs and whether such costs should be taxed and paid forthwith was reserved.

4                     On 12 November 2001 the applicants sought leave to join Mr Tyne as an applicant.  As noted earlier, leave was granted on 16 November 2001 to join him and also to file a third further amended statement of claim.  Leave was given without prejudice to the respondents to file a further strike out application or to seek the removal of Mr Tyne as a party.  On 23 November 2001, the respondents filed a motion concerning the joinder of Mr Tyne and the pleadings.  It was listed for hearing on 8 February 2002.  Both parties filed written submissions.  The issues requiring resolution included the joinder of Mr Tyne, security for costs, the strike out application in relation to aspects of the pleadings and costs.

5                     On 8 February 2002, the respondents’ motion was heard and leave was granted to the applicant to file a further statement of claim, a fourth further amended statement of claim (“the most recent claim”), to clarify the pleadings and, in particular, to address some of the issues raised by the respondents during the proceedings on 8 February 2002 and in earlier correspondence.

Unresolved issues

6                     The applicants filed the most recent claim on 13 March 2002.  The parties have since provided supplementary submissions (the submissions concluding on 15 April 2002) and the issues requiring resolution as outlined above remain substantially unresolved except for the joinder of Mr Tyne.

(i)  Joinder of Mr Tyne

7                     The respondents opposed the joinder of Mr Tyne on the basis that it was a derivative claim which breached the rule in Foss v Harbottle (1843) 2 Hare 461 and Mr Tyne’s loss was not separate and distinct from the loss suffered by Loxias: see  Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 Ch 204;  Gould v Vaggelas (1985) 157 CLR 215;  Milfull v Terranora Lakes Country Club Limited [2002] FCA 178.  The joinder would be an abuse of process as it was being brought for the collateral purpose of avoiding an order for security for costs.  On 8 February 2002, the applicants indicated that Mr Tyne had suffered losses in addition to those suffered by him as a shareholder, including losses incurred by Mr Tyne in respect of the formation and promotion of Loxias.  However the position of Mr Tyne does not require further consideration as the most recent claim filed on 13 March 2002 does not have Mr Tyne as an applicant.  The joinder of Mr Tyne is no longer pressed.

I will order that Mr Tyne cease to be a party.

(ii)  Strike out application

8                     The respondents’ strike out application originally raised a number of issues concerning the applicants’ pleaded case though the issues have since been narrowed.  It is convenient to deal with them under the following headings:

(a)  fraud

9                     In their written submissions of 21 December 2001, the respondents submitted that the applicants had failed to properly particularise the allegation of fraud.  Counsel for the applicants submitted that the allegations were sufficiently particularised.  The nature and extent of each alleged misrepresentation was set out, the manner in which it was made, and the date and place. The respondents now submit that while fraud has been particularised in the most recent claim, this should have been done earlier.  It is submitted that the inclusion of these particulars is a concession by the applicants which bears upon whether the respondents should have their costs. 

(b)  knowing involvement

10                  The respondents submit that while the most recent claim now provides further particulars of this allegation, the reformulation of the allegation constitutes a concession by the applicants that the respondents’ complaint about the inadequate particulars was correct.  The respondents say this is relevant to the issue of costs. 

(c)  breach of duty as a director

11                  There remains an issue about the case pleaded against Mr Cham concerning his role as a director of Loxias.  Paragraphs 56, 57 and 58 of the most recent claim say:

“56.     As a director of Loxias, Cham owed a common law duty at all times to act in good faith and in the best interest of the shareholders of Loxias as a whole and not to act or not to fail to act to the detriment of Loxias.  Cham, in failing to disclose the material facts referred to in paragraph 13 herein and in maintaining, and/or failing to disclose the falsity of, the representations referred to in paragraphs 8, 11, 36, 43 and 48 herein caused Loxias to incur trading losses in breach of his said duty.

57.       As a director of Loxias, Cham had a fiduciary obligation whereby he should not have put himself in a position where interest and duty conflicted, or if such conflict was unavoidable, he should have resolved it in favour of duty and not profited out of the position.

58.       By maintaining the representations and silences referred to in paragraph 56, Cham put himself in a position of conflict which he wrongfully resolved in favour of self-interest over duty and in favour of profiting from the continuing supply of Curacel products to Loxias to the benefit of Curacel and to the detriment of Loxias.”

[Emphasis added by respondent’s counsel.]

12                  The respondents submit that the words “not to fail to act” in paragraph 56 pleads a prescriptive duty which is not recognisable in Australian law. The pleadings allege a breach of fiduciary duty and should be struck out on the basis that the applicants allege, in par 56, a prescriptive duty to provide information, a duty not recognised in Australian law:  Breen v Williams (1996) 186 CLR 71 at 113 per Gaudron and McHugh JJ and Pilmer v Duke Group (2001) 75 ALJR 1067 at [73] and [74].  It is also submitted that the allegation of conflict between Mr Cham’s role as director of Curacel and of Loxias is fanciful as both parties were aware of his positions and the mere existence of such a conflict is not a breach if there is appropriate disclosure.  Further, par 56 should be struck out as the alleged breach of the duty is a failure by Mr Cham to disclose information.  The respondents submit that this is not sufficient to constitute male fides and as there is no reference to fraudulent intention there is no cause of action disclosed in par 56.

13                  Counsel for the applicants submits that par 56 does not relate to a fiduciary duty but a common law duty.  It is submitted that it is overly pedantic to require a repetitive pleading of fraudulent intention as the pleadings should be read as a whole. Further Mr Cham’s alleged continuing fraudulent misrepresentations and concealment of the truth, while a director of Loxias, is capable of supporting a finding of male fides.  In relation to paras 57 and 58 it is a proscriptive duty alleged, as Mr Cham (as a director of Loxias) should not have put himself in a position of conflict, or if unavoidable, should have resolved the conflict in favour of the duty owed and not profited out of the position.  The applicants allege Mr Cham could have declined the appointment as director of Loxias or disclosed the falsity of the misrepresentations so as to avoid obtaining a profit at the expense of Loxias.  Counsel for the applicants submits that the respondents have confused the need for a prescriptive duty and what is necessary to discharge a proscriptive duty.  It was submitted that some positive act may be required to satisfy a proscriptive obligation as otherwise, a director could properly act in the full knowledge that purchasing goods that profited an entity in which he had an interest would be totally inimical to the interests of the company.  A positive step would be needed to prevent this occurring.

14                  It may be accepted that par 56 alleges, in terms, a breach of a common law duty of a director and not a breach of a fiduciary duty.  I proceed on the basis, for present purposes, they are discrete duties or duties having a different legal foundation; as to which see Daniels v Anderson (1995) 37 NSWLR 438.  It may also be accepted that directors have a common law duty to the company of which they are director.  What is comprehended by that duty has recently been discussed in Sheahan (as liquidator of SA Service Stations) (in liq) v Verco (2001) 37 ACSR 117 at 134.  The duty may require action: see Daniels v Anderson at 505 per Clarke JA and Sheller JA.  However, counsel for the applicants did not refer me to any authority on this question let alone any which suggests the common law duty of care of directors includes a duty to reveal or disclose that an assumption on which the company is operating is false or wrong and known to the director to be false or wrong and breach of that duty sound in damages.  My present view is that this allegation could not, as a matter of law, be made good and should be struck out.  If I have overlooked any relevant authority, the matter can be reconsidered.

15                  Paragraphs 57 and 58, in terms, concern the fiduciary obligations of Mr Cham as a director of Loxias.  The substance of the pleading is that the obligation was breached by Mr Cham failing to disclose the true position (as alleged) having regard to the various representations pleaded earlier in the most recent claim while profiting from the consequences of Loxias carrying on business unaware of the true position.  It may be that in some circumstances a fiduciary may have an obligation to disclose information: see A Fiduciary Duty to Disclose (1997) 113 LQR 220, Aequitas v AEFC [2001] NSWSC 14 at [323]-[341] see also the observations of Windeyer J in Smith Kline & French Laboratories Ltd v Inter-Continental Pharmaceuticals (Australia) Pty Ltd (1969) 123 CLR 514 at 522.  In the present case, paras 57 and 58 are no more than asserted conclusions.  If the law presently permits a case to be maintained against Mr Cham, as a fiduciary, resulting in liability to Loxias for loss occasioned by a breach of a fiduciary obligation then the material facts establishing the factual foundation creating liability would have to be identified with precision as would the nexus with any loss suffered.  What, for example, did Mr Cham do or fail to do in a particular set of circumstances which creates liability?  If it was a failure to reveal information, what were the circumstances in which he gained the information?  Was there one or number of occasions on which the obligation was breached?  Why, if the alleged obligation was breached, would it sound in damages?  How did his conduct cause loss?  It is insufficient, in my opinion, to simply incorporate, by reference, what was pleaded in par 56 which, in turn, incorporates by reference 8,11,13,36,43 and 48.  If the factual foundation of the alleged liability is exposed with precision in the pleading then it would, amongst other things, enable the legal foundation to be considered also.  I propose to strike out paras 57 and 58.

(d)  failure to inform/s 52/ negligence

16                  Paragraphs 13, 16, 21 and 22 of the most recent claim provides:

“13.     Between September 1998 and 15 January 1999 Curacel and Cham knew or ought to have known and failed to inform Curatherapy, Tyne and Holmes that:

            a)         the Therapeutic Products Acne and Pimple Gel, APR Cream and VR Gel could not be sold to the public over the counter as they contained a substance known as dimethyl sulfoxide (“DMSO”);

            b)         DMSO was a substance that, in Australia, could only be incorporated in prescription-only medications;

            c)         Curacel SPF 30+ Sunscreen could not be sold to the public over the counter as it was registered under the Therapeutic Goods Act 1990 (Cth) (the “TG Act”) as:

                        i)          SPF 15+ and not SPF 30+;

                       ii)         being packaged in a 100ml tube rather than the 125 ml tube;

            d)         the Antiseptic Gel could not be sold to the public as it was not registered under the TG Act when it was required to be so registered;

            e)         the Complexion Powder could not be sold to the public over the counter as:

                        i)          it contained a substance known as hydroquinone;

                       ii)         hydroquinone was incorporated in the manufacturing process in the ratio of approximately 12% by volume;

                       iii)        if the ratio of hydroquinone in a product was greater than 2% by volume, hydroquinone could only be incorporated in prescription-only medications in Australia; and

                       iv)        if the ratio of hydroquinone in a product was between 0% and 2% by volume the product could not be sold over the counter;

            f)          the Therapeutic Products APR Cream, ER Cream and Curasol SPF 30+ Sunscreen and the Skin Care Products Complexion Day Cream and Complexion Night Cream could not be sold to the public over the counter as they:

                       i)          contained a substance known as octyl phenol ethoxylate; and

                       ii)         did not disclose the presence of octyl phenol ethoxylate as required under the TG Act.

Particulars

            a)         Cham in his websites www.curacel.com.au and www.curacel.gil.com.au describes himself as a ‘world renowned medical scientist, Dr Bill Cham’ and as having ‘published over 80 scientific papers and been cited by more than 3000 scientists world-wide, including Nobel Prize winners’;

            b)         Cham personally developed the Curacel products;

            c)         Cham was responsible for determining the ingredients to be used in the manufacture of the Curacel products at the times of the representations referred to herein;

            d)         Cham supervised the manufacture of the products at Curacel’s Rocklea premises;

            e)         Cham, as the managing director of Curacel, was responsible for ordering the ingredients for the manufacture of the products;

            f)          Curacel was the manufacturer of the products;

            g)         Curacel ordered the ingredients for the manufacture of the products;

            h)         Cham approved Curatherapy’s labelling and packaging which were subject to the requirements of the TG Act and regulations;

            i)          Curacel and Cham and previously obtained the approval of the Therapeutic Goods Administration (‘TGA’) for the distribution and sale of the Curacel products.

Liability for Representations and Silences

….

16.       In the premises Curacel and Cham were under a duty to take reasonable care not to misstate or omit material facts in the making of the said representations and remaining silent in the circumstances alleged.

…

21.       The failure of Curacel and Cham to inform Curatherapy and/or Tyne and/or Holmes of the matters alleged in paragraph 13 was misleading or deceptive or was likely to mislead or deceive and they were in breach of their duty to inform Curatherapy and Tyne of those matters referred to in paragraph 13 herein the existence of which they well knew or, as the manufacturers of the products and the other matters set out in the particulars to paragraph 13 herein, should reasonably have known.

22.       Curacel and Cham were in breach of their duty of care to Curatherapy in misstating the matters referred to in paragraph 8 herein and in failing to inform Curatherapy and/or Tyne and/or Holmes of the matters referred to in paragraph 13 herein when they knew, or ought to have known, as the manufacturers of the products and the other matters set out in the particulars to paragraph 13 herein, of their falsity and existence respectively, and Curatherapy repeats paragraph 19 herein.”

17                  The respondents submit par 13 continues to be a rolled-up plea and is therefore embarrassing.  The complaint appears to be that the paragraph alleges a failure to inform, inter alia, Curatherapy about the pleaded matters and, additionally, that the matters are true in fact.  Before the most recent claim was filed, the respondents criticised the lack of particulars in relation to the claim based on contravention of s 52 and in negligence.  However, the most recent claim provides particulars of both claims and that issue is not now pressed.  But the respondents submit that these particulars are provided for the first time and as such, are a concession that such particulars ought to have been provided earlier.  It is still submitted that the pleadings fail to distinguish between the s 52 and negligence claims and that par 21, which alleges conduct to be misleading or deceptive conduct by silence, does not contain an allegation that the silence was deliberate or intentional. 

18                  The applicants submit that it is commonplace to roll-up the plea “knew or should have known” (though this was not the point being raised by the respondents).  The admission or traverse can indicate whether or not each allegation is actually or constructively known, without risk of embarrassment.  Further, if the respondents knew of the matters alleged, then it is a logical inference that the silence was deliberate.  The applicants submit that they are unable to plead matters that are in the peculiar knowledge of the other party, other than by inference.  As to the allegation of negligence, the applicants submit that par 16 of the most recent claim alleges a duty of care and par 22 alleges the breach.  It is submitted that there is no ground for complaint that the pleading fails to distinguish between the two claims.

19                  As to par 13, I do not see any real difficulty in understanding the allegation nor in the respondents pleading to it in a defence.  I accept that the paragraph as pleaded involves two elements namely an allegation about Curacel's and Mr Cham's knowledge of certain matters and, impliedly, an allegation that the matters were true.  However both elements can be responded to in a defence.

20                  I agree with the respondents criticism of par 21.  It appears that the applicants seek to rely, either in whole or in part, on the existence of a duty to disclose as part of the contention that the failure to disclose was misleading or deceptive conduct.  Why it is viewed as necessary to allege a duty is not clear: see Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 465-468.  However the reference to "breach of their duty" in par 21 appears to me, at the very least, to cause confusion about what is being alleged, if what is being alleged is a failure to meet the standard of conduct established by s 52.  This paragraph should be repleaded.  As to the suggestion that it was necessary to plead that the silence was intentional (repeated in the respondents' most recent written submissions), I understood that point to have been abandoned earlier (at the hearing on 8 February 2002) in the face of the allegation in par 54 that Mr Cham's silence involved knowing concealment.  If I misunderstand the position I can revisit this ruling.

(e)  loss and damage

21                  Paragraphs 60, 61 and 62 of the most recent claim provide:

“60.     On 15 December 2000 Tyne on behalf of Loxias wrote to Cham, as principal of Curacel, terminating the agreements assigned to it under the Novation Deed.  Loxias was unable to continue to distribute the Therapeutic Products and the Skin Care Products including from stock it was holding as a result of;

            a)         the TGA informing Loxias of the contraventions of the TG Act and regulations referred to in Schedule ‘A’ herein related to:

                        (i)         APR Cream;

                        (ii)        ER Cream;

                        (iii)       Acne and Pimple Gel;

                        (iv)       Antiseptic Gel; and

                        (v)        Curasol 30+ SPF Sunscreen;

            c)         the discovery by Loxias of the other contraventions set out in Schedule A;

            d)         the discovery by Loxias of the fact that the said products did not penetrate the dermal layer of the skin;

            e)         the discovery by Loxias that the removal of hydroquinone rendered the Complexion Powder ineffective in relation to lightening skin pigment;

            f)          the discovery by Loxias that the Complexion Powder did not contain its advertised grapeseed extracts or bearberry-C; and

            g)         the risk of selling products that could involve Loxias in false advertising and prosecution and/or civil suit.

61.       As a result of the representations and silences referred to in paragraphs 8, 11, 13, 28, 32, 34 and 36 amounting to misleading or deceptive conduct to Curatherapy, Tyne and Holmes, Loxias has suffered loss and damage.

Particulars

Loxias was induced to enter into the Novation Deed and waste expenditure in the distribution of the Curacel Products, as well as by Curacel’s misleading or deceptive conduct towards it, by reason of Tyne’s and Holmes’ beliefs in and understandings of the representations prior to the formation of Loxias and referred to in paragraphs 8, 11 and 13 herein.

62.       By reason of the:

            a)         misleading or deceptive conduct of Curacel’

            b)         negligence of Curacel and Cham;

            c)         breach of warranty of Curacel;

            d)         fraud of Cham; and

            e)         breach of duty and fiduciary duty of Cham,

Curatherapy and Loxias have suffered loss and damage as a result of wasted expenditure due to net operating costs as follows:

            i)          product expense;

            ii)         packaging expense;

            iii)        media expense;

            iv)        staff expense;

            v)         plant expense;

            vi)        office expense; and

            vii)       other expense,

a)         Curatherapy

            Total expenses                                                $1,222,874

            Less income                                         $597,464

            Net loss                                               $625,410

b)         Loxias

            Total expenses                                                $1,781,269

            Less income                                         $433,840

            Net loss                                               $1,347,429

AND Curatherapy and Loxias claim:

As against Curacel:

A         Damages pursuant to s 82 of the Trade Practices Act 1974;

B          Damages for negligence;

C         Damages for breach of warranty;

D         Interest; and

E         Costs;

As against Cham:

A         Damages pursuant to s 82 of the Trade Practices Act 1974;

B          Damages for negligence;

C         Damages for fraud;

D         Interest; and

E         Costs;

AND Loxias also claims:

As against Cham:

A         Damages for breach of common law duty as a director; and

B          Compensation in equity for breach of fiduciary duty.”

22                  Counsel for the respondents submit that par 60 of the pleadings remains defective as it fails to allege that the TGA informed Loxias of certain of the alleged contraventions.  There is no allegation that the TGA directed Loxias to cease distribution. The pleadings only allege that the TGA advised Loxias of the fact that there was a risk of selling products that could involve Loxias in false advertising.  It is submitted that it was a voluntary act on Loxias’ part and as such, paragraph 60 should be struck out.  Paragraphs 61 and 62 should be struck out as there is no proper pleading as to how the claimed expenditure came to be wasted.  This was particularly so in respect of Curatherapy because Loxias took over the business.  The respondents also submitted that the inconsistent pleadings in respect of loss and damage are a further reason to award costs on an indemnity basis. 

23                  Counsel for the applicants submits that the complaint about par 60 being defective is baseless.  It is submitted that it was not necessary that TGA direct Loxias to cease distributing the products. It was sufficient that the TGA informed the applicants of the contraventions and for Loxias to make a reasonable commercial decision to discontinue distribution.  The question of whether it was in fact reasonable to make that decision is a question for evidence and pleadings.  It is submitted that the applicants are not required to plead to the actions of the TGA, and it would be inappropriate to require precise particulars of the places, dates, times and substance of each occasion that the applicants were so informed by the TGA.  The products involved have been identified in the pleadings. The applicants submit that complaints about lack of detail about the wasted expenditure are not sustainable as par 61 provides details of the wasted distribution in respect of the distribution of the Curacel products and par 62 also provides details.  It is also submitted that the losses of Curatherapy and Loxias are separately itemised and O 12 r 4(1) has been satisfied.

24                  In my opinion, if the applicants wish to run their case on the basis that it is sufficient for them to prove they were advised by TGA of the matters referred to in par 60 and nothing more (and that the word "unable" in par 60 is to be understood in this way) then they should not be prevented from doing so.  The point raised by the respondents is not, in my opinion, one that would warrant the paragraph being struck out or pleaded in some different way.  To do so could involve prejudgment of the question of causation without any real understanding of the factual context in which the alleged damage was suffered as a result of the pleaded conduct of the respondents.

25                  As to the way wasted expenditure is pleaded in par 62, I am inclined to agree with the criticisms of the respondents.  When reading the pleading, it is not at all clear what expenditure it refers to.  While there is a list of matters each described as an "expense", the list really says nothing about the nature of the loss and how it is linked to the unlawful conduct of the respondents other than in a rolled up and very generalised way.  In addition, bearing in mind that Loxias assumed the business of Curatherapy, it is unlikely their losses would be the same though no attempt is made to distinguish their positions in the pleading.

(f)  Implied terms

26                  Paragraphs 23 and 26 of the most recent claim say:

“23.     Curatherapy made known to Curacel that the Therapeutic Goods and the Skin Care products were required for re-sale as products having the characteristics represented as described in paragraph 8 and, by implication, without the characteristics of those described in paragraph 13.

…

26.       It was an implied term of the Distribution Agreement that the Therapeutic and Skin Care Products were:

            a)         reasonably fit for the purpose of on-sale;

            b)         of merchantable quality;

            c)         compliant with any relevant legislation and or regulations; and

Particulars

The Applicants repeat paragraphs 8 and 13 herein.

The terms are implied under the general law and also, in relation to sub-paragraphs a) and b), by operation of Section 17 of the Sale of Goods Act (Qld).”

The applicants claim there was an implied term that the therapeutic and skin care products were reasonably fit for the purpose of on-sale, of merchantable quality, and complied with the relevant legislation and regulations (see par 26).  Reference is made to s 17 of the Sale of Goods Act 1986 (Qld).  The respondents submit that none of the matters set out in pars 8 and 13 of the most recent claim are properly “purposes” within the meaning of s 17 of the Sales of Goods Act.  These matters are in respect of the ingredients and packaging of the goods, not how the goods are to be used.  Further, it cannot be argued that the alleged silence concerning the matters set out in paragraph 13 involved Curatherapy “making known” a purpose for the goods.  The words following “required for re-sale” should be struck out of paragraph 23 of the claim.

27                  The applicants submit that the pleading alleges unfitness for re-sale, being the purpose for which the goods were supplied.  The particulars identify the characteristics and properties that made them unfit for that purpose.  It does not appear to me that the matters pleaded by the applicants are unarguable or so hopeless as to warrant the pleading being struck out.  It may be that the points made by the respondents will succeed at trial.  However these are issues to be determined at a later point in those proceedings and not now.

(iii)  Security for costs

28                  The respondents seek security on the basis that the remaining applicants (once Mr Tyne has been removed as a party) would be unable to meet a costs order if they are unsuccessful in these proceedings.  The respondents’ estimated legal costs, including any final hearing, are $202,675.54.  The figure is not put in issue by the applicants.  The respondents seek an order for security for costs in the amount of $200,000.00, reduced by any costs now ordered to be taxed and paid forthwith. 

29                  The application for security for costs is advanced on the following basis.  In the most recent claim Loxias is claiming a net loss of $1,347,429 and Curatherapy a net loss of $625,410.  It is also said that Loxias has ceased to trade.  It can be inferred that both applicants are impecunious and unable to meet a costs order.  The respondents draw attention to the fact that the applicants have not filed any evidence about the current financial status of either Loxias or Curatherapy.  In the most recent claim, it is said that the business premises, vehicles, furnishings and equipment of Loxias and Curatherapy was either leased or hired. Counsel for the respondents also drew attention to an allegation pleaded at one point that Mr Tyne's losses included the loss of moneys lent to Loxias from which it can be inferred that the company has insufficient funds to repay the loan. 

30                  The applicants submit the respondents have not established that Loxias would be unable to meet a costs order.  It is submitted that an inference cannot be drawn that the companies are impecunious simply because they ceased trading.  Counsel for the applicants referred to a company search of Loxias which indicated that Loxias had paid up capital of 1.9 million dollars and submitted that if the losses of 1.3 million dollars were taken into account, Loxias would still have $600,000 to satisfy a costs order. 

31                  Counsel for the applicants raised several further matters.  The Court should not order security at least at this point as the respondents have not shown that they have a good defence to the most recent claim.  The applicants submit that without a defence, it is not possible for the Court to consider the usual criteria affecting the exercise of discretion to order security for costs.  They include the public interest (exposing breaches of the TG Act), the applicant’s prospects of success, admissions in the pleadings and whether the respondents’ actions brought about the applicants’ impecuniosity.  The respondents’ claim for security in the sum of $200,000 before filing a defence should be viewed as an attempt to stifle litigation.  Further, if impecuniosity had been established then it was the result of the respondents’ wrongdoing and as a matter of discretion the Court should refuse to order security. If security is to be ordered, the applicant submits that the order should not exceed party/party costs to date on the basis that where a defence has not been filed, the usual practice is to make incremental orders, rather than an order for the whole of the costs of a final hearing:  applicants’ Counsel referred to Ciappina v Ciappina (1983) 70 FLR 287; and Drumdurno Pty Ltd v Braham (1982) 42 ALR 563.

32                  The Court’s power to order security for costs is provided for in s 56 of the Federal Court of Australia Act 1976 (Cth) (“the Federal Court Act”) and O 28 r 3 of the Rules.  Section 56 of the Federal Court Act confers a broad discretionary power which must be exercise judicially.  However, as the applicants are both companies, s 1335 of the Corporations Act 2001 (Cth) is also relevant to the question of security for costs and provides: 

“(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 Act is to be borne by such party to the proceeding as the court, in its discretion, directs.”

In order for the respondents to gain the benefit of this provision it is necessary to demonstrate there is reason to believe that the corporate applicants would be unable to meet a costs order and, in addition, to satisfy the Court that the discretionary power to order security ought to be exercised in the respondents’ favour.

33                  I am not satisfied that security should be ordered at least at this stage.  I am not satisfied that there is credible evidence pointing to a conclusion that Loxias will be unable to meet any costs order if it is unsuccessful.  Moreover even assuming that there was such evidence, I would, at this point, be reluctant to order security when that situation has, on the case alleged by Loxias, been brought about by the conduct of the respondents.  When a point is reached where the issues have been defined with precision (that is, when the statement of claim is in its final form and a defence to it has been filed) I can, if called upon to do so, give further consideration to the question of security (and the form of any security if it is to be provided) having regard to any further evidence about the financial circumstances of the applicants.

 (iv)  particulars

34                  The respondents originally argued that particulars should be provided in relation to pars 19(g) and 34. Those particulars have now been provided.  They are found in schedule A of the most recent claim.  The respondents submit that these ought to have been provided at the outset.

(v)  Costs

35                  The respondents seek costs, on an indemnity basis, in respect of the motions of 3 September 2001 and 23 November 2001, and the costs should be taxed and paid forthwith. 

36                  The first motion, filed on 3 September 2001, set out the respondents’ concerns about the statement of claim in the form it was then in.  The respondents submit that the applicants have failed to cure the defects in the pleadings despite numerous requests and amendments to their statement of claim.  It is submitted that none of the first three versions of the statement of claim addressed the substantive matters raised in the first motion or correspondence sent at that time.  The respondents submit that in analogous circumstances the Court has awarded indemnity costs:  Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR 41-383 and Sammy Russo Supplies Pty Ltd v Australian Safeway Stores Pty Ltd (1998) ATPR 41-641.

37                  The respondents also refer to a directions hearing on 13 August 2001 and that directions were made requiring the legal representatives to advise their clients of the potential cost implications if the dispute about the pleadings continued (including advice to the respondents that if their complaints were not reasonable, indemnity costs could be awarded against them).

38                  The respondents also seek costs, on an indemnity basis, in respect of the notice of motion filed on 23 November 2001 and heard on 8 February 2002.  The respondents’ complain that the applicants have failed to address their complaints about the pleadings.  The respondents submitted that they wrote to the applicants on a number of occasions setting out the alleged defects and requesting further particularisation.  They submitted that the applicants have failed to provide an adequate response and this has resulted in additional expense for the respondents.

39                  The respondents also referred to the applicants’ allegation of fraud against Mr Cham, submitting that there is no foundation for the allegation of fraud and indemnity costs should be awarded for persisting with this claim:  Colgate Palmolive;  Thor v Weekes (1989) 92 ALR 131.  In the alternative, these circumstances are such that the Court should exercise its jurisdiction to order costs personally against the applicants’ solicitor as there is no factual basis for this allegation and persisting with such an allegation amounts to serious misconduct by the applicants’ solicitor:  White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169.

40                  Counsel for the respondents submitted that their clients’ costs in dealing with the pleadings have been thrown away, and seek an order that the applicants pay the costs of and incidental to:

• Preparation of and amendments to any defences;
• Correspondence in respect of the pleadings;
• Directions hearings on 1 August and 13 August 2001

41                  The respondents also seek that the costs are taxed and paid forthwith pursuant to O 62 r 3(3) of the Federal Court Rules.  Rule 3 provides:

“(1)     The Court may in any proceeding exercise its powers and discretions as to costs at any stage of the proceeding or after the conclusion of the proceeding.

(2)       Where the Court makes an order in any proceeding for the payment of costs the Court may require that the costs be paid forthwith notwithstanding that the proceeding is not concluded.

(3)               An order for costs of an interlocutory proceeding shall not, unless the Court otherwise orders, entitle a party to have a bill of costs taxed until the principal proceeding in which the interlocutory order was made is concluded or further order.”

42                  The respondents also submitted that there is still some time before an adequate statement of claim will be filed and further, some time before the matter will proceed to a final hearing such that the respondents costs should be taxed and paid forthwith:  Allstate Life Insurance Co v ANZ Banking Group Ltd (No 14) (unreported, Lindgren J, 18 August 1995);  Marshall v Sheahan [1999] FCA 1249 (unreported, Mansfield J, 10 September 1999). 

43                  In Life Airbag Company of Australia v Life Airbag Company (New Zealand) (unreported 22 May 1998) Branson J noted that where a party has incurred significant costs, which were over and above the usual costs of litigation as a result of the other party not handling the proceedings with competence and diligence then it would be appropriate to order costs to be taxed and paid forthwith.  The respondents submitted that this is such a case, noting that the application was filed some time ago and there have been five sets of amendments to the statement of claim.  It was the inadequate pleadings that led to the respondents’ making two strike-out applications resulting in considerable expense being incurred by the respondents.

44                  The applicants submitted that in respect of the first motion, the respondents did not pursue their strike-out application but opted to consider further amendments to the statement of claim.  It is not conceded by the applicants that if the application was heard and determined, the respondents’ application to strike out the proceedings would have succeeded.  The applicants submitted that it would have been more likely that further particulars would have been ordered, which could have been provided without the costs of filing a further notice of motion. 

45                  The applicants also submitted that the claim is complex and the amendments were of the usual kind found in a complex claim.  The respondents have not pleaded and when they do, there will be no costs additional to those that would have been incurred if the new matters had been initially pleaded.  (In the applicants’ first set of submissions, the applicants conceded that the costs directly resulting from the amendments should be paid on a solicitor/client basis).

46                  In relation to the motion of 23 November 2001, the applicants submitted that the second further amended statement of claim was not objectionable in terms of allowing the respondents to file a defence whilst the third further amended statement of claim was drawn to include Mr Tyne as an applicant and at that time, the opportunity was taken to address some of the respondents’ complaints.  The hearing on 8 February 2002 did not result in the striking out of the claim.

47                  However, after these submissions were made and immediately before a hearing scheduled on 23 April 2002, counsel for the applicants and counsel for the respondents agreed that further submissions on the question of costs could be made after this judgment was given on outstanding issues. 

Associate:

Dated:              14 June 2002

Attachment A

The “therapeutic products” manufactured or caused to be manufactured by Curacel include the following products:

APR Cream

Acne and Pimple Gel

ER Cream

VR Gel

SP Cream

Antiseptic Gel

Curasol SPF 30+ Sunscreen

The “skin care products” manufactured or caused to be manufactured by Curacel include the following products:

Complexion Gel

Complexion Powder

Complexion Day Cream

Complexion Night Cream