Federal Court of Australia

Federal Treasury Enterprise (FKP) Sojuzplodoimport v Spirits International B.V. (Security for Costs) [2022] FCA 1371

ORDERS

THE COURT ORDERS THAT:

1.    The Cross-Claimants provide additional security for the costs of the Cross-Respondent in respect of the Cross-Claim in the sum of AUD45,412.50 (‘Security Amount’) within 14 days of the making of this order by way of payment into a controlled monies account maintained by the Cross-Respondent’s solicitors, namely National Australia Bank account number 156062128 in the name of King & Wood Mallesons – Security for costs in Federal Court Proceedings NSD1816 of 2004 CMAC, to which Catriona Nagy of King & Wood Mallesons and Michelle Fox of Quinn Emanuel are joint signatories (‘Account’).

2.    The Security Amount is to be held in the Account together with any interest (subject to any amount required for payment of tax on the interest) until the occurrence of any of the following:

(a)    The Federal Court of Australia orders the payment or release of all or part of the monies held in the Account to either of the Cross-Claimants, the Cross-Respondent or to any other person;

(b)    The Cross-Claimants consent to the payment or release of all or part of the monies held in the Account to the Cross-Respondent or to any other person, such consent of the Cross-Claimants to be provided in writing by the Cross-Claimants’ solicitors in this proceeding; or

(c)    The Cross-Respondent consents to the payment or release of all or part of the monies held in the Account to the Cross-Claimants, such consent of the Cross-Respondent to be provided in writing by the Cross-Respondent’s solicitors in this proceeding.

3.    In the event of the Cross-Claimants failing to provide security in accordance with Order 1, the proceeding in respect of the Cross-Claim be stayed.

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

REASONS FOR JUDGMENT

PERRAM J:

Introduction

1    This is a security for costs application. I will refer to the Cross-Respondent to the Third Further Amended Cross-Claim who is the applicant for security as ‘Spirits’ and to the Cross-Claimants on the Third Further Amended Cross-Claim who are the respondents to that application as ‘FKP’. FKP is an emanation of the Russian Federation and is resident in Russia. I will refer to the Third Further Amended Cross-Claim as the ‘Cross-Claim’. The balance of the proceedings settled long ago.

2    Security in the amount of AUD210,000.00 is sought for Spirits’ costs up to and including a two day hearing scheduled for 21 and 22 March 2023. Relevantly, two applications are then to be heard: (a) an application by Spirits to amend, inter alia, §§65, 66 and 67 of its defence to the Cross-Claim; and (b) an application by FKP to strike out those same paragraphs. A third question is also to be determined but is not relevant to the present debate.

3    It is not disputed that FKP is ordinarily resident outside Australia so that the power to order security in s 56 of the Federal Court of Australia Act 1976 (Cth) is enlivened: see also Federal Court Rules 2011 (Cth) (‘FCR’) r 19.01(3)(b). FKP submits, however, that the amount sought is excessive and, in any event, that the Court ought not to exercise the discretion in Spirits’ favour. It has three contentions. First, the costs claimed include work which is not relevant to any issue. Secondly, Spirits will be ordered to pay the costs of the amendment application as the party seeking the indulgence of an amendment so that security for its amendment application is inappropriate. Thirdly, Spirits is indebted to FKP in an amount which exceeds the security sought.

Does the security claimed include an amount for work that is not relevant?

4    FKP says that this amount is excessive because it includes a component for examining evidence about the lengthy procedural history of the matter. FKP submits that this can only be relevant to Spirits’ amendment application and not to FKP’s strike out application. FKP accepts that Spirits is entitled to security for FKP’s strike out application, but it denies that Spirits is entitled to security for its own amendment application.

5    Spirits says that FKP is wrong and that the procedural history is relevant to the strike out application. It submits that if FKP establishes grounds for striking out one or more parts of Spirits’ defence, then the question of whether they should in fact be struck out will involve the exercise by the Court of a discretionary power. Spirits submitted that the lengthy procedural history of the case will demonstrate that FKP has delayed in applying to strike out the defence and therefore that even if grounds for striking out are established, it will be entitled to argue that they should not be struck out by reason of FKP’s delay.

6    The grounds upon which pleadings may be struck out are set out in FCR r 16.21(1):

16.21     Application to strike out pleadings

(1)    A party may apply to the Court for an order that all or part of a pleading be struck out on the ground that the pleading:

(a)    contains scandalous material; or

(b)    contains frivolous or vexatious material; or

(c)    is evasive or ambiguous; or

(d)    is likely to cause prejudice, embarrassment or delay in the proceeding; or

(e)    fails to disclose a reasonable cause of action or defence or other case appropriate to the nature of the pleading; or

(f)    is otherwise an abuse of the process of the Court.

7    Once satisfied that a pleading suffers from any of the vices mentioned in this provision, the Court is empowered to strike the pleading out: FCR r 1.41.

8    It is therefore necessary to examine the grounds on which the strike out is sought and to assess the relevance of delay to those grounds. In the Cross-Claim, FKP claims to be the true owner of a number of trade marks including the STOLICHNAYA trade marks. The Register of Trade Marks (‘the Register’) currently records Spirits as their owner. Simplifying for present purposes, FKP contends that the trade marks were looted from the Russian Federation during the chaos which ensued at the time of the collapse of the former Soviet Union. Since that time, title to the trade marks has passed through several hands but FKP’s contention is that the root of this chain of title is misappropriated property. Invoking the nemo dat rule, FKP says that it is the true owner of the trade marks and that Spirits’ title to them as a successor in title is defective for that reason. It seeks to rectify the Register under s 88 of the Trade Marks Act 1995 (Cth) (‘the Act’) to remove the statement that Spirits is the owner of the trade marks and to replace it instead with an annotation that FKP is.

9    Spirits’ answers to this claim include the defences pleaded at §§65, 66 and 67 of its defence. §65 pleads an estoppel against FKP arising from representations alleged to have been made by the Government of the Russian Federation. §66 pleads a defence of laches. §67 pleads that if FKP is otherwise entitled to apply for the removal of the trade marks from the Register under s 88 of the Act, then that relief should be refused on discretionary grounds because of the same factual matters which underpin the estoppel and laches defences.

10    FKP has previously indicated that it seeks to strike these defences out on three bases. First, §§65, 66 and 67 are deficient in the terms in which they are pleaded; that is to say, allegations which as a matter of law need to be made have not been made. I will refer to these arguments as ‘pleading points’. Secondly, FKP says that Spirits is prevented from raising the matters in §§65, 66 and 67 by reason of the preclusive effect of certain judgments given by the Dutch Courts including a judgment of the Supreme Court of the Netherlands. Thirdly, in relation to the discretionary defence to removal under s 88(1) of the Act, FKP says that the authorities on the discretion conferred by s 88 show that the conduct of the applicant for removal is irrelevant to its exercise.

11    It therefore follows that FKP’s application will be made under FCR rr 16.21(1)(e) (no reasonable defence) and (f) (abuse of process). If either is established, it is unlikely that the Court would decline to strike out §§65, 66 and 67 because of FKP’s delay in bringing the strike out application. The Court would be unlikely to require FKP to meet a case which cannot succeed. Although it is unlikely, however, it is not impossible. An appropriate course therefore is to reduce the amount of security to reflect my estimate of the cost of the work involved and the unlikelihood of it being relevant.

12    Spirits submitted that no such reduction should be applied. I accept its submission that its estimate of AUD210,000.00 has been already been subject to a substantial discount but I do not accept that this means no further reduction is warranted. The discount applied by Spirits to its own costs related to the global rate it expected to recover on a taxation which was set at 65-75%. I do not consider that this global reduction should be regarded as including within it an element for work to be done which is unlikely to be relevant.

13    As to the cost of the work, Spirits’ evidence justifying AUD210,000.00 does not identify how much of that figure relates to an examination of the procedural history. Its evidence does show that there is a substantial amount of other work to be done. It is therefore necessary to adjust the figure impressionistically. Having perused the evidence, it seems to me that a 15% reduction is appropriate.

14    As to the likelihood of it being irrelevant, it seems to me appropriate to proceed on the basis that there is a 10% chance of it being relevant and therefore a 90% chance of it being irrelevant. I will therefore maintain 90% of the 15% reduction. Combining these two matters there should be a reduction by 13.5% to 86.5% of the sum claimed.

No security because Spirits will be ordered to pay the costs of the amendment application?

15    Next FKP submitted that Spirits would be unlikely to obtain a costs order in its favour on the amendment application. FKP submitted this was so for two reasons:

(a)    as a general rule a party seeking security is not entitled to obtain security in respect of its own subsequent interlocutory applications; and

(b)    on an amendment application the usual order is that the party seeking the amendment should pay the costs of the other party. It was therefore unlikely that it would be ordered to pay Spirits’ costs of its own amendment application.

16    I do not think it useful to consider the first argument at the level of generality at which (a) is pitched since it is by no means obvious that it is susceptible to a general answer. Rather, the question is whether Spirits is likely to obtain a costs order in its favour on the amendment application or an order that the costs be costs in the cause. The latter is so because if such an order is made and Spirits is successful in resisting the Cross-Claim, then the effect of the order will be to require FKP to pay Spirits’ costs of the amendment application.

17    FKP’s strike out application and Spirits’ amendment application are not unconnected and overlap in that they both concern §§65, 66 and 67 of Spirits’ defence. These include an attack on the basis of the pleading points. Spirits seeks to amend §§65, 66 and 67 to outflank the pleading points. Spirits also seeks to amend §2. It is not clear to me what the significance of that amendment is and neither party raised it as relevant to the question of security.

18    The argument FKP raises requires one to assess the likelihood that Spirits will obtain a costs order in its favour on the amendment application. I do not consider that it is possible to determine that question at this stage as there are too many uncertainties. For example, FKP might succeed in striking out §67 (on the basis that the conduct of FKP and/or the Russian Federation is irrelevant to the exercise of the discretion under s 88(1) of the Act) but fail to strike out §§65 and 66 on the basis of the preclusive effect of the judgments of the Dutch Courts. If FKP’s pleading points in relation to §§65 and 66 then also failed, this might entail that Spirits’ amendment application (which in part is intended to head off that challenge) was unnecessarily provoked by FKP’s communication of the pleading points prior to the filing of its strike out application. In that circumstance, FKP might well be ordered to pay Spirits’ costs of the amendment application.

19    On the other hand, if §§65 and 66 were struck out because of the preclusive effect of the judgments of the Dutch Courts, then the amendment application insofar as it relates to those paragraphs may be moot. In that circumstance, it is possible that Spirits would be ordered to pay FKP’s costs of the amendment application.

20    There may well be other such possibilities. It is not necessary to enter upon them but the risk of their existence emphasises that determining in advance the likely costs outcome of the amendment application is not possible.

21    In that circumstance, the appropriate course is to adjust the amount of the security claimed to reflect the various uncertainties which exist. Again, this may only be done as a matter of impression. My impression is that the more likely outcome is that Spirits will be ordered to pay FKP’s costs of the amendment application although there is some chance that FKP will be ordered to pay Spirits’ costs. There is also a chance that there will be no costs order or that costs will be costs in the cause. In my view, an appropriate reduction reflecting all of these various matters is 75% so that the amount of the security should be reduced to 25% of the amount otherwise thought appropriate.

Relevance of Spirits’ liabilities to FKP

22    Next FKP submitted that there should be no security at all because Spirits is indebted to FKP in sums in Euros presently worth AUD488,516.38 and because it had costs orders in its favour in the Full Court and the High Court. FKP submitted that its recoverable costs under these orders would be AUD650,000.00.

23    I accept that both matters are relevant to the question of security. The foreign judgment debts are as follows:

24    Spirits submitted that FKP had not provided any detail as to whether these debts were enforceable or what the limitation periods applying to them were. As to enforceability, it is unclear whether Spirits meant that it had no assets in the places where the judgments were given (so that the judgment debts although existent were worthless to FKP) or whether there was some unspecified legal impediment that stood in the path of their enforcement. As to the limitation periods, it is no doubt true that some of the judgment debts are old, for example, one of them arises from an order made by the Court of Linz on 12 August 2014.

25    However, I do not consider it is FKP’s burden on the present application to prove that these problems do not exist. If Spirits wishes to contend that these debts are not enforceable or that recovery of them is statute barred, it was its burden to prove as much and that burden has not been discharged. I will therefore proceed on the basis that Spirits is indebted to FKP in the sum of AUD488,516.38.

26    I also accept that FKP has a contingent entitlement to a sum for its costs of an appeal to the Full Court and a special leave application to the High Court. As I have already noted, FKP estimates the recoverable element of these costs to be AUD650,000.00. Although this appears on the high side to me, I propose to act upon it.

27    It was on this basis that FKP invited the Court not to award Spirits security for costs: the amount of security sought would be less than the sum of the foreign judgment debts and FKP’s contingent costs entitlement. I do not accept this submission which fails to consider the correct circumstance to which an award of security is directed. That circumstance is that FKP’s Cross-Claim has been dismissed and that it has then been ordered to pay Spirits’ costs of the proceeding. Spirits’ actual costs of the proceeding are already in excess of AUD7 million. Even allowing for set offs from previous costs orders and a substantial reduction on taxation or assessment, I am satisfied that if FKP loses the proceeding it will be indebted to Spirits in a sum for costs which exceeds the sum of the foreign judgment debts and its contingent costs entitlement.

28    As such, I am satisfied that this case is distinguishable from Derma Pen LLC v Biosoft (Australia) Pty Ltd (Security for Costs) [2022] FCA 885. In that case, any eventual costs entitlement in the security applicant’s favour could not have exceeded the amount of a foreign judgment debt of USD15,575,327.53 owed by the security applicant to the security respondent. In this case, on the other hand, Spirits’ eventual costs entitlement will exceed the sum of the foreign judgment debts and the contingent costs liability.

29    The parties also joined issue on whether a judgment for costs in Australia would be enforceable in Russia. No such issue arises. FKP is not resident in the jurisdiction and security for costs may therefore be ordered. It is true that where a judgment for costs is able to be enforced in a defendant’s country of residence there is some authority for the proposition that the amount of the security may be limited to the costs of seeking to enforce the costs judgment in that place. However, FKP did not submit that the amount of the security should be reduced on this basis. Consequently, the debate is irrelevant.

Other Matters

30    There are two final points. First, Spirits sought orders that the security be paid in either US dollars or Australian dollars. The liability for costs will eventually be determined in Australian dollars and for that reason the security will be paid in Australian dollars. Secondly, neither party submitted that the question of security was affected by the sanctions regime currently in place against the Russian Federation.

Orders

31    The amount of the security will be reduced by 13.5% and then 75% which will result in a figure of AUD45,412.50. I will make the substantive orders sought by Spirits in its interlocutory application using that figure. The question of the costs of this application may be dealt with at the end of the proceedings: see Federal Treasury Enterprise (FKP) Sojuzplodoimport v Spirits International B.V. (Permanent Stay) (No 2) [2022] FCA 1031 at [19].

Associate:

Dated:    17 November 2022