FEDERAL COURT OF AUSTRALIA

Capital Webworks Pty Ltd v Adultshop.com.limited [2002] FCA 1420

COSTS – security for costs – application to vary order for further security – new causes of action – arguable public interest in litigation – applicant a $2.00 company unable to borrow – no material change of circumstances or discovery of relevant new material – no disclosure of persons standing behind company

Federal Court of Australia Act 1976 (Cth) ss 56, 56(1), 56(3), 56(4), 56(5)

Federal Court Rules O 13 r 2, r 2(2) and r 3(2), O 28 r 5(1), r 5(2) and r 5(3)

Darling Harbourside (Sydney) Pty Ltd v Sanirise Pty Ltd (17 May 1996, Beaumont, Carr, Sackville JJ, unreported) referred to

Truth about Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd [2001] FCA 1603 referred to

Brimaud v Honeysett Instant Print Pty Ltd (Supreme Court of New South Wales, Equity Division, 19 September 1988) referred to

Cameron’s Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46 referred to

Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40 – 972 referred to

Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 followed

Jet Corporation of Australia Pty Ltd v Petres Pty Ltd (1983) 50 ALR 722 considered

Sent v Jet Corporation of Australia Pty Ltd (1986) 160 CLR 540 considered

Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 considered

CAPITAL WEBWORKS PTY LTD v ADULTSHOP.COM.LIMITED and MALCOLM DAY and MELBOURNE INFORMATION TECHNOLOGIES AUSTRALIA PTY LTD

W49 of 2000

RD NICHOLSON J

20 NOVEMBER 2002

PERTH

THE COURT ORDERS THAT:

1.                  The applicant’s notice of motion dated 29 August 2002 be dismissed.

2.                  The applicant pay the third respondent’s costs on the motion.

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

REASONS FOR JUDGMENT

1                     On 4 February 2002 it was ordered as follows:

“(a)     the applicant provide further security for costs of the third respondent up to and including the briefing and reviewing of the draft reports of two experts for the third respondent in the amount of $35,000 by way of payment into Court with liberty to the third respondent to apply for further security through to trial thereafter (“the further Security Order”);

 (b)      the application be stayed until compliance by the applicant with the Security Order;…”

The applicant now brings a motion seeking that the further security order be set aside pursuant to O 28 r 5 of the Federal Court Rules.  That provides:

“5(1)   Where the Court orders that the applicant provide security for costs, it may order-

(a)               that the proceeding on any claims by the applicant for relief be stayed until security is provided; or

(b)               that if the applicant fails to comply with the order to provide security within the time limited in the order, the proceeding be thereafter stayed or dismissed.

 5(2)    Subject to sub-rule (3), the Court may set aside or vary any order made under this Order.

 5(3)    Where a proceeding stands dismissed pursuant to an order under this Order, that order shall not be set aside or varied except in special circumstances.”

Sub-rule (3) has no application in the circumstances of this proceeding.  It is sub-rule (2) which is relied upon.

2                     The further security order followed orders made on 23 August 2000 (“the original security orders”) staying the applicant’s application for an interlocutory injunction until compliance with security orders by which the applicant was to provide security for the costs of the first and second respondents up to and including the completion of discovery in the amount of $30,000 and a further such amount in respect of the third respondent.  On 3 April 2001 the Court ordered the applicant to provide the security the subject of these orders.  The sum of $60,000 was paid into court on 10 April 2001.  The application for the further security order came about following completion of discovery.  Both the original security orders and the further security order were made after contested hearings.

3                     The provisions in the Federal Court Rules to which reference has been made should be read in conjunction with s 56 of the Federal Court of Australia Act 1976 (Cth) (“the Act”).  Section 56(1) gives the power to the court to order an applicant in a proceeding to give security for the payment of costs that may be awarded adversely to the applicant.  Section 56(3) provides that the court or a judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or form in which, the security is to be given.  Section 56(4) provides that if security, or further security, is not given in accordance with an order made under the section, the court or a judge may order that the proceeding or appeal be dismissed.  The section itself is expressed not to affect the operation of any provision made by or under any other Act or by the rules of the court for or in relation to the furnishing of security:  s 56(5).

4                     The applicant’s submissions state that the ordinary practice in respect of setting aside or varying or discharging an order of a substantive nature made after a contested hearing in contemplation that it would operate until a final disposition of the proceedings, must be founded on a material change of circumstances since the original application was heard or the discovery of new material which could not reasonably have been put before the court on the hearing of the original application:  Darling Harbourside (Sydney) Pty Ltd v Sanirise Pty Ltd (17 May 1996, Beaumont, Carr, Sackville JJ, unreported), Truth about Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd [2001] FCA 1603.  In Darling Harbourside at par 13 Carr J relied upon the statement of principle by McLelland J in Brimaud v Honeysett Instant Print Pty Ltd (Supreme Court of New South Wales, Equity Division, 19 September 1988) to the above effect.  This statement of principle finds common ground with the respondent.  The dispute between the parties concerns the application of the principle to the circumstances of the case. 

Applicant’s contentions

5                     The submissions for the applicant commence by stating that when considering the making of the further security order the Court did not have before it any evidence from the applicant concerning the effect of an order for security of costs upon the applicant.  In support of the present application the applicant brings forward an affidavit of one of its company directors, Mr Sweeney.  The affidavit is substantially directed towards the circumstances in which the claim by the applicant is said to have arisen.  I allow the objection to par 15 of the affidavit.

6                     The affidavit also provides evidence that the applicant has received advice there might be other further or alternative causes of action to be pleaded against the third respondent.  These involve claims for negligence and misleading and deceptive conduct.  It is proposed that the causes of action will be founded on the premise that the third respondent was not entitled to permit any party to obtain the registration of a domain name even if the registration of the domain name had lapsed.  The applicant’s rights are not founded simpliciter on the fact of the registration of the domain name but rather on the fact that having been permitted to register it, the applicant went on to use it and used it successfully to a point where it was the fourteenth most visited site of such kinds.

7                     The case for the applicant contends that a document discovered by the respondent (and hence not available prior to the making of the further security order) establishes evidence that the first and second respondents were aware of the value of the domain name to the applicant, having considered the payment of a significant sum to the applicant to purchase the name.  This is advanced for the applicant as a relevant material change of circumstances.

8                     The arguments for the applicant in support of its motion are therefore:

(1)               New causes of action:  Firstly, there are the proposed new causes of action.  It is submitted for the applicant that when the order for further security of costs was made and the application stayed until compliance, the applicant was prevented from taking steps to amend its claim.  It is to be noted, however, that so far as the amendment is expressed to be derivative from the discovery of documents in the respondents’ discovery, that had not occurred at that point in time.  It is also to be noted that in articulating this argument counsel for the applicant stated that “what is apparent is that there has been a recasting based on material that was perhaps in existence but to which the applicant and their advisors had not adverted” (emphasis added). 

(2)       Actions of third respondent causative of impecuniosity:  Secondly, it is submitted that the applicant’s inability to meet from its own funds any order for security for costs and its financial predicament are the result of the actions of inter alia the third respondent.  This was because after the third respondent cancelled the applicant’s registration of the domain name and the first respondent became registered as the holder of that name on or about 30 March 2000 the applicant lost the business it had been carrying on from the website and could not sell any further products from that site. 

(3)       Interests of justice:  Thirdly, it is submitted that the applicant has had great difficulty borrowing further funds and will be unable to continue to prosecute its claim if the order for the security costs were not set aside or varied or if a springing order were to be made.  Mr Sweeney’s evidence was that the applicant had been able to borrow the first $60,000 required by the original security orders but has had great difficulty borrowing further funds.  On 14 August 2002 the applicant received advice from its solicitors that a deposit of a further $20,000 to cover legal costs was required by 21 August 2002 failing which the applicant’s solicitors would cease to act.  The applicant has managed to obtain short-term emergency funding to meet this requirement but will require access to the $60,000 lodged in court in order to repay the loan and pay ongoing legal costs.  His evidence was that if a springing order is made and if the further security order is not set aside or varied, the applicant will lose its right of action and its lender will lose the $60,000 already advanced.  It is submitted for the applicant that the interests of justice would not be served by such an outcome. 

It is to be noted that although this evidence and the submissions address the utilisation of the moneys paid into court, the notice of motion is restricted to the setting aside of the further security order. 

(4)       Public interest:  Fourthly, it was said for the applicant that the hearing of the action involves a matter of public interest.  The issue of public interest is said to be the rights of persons who have accumulated goodwill in the use of a domain name.  Both in connection with this argument and generally, the applicant relies on the authority of Cameron’s Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46 for the proposition that where the granting of security would stifle an action which was arguable and legitimately instituted, security will not normally be awarded, especially where it is in the public interest that the action proceed. 

Respondents’ contentions

9                     Argument for the third respondent is supported by reference to the affidavit of M/s Fielding, a solicitor employed by the solicitors for the third respondent.  She expresses the opinion that no new material has been discovered which could not reasonably have been put before the Court on the hearing of the application for the further security order.  She attests that in relation to the proposed further re-amended statement of claim exhibited to the affidavit of Mr Sweeney, the applicant had made no attempt during the intervening seven months to obtain either the consent of the third respondent to the filing of that claim or the leave of the Court to the same:  see O 13 r 2 and 2(2) and 3(2) of the Federal Court Rules.  She states in her opinion that the further alternative causes of action arise from the same facts presently pleaded and are accordingly matters which could have reasonably been put before the Court on the hearing of the original application.  (No objections were taken to this affidavit although some of the evidence of the deponent would appear to have character of a legal conclusion and be in the nature of argument).

10                  In relation to the public interest contention for the applicant M/s Fielding’s evidence is that the potential for the proceedings to affect the law of the internet is limited given that the third respondent’s ability to register applicants for domain names derives from a contractual agreement with a non-profit organisation formed by the United States government to administer the internet space.  In relation to the Court’s general discretion in the matter M/s Fielding stated that the applicant has not tended any evidence to the Court concerning the financial status of the persons standing behind the litigation.  She goes further and states in relation to an affidavit of Mr Yuncken sworn on 24 January 2002 that the matters there detailing the financial status of the applicant prior to February and March 1999 contradict the evidence of Mr Sweeney that the applicant’s impecuniosity was the result of the respondents’ actions.  Further, she states they show that the applicant was impecunious prior to the conduct of the third respondent which the applicant complains of in February and March 1999. 

11                  In oral submissions counsel for the third respondent sought to answer the principal submissions for the applicant in the following way:

Re (1):  It is submitted that there is nothing put to the Court to explain in any satisfactory terms why the matters now sought to be raised as new causes were not put previously.  It is said that the new causes arise out of the same material and are not based on an identified material change of circumstances particularly in the sense of material which could not reasonably have been put to the Court previously. 

Re (2):  It is submitted that whatever the consequences being suffered by the applicant, it is not a consequence of actions of the third respondent but rather the use of the name by the first respondent.  Put in another way, the cause of the applicant’s complaints is said to be the usage by the first respondent, not the registration of the domain name by the third respondent.  Therefore, the actions of the third respondent are not either a new matter or a matter supporting the applicant’s case. 

Re (3):  In relation to the applicant’s financial circumstances, it is submitted there is no evidence of the financial position of the applicant at the time the name came to be allocated (as it were) by the third respondent to the first respondent.  It is said it is one thing to say the party who claims to have invested in advertising and efforts to promote and use the domain name might be prepared to pay a capital sum for it but it is another to say the financial circumstances of the applicant are attributed to what has happened in relation to the registration of the domain name.  The submission is that there is no evidence that the applicant’s impecuniosity arose out of the very acts which the applicant is seeking damages in respect of:  Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40 – 972 at 50, 637. 

Re (4):  It is submitted that there is no public interest at issue but rather a private law right. 

12                  In relation to the general discretion, the need for those who stand behind a company to accept the risks and burdens of the proceedings to meet an application for security for costs was emphasised:  Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1.  It is submitted the absence of such information in the present circumstances mitigate in any event against the exercise of the discretion to discharge the order.

13                  In summary then, the contentions for the third respondent are that the motion should fail because it is not brought on a basis which establishes the requirement that there be new information not previously available and, in any event, the order should not be varied because of the financial circumstances of the applicant.

Reasoning

14                  I accept the submission for the third respondent that the case brought for the applicant in support of the motion is not founded on a material change of circumstances or the discovery of new material which could not reasonably have been put before the Court on the hearing of the original application.  The discovered piece of information disclosing awareness by some respondents of the value of the applicant’s alleged then right is not a new circumstance out of which the possibility of the pleading of the new proposed causes of action emerged.  It is arguably evidence relevant to knowledge of the value of the right but not evidence giving rise to the new causes of action.  The motion is therefore not founded on evidence of the character which can satisfy the established test for variation of an order for security for costs.

15                  The public interest in the action cannot in my view be measured entirely by reference to whether there is a public right at stake.  There may be a public interest in the determination of the application of a private right in an area of commercial activity of wide private interest:  cf Jet Corporation of Australia Pty Ltd v Petres Pty Ltd (1983) 50 ALR 722; Sent v Jet Corporation of Australia Pty Ltd (1986) 160 CLR 540 at 217; Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 at 314 followed in Cameron’s Unit Services Pty Ltd at 52.  However, whatever that degree of interest is here, it is outweighed by other circumstances.

16                  The financial circumstances of the applicant are such that it is material that there is no new evidence of material change in relation to that condition which can assist the applicant.  It is correct that the applicant remains as a $2.00 company and that the assets of those who stand behind it has not been made known to the Court.  It remains the circumstance that the most recent annual returns publicly available at the time of the original application, being annual returns for 1993 and 1994, disclosed liabilities of $5.3m.  It is not established that the third respondent’s alleged actions alone were causative of the applicant’s impecuniosity. 

17                  On the exercise of the general discretion I also have in mind that the Full Court (Sheppard, Morling and Neaves JJ) said in Bell Wholesale at 4:

“In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors, or, as in this case, beneficiaries under a trust) are also without means.  It is not for the party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.”

I can see no reason why this principle should not equally affect the discretion sought to be invoked to vacate an existing order for security of costs.

18                  In those circumstances I do not consider that it is properly open to exercise the discretion to set aside the further security order. 

Conclusion

19                  It follows that the applicant’s notice of motion must be dismissed.

Associate:

Dated:              20 November 2002