Federal Court of Australia

Watson v Kriticos (Summary Judgment) [2021] FCA 261

ORDERS

THE COURT ORDERS THAT:

1.    Paragraphs 1, 2, 3, 4, 5, 6, 8 and 9 of the interlocutory application dated 7 July 2020 be dismissed.

2.    Paragraphs 31, 32, 65, 86, 94, 101, 110, 125, 141, 151, 175, 176, 194, 199 and 206 of the Second Further Amended Statement of Claim filed 26 June 2020 be struck out.

3.    Leave be granted to the Applicant to re-plead the paragraphs referred to in order 2 by filing and serving a Third Amended Statement of Claim within 28 days of the date of these orders.

4.    Leave be granted to the Applicant, pursuant to r 10.43(2) of the Federal Court Rules 2011 (Cth), to serve the Further Amended Originating Application filed 6 December 2019, the Second Further Amended Statement of Claim filed 26 June 2020 and a copy of these orders on the Second Respondent, in Canada, in accordance with the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. Opened for signature 15 November 1965. 658 UNTS 163 (entered into force 10 February 1969).

5.    If service in accordance with order 4 is not effected before the filing of any Third Amended Statement of Claim filed in accordance with order 3, the Applicant be granted leave to approach the Court in Chambers in relation to leave to serve the Third Amended Statement of Claim on the Second Respondent.

6.    The First Respondent pay the Applicant’s costs of the interlocutory application dated 7 July 2020 as taxed, agreed or assessed.

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

REASONS FOR JUDGMENT

PERRAM J:

Introduction

1    By an interlocutory application dated 7 July 2020 the First Respondent seeks summary judgment in relation to some of the Applicant’s claims and the striking out of others. The current originating process is the Applicant’s Further Amended Originating Application (‘FAOA’) and the current pleading is the Second Further Amended Statement of Claim (‘2FASOC’). The basic thrust of the case is that the Applicant agreed to forgo some professional fees due to him for work done in securing international patent protection for the First Respondent in respect of inventions including one known as the ‘Surf Machine Invention’. The agreement is alleged to have been made on 21 June 2013 (‘2013 Agreement’). Under it the Applicant would continue to work on obtaining patent protection for the Surf Machine Invention in return for some of his fees and a 12.5% ownership interest in any patents that were secured (and where patents had not yet been secured, a similar interest in any patent applications). Registration of the patents was then pursued and in some cases obtained in a large number of jurisdictions.

2    The 2FASOC covers a large number of topics many of which are not relevant to the present application. The features of the 2FASOC which are relevant to this application are as follows:

(1)    the Applicant alleges that the First Respondent breached the 2013 Agreement when he assigned some of the patents and patent applications to the Second Respondent. This subset of the patents and patent applications deriving from the Surf Machine Invention are described as the ‘Whitewater Patents’; and

(2)    the Applicant also alleges that the First Respondent breached the agreement by causing some of the patents to be issued directly to the Second Respondent.

3    For present purposes what matters is that the Applicant alleges that the patents which were granted to the First Respondent were impressed with a trust in the Applicant’s favour. The trust is alleged to have arisen from a term of the 2013 Agreement which provided that the Applicant would obtain a 12.5% ownership interest in the patents and the patent applications. On the basis of this trust the Applicant alleges that the First Respondent was his fiduciary and that his actions in causing the patents to be issued in the name of the Second Respondent or his actions in assigning the patents to the Second Respondent were done in breach of that fiduciary duty. The pleading also alleges that various representations were made to him by the First Respondent which are inconsistent with any denial by him of the existence of the 2013 Agreement. On this basis, he pleads that an estoppel by representation has arisen which prevents the First Respondent denying the agreement. The same representations are also said to have been misleading and deceptive under the Australian Consumer Law (‘ACL’), being Sch 2 to the Competition and Consumer Act 2010 (Cth), by reason of which the Applicant claims to have suffered loss and damage (‘the misrepresentation case’).

4    The Applicant also advances, as a discrete component of the misrepresentation case, a claim for misleading and deceptive conduct based on representations alleged to have been made by the First Respondent on 9 and 10 December 2014 to the effect that the Applicant would take a share of the proceeds accruing from the First Respondent’s sale of his business and assignment of the Whitewater Patents to the Second Respondent.

5    The Applicant further complains that the First Respondent failed to file some of the patent applications which had been prepared by the Applicant and failed to maintain others which had been filed. This is alleged to have been in breach of an implied term of the agreement that the First Respondent would file and maintain the patents and patent applications where it was not unreasonably onerous to do so: §24(h).

6    At various points in the 2FASOC the Applicant seeks damages on the basis that he has lost the opportunity to exploit his 12.5% interest in the patents (or patent applications).

7    The First Respondent now seeks summary judgment on:

(a)    the allegation that the First Respondent agreed to give the Applicant a 12.5% ownership interest in the patents or patent applications;

(b)    the allegation that the patents and patent applications were impressed with a trust (and with it the parallel allegation that the First Respondent owed the Applicant a fiduciary duty);

(c)    the estoppel case; and

(d)    the misrepresentation case.

8    The First Respondent seeks to strike out portions of the 2FASOC which contain or relate to:

(e)    the allegation that there was an implied term in the agreement that the First Respondent was required to file and maintain the patents and patent applications where it was not unreasonably onerous to do so;

(f)    the claim for damages on the basis of the Applicant’s allegation that he lost the opportunity to exploit his 12.5% ownership interest in the patents or patent applications; and

(g)    the matters at (a)–(d) above, as an alternative to the application for summary judgment.

9    In the alternative to strike out of the portions of the 2FASOC which allege loss and damage, the First Respondent seeks that the Applicant provide further particulars of loss and damage.

Outcome

10    I reject the summary judgment application in relation to propositions (a) and (b), which travel together for if the term does not arise then the trust does not arise either. The Applicant has given affidavit evidence that provides some support for the contention that the 2013 Agreement included a term that the First Respondent would give the Applicant a 12.5% share in the patents or patent applications. For the purposes of the present application, the First Respondent said that he accepted this affidavit evidence. Consequently, it cannot be said that the Applicant’s contentions about this term have no reasonable prospects of success.

11    I also reject the summary judgment application in relation to (c) and (d). The only purpose served by the estoppel case is to prevent the First Respondent from denying the existence of the alleged agreement. In fact, the First Respondent admits the existence of the agreement so the estoppel case does not arise. Consequently, the question of whether summary judgment should now be granted on it is moot.

12    Although the misrepresentation case in (d) is not resolved merely because the First Respondent admits the existence of the agreement, the Applicant expressly conceded that it no longer arises because the agreement had been admitted. The effect of that concession is that, save in one respect, the question of whether the misrepresentation case should now be summarily dismissed is also moot.

13    The one respect in which the misrepresentation question still arises was addressed by the Applicant in his written submissions – viz, that the Applicant maintains his misleading and deceptive conduct case based on the First Respondent’s alleged representations on 9 and 10 December 2014 that the Applicant would receive a share of the profits accruing from the First Respondent’s sale of his business and assignment of the Whitewater Patents to the Second Respondent. This claim is said to be unaffected by the First Respondent’s concession that the 2013 Agreement existed. For the reasons I explain at [42]-[48] below, I reject the First Respondent’s application for summary judgment and strike out insofar as it relates to this aspect of the misrepresentation case.

14    I reject those parts of the strike out application which are brought in the alternative to the summary judgment application on propositions (a)–(d). None of the impugned pleadings fail to disclose a reasonable cause of action, meaning one with some chance of success having regard only to the allegations relied on by the Applicant. This follows from my conclusion that the First Respondent has failed to establish that the Applicant enjoys no reasonable prospects of success on the grounds in the FAOA to which the impugned pleadings relate and that there are real questions to be tried in respect of those grounds.

15    I also reject that part of the strike out application based on proposition (e). The question of whether the term should be implied by law into the agreement cannot coherently be determined before the express terms of the agreement have been established. That will only occur at trial.

16    I accept, however, the First Respondent’s submissions about proposition (f). The Applicant will need to plead what he says would have happened if the First Respondent had not breached the alleged terms of the 2013 Agreement and the alleged fiduciary duty. The pleading of loss and damage will be struck out with leave to re-plead.

Consideration

Principles

17    The First Respondent applies for summary judgment under r 26.01(a) of the Federal Court Rules 2011 (Cth) (‘FCR’) which the Court may grant if satisfied that the Applicant has no reasonable prospects of successfully prosecuting the relevant part of the proceeding. The First Respondent does not apply under s 31A(2) of the Federal Court of Australia Act 1976 (Cth) (‘the FCA Act’). One cannot be definitive about these matters but FCR r 26.01(a) will often apply to a situation where there is unanswerable or unanswered evidence of a fact which is fatal to the pleaded case: cf Spencer v Commonwealth [2010] HCA 28; 241 CLR 118 at 130-131 [22] per French CJ and Gummow J. The First Respondent’s submissions are directed to a contention of that kind. As will be seen he submits that because of the state of the evidence the Applicant cannot succeed in demonstrating that the First Respondent agreed to give him a 12.5% share in the patents. Given the fact that (a) the Applicant’s evidence is that the First Respondent agreed to this in a telephone conversation and (b) the First Respondent does not contradict that evidence on the present application, there are obvious problems with the application.

18    In relation to his application to strike out various parts of the 2FASOC, the First Respondent relies upon FCR r 16.21(1) which permits a pleading to be struck out on certain grounds. The First Respondent does not identify the ground upon which he relies but I take it to be the ground in FCR r 16.21(1)(e) which is available where the pleading ‘fails to disclose a reasonable cause of action’. A reasonable cause of action means one with some chance of success if regard be had only to the allegations in the pleading relied upon by the claimant: Polar Aviation v Civil Aviation Authority [2012] FCAFC 97; 203 FCR 325 at [41]-[43] per Perram, Dodds-Streeton and Griffiths JJ; Wride v Schulze [2004] FCAFC 216 at [25] per Spender, Tamberlin and Bennett JJ; Allstate Life Insurance Co v Australia and New Zealand Banking Group Limited [1994] FCA 636; 217 ALR 226 at 236 per Beaumont J.

The 12.5% ownership term

19    The Applicant, who is a patent attorney, alleges at 2FASOC §23 that on 21 June 2013 he reached an agreement with the First Respondent, a client, concerning the disposition of the patents and patent applications in relation to the Surf Machine Invention. The agreement is also alleged to extend to other inventions and to the Surf Machine Invention itself. However, those broader allegations may be put to one side since it was not suggested that the other patents and patent applications would be dealt with on any different basis to those applying in the case of the Surf Machine Invention. Attention may therefore be confined to the allegation concerning the existence of the term that the First Respondent agreed to give the Applicant a 12.5% ownership interest in the patents and patent applications relating to the Surf Machine Invention.

20    The agreement is alleged to be partly written, partly oral and partly implied: 2FASOC §23 particulars (i)-(iii). As I have said, the existence of this agreement is admitted by the First Respondent: Amended Defence §23(a). But the terms of the agreement are extensively disputed. Further, the First Respondent alleges the existence of a subsequent agreement.

21    At 2FASOC §24(f) it is alleged that the agreement contained an express term to this effect:

the Applicant would receive a 12.5% share in the ownership of the Covered Inventions and the Covered Patents and Applications.

22    Particulars are subscribed to this allegation consisting of three emails passing between the Applicant and the First Respondent together with a telephone conversation they also had.

23    As mentioned above, the immediate irritant which has given rise to the litigation is that in the several jurisdictions in which a patent has been issued for the Surf Machine Invention it has either been issued to the Second Respondent or issued to the First Respondent who has then assigned it to the Second Respondent. Relevant for present purposes is the allegation appearing at 2FASOC §26 that by reason of a number of matters the First Respondent held the Applicant’s rights to the 12.5% ownership interest in the patents or patent applications on trust for the Applicant. Without dwelling on the detail, the pleader then relevantly approaches the matter on the basis that it was a breach of that trust for the First Respondent to divert the patents into the Second Respondent’s name or, where a patent was issued to the First Respondent, for him then to assign that patent to the Second Respondent. Here the basic idea is that having agreed to give the Applicant a 12.5% ownership stake in, inter alia, the patents, the First Respondent could not thereafter do either of those things.

24    There are several steps towards that conclusion in the pleading but each step represents a single point of failure, ie, if the Applicant fails to make good each step then the whole trust claim fails. The First Respondent alleges that the case in §26 cannot succeed because it depends for its efficacy on §24(f). Actually, he has not submitted anything so pithy in his 36 pages of single-spaced submissions but that is burden of much of what he says. But prolixity aside, I accept the submission that §26 depends in part on §24(f). §26 is as follows:

Due to the terms of the Patent Share Agreement, and further and in the alternative, in all the circumstances, including the Patent Share Email Representations, the Patent Share Verbal Representation, and the Patent Agreement Representations, the relationship between the Applicant and the First Respondent was one whereby, or in the alternative on 21 June 2013 there was an equitable assignment by the First Respondent to the Applicant of the following rights such that, the First Respondent held the Applicant’s rights to:

(a)     12.5% share of all the Covered Inventions, Covered Patents and Applications;

(b)     2.5% share of the sale price of any device sold that was based on any of the Covered Patents and Applications;

(c)     12.5% share of the licence fee obtained by the First Respondent in relation to any licence sold in relation to the Covered Patents and Applications;

(d)     2.5% of the sale price if the First Respondent sold his business before 21 June 2023; and

(e)     1.5% of the sale price if the First Respondent sold his business after 21 June 2023,

(together the Trust Property) on trust for the Applicant (Patent Trust), and the First Respondent owed fiduciary duties to the Applicant in relation to the Trust Property:

(f)     to act in the best interests of the Applicant; and

(g)     to avoid a conflict between his personal interest and his duties to the Applicant,

(together the Fiduciary Duties).

25    No issue is raised about the nature of the trust alleged in this paragraph. Instead the contention is that the trust so alleged is expressed to depend on ‘the terms of the Patent Share Agreement’ which, of course, includes the term alleged at §24(f). The First Respondent’s contention is that the Applicant has no reasonable prospects of making good that allegation.

26    At the hearing of the present application both sides put on evidence in an effort to show that the Applicant would, or would not, succeed in making good this contention. There were over one thousand pages of this evidence. That evidence included from the Applicant evidence to this effect (as summarised in the Applicant’s Submissions (‘AS’) at [19]):

The evidence in support of this term is primarily contained in the affidavit of Dale Watson affirmed 5 August 2020 at [96]. The First Respondent does not dispute this evidence.5 For convenience, this conversation is reproduced below (“Ownership Conversation”).

DW:    “I can’t proceed with any more national or regional phase applications until you confirm the amount of my share in writing.”

SK:    “Look, I would never give away ownership, otherwise, I would have just let the patents go, but I’ll do 12.5% of the patents as a carrot, so that you keep them in good order.”

DW:    “Ok, I’m very happy with that amount, it’s very generous thank you. Can you please just send an email confirming the amount as soon as you can so that I have it in writing?”

SK:     “OK, will do”

DW:    “Great, thanks. I have a lot of work to do now to file the remaining applications. I’m actually under a huge amount of pressure because of the time constraints so I’ll keep going on the basis that you’ll send the email soon.”

SK:    “Ok, I’ll do that now.”

27    For the purposes of the present application the First Respondent indicated at §23 of his written submissions (‘RS’) that he did not dispute this evidence. Yet at another part of his submissions ([92]) he said this:

In any event, even though potentially admissible, Watson’s evidence is of limited probative value, particularly due to the passage of time and the absence of corroborating contemporaneous documents.

28    So, in fact, it would appear the First Respondent does dispute the evidence because of (a) the passage of time and (b) the absence of corroborating documents. It is not possible, of course, to assess such a submission on a summary judgment application.

29    In any event, the question remains: does the Applicant have reasonable prospects of establishing that there was a term of the agreement that he would receive a 12.5% ownership interest in the patents and patent applications? The Applicant gives evidence that he had a telephone conversation with the First Respondent in which they explicitly discussed the possibility of the Applicant receiving a 5% interest in the First Respondent’s business and that this occurred on 20 June 2013. The significance of the date is that it is before the telephone conversation set out above which occurred on 21 June 2013. The conversation on 20 June 2013 is set out in the Applicant’s affidavit at §91:

On 20 June 2013 on a number of occasions during the period between approximately 1:55 pm to about 4:20 pm I had telephone calls with SK and I made a file note of our conversation shortly after that day, a copy of which is exhibited at DW-364. During that telephone call, we had a conversation with words to the following effect:

Me:    “The invoiced debt to me is about $48,000 and the un-invoiced debt is about $80,000.“

SK:    “My business is conservatively valued at seven million dollars, but I need a partial sale to confirm the value. Conservatively it is valued at four million dollars right now, and I am happy for you to have five percent equity in my business in return for you foregoing the un-invoiced debt and continuing to work to a value of about $180,000 to about $200,000 without payment. The benefit to me is that it enables me to manage my costs and I won’t have to get another investor. I have only one investor, Tynan, and that investor has 10% ownership. With you having 5% ownership I will retain 85% ownership, which is enough for me to sell part of it and retain control. If you aren’t happy with this then the only other option would be for me to pay you the un-invoiced debt of $80,000 only when I can.”

Me:    “I’m happy with 5% equity in your business.”

30    He says that with that context, the First Respondent’s rejection of ‘ownership’ in the conversation which then took place on 21 June 2013 was a reference to that proposal and that the reference to the ‘carrot’ was therefore a reference to an interest in the patents.

31    The First Respondent submits at [31] that the question of whether the term at §24(e) could be established ‘must be proved by reference to the express terms of their negotiations’ which is no doubt true. In his written submissions the First Respondent then embarked at [48]ff on a 17 page analysis of the universe of negotiations and post-contractual communications passing between the parties which was said to show that the Applicant has no reasonable prospects of establishing, in effect, that the ‘carrot’ referred to was the ownership of the patents.

32    These submissions read like a set of trial submissions prepared well after bedtime and, read that way, they may perhaps yet turn out to have some merit at trial (although I express no view). However, at the risk of stating the obvious, this is not a trial. What the submissions do clearly establish is that the First Respondent’s contention that this issue should not be tried is itself hopeless. Some passages in the written submissions will illustrate the extent and depth of the misconception afoot. One may begin at [50]:

When the full picture is considered, what emerges is that Watson and Kriticos initially discussed the potential for an ownership interest – particularly by way of a minority ownership share in Kriticos’ business – but Kriticos did not ultimately agree to give any such interest, or any ownership interest in the Surf Machine Invention, the Patents or the Applications, to Watson.

33    One might think that this paragraph was acknowledging the existence of a debate which the submissions were predicting would end a particular way when the full picture emerged. This may engender a suspicion that the submissions may not have quite grasped the nature of an application for summary judgment. This suspicion is not diminished by what then follows. At [55]-[56] the submissions confront an ambiguity:

In that context, Watson proposed a “share in the invention” as follows:

“In my opinion, the best way to enable national phase entry in additional jurisdictions is to reduce the proposed payment to me for the remaining outstanding in additional jurisdictions. And I believe that a share in the invention is the best way of offsetting the proposed reduced payment and also our deferred charges and future deferred charges … As previously discussed, the suggested share in the invention could, for example, comprise a percentage of future sales, licence payments and royalties. …”

However, objectively, it is not clear that the reference to a “share” in the invention was intended to mean ownership. To the contrary, Watson defines what he means by a “share” as a percentage of certain types of revenue from exploitation of the patent, but an entitlement to a share of revenue is not an indicia of co-ownership.

(Footnote omitted)

34    The submissions have an answer – the word ‘share’ has to be given a particular meaning. So much appears at [57]-[58]:

Kriticos responded by email to the effect that “I do see a way forward with a share option, preferably as mentioned directly related to a device sale, licence sale, etc.”

Considered objectively, what Kriticos is tentatively agreeing to in principle is to agree to give Watson an entitlement to a share of certain types of revenue. There is, however, no reference to ownership or any of the indicia of ownership.

(Footnote omitted)

35    Again, on its face these kinds of matters are plainly for trial. Next the submissions confront the presently admitted (although then again perhaps not admitted) telephone conversation between the Applicant and the First Respondent. This begins at [60]-[61]:

After that email, Watson and Kriticos had a telephone conversation (the first of the particularised conversations). Kriticos does not have a specific recollection of this call. Watson’s recollection of this call is based on his allegedly contemporaneous file note, and is that Kriticos said words to him including to the effect that:

(a)    “I am happy for you to have five percent equity in my business”

(b)    “With you having 5% ownership I will retain 85% ownership, which is enough for me to sell part of it and retain control”.

Watson’s evidence is that he then said words to the effect that “I’m happy with 5% equity in your business”.

(Footnote omitted)

36    The submissions then address the carrot. At [62]-[64] this is said:

This evidence does not, however, support Watson’s case.

Instead, it highlights that their discussion on 20 June 2013 was about a minority share in the Kriticos’ business, not a share of ownership of the Patents and Applications.

The two are fundamentally different propositions. Relevantly, a minority share in a business, unlike a share in a patent:

(a)    does not confer any veto right over business decisions, such as licencing and assignment; and

(b)    does confer a right to a share of profits (albeit not revenue).

37    And so it goes on. I will not set out any further extracts from the balance of the 17 pages dealing with this issue. It suffices to say that it is apparent that the submissions misconceive the nature of a summary judgment application. The question of what was said in the telephone call between the Applicant and the First Respondent and what this meant in light of their previous communications (and maybe even their subsequent communications – I need not decide), is a matter which will depend on a close reading of the material, the testimony of both the Applicant and the First Respondent and their respective cross-examinations. The idea that such an issue could be determined on an application for summary judgment is facile.

The estoppel and misrepresentation cases

38    The Applicant has alleged, in the event that his allegation that there was an agreement reached between the parties was not proved, that the First Respondent is estopped from denying the existence of the agreement: 2FASOC §25. The allegation that there was an agreement appears at §23. Importantly, this allegation is admitted by the First Respondent at Amended Defence §23. Since the agreement is admitted, the estoppel case does not arise between the parties and that is so whether the allegation is ‘in the alternative’ (as the Applicant submits) or whether it is also a ‘further’ case and not just in the alternative (as the word ‘further’ in 2FASOC §25 might rather suggest). I therefore decline to entertain the First Respondent’s summary judgment application in relation to the estoppel argument which is moot.

39    The Applicant has also pleaded a case of misleading and deceptive conduct based on the same representations which are said to give rise to the estoppel. The pleading is at 2FASOC §27:

Further and in the alternative, the Patent Share Email Representations and the Patent Share Verbal Representation were representations as to future matters within the meaning of section 4 of the Australian Consumer Law (ACL).

40    I am not sure I would read this as necessarily being only an alternative case, again, because of the word ‘further’. It is true, as I have explained, that the word ‘further’ also appears at 2FASOC §25 but the whole of that allegation, whether it be ‘further’ or ‘in the alternative’, is rendered moot when the agreement in question is admitted. By contrast, in the case of the misrepresentation case pleaded at 2FASOC §27 a damages case is also advanced at §32. The fact that the agreement is admitted at Amended Defence §23 does not conceptually impinge on that allegation in the same way that it does in relation to the estoppel case pleaded at 2FASOC §25. Put another way, it is conceptually possible for the misrepresentation case to exist even though the agreement is admitted.

41    However, in his written submissions the Applicant accepted that the misrepresentation case does not arise since the existence of the agreement has been admitted: AS [42]. Given that concession, subject to the caveat I referred to at [13] above, the summary judgment application brought by the First Respondent in relation to it is moot. The Applicant’s concession to this effect is sufficiently recorded in these reasons for judgment.

42    In relation to the misrepresentation case based on the alleged representations on 9 and 10 December 2014, the Applicant submits that these are unaffected by the First Respondent’s concession that the 2013 Agreement existed. The Applicant therefore presses the misrepresentation case in respect of the alleged representations on 9 and 10 December 2014 (AS [43]). I reject the First Respondent’s prayers at §5 and §6 of the present application that in respect of these claims summary judgment should be entered for the First Respondent on FAOA §5 or that §§162-167 and 176 of the 2FASOC should be struck out. In order to explain this outcome, it is necessary to say a bit more about the representations and the circumstances in which they were alleged to have been made.

43    The Applicant says that on 30 September 2014, the First Respondent informed him that he was proposing to strike a ‘large deal’ with the Second Respondent: 2FASOC §160. On 11 November 2014, that deal came to fruition in the form of the First Respondent’s sale of his business and assignment of the Whitewater Patents to the Second Respondent. The Applicant complains about two representations alleged to have been made in the context of that transaction:

(a)    on 9 December 2014, the First Respondent represented to the Applicant that he would receive 2.5% of the business sale and 12.5% of the restraint of trade portion of the sale (‘the Whitewater Percentage Representation’); and

(b)    on 10 December 2014, the First Respondent represented to the Applicant that he would receive approximately $125,000 per year for the next 20 years as a result of the transaction (‘the Whitewater Representation’).

44    The Applicant contends that the Whitewater Percentage Representation and Whitewater Representation were misleading and deceptive and that, in reliance upon them, he continued to provide patent attorney services in relation to various patents including the Whitewater Patents, to his detriment.

45    In his submissions on this point, the First Respondent makes two basic arguments: first, that the Applicant’s claim fails because he ‘never had the pleaded interest’ in the relevant patents; and, secondly, that the timing and character of the representations mean that the Applicant could not have been misled. The first of these contentions ties its fate to the arguments for summary judgment and strike out in respect of the alleged term that the Applicant was to take a 12.5% share in the patents and patent applications and therefore fails in common with those arguments.

46    The second contention is a chronological one and is cast in these terms at RS [214]-[216]:

… as to the Whitewater Percentage Representation, about an hour after it was allegedly made by Kriticos at 2.40pm on 9 December 2014, Watson queried at 3.47pm “how was it assigned given that I have an equitable interest”, and Kriticos responded at 6.41pm that “[t]here has never been a share, equity” [footnote to §72 of the First Respondent’s affidavit of 6 July 2020].

The Whitewater Representation was then made the following day, after Kriticos had made abundantly clear that he did not consider Watson to have any share or equity in the Patents.

As such, Watson could not have been mislead or deceived by Kriticos to continue to provide services by what Watson from 10 December 2014 to on or about 4 August 2017, as he alleges.

47    There are two difficulties with this submission. First, it seems to overlook the content of the Whitewater Representation, being that the Applicant would receive $125,000 per year from the transaction. That representation does not in its terms depend on any alleged interest in the patents. Consequently, even if it was preceded in time by the First Respondent’s disavowal of the existence of any such interest, this would not logically preclude the prospect that the Applicant relied upon the representation as to income to his detriment in continuing to perform patent attorney services. Obviously, the same logic does not apply to the Whitewater Percentage Representation but even there, and this is the larger difficulty with the submission, the character and effect of the representations are matters to be assessed, as the Applicant correctly submits at AS [44], ‘in all the circumstances’ or, to borrow the First Respondent’s phrase quoted at [32] above, once the ‘full picture’ has emerged. As I explained at [33]-[37] above, the ascertainment of that picture is the province and function of the trial. At this stage, even if the First Respondent’s chronology of events is accepted, it cannot be said that the Applicant has no reasonable prospects of making good the pleaded allegations at 2FASOC §§162-167 and 176.

48    Thus, the second contention bespeaks in microcosm the larger problem affecting the present application: it serves only to point up the existence of a genuine dispute about and upon the evidence which has been or may yet be led, and in this way forecloses any conclusion that there is no question to be tried or that the relevant portions of the FAOA and 2FASOC enjoy no reasonable prospects of success or disclose no reasonable cause of action. I note for completeness that this conclusion disposes also of the First Respondent’s ancillary argument that the claim in respect of the Whitewater Representation should be dismissed or struck out because, according to the First Respondent, that representation had a reasonable basis: (RS [212]; Amended Defence [163]). This too is an issue not appropriately dealt with in the context of the present application.

Related but pointless arguments

49    The First Respondent’s submissions raised some other points. First, he said that an ownership interest in the patents could not be inferred from the terms which the Applicant admitted: RS [31]. This is, however, irrelevant as the present debate is about an express oral term which the First Respondent in fact denies. This submission was accompanied by a short but nevertheless unnecessary detour through the rights conferred by the Patents Act 1990 (Cth) (‘Patents Act’) but this is no more relevant than the submission to which it was attached. The Applicant understandably felt obliged to say something about this as well (that the patents were foreign patents so that the Patents Act was the wrong question), however, none of this matters either.

50    Secondly, the First Respondent submitted that there was no evidence that the First Respondent was to be restricted from licensing or assigning an interest in the patents or patent applications without the Applicant’s consent: RS [28]. However, this too was but a tributary into the First Respondent’s contention that the 12.5% ownership interest term could not be inferred from those terms of the agreement which the First Respondent admitted. This issue does not matter because the summary judgment application is only about the express term which the First Respondent denies.

51    Thirdly, the First Respondent alleges in his statement of cross-claim (‘CC’) that the Applicant owed him a fiduciary duty not to place himself in a position without the First Respondent’s consent where there was or might be a conflict between his duty as a fiduciary and his own interest: CC §7. At CC, §8 it is alleged, shortly stated, that the Applicant knew that it would be very difficult to get the patents registered. At CC §10 the First Respondent then alleges that the Applicant breached his fiduciary duty by recommending that he, the Applicant, carry on seeking registration of the patents without telling the First Respondent that this would, in fact, be a most difficult undertaking. At CC §12 the First Respondent seeks equitable compensation and/or an account of profits for this breach of fiduciary duty. Significantly, he does not seek an order in equity setting aside the agreement alleged by the Applicant.

52    It is significant because in his submissions on the summary judgment application the First Respondent alleges that the conflict of interest and duty pleaded at CC §7 permits him to avoid the term of the agreement which provided for the 12.5% ownership interest. There are several problems with this. First, no such case is actually pleaded in the cross-claim. Secondly, even if it were, this would not provide a basis for summary judgment on the existence of the term. Indeed, quite to the contrary, the argument takes as its point of departure that the term does in fact exist. Thirdly, this would actually be summary judgment on the cross-claim and not summary judgment on the 2FASOC.

53    Fourthly, what would be involved would be rescission in equity and its efficacy would await determination by the Court: Alati v Kruger (1955) 94 CLR 216 at 223-224 per Dixon CJ, Webb, Kitto and Taylor JJ. Fifthly, such a decree would not be granted unless the parties could be substantially restored to their original positions. It is not necessarily clear how that would be achieved in this case even if the matter were now at trial. Viewed, however, through the lens of a summary judgment application, the issue is hopeless.

54    Moving then to those parts of the 2FASOC which the First Respondent says should be struck out:

The implied filing and maintenance term

55    This allegation appears at 2FASOC §24(h) and is an allegation that the agreement contained an implied term that:

the First Respondent was required to file and maintain the Covered Patents and Applications, where not unreasonably onerous to do so;

Particulars

The term was implied because:

A.     it is reasonable and equitable;

B.     it is necessary to give business efficacy to the Patent Share Agreement [ie, the 2013 Agreement];

C.     it is so obvious that 'it goes without saying';

D.     it is capable of clear expression; and

E.     it does not contradict any express term of the contract.

56    The five particulars correspond with the five matters which justify the implication in fact of a contractual term: Associated Alloys Pty Limited v ACN 001 452 106 Pty Ltd [2000] HCA 25; 202 CLR 588 at 609-610 [44]-[45] per Gaudron, McHugh, Gummow and Hayne JJ, citing BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 per Simon, Dilhorne and Keith LL and Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; 149 CLR 337 at 347 per Mason J. The First Respondent submits that the term should be struck out because it is the forbidden fruit of the Applicant’s breach of fiduciary duty. However, this is misconceived. No such allegation is made in the cross-claim; there is no application for summary judgment in relation to the cross-claim; even if there were, striking out would not be the appropriate remedy.

57    The First Respondent also submits that the term should not be implied because it is not ‘necessary’ in the requisite sense. However, the question of what is necessary is a function of the terms of the agreement. Because the alleged terms of this agreement consist of multiple emails, conversations and implied terms scattered like plane wreckage across the forensic landscape and because many of these are hotly contested, it cannot yet be known what the terms of the agreement actually are. Embarking, therefore, upon an analysis of whether the law would imply a term into a bargain, where it has not yet been determined what the bargain actually was, would be akin to building a house from the roof down.

Loss and damage

58    The First Respondent submits that §§31, 32, 65, 86, 94, 101, 110, 125, 141, 151, 175, 176, 194, 199 and 206 of the 2FASOC should be struck out. What each of these paragraphs has in common is an allegation that the Applicant has suffered loss and damage ‘due to the fact that he cannot exercise his monopoly to exploit [a patent], nor derive a benefit from others exploiting [a patent]’.

59    There are two sets of claims to which these allegations are attached: (a) the breach of contract and fiduciary duty claims and (b) the misleading and deceptive conduct claims. The First Respondent’s submission is that the allegation in each of the paragraphs is not properly pleaded because it does not allege a counterfactual. The Applicant submits that this is not so in relation to the fiduciary duty and breach of contract claims because he is entitled to be put back in the position he would have been in but for the breaches. In relation to the misleading and deceptive conduct case, he says that the pleading does suggest a counterfactual at 2FASOC §32 being that he would have ceased working on the patents and patent applications from the time of the representations.

60    I do not accept either of the Applicant’s submissions about this. As to the claim for damages for breach of contract and the claim for equitable compensation, whilst it may be generally correct to say that the plaintiff is to be restored to the position he would have been in but for the breach, this does not mean that the plaintiff is relieved from the requirement of making allegations of material fact relevant to that endeavour. Making the assumption that the breaches are established, the question then immediately arises as to what the Applicant’s position would have been but for those breaches. It will not do to leave that question unanswered in the pleading. Presumably he would have done something – perhaps exploit his 12.5% interest or perhaps sell it. Other possibilities may be imagined. The point for present purposes is that this is an inherent part of his case and he must plead it.

61    In relation to his misleading and deceptive conduct case the Applicant submitted that the onus of proving a counterfactual could ‘shift constantly according as one scale of evidence or the other preponderates’, citing Berry v CCL Secure Pty Ltd [2020] HCA 27; 94 ALJR 715 (‘Berry’) at [37], [39] and [42] per Bell, Keane and Nettle JJ. I do not accept this submission. Berry was a case in which the appellant was induced by representations made by the respondent to give up a contract. However, the contract was one which the respondent could also lawfully have terminated. The question was whether in assessing the damages to which the appellant was entitled it was to be brought to account that had the contract remained on foot the respondent would in any event lawfully have terminated it. One of the questions in the appeal concerned who bore the onus of proving that the respondent would have terminated the agreement lawfully: was the possibility something to be negatived by the appellant as part of its burden of proving its case on loss or was it something to be proved by the respondent? Much of the debate in the appeal was concerned with the question of when the evidentiary burden might shift from the appellant to the respondent and, within that debate, there was consideration of the principle that sometimes prevents a wrongdoer from taking advantage of its own wrong.

62    The Applicant is correct that the case does contain statements that the evidentiary burden might shift to a respondent depending on the evidence, but those statements are directed at the narrow situation where the event the subject of dispute is some act by the respondent in the counterfactual which might reduce the loss: Berry at [37], [39] and [42] per Bell, Keane and Nettle JJ. In Berry the burning question was whether it could be inferred from the fact that the respondent had induced the appellant to end the contract by means of a fib that it had some reticence about exercising its legal right to terminate the contract.

63    I do not think, therefore, that Berry assists the Applicant. The statements in Berry do not suggest that the applicant’s burden of proving his loss shifts depending on the evidence. Indeed, Berry proceeds on the orthodox assumption that the applicant has that burden. It is not sound to transplant statements about the evidentiary burden in relation to steps which a respondent might have taken in the counterfactual into the general proposition for which the Applicant now contends.

64    Consequently, I think the First Respondent is entitled to know how the Applicant puts the case alleged in the impugned paragraphs. For example, does he have in mind particular opportunities that were missed? Is a loss of a chance case to be put? Is there some other way the loss and damage case is to be approached? I do not accept the Applicant’s contention that these are matters which do not need to be pleaded. Any allegation about a foregone opportunity or a lost chance will be an allegation of material fact which is required by the rules to be pleaded: FCR rr 16.02(1)(d), 16.03. Consequently, I accept that as these paragraphs are framed they are not sufficient.

65    Finally, for completeness, I reject the Applicant’s submission that 2FASOC §32 pleads a counterfactual scenario in relation to the misleading and deceptive conduct case. It says:

Further and in the alternative, as a consequence of the First Respondent’s misleading and deceptive conduct in making the Patent Share Email Representations, the Patent Share Verbal Representation, and the Patent Agreement Representations in breach of section 18 of the ACL, the Applicant has suffered loss and damage as detailed below in relation to each of the Covered Patents and Applications, and the Applicant claims this loss and damage pursuant to section 236 of the ACL.

66    The Applicant submits that this allegation ‘suggests’ that but for the representations the Applicant would have stopped work on the patents and patent applications. It does not say that, nor do the facts pleaded in relation to it.

67    I will therefore strike these paragraphs out. However, it is far from obvious that this entails that the Applicant has no case on loss or damage. Consequently, I will grant the Applicant an opportunity to re-plead the paragraphs with the appropriate allegations included.

68    This renders redundant the First Respondent’s application for further particulars.

Service on the Second Respondent

69    I previously refused to grant leave to the Applicant to serve the Second Respondent: Watson v Kriticos (Joinder and Service Applications) [2020] FCA 1019. At [10] I observed:

But the prima facie requirement does require the party seeking leave to put material before the Court from which inferences are open which, if translated into findings of fact, would support the relief claimed: Ho v Akai Pty Limted (in liquidation) [2006] FCAFC 159; 247 FCR 205 at [10]. I do not accept that §11 meets this standard. Although counsel summarises the pleadings in his written submissions, this did not solve the problem either. In order to satisfy the requirement of the rules there will need to be some material from which it can be inferred that the Applicant has a case for some relief against the First Respondent. Since the claim against the Second Respondent concerns a trust said to bind the First Respondent, proof of a prima facie case in relation to that trust might be worthwhile point to start.

70    The present application has persuaded me that there is material from which it can be inferred that the Applicant has a prima facie case in relation to his trust allegations against the First Respondent. Consequently, I grant leave to the Applicant to serve the originating application and the 2FASOC on the Second Respondent. If the third further amended statement claim is filed before that service has been effected my chambers may be approached for an order permitting service of that pleading in lieu of the 2FASOC. However, until the later pleading is filed the 2FASOC remains the filed pleading. The Applicant will also need to serve a copy of the orders accompanying these reasons for judgment.

Orders

71    I will make the following orders:

(1)    Paragraphs 1, 2, 3, 4, 5, 6, 8 and 9 of the interlocutory application dated 7 July 2020 be dismissed.

(2)    Paragraphs 31, 32, 65, 86, 94, 101, 110, 125, 141, 151, 175, 176, 194, 199 and 206 of the Second Further Amended Statement of Claim filed 26 June 2020 be struck out.

(3)    Leave be granted to the Applicant to re-plead the paragraphs referred to in order 2 by filing and serving a Third Amended Statement of Claim within 28 days of the date of these orders.

(4)    Leave be granted to the Applicant, pursuant to r 10.43(2) of the Federal Court Rules 2011 (Cth), to serve the Further Amended Originating Application filed 6 December 2019, the Second Further Amended Statement of Claim filed 26 June 2020 and a copy of these orders on the Second Respondent, in Canada, in accordance with the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters. Opened for signature 15 November 1965. 658 UNTS 163 (entered into force 10 February 1969).

(5)    If service in accordance with order 4 is not effected before the filing of any Third Amended Statement of Claim filed in accordance with order 3, the Applicant be granted leave to approach the Court in Chambers in relation to leave to serve the Third Amended Statement of Claim on the Second Respondent.

(6)    The First Respondent pay the Applicant’s costs of the interlocutory application dated 7 July 2020 as taxed, agreed or assessed.

Associate:

Dated:    24 March 2021