FEDERAL COURT OF AUSTRALIA

Australian Mud Company Pty Ltd v Coretell Pty Ltd (No 6) [2013] FCA 1025

THE COURT ORDERS THAT:

1.    The applicants’ interlocutory application filed 16 July 2013 be dismissed.

2.    The applicants’ pay the costs of the first respondent on the interlocutory application filed 16 July 2013.

3.    The first respondent amend its Statement of Claimed Loss and Damage to set out its revised loss and damage claim on or before 23 October 2013.

4.    The first respondent amend its Particulars of Claimed Loss and Damage on or before 23 October 2013 to identify by reference to its affidavit evidence in chief the facts, matters and circumstances relied upon to contend that the threats made in the period up to the commencement of the proceeding give rise to loss and damage both in the period up to the commencement of the proceeding and, if it is so contended, give rise to loss and damage in any other identified period.

5.    The applicants to file and serve their lay and expert evidence in answer on or before 11 December 2013.

6.    The first respondent to file and serve its lay and expert evidence in reply on or before 19 February 2014.

7.    The applicants be released from the implied undertaking not to use, other than for the purposes of this proceeding, the following documents:

(a)    Affidavit of Ashley Gordon Barker sworn 10 September 2013;

(b)    Affidavit of Nicky Kleyn sworn 11 September 2013;

(c)    Second Affidavit of Gregory Pollard Meredith affirmed 12 September 2013; and

(d)    Second Affidavit of Zane Kenny sworn 13 September 2013,

for the purposes of evidence in Federal Court proceeding NSD 2082/2011.

8.    The proceeding be listed for further directions including the making of pre-trial directions on 14 March 2014 at 10:15 am.

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

REASONS FOR JUDGMENT

1    The applicants commenced this proceeding for patent infringement against the respondents in 2007.

2    Shortly before the trial commenced, the respondents moved to amend their defence to plead and to file a cross-claim claiming damages for unjustified threats pursuant to s 128 of the Patents Act 1990 (Cth).

3    The applicants then conceded that if the respondents were successful in their defence to infringement then the unjustified threats action would be made out and they would be entitled, as cross-applicants, to relief.

4    In the result, the Court found that the patent infringement proceeding should be dismissed and so the respondents as cross-applicants were entitled to the relief they sought in respect of unjustified threats: see Australian Mud Company Pty Ltd v Coretell Pty Ltd [2010] FCA 1169; (2010) 88 IPR 270; appeal dismissed Australian Mud Company Pty Ltd v Coretell Pty Ltd [2011] FCAFC 121; (2011) 93 IPR 188.

5    The first respondent/cross-applicant (Coretell) then sought to have the damages it alleged it suffered by reason of the unjustified threats to be assessed and in that regard directions were made including for the filing of a statement of claim in order to particularise the loss and damage alleged to have been suffered by Coretell.

6    It is in the course of this consequential proceeding for the assessment of damages on the cross-claim that the applicants/cross-respondents now seek security for costs from Coretell in a total sum of $400,000.

7    Coretell opposes the application for security for costs.

8    Four issues have been identified as generally being relevant to the disposition of this interlocutory application: the power of the Court in these particular and slightly unusual circumstances to make any order for security for costs against Coretell; the financial position of Coretell; discretionary issues bearing upon whether security should be ordered; and, if the security is to be ordered, the quantum and form of security to be required.

9    The first issue concerning power is raised because Coretell, noting that security can only be ordered against an “applicant” in a proceeding, says the Court has no power to order security in this case and the interlocutory application is misconceived.

10    The starting point in relation to the Court’s power to order security for costs is s 56(1) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) which provides that: the Court or a judge may order an “applicant” in a proceeding in the Court, or an appellant in an appeal under Div 2 of Pt 3, to give security for the payment of costs that may be awarded against the applicant.

11    It is well established that s 56 confers a discretion on the Court or a judge that is broad and unfettered and I will shortly return to consider the nature of this discretion and the factors that, in present circumstances, may be considered to guide its exercise.

12    But for present purposes the initial question is whether it can be said that Coretell is in any relevant sense an “applicant”. If it is not then s 56 is not satisfied and the Court would not have the power to order security against it.

13    In my view, given that Coretell is currently proceeding to have the damages assessed under its cross-claim, there is no doubt that it is an applicant. The term “applicant” plainly comprehends a cross-claimant: see Lewis v WD & VJ Hambley Pty Ltd (unreported, French J, 13 November 1987).

14    The question whether a party is an applicant, strictly speaking, should not be confused with the question whether, in the exercise of the Court’s discretion, a particular applicant, maintaining what may reasonably be characterised as a defensive cross-claim, should be required to provide security for costs in respect of that cross-claim.

15    I turn then to the question whether, in circumstances where the current proceeding for assessment for damages has arisen in consequence of the dismissal of the applicants’ patent infringement proceeding, security should be ordered.

16    I turn therefore to the question of the nature of the judicial discretion conferred by s 56. In Madgwick v Kelly [2013] FCAFC 61; (2013) 212 FCR 1 (Madgwick v Kelly), Allsop CJ and Middleton J in a joint judgment (at [6]) emphasised that the discretion conferred by s 56 is broad and unfettered and observed that the many attempts to set limitations upon the discretion have been rejected and that the only limitation is that it must be exercised judicially, according to the merits of each case and without any particular predisposition.

17    At [7], their Honours noted some 12 considerations that are often considered relevant to the exercise of a discretion, explaining at [8], however, that it should not be taken that every case requires an examination of all such factors and that much will depend on the facts of the individual case and how the application is argued by the parties.

18    Their Honours noted in particular that one such factor that might be considered is whether the proceeding in which a party is the applicant is essentially defensive in nature.

19    In that regard, their Honours (at [16]) observed that the language of “defence” and “attack” or “offence” has a lineage but that this language was not intended to be a reason to analyse minutely the legal relationships involved in a dispute. Rather, it is language used in furtherance of the proposition that it is substance, not form, that matters.

20    With respect, the point made by their Honours does need carefully to be borne in mind. If as a matter of substance an applicant, such as Coretell on its cross-claim, is not seen to be the “attacker” but rather as the “defender” of the primary action of another party, then one can see that that consideration might cause the discretion conferred by s 56(1) not to be exercised so as to require the party who is in substance the defender, to give security for costs to the party who is in substance the attacker.

21    The characterisation of a party, however, as a defender does not automatically mean that security for costs cannot be ordered. That point is well made in Madgwick v Kelly by their Honours and also by the primary judge in the decision the subject of that appeal: see Kelly v Willmott Forests Ltd (in liquidation) [2012] FCA 1446; (2012) 300 ALR 675 at [49].

22    Thus, while there is no rule of law that security should not be granted where a proceeding is defensive in nature it remains one of the relevant factors that requires to be weighed.

23    In this case, the cross-respondents seek to highlight the financial position of Coretell in order to show that the key factor relevant to the exercise of the discretion, namely, whether there is reason to believe that the cross-applicant will be unable to pay the cross-respondents’ costs if so ordered, that is, whether the cross-applicant is impecunious, is satisfied.

24    Coretell denies that it is impecunious but argues that to the extent that its means may be demonstrated to be strained at this point of the proceeding, its insufficiency of means has been caused by the conduct which is the foundation for its entitlement to damages. It also suggests that the application was not brought promptly and the stage of the proceeding at which the application for security is brought also weighs against any order now being made.

25    To a lesser extent the cross-respondents draw attention to the strength of the damages particularised by Coretell, noting that in the statement of claim, the sum of $18.4 million (approximately) was claimed, whereas recently, when the affidavit material and expert opinion was filed in advance of a hearing for the assessment of damages, the damages claimed were reduced to the much lower sum of just in excess of $3 million.

26    These are in essence the relevant factors identified by the respective parties, going to the question whether the Court, in its discretion, should order security.

27    For my part, the factor of merits of the claim does not weigh in any significant sense in favour of the grant of security. It was always understood by the parties that should the applicants’ patent infringement proceeding fail then the respondents, including Coretell, would be entitled to damages for unjustified threats and it would then be a matter of the Court assessing the damage and loss suffered, if any. While Coretell, which is the only respondent pressing the damages assessment, has been slow to finally particularise its claimed loss in this regard, there is no particular basis advanced to suggest that the loss now particularised in advance of the hearing is not, for example, arguable.

28    So far as the claim by Coretell that the interlocutory application for security has been brought too late in the proceeding and that the applicants are guilty of delay in this regard, I also do not put great store on that factor. The cross-respondents say, not unreasonably, it is only in the course of the recent particularisation of the loss claimed that the financial position of Coretell has become apparent, leading to the application for security.

29    In some ways, the question of the stage of the proceeding at which the interlocutory application for security is made is tied to the more general question of whether the damages assessment proceeding as part of the cross-claim proceeding is defensive in nature and whether, in all the circumstances, any security order would be appropriate at this or any other stage of that proceeding.

30    The primary consideration identified on behalf of the cross-respondents as to why security should be required at this point has to do with the impecuniosity of Coretell. In this regard, they note that Coretell alone brings the cross-claim and the second respondent (Mincrest) is not involved.

31    They further say that Coretell is of limited means and that its controller, Mr Kleyn, as well as Mincrest and other related entities caused Coretell to be incorporated and to (notionally) hold the core tool business established by Mincrest in order to “quarantine” the core tool business from the balance of the business (that is, the camera business operated by Mincrest) lest patent infringement claims be made in relation to the core tools. In this they rely on the affidavit of Mr Barker filed in the assessment proceeding by Coretell.

32    The applicants also note that Mr Kleyn has revealed in his recent affidavit in the assessment proceeding, for the first time in the proceeding, that two months before the trial on liability for patent infringement commenced he transferred the balance of Mincrest’s business to another related entity, Kleyn Investments, which is not a party to the litigation – an undocumented transaction.

33    Mr Kleyn is also noted to be the sole director and secretary of, and shareholder in, Coretell which has a paid up share capital of $1.

34    The cross-respondents further note that:

    Coretell holds no real property in Australia.

    Its only fixed asset recorded on its balance sheet is a motor vehicle worth approximately $6,000.

    Its financial statements reveal that it did not receive income distributions from trusts administered by related entities as trustees throughout the financial years ending 2007 to 2011, and during this period it would have reported significant cumulative losses.

35    They rely on the opinion of Mr Ross, an accountant, to the effect that Coretell does not have the financial capacity to meet a costs order in the vicinity of $478,395, the level of costs that the applicants, by their solicitor (confirmed by a costs consultant) say would be an appropriate sum to be the subject of a security order.

36    The cross-respondents also draw attention to Coretell’s financial statements which record interest free loans payable by related entities and suggest that should Coretell attempt to rely on the book entries about those loans, the loans are uncertain in nature and there can be no guarantee of repayment. They submit that commercial common sense would suggest it is unlikely, in the event that an adverse costs order is made against Coretell, that the related entitles would really “repay” it $473,754 so as to put it in a position to pay the cross-respondents, rather than go into liquidation.

37    The cross-respondents also suggest that Coretell’s bank statements do not indicate that it is performing in a manner that would suggest it has the capacity to pay an adverse costs order; in fact they indicate a business that is in decline.

38    Indeed, it may reasonably be said that the current financial position of Coretell does not look rosy. However Coretell makes two principal points about the circumstances in which it currently finds itself. Firstly, that in the financial years since 2007 whilst it has been engaged in the patent infringement litigation with the cross-respondents as applicants, it has paid out significant funds on account of legal costs (which indeed it has) and but for the engagement in that litigation would be in a much healthier financial position. I accept this proposition. Secondly, it points to the fact that during that period, while there was a mining boom in Western Australia, it was largely kept out of its business by reason of the unjustified threats. Now that the mining boom seems to have subsided, business is not good, thus explaining why its profits recently appear to be down on what they were previously. This may be so, but is harder to assess in the absence of evidence.

39    Additionally, Coretell draws attention to the fact that it obtained a costs order in its favour following the successful defence of the patent infringement proceeding and that it has been engaged in the process of taxation of those claimed costs before a Registrar of this Court for some time. Coretell considers it has been unreasonably frustrated in the prosecution of the taxation of costs by the applicants, something that the applicants deny. Coretell submits it is plain it will be entitled to a costs order in excess of $600,000, something which the applicants do not concede.

40    From the Court’s point of view, all that can be said is that there currently is no certified bill of costs recoverable by Coretell against the applicants, but one may expect that before long there will be a settled and certified bill in a significant sum. In all of those circumstances, it appears to the Court that it is reasonable to add to the financial picture of Coretell that it has the current right to obtain taxation of its costs in the patent infringement litigation in this proceeding, and that taxation will be concluded in the reasonably foreseeable future, and that the costs are likely to be taxed in a significant sum.

41    I also consider that it is appropriate, in the circumstances of this case, to consider two other factors, which have both been mentioned already. First, that, on any view, the cross-claim for damages for unjustified threats was taken out as a defensive measure and is pursued as a corollary to the patent infringement claims made by the applicants. The question of damages, as agreed by the parties at trial, would only arise in the event that the patent infringement claims of the applicants failed, as in the end they did. The order that there be an enquiry into the amount payable by the cross-respondnets to the cross-applicants by way of damages for unjustified threats followed automatically from the dismissal of the infringement proceeding. The matter currently before the Court is an assessment of the damages claimed. While this proceeding has been drawn out and highly contested and Coretell has been slow in finally particularising its claim to damages, the true nature of this proceeding should not be lost sight of when it comes to exercising the s 56 discretion to award security for costs in this case. In my view, the nature of the current proceeding being prosecuted on behalf of Coretell significantly weighs against there being security ordered against it. Coretell is not, in my view, to be relevantly regarded as an attacker in all the circumstances. It only finds itself in the position that it is now in because of the patent infringement proceeding.

42    Related to this consideration, in my view, is the consideration that it would appear, having regard to the financial materials put in front of the Court, including those upon which the cross-respondents rely, that there is something to be said for the submission made on behalf of Coretell, that its financial position, to the extent that it shows a strained financial position, may be explained in part by the fact that it has been kept out of the business in which it apparently competed with the applicants and has been obliged to expend considerable funds in defending itself. I take all that into account.

43    I also consider it is relevant to firmly bear in mind that Coretell is entitled to costs on the dismissal of the patent infringement proceeding and that those costs will be taxed soon enough and are likely to be in a significant sum.

44    All of these factors in my judgment bear upon the just exercise of the s 56 discretion to award security for costs and leave me, on balance, to consider that it would be inappropriate to award security for costs against Coretell in the proceeding currently before the Court.

45    For these reasons, I would dismiss the interlocutory application for security for costs and order that the applicants/cross-respondents pay Coretell’s costs of the application.

46    There is also a question concerning the future conduct of the proceeding leading up to the hearing in relation to the assessment of damages. In that regard, I would make the orders proposed in the applicants/cross-respondents’ amended proposed short minute of order dated 2 October 2013.

orders

47    The Court orders:

1.    The applicants’ interlocutory application filed 16 July 2013 be dismissed.

2.    The applicants’ pay the costs of the first respondent on the interlocutory application filed 16 July 2013.

3.    The first respondent amend its Statement of Claimed Loss and Damage to set out its revised loss and damage claim on or before 23 October 2013.

4.    The first respondent amend its Particulars of Claimed Loss and Damage on or before 23 October 2013 to identify by reference to its affidavit evidence in chief the facts, matters and circumstances relied upon to contend that the threats made in the period up to the commencement of the proceeding give rise to loss and damage both in the period up to the commencement of the proceeding and, if it is so contended, give rise to loss and damage in any other identified period.

5.    The applicants to file and serve their lay and expert evidence in answer on or before 11 December 2013.

6.    The first respondent to file and serve its lay and expert evidence in reply on or before 19 February 2014.

7.    The applicants be released from the implied undertaking not to use, other than for the purposes of this proceeding, the following documents:

(a)    Affidavit of Ashley Gordon Barker sworn 10 September 2013;

(b)    Affidavit of Nicky Kleyn sworn 11 September 2013;

(c)    Second Affidavit of Gregory Pollard Meredith affirmed 12 September 2013; and

(d)    Second Affidavit of Zane Kenny sworn 13 September 2013,

for the purposes of evidence in Federal Court proceeding NSD 2082/2011.

8.    The proceeding be listed for further directions including the making of pre-trial directions on 14 March 2014 at 10:15 am.

Associate:

Dated:    7 October 2013