Federal Court of Australia

Gensco Laboratories, LLC v Care A2 Plus Pty Ltd (receiver appointed) (No 2) [2024] FCA 23

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to r 19.01(1)(a) of the Federal Court Rules 2011 (Cth) (Rules), the first respondent/cross-claimant is to provide security for the applicants’/cross-respondents’ costs of and incidental to the statement of cross claim filed on 19 September 2023 (Cross Claim), in the amount of $675,859.05, to be paid into Court by way of:

(a)    an initial tranche of $50,000 by 4.30 pm on Monday, 19 February 2024; and

(b)    subsequent tranches of security, to be agreed between the parties, or in the absence of agreement, in a manner to be determined by the Court at the case management hearing at 9.30 am on Friday, 1 March 2024.

2.    Pursuant to r 19.01(1)(b) of the Rules, the Cross Claim be stayed pending provision of the initial tranche of security in the amount of $50,000 by the first respondent/cross-claimant pursuant to Order 1 of these orders.

3.    If the initial tranche of security in the amount of $50,000 is not provided in accordance with Order 1 of these orders by Thursday, 7 March 2024, the Cross Claim be dismissed as against the applicants/cross-respondents, and the first respondent/cross-claimant is to pay the applicants’/cross-respondents’ costs of and incidental to the Cross Claim as agreed or taxed.

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

REASONS FOR JUDGMENT

HALLEY J:

A.    Introduction

1    By an interlocutory application filed on 27 October 2023, the applicants/cross-respondents (Gensco) seek an order that the first respondent/cross-claimant (Care A2) provide security for Gensco’s costs of and incidental to the Statement of Cross Claim filed on 19 September 2023 (Cross Claim or CC), in the amount of $800,847.50 (Gensco security costs application).

2    The Gensco application is made pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) and r 19.01 of the Federal Court Rules 2011 (Cth) (Rules). Alternatively, Gensco relies on s 1335(1) of the Corporations Act 2001 (Cth) (Corporations Act) as a source of power for the Court to make the orders it seeks.

3    Gensco further seeks an order pursuant to (a) r 19.01(1)(b) of the Rules, that the Cross Claim be stayed pending provision of security, and (b) r 19.01(1)(c) of the Rules, that if security is not provided within 45 days’ of the Court’s order, the Cross Claim be dismissed as against Gensco and Care A2 pay Gensco’s costs of the Cross Claim as taxed or agreed.

4    The Gensco application raises two substantive questions for determination. First, is there reason to believe that Care A2 would not be able to meet an adverse costs order? Second, is the Cross Claim properly to be characterised as essentially defensive in nature or an independent claim?

5    Gensco relies upon two affidavits of their solicitor, Suzanne Katherine Madar affirmed on 23 October 2023 and 27 November 2023. In her second affidavit, Ms Madar provided a detailed estimate of the additional costs that she believes Gensco will incur in defending the Cross Claim. She was not cross-examined.

6    Care A2 did not adduce any evidence in response to Gensco’s application.

7    For the reasons that follow, I have concluded that there is reason to believe that Care A2 could not meet an adverse costs order and that the Cross Claim is not essentially defensive in nature. In the circumstances, Care A2 is to provide security for Gensco’s costs with respect to the Cross Claim in the amount of $675,859.05 in an initial tranche of $50,000 and, thereafter, in a series of subsequent tranches to be agreed between the parties, or in the absence of agreement, to be determined by the Court.

B.    Background

8    On 19 June 2023, the applicants, Gensco Laboratories, LLC and Gensco Nutrition LLC, commenced proceedings in this Court against four respondents, including the first respondent, Care A2 and the third respondent, Kerry Hyland, a director of Care A2. The applicants allege against Care A2, breaches of contract and misleading or deceptive conduct with respect to a proposed supply of an infant formula product manufactured by Care A2 in Australia to the applicants in the United States (Principal Claim). The applicants also allege against Ms Hyland, that she has engaged in misleading or deceptive conduct. Gensco has undertaken not to pursue these claims against Ms Hyland, at least until the determination of related proceedings that Gensco has brought against her and Care A2 in the United States.

9    On 7 August 2023, Care A2 and Ms Hyland filed an interlocutory application seeking security for their costs of and incidental to the Principal Claim in the amount of $1,800,000 (Care A2 Application).

10    On 19 September 2023, Care A2 filed the Cross Claim against Gensco and three of Gensco’s officers, Paul Zimmerman, Marc Fry and Daniel Nalley (Gensco officers). The Gensco officers are not parties to the Principal Claim.

11    On 23 November 2023, I heard the Care A2 Application and ordered that Gensco provide security for the costs of Care A2 and Ms Hyland, of and incidental to the Principal Claim, in a form and amount to be determined at a hearing on 19 December 2023.

12    On 19 December 2023, I ordered Gensco to provide an initial tranche of $400,000 by 4.30 pm on Friday, 19 January 2024 as security for the costs of Care A2 and Ms Hyland and otherwise stood the Care A2 application over to 9.30 am on Friday, 1 March 2024 for the purpose of making orders for the provision of additional tranches of security for costs.

13    On 19 December 2023, I also heard the Gensco security costs application and reserved my decision.

C.    Is there Reason to believe that Care A2 could not meet an adverse costs order?

C.1.    Legal principles

14    Section 56 of the FCA Act provides:

56    Security

(1)    The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her.

(2)    The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs.

(3)    The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given.

(4)    If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed.

(5)    This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.

15    Rule 19.01(1) of the Rules provides:

19.01    Application for an order for security for costs

(1)    A respondent may apply to the Court for an order:

(a)    that an applicant give security for costs and for the manner, time and terms for the giving of the security; and

(b)    that the applicant’s proceeding be stayed until security is given; and

(c)    that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed.

16    Section 1335(1) of the Corporations Act relevantly provides:

1335    Costs

(1)    Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

17    The principles applying to an application for security for costs are well settled: Forest Carbon Methodology Pty Ltd v Schultz [2023] FCA 943 at [31] (O’Sullivan J), citing All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited [2020] FCA 840 at [40]-[44] (Allsop CJ).

18    Section 56 of the FCA Act does not expressly impose any threshold to be met before the Court considers the various matters relevant to the exercise of its discretion to order security for costs: All Class at [41]. However, the applicant’s inability to pay the costs of the respondent remains an important consideration in the exercise of the Court’s discretion. Section 1335 of the Corporations Act does not raise any different issue than s 56 of the FCA Act as to the foundation of the Court’s jurisdiction to make an order for security for costs: Nine Films & Television Pty Ltd v Ninox Television Limited (2005) 146 FCR 144; [2005] FCA 735 at [52] (Lindgren J).

19    In A1 for Maintenance Pty Ltd v Lehal Pty Ltd [2018] FCA 1476 at [23], Colvin J summarised the principles governing an order for security for costs pursuant to s 1335 of the Corporations Act, which I respectfully adopt, as follows:

The wording of s 1335 of the Corporations Act and the weight of the authorities is to the effect that there is an initial jurisdictional question as to whether it appears by credible testimony that there is a reason to believe that the company will be unable to pay the costs of the defendant if successful in its defence. If the jurisdiction is enlivened then there is an unlimited discretion: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 156 FLR116 at [21]. As to the jurisdictional question, there must be a rational basis for a belief as to what the position will be when the time comes to pay costs if the defendant is successful. This may be said to be a low threshold: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 at [14]-[17]. It involves the making of a judgment as to whether there is credible evidence for a present belief about future events.

20    The test for reasonable belief that a company will be unable to pay the costs of the defendant if it is unsuccessful in its defence has been referred to as an “undemanding test”: HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [6] (Ward JA, as her Honour then was); Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360 at [41] (White J), and a “fairly modest threshold test”: Meni’s Tailoring & Alterations Pty Limited v Jeanswest Corporation Pty Ltd [2003] FCA 1108 at [4] (Merkel J).

21    In A1 for Maintenance, Colvin J said the following with respect to the exercise of the discretion:

25    The discretion as to whether to order the provision of security, and if so in what amount, is to be exercised having regard to the interests of justice and the purpose evident from the nature of the power conferred.

26    Lists of matters that might be considered have been expressed: see, for example, Madgwick v Kelly [2013] FCAFC 61; (2013) 212 FCR 1 at [7]; Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd [2004] FCA 1334 and Mercus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103 at [19]-[21]. However, the considerations are not a checklist of matters to be brought to account as part of the balancing exercise in every case. Whether a consideration has significance and, if so, the weight that it should be afforded will depend upon the particular circumstances of each case: PS Chellaram & Co Ltd v China Ocean Shipping Company [1991] HCA 36.

22    In Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371, Gleeson J succinctly stated the following relevant principles in relation to the respective onuses on the parties to an application for security for costs:

25    Once it appears by credible testimony that there is reason to believe that a corporation will be unable to pay the costs of the defendant if successful in its defence, there is an evidentiary burden on the party resisting the order for security for costs to establish a reason why security should not be granted: Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [30] (“Wollongong City Council”), Topcide Pty Ltd v Charter Financial Planning Ltd [2010] FCA 1151 at [12] and Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222 at [9].

26    Even so, the burden rests on the defendants, from first to last, to persuade the court that the order for security should be made: Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [21].

C.2.    Submissions

23    Gensco submits that while it bears the onus and evidentiary burden of proving that Care A2 would be unable to meet any judgment for costs, that burden is not arduous and the test for reason to believe that Care A2 would not be able to satisfy an adverse costs order is a low threshold test that requires “a rational basis for the belief and no more”.

24    Gensco submits that the following evidence establishes that there is reason to believe that Care A2 would not be able to satisfy an adverse costs order (a) a receiver was appointed to Care A2 on 2 December 2022 (and remains appointed), (b) Care A2 has provided Gensco with no information and led no evidence in the context of this application, as to its financial position, and (c) searches of the Personal Property Securities Register for Care A2 (PPSR Summary) reveal that there are fixed and floating charges over all the assets of Care A2 in favour of GI 305 Pty Ltd (GI 305) and Fishbank Development Corporation Pty Ltd (Fishbank).

25    Gensco submits that in the absence of any countervailing evidence from Care A2 as to its financial position, or any other countervailing circumstance which would justify refusing to make an order for security for costs, the Court ought to exercise its discretion in favour of an order for security.

26    Care A2 submits that Gensco has failed to discharge its evidentiary burden of establishing that there is reason to believe Care A2 will be unable to meet any adverse costs order.

27    Care A2 submits that the only admissible evidence adduced by Gensco comprises of the (a) appointment of a receiver to Care A2 on 14 December 2022, and (b) registration of security interests by GI 305 and Fishbank.

28    Care A2 submits that the evidence sheds no light on the ability of Care A2 to pay any adverse costs order and is not sufficient to support a finding that there is a reason to believe that it will not be able to do so.

29    Care A2, therefore, submits that the Court’s jurisdiction to order security is not engaged and, accordingly, there is no compelling reason for Care A2 to have adduced any evidence as to its financial position.

C.3.    Consideration

30    In my view, Gensco has established that there is reason to believe that Care A2 may not be able to meet an adverse costs order, for the following reasons.

31    First, the appointment of a receiver to Care A2 since 2 December 2022 provides a credible reason, in the absence of any evidence explaining the extent, nature or scope of the appointment, that Care A2 may not be able to meet an adverse costs order. An Australian Securities and Investments Commission (ASIC) company search extracted on 10 October 2023, annexed to Ms Madar’s first affidavit, provides the following descriptions of external administration documents (a) “notice by external administrator/controller-appoint/cease appointment by receiver” lodged on 2 December 2022, and (b) “notification of an appointment of a receiver” lodged on 14 December 2022. Although the first description appears to be generic on its face, when read in the context of the second description, it is confirmation of the appointment of the receiver on 2 December 2022. A further ASIC company search extracted on 23 November 2023, annexed to Ms Madar’s second affidavit, confirms that Care A2’s status remains “under external administration and/or controller appointed”.

32    Care A2 made forensic decisions not to lead any evidence explaining the circumstances in which the receiver was appointed and objected to the admissibility of any evidence relied upon by Gensco with respect to the receivership on hearsay grounds. I do not accept the submission made by Care A2, that an unexplained appointment of a receiver over all the assets of a corporation does not give rise to any inference that the corporation may not be able to meet an adverse costs order.

33    Second, and relatedly, the unexplained registration of security interests over the assets of Care A2, by GI 305 and Fishbank, at least as to the quantum of the amounts secured, provides further reason to believe that Care A2 may not be able to meet an adverse costs order. Collateral class descriptions in relation to the relevant security interests are outlined in the PPSR Summary, which is annexed to Ms Madar’s first affidavit. The PPSR Summary describes the security interest of GI 305 over the assets of Care A2 using the description of “all present and after-acquired property – no exceptions”. It further describes the various security interests of Fishbank with reference to the following collateral class descriptions (a) “all present and after-acquired property – no exceptions”, (b) “any and all goods the subject of the general security agreement, or any other financing arrangement, between the secured party and the grantor”, and (c) a list of specific plant and equipment.

34    Third, I am satisfied that the otherwise unexplained appointment of a receiver to Care A2 does give rise to an evidentiary onus on the part of Care A2 to establish that it would be able to meet an adverse costs order. Further, the communications annexed to Ms Madar’s affidavit make clear that Gensco raised serious and substantive concerns about the ability of Care A2 to meet any adverse costs order with respect to the Cross Claim and each of those requests were refused by Care A2. The absence of any explanation of the extent, nature or scope of the appointment of the receiver, together with the absence of any evidence of the amounts secured by relevant security interests identified in the PPSR Summary, allows me to more readily draw an inference, in all the circumstances, that there is reason to believe that Care A2 would not be able to meet an adverse costs order. The amount sought by Gensco as security for its costs is substantial, it could not readily be inferred in the absence of any explanation of Care A2’s financial position that Care A2 could meet an adverse cost order.

D.    Is the Cross Claim purely defensive?

D.1.    Legal principles

35    An application for security for costs with respect to a cross claim raises the additional issue of whether it can be said that the cross claim is purely defensive in nature or whether the cross-claimant has become, in substance, an applicant in the proceeding: Energy City Qatar Holding Company v Hub Street Equipment Pty Ltd [2020] FCA 1033 at [9] (Jagot J). The relevant test is whether the respondent’s position is defensive or not. The Court will have regard to the overall nature of the proceeding and the cross claim to see whether it can be said that in truth the cross-claimant has become, in substance, an applicant: Bevwizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399 at [18] (Brereton J).

36    A cross claim that arises out of the same matters as the statement of claim will generally be considered purely defensive and the Court may exercise its discretion to not award security for costs. It has been said that proceedings may be characterised as defensive in nature when they are directly resisting proceedings already brought by the applicant: Energy City at [9], citing Interwest Ltd v Tricontinental Corporation Ltd (1991) 9 ACLC 1218 at [627] (Ormiston J). However, a cross claim will not be defensive where it seeks “to go out for the recovery from the opposition by attack”: Sergienko v AXL Financial Pty Ltd [2019] NSWSC 1611 at [43] (Ward CJ in Eq, as her Honour then was), citing Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289 at 302 (Smart J) and John Arnold’s Surf Shop (in liquidation) v Heller Factors Pty Ltd (1979) 22 SASR 20 at 38 (Legoe J). It also inappropriate to characterise a cross claim as defensive where it appears to arise out of substantially different facts from the claim: Eastern Pearl Corporation v Groundhog Sales & Rentals Pty Ltd [2011] FCA 411 at [4] (Dowsett J).

37    The fact that the onus of proof lies on the respondent cannot be determinative of the question of whether they are in substance the applicant in the proceeding: Energy City at [10], citing Toolgen Incorporated v Fisher [2019] FCA 2158 at [23] (Nicholas J).

38    In Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263, Young J adopted the test in Visco v Minter [1969] 2 All ER 714, which is expressed by Ormrod J at 716 as follows:

The principle seems to be that where a defendant counter-attacks on the same front on which he is being attacked by the plaintiff, it will be regarded as a defensive manoeuvre. But if he opens a counter-attack on a different front, even to relieve pressure on the front attacked by the plaintiff, he is in danger of an order for security for costs depending on the court’s assessment of the position in each case.

39    In Nine Films, Lindgren J stated the following:

71    …where a cross-claim amounts, in substance, ‘simply’ to a defence, an order against the cross-claimant for security will ordinarily not be made. Ninox cites Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 306–7 per Street CJ (Moffitt P and Hutley JA agreeing); Neck v Taylor above, and New Fenix Compagnie Anonyme D’Assurances de Madrid v General Accident, Fire and Life Assurance Corporation Ltd [1911] 2 KB 619 at 625–6 per Vaughan Williams LJ.

72    In that line of authority, the language differs as between cases and judges, and sometimes the description is of the circumstances in which security will be ordered, and, at other times, the circumstances in which it will not be. Statements can be found that security will be ordered where the respondent’s cross-claim raises a distinct claim or seeks relief other than dismissal of the head claim and, on the other hand, that security will not be ordered where the cross-claim is truly only defensive.

D.2.    Submissions

40    Gensco submits that the Cross Claim raises additional factual mattes and legal issues beyond those raised in the Statement of Claim filed on 19 June 2023 (Statement of Claim or SOC) and is not merely defensive or reflexive of the Statement of Claim for the following principal reasons.

41    First, the Cross Claim raises additional questions concerning the personal liability of the Gensco officers, because they are not parties to the Principal Claim.

42    Second, the representations alleged in the Cross Claim are directed at Gensco’s reputation and ability to perform within the United States market for infant formula and provide a foundation for a “no transaction case” that enlivens a complex legal and factual scenario, including an assessment of a counterfactual scenario to determine any loss or damage suffered by Care A2. This scenario is framed as Care A2 having abandoned an alternative strategy to enter the United States infant formula market in reliance on certain representations made by Gensco.

43    Third, the contractual claim sought to be advanced in the Cross Claim pleads new implied terms of good faith and co-operation, and allegations of breach and repudiation that are alleged to have given rise to a loss of profit of over A$358 million.

44    Fourth, the strength and bona fides of the Cross Claim is questionable given the Cross Claim is inconsistent with Care A2’s defence to the Principal Claim and its position on its application for security for costs in that (a) it contends in the Cross Claim and its defence to the Principal Claim that the infant formula that it manufactured for Gensco was not defective but in its application for security for costs it contended that the infant formula could not be imported into the United States because of defective labels, and (b) Care A2 denies in its defence that there was a binding contract between Gensco and Care A2 but positively asserts in the Cross Claim the existence of a binding contract that has given rise to a substantial claim for damages.

45    Care A2 submits that the Cross Claim is reciprocal to the primary claim and is purely defensive. It submits that the cross claim is defensive as (a) both parties claim that they would not have entered the exclusive license agreement on or about 5 November 2022 (Exclusive License Agreement) but for the other party’s misleading or deceptive conduct, (b) both parties claim that the other party breached the Exclusive License Agreement in a number of ways, (c) both parties claim that the other party repudiated the agreement, and (d) all of the representations pleaded by Gensco and Care A2 respectively, are to be found in the correspondence within the same factual matrix, leading up to the execution of the Exclusive License Agreement.

46    It also submits that the Cross Claim is defensive as it (a) comprises of counter-allegations to the Statement of Claim and the fact that the counter-allegations are not pleaded in the primary defence should not detract from the defensive nature of these allegations, (b) the contentions in the Cross Claim regarding Gensco’s ability to commercialise opportunities in the United States market for infant formula arise from “the same transaction, the same business dealings, correspondence and conversations” as those in the Statement of Claim, and (c) its contention that it lost future profits of A$358 million is no more than a counter-allegation to the allegations in the Statement of Claim regarding alleged breaches of contract, repudiation of the contract, and misleading or deceptive conduct.

D.3.    Consideration

D.3.1.    Overview

47    In order to determine whether the Cross Claim can be characterised as purely defensive, it is necessary to identify and then compare the principal causes of action advanced in the Cross Claim and Statement of Claim and the legal and factual issues that each raises for determination.

D.3.2.    Statement of Claim

48    In summary, the Statement of Claim is relevantly directed, principally, at the capacity and willingness of Care A2 to supply to Gensco the quantity and quality of the infant formula that they had contracted to supply pursuant to the Exclusive License Agreement.

49    Gensco alleges that Care A2 engaged in misleading or deceptive conduct by making representations as to is capacity and willingness to supply the Care A2 infant formula product to Gensco (Care A2 representations), in contravention of s 18 of the Australian Consumer Law in Sch 2 to the Competition and Consumer Act 2010 (Cth) (ACL). Gensco alleges that it has suffered loss and damage as a result of Care A2’s contraventions because it relied on the Care A2 representations in entering into the Exclusive License Agreement (SOC at [150]).

50    Gensco advances related claims in the Statement of Claim directed at representations alleged to have been made in breach of s 18 of the ACL, by (a) Dominic Galati to Edge Financial expressing concern about its relationship with Gensco (Galati representations) that caused it to lose a valuable business opportunity to obtain financing from Edge Financial (SOC at [87], [156]-[159]), and (b) Pablo-Omar Vasquez to David Potenza, the CEO of Strategyn Management Group, Inc, that he owned Ausmore Dairy Pty Ltd, the second respondent, and it was the sole international distributor for the Care A2 infant formula (Vasquez representations), that caused Mr Potenza to discontinue discussions with Gensco about the supply of Care A2 infant formula to CVS and a retail buyer in Mexico (SOC at [134], [182]-[185]). I note that the Statement of Claim includes allegations that Ms Hyland also made representations in contravention of s 18 of the ACL but Gensco has undertaken not to pursue these claims, at least until the determination of related proceedings that Gensco has brought against her and Care A2 in the United States (SOC at [176]-[181]).

51    In addition, Gensco advances contractual claims in the Statement of Claim directed at breaches of the following clauses in the Exclusive License Agreement (a) cl 8 with respect to various warranties concerning authorisation, ownership of intellectual property and compliance with applicable laws relating to the Care A2 infant formula product (warranty breaches) (SOC at [160]-[167]), (b) cl 9(b) because of a failure to provide an insurance policy endorsement (insurance policy breach), (c) cl 10 by attempting to supply the Care A2 infant formula with an invalid label (label breach), and (d) cl 14 and cl 15 for failing to promote and provide product support for the sale of the Care A2 infant formula product in the United States (promotion breach) (SOC at [172]-[173]).

D.3.3.    Cross Claim

52    In contrast, the Cross Claim is directed at the capacity of Gensco to acquire and effectively promote the sale of the Care A2 infant formula product in the United States.

53    Moreover, it is alleged in the Cross Claim that Care A2, from at least early 2022, was pursuing a non-exclusive distribution strategy in the United States for its infant formula product (Strategy). In summary, the Strategy proposed that Care A2 gain export approval for its Care A2 infant formula product in the United States and then enter into agreements with companies in the United States on a regional basis to distribute its product. At no time prior to August 2022, did Care A2 contemplate entering into any exclusive distribution agreement with any United States company (CC at [7]-[12]).

54    Care A2 alleges that (a) Gensco and the Gensco officers engaged in misleading or deceptive conduct by making representations as to Gensco’s financial and operational capacity and its ability to acquire and effectively promote the sale of the Care A2 infant formula product in the United States (Gensco representations), in contravention of s 18 of the ACL (CC at [13], [46]-[50]), and (b) Mr Zimmerman engaged in misleading or deceptive conduct by making representations as to his authority to enter into contractual arrangements on behalf of Gensco Pharma LLC and that it was a registered company in Florida and a subsidiary of Gensco (Pharma representations), in contravention of s 18 of the ACL (CC at [13], [46]-[50]).

55    Care A2 alleges that it has suffered loss and damage as a result of the contraventions by Gensco and Mr Zimmerman because in reliance on the Gensco representations and the Pharma representations, it abandoned the Strategy and entered into and performed the Exclusive License Agreement (CC at [49]-[50]).

56    Relatedly, Care A2 alleges that Gensco and the Gensco officers contravened s 18 of the ACL by making representations that Gensco would take all steps to perform the Exclusive License Agreement that were misleading or deceptive because it did not have the capacity or the experience to do so (Performance representations) (CC at [51]-[54]).

57    In addition, Care A2 advances contractual claims in the Statement of Claim directed at breaches of the following clauses in the Exclusive License Agreement: (a) cl 5(a), by failing to provide six monthly rolling forecast of their monthly requirements for the Care A2 infant formula product (forecasting breach) (CC [31]-[33], (b) cl 14(b), by failing to use their best efforts to market and sell the Care A2 infant formula product in the United States (sales and marketing breach) (CC [33]-[34]), (c) cl 14(c), by appointing a marketing company that was not agreed by the parties and which was not designated under the Exclusive License Agreement (appointment breach) (CC [35]-[36]), and (d) implied terms of duties to co-operate and act in good faith, by attempting to purchase product directly from Care A2’s manufacturing facility, entering into the Exclusive License Agreement with an entity that was not registered or in good standing, preventing a shipment of Care A2 infant formula entering the United States, making incorrect allegations about the labelling of the Care A2 infant formula, and concealing relevant correspondence that it had received from the United States Food and Drug Administration (co-operation and good faith breach) (CC at [23], [26], [28], [37]-[38]).

58    Care A2 alleges that by reason of the forecasting breach, the sales and marketing breach, the appointment breach, and the co-operation and good faith breach, together with the absence as at 2 March 2023 of any Gensco agreements for the sale of Care A2 infant formula to retailers, distribution agreements or other arrangements for the sale of product to retail customers, Gensco repudiated the Exclusive License Agreement and Care A2 has thereby, suffered loss or damage. The loss or damage is alleged to include losses in the form of brand awareness, reputational damage and over A$1.2 billion in revenue resulting in an estimated loss in future profit of over A$358 million that Care A2 would not have suffered if the Exclusive License Agreement had been performed.

D.3.4.    Comparison of causes of action

59    In my view, it is readily apparent from a comparison of the causes of action advanced in the Cross Claim and the Statement of Claim, that the Cross Claim is not defensive in nature, for the following reasons.

60    First, the contention that the respective claims are directed at breaches giving rise to a repudiation of the same agreement and representations that are alleged to have made in the same business meetings, correspondence and conversations between the parties provides only a superficial veneer of symmetry or reciprocity between the claims advanced in the Statement of Claim and in the Cross Claim. It is necessary to compare the specific causes of action and the substantive factual substratum on which those causes of action are advanced.

61    Second, it is readily apparent from a comparison of the specific causes of action and the substantive factual substratum on which those causes of action are advanced, that the capacity and willingness of Care A2 to supply its infant formula product to Gensco involves a fundamentally different factual inquiry to the capacity and ability of Gensco to market and sell the Care A2 infant formula product in the United States. There is no apparent connection or overlap between the claims advanced in the Statement of Claim and the Cross Claim. The alleged warranty breaches, insurance policy breach, label breach, and promotion breach are factually and legally distinct from the alleged forecasting breach, sales and marketing breach, appointment breach, and co-operation and good faith breach. Similarly, the content and conduct alleged to be in breach of Care A2 representations, Galati representations, and Vasquez representations are factually and legally distinct from the content and conduct alleged to be in breach of the Gensco representations, the Pharma representations, and the Performance representations.

62    Third, the degree of asymmetry in the respective claims advanced in the Statement of Claim and the Cross Claim is highlighted in the allegation of loss and harm suffered. As submitted by Gensco and summarised above at [42], the loss or damage alleged by Care A2 in the Cross Claim enlivens the need to assess a complex counterfactual scenario based on a “no transaction case” in which Care A2 contends that it has suffered an alleged loss of future profit in excess of A$358 million.

63    Fourth, the Cross Claim advances causes of action against the Gensco officers who are not parties to the Principal Claim. Necessarily, additional costs will need to be incurred in responding to substantive allegations of personal liability for the causes of action pursued in the Cross Claim, irrespective of any alleged overlap between the legal and factual issues raised in the Statement of Claim.

64    For these reasons, I am satisfied that the Cross Claim is not, in substance, defensive. The Cross Claim raises substantive legal and factual issues that are not raised in the Statement of Claim. In my view, Care A2 has become an applicant in advancing the causes of action in the Cross Claim and has sought “to go out for recovery from the opposition by attack” in the sense described in Sergienko at [43] and opened a new front for a counterattack in the sense described in Visco at 716.

E.    Quantum of security to be provided

E.1.    Legal principles

65    The amount of security to be ordered is at the unfettered discretion of the Court: Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 at [77] (Yates J); Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 19) (1995) 134 ALR 187 at 197-201 (Lindgren J). In determining the appropriate amount for security, the Court does not sit as a taxing officer or set out to give a complete and certain indemnity to a respondent, rather it seeks to fix an amount as it thinks fit, in all the circumstances of the case: Austcorp at [83]; Khoo at [77]. It is appropriate for the Court to adopt a “broad brush” approach in determining the quantum of security: Allstate at 200.

E.2.    Submissions

66    Gensco relies on the assessment undertaken by Ms Mader in her first affidavit at [26]-[65] to support its claim for the provision of security for its costs of and incidental to the Cross Claim in the amount of $800,847.50.

67    Gensco submits that the Cross Claim necessarily gives rise to the need to incur additional costs to defend the Cross Claim beyond those costs necessary to pursue Care A2’s claims, and that there is no evidence from Care A2 challenging the costs estimated by Ms Madar.

68    Care A2 resists the full quantum of security for costs estimated by Gensco on the basis that (a) a complete indemnity is not warranted, and (b) a significantly lesser sum, in a precise amount to be determined by the Court, would provide adequate and fair protection to Gensco whilst avoiding the imposition of an unjust financial burden on Care A2 in the circumstances of this case.

E.3.    Consideration

69    Ms Madar gives evidence that based on her review of the Cross Claim and her experience litigating in this Court, the Cross Claim raises a significant number of new factual and legal issues which are not raised in the Statement of Claim. She points, in particular, to (a) Care A2 raising a new issue with respect to the scope of the personal liability of the Gensco officers that are joined as cross respondents to the proceedings, (b) the contention that Care A2 abandoned its strategy to enter the United States market for infant formula on the basis that it pursued a contractual relationship with Gensco and suffered loss or damage as a result of this relationship, (c) contentions that all five cross respondents have made, together and separately, eleven specific representations which are said to be misleading or deceptive, and (d) contentions that the Exclusive License Agreement incorporates implied terms imposing duties of good faith and co-operation which Care A2 alleges were breached by Gensco.

70    Ms Madar’s estimate of the additional costs of $800,847.50 is based on assessments by her of additional work necessary to be performed by counsel, solicitors, and an accounting expert witness arising from the Cross Claim with respect to the preparation of a defence to the Cross Claim ($27,412.50), requests for further and better particulars ($10,798.75), discovery ($23,387.50), general matter management ($34,125), mediation ($29,756.25), lay evidence ($51,212.50), expert evidence ($205,993.75), trial preparation and attendance at trial ($368, 850), case management hearings ($11,661.25), and interlocutory applications ($37,650). Necessarily, these estimates are imprecise as to the scope and extent of the work required in addressing these issues because it is difficult to determine those matters at this early stage of the proceedings. The estimates include the number of hours and charge out rates for the work that it is anticipated will be required from Ms Madar, a partner of King & Wood Mallesons (KWM) ($920 per hour), a Senior Associate ($760 per hour), two junior solicitors (at rates of $515 and $425 per hour), junior counsel ($400 per hour or $4,000 per day), and senior counsel ($1,400 per hour or $14,000 per day). All rates are exclusive of GST. Ms Madar does not apply any discount to the rates for counsel or the accounting expert but applies a 25% discount for the fees of KWM, the solicitors for Gensco.

71    I am generally satisfied with the approach undertaken by Ms Madar to estimate Gensco’s likely additional costs arising from the Cross Claim. I accept that on a taxation, the fees of counsel, although perhaps at the upper end of the scale, would likely be accepted without deduction, as would the fees for the accounting expert. On balance, however, I would expect, on a taxation, a 35% rather than a 25% discount would be applied to the fees of KWM to translate actual solicitors’ costs to costs recoverable on a party and party basis. The application of a discount of 35% to KWM’s fees produces a revised estimate of $750,954.50.

72    In my view, it is also necessary to apply a further discount of 10% to the revised estimate to reflect the very early stage of the proceedings and the inherent difficulty, in a practical sense, in drawing bright lines between costs incurred in connection with a statement of claim and a cross claim, where issues are dealt with concurrently and there are inevitable overlaps in factual and legal issues. The application of a further discount of 10% produces a final estimate of $675,859.05.

73    The orders sought in the Gensco application contemplate that security will be provided by Care A2 in two tranches, (a) the first tranche of security in the amount of $431,997.50 is to be provided by Care A2 within 28 days of the orders being made, and (b) the second tranche in the amount of $368,850 is to be provided 14 days after the date of the conclusion of any mediation, if unsuccessful, or 12 weeks prior to the commencement of any final hearing, whichever is earlier.

74    In my view, a more staggered approach is required for the provision of security for Gensco’s costs. In the first instance, I am satisfied that it would be appropriate for Care A2 to provide security in the amount of $50,000 within 28 days from the date of the making of these orders and to provide the parties with an opportunity to reach agreement on remaining tranches. In the absence of agreement, remaining tranches can be determined by the Court at the case management hearing in these proceedings on 1 March 2024.

F.    Disposition

75    Care A2 is to provide security for the costs of Gensco in an amount of $675,859.05 by tranches. An initial tranche of $50,000 is to be paid by 4.30 pm on Monday, 19 February 2024 and then the security is to be provided in subsequent tranches to be agreed between the parties, or in the absence of agreement, in a manner to be determined by the Court at the upcoming case management hearing in this matter, at 9.30 am on Friday, 1 March 2024.

Associate:

Dated:    22 January 2024

SCHEDULE OF PARTIES