FEDERAL COURT OF AUSTRALIA

Shearpond Pty Ltd v Atune Financial Solutions Pty Ltd (No 2) [2013] FCA 716

THE COURT ORDERS THAT:

1.    The applicant’s Interlocutory Application filed 1 July 2013 be dismissed.

2.    The respondents pay the applicant’s costs of that application.

3.    All parties make standard discovery by 18 October 2013.

4.    The applicant file and serve its lay affidavit evidence by 8 November 2013.

5.    The respondents file and serve their lay affidavit evidence by 29 November 2013.

6.    The proceeding be listed for directions at 9.30 am on 6 December 2013.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    On 17 July 2013, I dismissed an interlocutory application filed by the applicant on 1 July 2013, and required the respondents to pay the costs of that application. These are my reasons for having done so.

2    In the proceeding, which was commenced on 3 April 2013, the applicant, Shearpond Pty Ltd, makes allegations of breach of contract, intentional interference with contractual relations and unconscionable conduct in breach of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1999 (Vic). The case in contract is advanced against the first respondent, Atune Financial Solutions Pty Ltd (“AFS”), the intentional interference case is advanced against the second and third respondents, Aaspire Pty Ltd (“APL”) and Link Administration Holdings Pty Ltd (“Link”), respectively, and the unconscionable conduct case is advanced against all three respondents.

3    It is established on the pleadings that, on or about 21 November 2000, the applicant and AFS entered into a royalty agreement, by which AFS agreed to pay royalties to the applicant in relation to revenues received by it from the licensing of something described in that agreement as “the System”. On 1 May 2007, AFS (which by then had become a member of the Link group of companies) granted to APL (incorporated on 30 April 2007 and also a member of the Link group of companies) a licence to use and commercially to exploit the System throughout the world for an initial term of 25 years. The only revenue received by AFS in relation to this licence was a one-off licence fee of $1,000,000.

4    In its contract case, the applicant alleges that the royalty agreement of 21 November 2000 contained certain implied terms, namely –

(a)    during the term of the Royalty Agreement AFS would license the use of the System on arms length commercial terms (Arms Length Term);

(b)    each party would do all things necessary on its part to enable the other party to have the benefit of the Royalty Agreement (Co-Operation Term);

(c)    in exercising its powers and performing its obligations under the Royalty Agreement, each party would act in good faith (Good Faith Term).

(d)    further to sub-paragraph (c), or in the alternative, AFS was obliged to attempt in good faith to market the System for licence to superannuation administration businesses and related end users (Marketing Term).

These allegations are denied by the respondents.

5    The applicant alleges that, by reason of – and by the terms of – the licence granted by AFS to APL in May 2007, and the decision of the former, made at about the same time, to cease to market the System to third parties, AFS breached each of the implied terms referred to above. The applicant alleges that it has suffered the following losses as a result of AFS’s breaches of contract:

(a)    the difference between the net present value of the Royalty Payment Shearpond would have received, or alternatively would continue to receive, had the APL Licence been entered into consistently with the Arms Length Term, less the amount paid to Shearpond in respect of the APL Licence; and/or

(b)    the difference between the amount paid to Shearpond in respect of the APL Licence and the net present value of the amount that Shearpond would have received over the term of the Royalty Agreement if AFS had continued to offer the System for licence to superannuation administration businesses and related end users over the term of the Royalty Agreement; and/or

(c)    the amount that Shearpond would have received if AFS had offered the System for licence in accordance with the Marketing Term.

That is the extent of the applicant’s case in contract against AFS.

6    The applicant proceeds to make the following allegations in its Statement of Claim:

18.    It was a term of the APL Licence that APL indemnified and agreed to keep AFS indemnified against any and all claims, actions, demands, losses, liabilities, costs and/or expenses which AFS incurred or was liable for in connection with any and all claims, actions, damages, losses, liabilities, costs, and/or expenses arising from, inter alia, the grant of the APL Licence or use of the System by or on behalf of APL (Indemnity Term) [Clause 8.4].

19.    The remedies claimed by Shearpond against AFS constitute a claim, action, demand, loss, liability, cost or expense which AFS has incurred or is liable for in connection with a claim or action arising from the grant of the APL Licence or use of the System by or on behalf of APL, for the purpose of the Indemnity Term.

20.    In the premises, Shearpond is entitled to a declaration that pursuant to the Indemnity Term APL is liable to indemnify AFS in respect of the liability of AFS to Shearpond alleged in this proceeding.

From the terms of their Defence filed immediately before the hearing of the current interlocutory application, it is clear that the respondents accept that the licence operating as between AFS and APL did contain an indemnity at least in terms substantially as expressed in para 18 of the Statement of Claim. It is also clear, however, that paras 19 and 20 of the Statement of Claim will be contentious.

7    Although the Statement of Claim was filed only on 1 July 2013, for present purposes the allegations which it relevantly contained corresponded with those which had been set out in the applicant’s Fast Track Statement filed when the proceeding was commenced on 3 April 2013. The proceeding came before the court in a scheduling conference on 24 May 2013, at which time senior counsel for the applicant referred to his client’s application for a declaration as to APL’s liability to indemnify AFS under the licence agreement of May 2007. Counsel said that this claim was important because the applicant had been informed by the respondents that its case against AFS was a case “against a company that has no assets”. According to counsel, that explained the applicant’s choice to join Link, to include allegations of intentional interference with contractual relations and to seek a declaration as to the operation of the indemnity.

8    The proceeding came before the court for directions on 14 June 2013. Senior counsel for the applicant handed up a minute of the orders which he then sought, one of which was that the applicant file and serve an interlocutory application as to whether the court should determine, as a separate question, the issue raised by the indemnity claim as then expressed in the Fast Track Statement. Counsel said that the applicant proposed that the court should proceed in that way. The point at stake, he said, was purely one of construction, and would not require the calling of evidence. Counsel indicated that, if the point were decided favourably to the applicant – that is, if it were held that APL was contractually obliged to indemnify AFS – there was “a very high likelihood” that those aspects of the applicant’s case which involved allegations of interference with contractual relations and unconscionable conduct would “fall away”. Those allegations had been made only because of the applicant’s own understanding, generated by something which had been said on behalf of the respondents, that AFS had no assets. If APL were obliged to indemnify AFS, however, that would not be a concern, since the liquidator of AFS, who would presumptively in due course be appointed, would be effectively obliged to make a claim under the indemnity if the court had, by then, made a declaration in the terms sought by the applicant.

9    Critical to this line of reasoning, of course, was the premise that APL itself had assets. The applicant did not know that this was the case; nor, if APL did have assets, did the applicant know the extent of those assets. However, there would self-evidently have been no point in the applicant seeking a declaration as to APL’s obligation to identify AFS if the former, like the latter, was without assets. Senior counsel for the applicant made that premise explicit on 14 June 2013 when he said:

Part of the – substantially the reason that they are there is because (1) we think there is a reasonable basis to make such an allegation against the third respondent, but more directly the motivation for making that claim, over and above the breach of contract claim, is the one that often motivates talks of interference claims, and that we have been told that the first respondent has no assets. So we understand the second respondent has assets and they’re – if their obliged to indemnify the first respondent, then from our perspective that concern goes away.

Senior counsel for the applicant indicated that he had spoken to counsel leading for the respondents, who had informed him that the respondents had not, at that stage, come to a firm view as to the attitude which they would take to the application for preliminary determination, but there was no suggestion that the applicant was not entitled to make the application which was foreshadowed on its behalf nor that the procedural directions proposed in that regard were inappropriate.

10    At the conclusion of the directions hearing on 14 June 2013, I made orders which included the following:

The applicant file and serve an interlocutory application in respect of whether or not the Court should determine, as a separate question, the issue presently identified in section C.4 of the fast track statement and fast track response and any evidence in support of such an application by 24 June 2013.

11    As it happened, the applicant did not make its interlocutory application until 1 July 2013, but nothing turns on that circumstance. What is important is that, from 14 June 2013 at least, the respondents were aware that the utility of marking out the indemnity point for preliminary determination, at least on the applicant’s case, was to a significant extent dependent upon the circumstance, articulated by counsel for the applicant on that date, that APL was a company with assets.

12    In the last few days before the hearing of the interlocutory application, there was correspondence between the parties’ solicitors concerned with, amongst other things, whether the respondents would file evidentiary material in response to that filed on behalf of the applicant in support of its application for preliminary determination. As is customary in such circumstances, this correspondence tended to expose professional aggravations as to where the responsibility lay for the slippage of the procedural timetable which had by then occurred. Nothing turns on that, but, in the course of the correspondence, the applicant’s solicitor asked his counterpart representing the respondents to provide details of the “net asset positions” of each of the respondents. The respondents’ solicitor replied, on the day before the interlocutory application came on for hearing, that she was instructed that the net asset position of AFS was $5,908,437 and that the net asset position of APL was $1.

13    Unsurprisingly in the light of that communication, when senior counsel rose to address the court on 17 July 2013, he announced that the applicant no longer proposed to press its application for the preliminary determination of the indemnity allegations. It being apparent that APL was itself a company without assets, there would, the applicant now recognised, be no utility in pressing the court to conduct a separate, and preliminary, investigation whether APL would be bound to indemnify AFS against a judgment secured by the applicant. The applicant accepted that its interlocutory application should be dismissed, and the respondents raised no objection to that course.

14    That left the question of costs. On behalf of the respondents, it was said that the interlocutory application had been dismissed, and that costs should follow the event. That submission was, however, overtaken by a submission made on behalf of the applicant, and which ultimately I found more persuasive. The applicant submitted that, because of the circumstances in which it was obliged to abandon its interlocutory application, its own costs incurred in connection with that application should be paid by the respondents.

15    It was submitted on behalf of the applicant that the net asset position of APL was, or must presumed to have been, always a subject well-known to the respondents and their advisers. It had been, since 24 May 2013 – or at least since 14 June 2013 – reasonably evident to the respondents that the whole point of the applicant’s indemnity claim, and necessarily the premise underlying the proposal for a preliminary determination of that claim, was the assumed circumstance that APL had assets. A simple communication from the respondents to the applicant (such as, perhaps, that ultimately given on 16 July 2013) would have corrected the applicant’s misunderstanding in this regard and would have left the applicant with no reason to embark upon the interlocutory process which it initiated on 1 July 2013. In the circumstances, it was submitted that the omission of the respondents to correct what ought reasonably to have appeared to them as a significant misapprehension on the part of the applicant was the circumstance which led the applicant to make what was ultimately an unnecessary application.

16    The respondents had a number of responses to the applicant’s claim for costs, but none of them provided an effective justification for their failure to disabuse the applicant of its apparent misapprehension on or after 14 June 2013. It was in effect submitted on behalf of the respondents that a person who commences a legal proceeding, including an interlocutory proceeding, on the strength of an assumption about the asset position of a respondent does so at his or her own peril. If such an applicant takes no step to clarify the position, he or she cannot later be heard to complain that the respondent has not taken the initiative in that regard. In the present case, it was submitted, all the respondents had done was to respond to the applicant’s process in the normal course and to raise no objection to the applicant making the interlocutory application which it did. It was the applicant, without any prompting from the respondents, which assumed that APL had assets, and the respondents should not be held responsible for the costs which the applicant incurred on the strength of that assumption.

17    The present question is not to be determined by reference to any view about the appropriateness of one party to litigation declining to assist another party beyond the former’s obligation under the Rules of Court or other relevant provision of law. I do not propose to enter upon the matter of the course which a party should follow if he or she knows of a fact which makes another party’s case, or a claim in it, untenable. I am content to have it as a given that the former is under no general obligation to assist the latter.

18    However, the present was not simply a situation in which the respondents knew something, known to be unknown to the applicant, that would seriously compromise the application for preliminary determination if and when it came to be heard. The matter on which the respondents remained mute would not have been part of the applicant’s substantive case, save to the extent, possibly, that it might have been disclosed to the court at a time of the respondents’ choosing, and then only as a discretionary consideration to the disadvantage of the applicant. But withholding the information from the applicant could never have advanced the respondents’ case on the interlocutory application.

19    In my view, once it became apparent to the respondents that the applicant was proceeding on a misapprehension as to an adjectival, but important, question as to which they had knowledge of the correct position, it was not consistent with the achievement of the purpose referred to in s 37M of the Federal Court of Australia Act 1976 (Cth), or with their obligations under s 37N(1) of that Act, for them to have omitted to inform the applicant of that position. There was ample time for them to have done so. In this regard, I would refer to what had been said by Allsop J (as he then was) in White v Overland [2001] FCA 1333 at [4] some years before the enactment of those provisions, but self-evidently in harmony with the philosophy of them:

[W]here it is evident, or indeed suspected, that the other side is proceeding on the basis of a misconception or has not appreciated something, as a general rule, efficiency, common sense and an appreciation of the costs and resources (both public and private) likely to be wasted by confusion in litigation will mandate that a party through his or her representative ensure that the other is not proceeding on a misconception or that the other does appreciate something that has been said.

20    It was also submitted on behalf of the respondents that the applicant’s interlocutory application would in any event have failed, and that they would inevitably have recovered their costs of that application. I did not encourage counsel to address me in detail on that proposition, although senior counsel for the respondents did take me generally through their clients’ outline of argument which had been filed on the application. I consider that considerations of that kind do not need to be addressed in the circumstances which have arisen. The applicant’s point, which I accept, is that the proper discharge by the respondents of obligations of the kind imposed by ss 37M and 37N (and like obligations which existed before the enactment of those sections) would have avoided the need for the application to be made at all. Regardless of the merits of the application, it was not, in my view, appropriate for the respondents, knowing what the asset position of APL was, to stand mute while the applicant, for reasons clearly articulated on its behalf on 14 June 2013, incurred costs on what was inevitably going to be a pointless exercise.

21    For the above reasons, the applicant’s costs of the interlocutory application should be to the account of the respondents.

Associate:

Dated:    23 July 2013