FEDERAL COURT OF AUSTRALIA

Loxias Technologies Pty Ltd v Curacel International Pty Ltd [2002] FCA 1473

Breen v Williams (1996) 186 CLR 71 cited

Johnson Tiles Pty Ltd v Esso Australia Ltd (2000) 104 FCR 564 referred to

LOXIAS TECHNOLOGIES PTY LTD & CURATHERAPY DISTRIBUTION PTY LTD v CURACEL INTERNATIONAL PTY LTD & BILL ELLIOT CHAM

N 166 of 2001

MOORE J

28 NOVEMBER 2002

ADELAIDE (VIA E-COURT)

THE COURT ORDERS THAT:

1.                  Paragraphs 56, 57 and 58 of the Statement of Claim be struck out.

2.                  Paragraphs 3.4.2, 8.1, 8.2.2, 8.4.2, 8.4.6, 12, 13.2, 13.3, 18.3, 19.4, 21.1, 26.1, 27.2, 29.4, 30, 32.5, 32.7, 37.1 and 37.2 of the Defence be struck out.

3.                  The respondents file and serve an amended defence within 14 days from the date of this judgment.

4.                  General discovery is to be given by each party filing and serving a list of documents within 28 days from the date of this judgment.

5.                  Inspection of discovered documents is to take place before 30 January 2003.

6.                  The matter be listed for directions at 9.30 am on 3 February 2003.

7.                  Costs are reserved.

8.                  Liberty to apply.

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

REASONS FOR JUDGMENT

1                     There remains an issue about the pleadings in this matter.  In an earlier judgment concerning an earlier version of the statement of claim, the history of the matter was set out in some detail: see Loxias Technologies Pty Ltd v International Pty Ltd [2002] FCA 753.  I will not repeat what was said in that judgment concerning the background, the history of the proceedings in the Court and generally the claims made by the first applicant Loxias Technologies Pty Ltd (“Loxias”) and the second applicant Curatherapy Distribution Pty Ltd (“Curatherapy”) against the first respondent Curacel International Pty Limited (“Curacel”) and the second respondent Mr Bill Cham (“Cham”). 

2                     There remains an issue about two aspects of the statement of claim.  The first is a claim against Cham which, while initially said to involve a breach of a common law duty as a director of Loxias, is now put as a breach of a fiduciary duty as a director.  This duty would be reflected in paragraphs 56, 57 and 58 of the fifth further amended statement of claim (filed pursuant to orders made 14 June 2002) on the basis that, if leave to amend was given, the allegation in paragraph 56 of a breach of a common law duty would become an allegation of a breach of a fiduciary duty.  Approached on that basis, paragraphs 56 to 58 involve, in substance, an allegation that Cham as a director of Loxias and a fiduciary in relation to that company, had a duty to disclose what he knew about Curacel products.  The substance of what is alleged is that Cham knew that the products did not have the characteristics and attributes they had been represented as having.  Accordingly, he was obliged to disclose the deficiencies to Loxias.  As the case is now formulated, what is asserted, in substance, is a duty of Cham as a fiduciary to take steps to disclose his knowledge to Loxias.

3                     Viewed this way, the applicants confront the difficulty that the obligations of fiduciaries are, in Australian law, proscriptive and not prescriptive.  So much has been made clear by the High Court in its judgment in Breen v Williams (1996) 186 CLR 71.  To the extent that paragraph 58 seeks to characterise the duty as prescriptive, by asserting that Cham should not have put himself in a position of conflict which required him to advise Loxias not to distribute the products, it seeks to avoid this result.  However, one might ask what were the consequences to Loxias if Cham breached that obligation and put himself in that position.  The answer, it seems to me, is nothing.  It is not suggested elsewhere in the pleadings that by Cham placing himself in that position, Loxias suffered damage.  The pleading, while in form an allegation that a position of conflict arose (perhaps a prescriptive obligation), is a pleading that, in substance, Cham was obliged to disclose the information he had about the products.  In my opinion paragraphs 56, 57 and 58 should be struck out.  While applicants should be given the opportunity of pleading cases involving allegations of law when the law is uncertain: see Johnson Tiles Pty Ltd v Esso Australia Ltd (2000) 104 FCR 564, I do not apprehend that there is any real prospect of this aspect of the claim against Cham succeeding.  In the Johnson Tiles case, French J considered the principles in relation to pleadings, and said, at 585-586:

Where a pleading “discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading” or “has a tendency to cause prejudice embarrassment or delay in the proceeding” or “is otherwise an abuse of the process of the court” the Court may order that the whole or any part of the pleading be struck out (Order 11 rule 16).  A pleading will disclose no reasonable cause of action if it is “so clearly untenable that it cannot succeed” – General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129.  The determination whether a statement of claim discloses a reasonable cause of action will be made on the assumption that the facts alleged are true – Empire Shipping Co Inc v Owners of the Ship “Shin Kobe Maru” (1991) 32 FCR 78.

The Court exercises a degree of restraint in responding to the contention that the pleading is so fatally flawed that it should not see the light of day at a trial of the action.  It is not enough that the pleaded case is weak or has a low prospect of success – Coe v Commonwealth of Australia (1979) 53 ALJR 403.  The Court should not shrink from striking out an untenable pleading because it thinks that argument is necessary to demonstrate its deficiencies – General Steel at 130 (Barwick CJ).  On the other hand an application to strike-out which involves prolonged and serious argument should only be entertained if the judge not only harbours doubt about the soundness of the pleading but also is satisfied that striking out will avoid the need for a trial or substantially reduce the burden of its preparation – Williams & Humbert Ltd v W & H Trademarks (Jersey) Ltd [1986] 1 AC 368 at 436 (Lord Templeman), applied in Sun Earth Homes Pty Ltd v Australian Broadcasting Corporation (1990) 45 FCR 265.

4                     It is desirable that this matter proceed with considerably more expedition than it has to this point.  The applicants have had several opportunities to formulate these issues and, in my opinion, they should not be given a further opportunity to reformulate their claims against Cham as a director.  That is not to say, of course, that they will be denied the opportunity to maintain a claim against Cham which is presently pleaded and not the subject of challenge. 

5                     I now turn to paragraph 61 of the statement of claim in relation to which the respondents submit they are entitled to further particulars.  The original submission by the respondents was based on a false assumption that the paragraph raised a question about the entitlement of Loxias to terminate certain agreements.  An amendment proposed by the applicants makes clear that the paragraph involves an allegation that Loxias was unable to continue to distribute the various products for the reasons particularised.  That amendment should be allowed.  In my opinion the pleading, as it presently stands but taking into account the proposed amendment (by assuming the first two lines of the paragraph are to be deleted) makes sufficiently clear the contention of the applicants. 

6                     The respondents also continue to complain about the loss and damages as particularised.  It is now put in terms of wasted expenditure which is now particularised.  This, in my opinion, is sufficient. 

7                     I now turn to the issues concerning the defence.  I should, at this stage, make two general comments.  The first is that the respondents take the point that the submissions by the applicants about deficiencies in the defence are not founded on any notice of motion nor has it been the subject of prior correspondence between the respective solicitors.  I should make it plain that this response is an entirely inappropriate one.  This litigation has been on foot now for 21 months.  Without, at this stage, attributing responsibility to any party, this is entirely unsatisfactory for what probably is not terribly complex litigation.  At the last directions hearing I made it tolerably clear that I intended the matter to proceed on the basis that the respondents could articulate further criticisms about the statement of claim in conjunction with the applicants raising issues about the defence.  As I understood it, this procedure was agreed to by the parties.  The following appears in the transcript: 

HIS HONOUR:   Well, one thing I could do now is endeavour to resolve the pleading issues I would hope finally by requiring submissions from both sides, and I rather think that it can be done contemporaneously, dealing with the adequacy of the remaining contentious areas of the statement of claim and also enabling Mr Evans to say whatever he wants to say about the defence and obviously for you to respond as well, Dr Dempsey.  Is there any reason why it cannot be done at the same time, rather than perhaps as it might ordinarily be done sequentially?

COUNSEL FOR THE RESPONDENTS:   Not that I can foresee, your Honour.

HIS HONOUR:   Mr Evans?

COUNSEL FOR THE APPLICANTS:   No, your Honour.

 and later:

HIS HONOUR:           I was going to suggest that within a further seven days, Mr Evans puts on his submissions responsive to yours and also his submissions impugning your defence.  Then within a further seven days, you, Dr Dempsey, can answer Mr Evans' criticisms of your defence and then I will give a ruling.  So we are talking about, hopefully, a regime that at least the submissions would be in within 21 days.  I mean, I can make it tighter if you wish but - - -

COUNSEL FOR THE RESPONDENTS:   That sounds good, your Honour.  I just wanted to check from my notes, is that seven days from the site having been established, or seven days all up?

8                     I did not expect that those representing the parties would take such a narrow approach to the conduct of commercial litigation in this Court by suggesting that submissions about deficiencies in the defence might not be made because there is no notice of motion seeking to have the defence set aside either in whole or in part.  Parties can either cooperate with each other and, more importantly, the Court, or can make, and persist in making, objections which might be seen as narrow in their focus, capable of being viewed as obstructive and conceivably even made with the purpose of delaying the proceedings, though I presently doubt that thus underlies the approach adopted.  I accept that the legal representatives may simply have taken the view that the arguments raised of this type were raised in the interests of their clients.  If so, I presently do not see how the position of the respondents is advanced.

9                     Secondly, I am concerned about the response of the respondents to the applicants' claims.  Those claims may ultimately prove to be without substance.  However the applicants are entitled to prosecute them in the expectation that the proceedings will progress with comparative expedition.  My concerns can perhaps be illustrated by the first issue raised by the defence which is first pointed to by the applicants in their critique of it.  In the statement of claim it is alleged that certain representations were made about the products in question.  One was that Cham had developed Curaderm as a treatment for skin cancer.  It is also alleged that Cham represented that Curaderm used a revolutionary carrier system he had developed and its effects are described.  It is then alleged in the statement of claim that Cham represented that the carrier system contained “mucopolysaccharide”.  This is met by a denial in the defence on the grounds that “Cham…represented “mucopolysaccharide” to be descriptive of a family of molecules and not a particular compound.  What is intended by this response is entirely obscure.  However it presently appears to me to be a nonsensical and pernickety response.  The real answer appears to lie in the remainder of the response in that paragraph of the defence that Cham represented that Curaderm had previously contained mucopolysaccharides but no longer did.  If that is the true defence of the respondents to the allegation that Cham made representations that Curaderm contained mucopolysaccharide then there is, fairly clearly, a joinder on the factual issue about what Chan said.  The earlier response I have just adverted appears to add nothing. 

10                  A range of other detailed criticisms are made by the applicants about the defence.  There is no particular utility, as I presently perceive the stage this litigation has reached, in engaging in analysis of each of those criticisms and the response.  However, I accept that it is generally inappropriate for the respondents to assert, as they do on several occasions in the defence, that there is lack of sufficient particularity to enable the respondents to determine whether or not the allegations are true or false.  This can be illustrated by one of the other matters pleaded in the statement of claim about what Cham represented.  It is alleged that Cham represented that the various products were of considerably greater efficacy than like products on the market which did not penetrate the dermal layer of the skin.  This is met firstly by denial and secondly a suggestion there is a lack of particularity to enable the respondents to determine whether the allegations are true or false.  The latter aspect of this answer appears to misunderstand the case pleaded.  It is that certain representations were made.  Plainly enough a respondent can admit that the representations were made, deny they were made or seek to say, if it is material, that a representation dealing with that subject matter was made but not in those terms.  It is simply inappropriate, in my opinion, to answer the allegation on the basis that it was not sufficiently particularised to determine whether or not the allegation was true or false.  In any event, there is a plain tension between a defence denying that such a representation was made and the contention that the respondents are, effectively, unable to respond.  The respondents appear to accept these matters in relation to this particular part of the defence in their submissions in reply.  Nonetheless, what I propose to do is strike out of the defence each instance when this formulation is used viz. there is insufficient particulars.  For similar reasons I propose to strike out any allegation in the defence that inquiries by the respondents are continuing and the respondents remains uncertain as to whether the allegations are true or false.  This is, without more, an untenable position when the litigation has been on foot for almost two years. 

11                  What I intend to do is direct that the respondents replead the defence in conformity with what has been said to this point and, in addition, make such changes as they are minded to having regard to the various criticisms of the defence by the applicants.  If they fail to respond to valid criticism, this is likely to have costs implications.  If it is necessary I will address at a later stage any residual deficiencies in the defence that may be identified by the applicants. 

12                  In the meantime I propose to move on to the question of discovery which I understand to be sought by both parties having regard to the clear statements made by the representatives of the parties at the directions hearing on 11 October 2002.  While ordinarily discovery would be ordered after the pleadings have closed, there is a real risk, in this case, the matter will be delayed by several further months while the pleadings are settled.  In addition, generally the practice in this Court is to require that discovery be given by reference to categories of documents rather than general discovery.  However that approach has been the subject of criticism along the lines that disputes about categories of documents can be as time and resource consuming as requiring general discovery to be given.  Given difficulties evident in these proceedings to this point, I apprehend that a process requiring categories to be identified, discussed and agreed to will delay the matter even further.  What I propose to do in this case, is to order general discovery.  I will direct that general discovery be given by both the applicants and the respondents by each filing and serving lists of documents within 28 days and directing that inspection of documents take place before 30 January 2003.  If this time frame is too burdensome, the parties can exercise the liberty to apply. 

13                  I have received detailed submissions on the question of costs arising from the various interlocutory hearings concerning the pleadings.  The only order I propose to make at this stage in relation to costs is to reserve the question of costs. 

Associate:

Dated:              28 November 2002