Cocoon Data Holdings Pty Ltd v K2M3 LLC
[2011] VSC 355
•29 July 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
S CI 2010 02645
| COCOON HOLDINGS PTY LTD (ACN 127 993 300) and COCOON DATA PTY LTD (ACN 127 993 284) | Plaintiffs |
| v | |
| K2M3 LLC | Defendant |
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JUDGE: | FERGUSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 20 May, 29 July 2011 | |
DATE OF JUDGMENT: | 29 July 2011 | |
CASE MAY BE CITED AS: | Cocoon Data Holdings Pty Ltd v K2M3 LLC | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 355 | |
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PRACTICE AND PROCEDURE – Application to strike out defence and enter judgment for failure to comply with anti-suit injunction – Defendant overseas - Declaratory relief - Application granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P Solomon SC with Mr P Herzfeld | Gadens Lawyers |
| For the Defendant | No appearance |
TABLE OF CONTENTS
Parties and introduction.................................................................................................................... 2
The anti-suit injunctions................................................................................................................... 2
Should the Court exercise its inherent jurisdiction to strike out the defence and enter judgment? 5
Conclusion........................................................................................................................................... 9
HER HONOUR:
Parties and introduction
The plaintiffs, which I will refer to as Australian Cocoon, entered into a joint development agreement with the defendant, K2M3 LLC, for the purpose of exploiting, in North America, proprietary software encryption technology beneficially owned by Australian Cocoon. For this purpose, there was a joint venture vehicle, Military Resources Limited, which is also a party to the joint development agreement.
In these proceedings, Australian Cocoon has alleged that K2M3 has breached the agreement and they seek a declaration that the agreement is at an end, damages, interest and costs. On this application, Australian Cocoon sought orders striking out the defence of K2M3 and entering judgment in its favour. The basis of the application is that, on more than one occasion, K2M3 has breached the terms of orders for anti-suit injunctions that were previously made in this proceeding.
The anti-suit injunctions
On 23 September 2010, K2M3 and another company, Cocoon Data LLC, which I will refer to as US Cocoon, began proceedings against Australian Cocoon in the District Court of Harris County Texas, United States of America. In that proceeding, K2M3 and US Cocoon alleged that Australian Cocoon had breached the joint development agreement and were attempting to licence the encryption technology directly in North America without going through the joint venture company. It was alleged that US Cocoon had been substituted for Military Resources as the joint venture vehicle. K2M3 and US Cocoon sought a “temporary restraining order” and a “temporary injunction” against Australian Cocoon to enjoin them from licensing or attempting to licence the encryption technology to any other North American company until the trial of the proceeding, at which stage they intended to seek a permanent injunction.
On 27 September 2010, Australian Cocoon sought urgent relief in this Court by way of an interim anti-suit injunction to restrain K2M3 from continuing with the proceeding in Texas. The application came before me and I made orders restraining K2M3 until 4pm on 14 October 2010 from seeking a temporary restraining order from the Texas District Court in the Texas proceeding. K2M3 was represented on the application. The matter was adjourned until 14 October 2010.
Following the hearing in this Court and the orders that were made, K2M3 continued with its application to seek a temporary restraining order in the Texas proceeding. However, at a hearing on 13 October 2010, the Texas District Court refused to make such an order.
The anti-suit injunction application by Australian Cocoon in this Court returned for hearing on 14 October 2010. On that occasion, K2M3 did not appear at the hearing. At the conclusion of the hearing, orders were made that, until further order or otherwise until the trial of the proceeding, K2M3 was restrained from seeking a restraining order from the Texas District Court in the Texas proceeding. The next day, the authenticated order was served on the solicitors for K2M3 both in Sydney and Melbourne.
In early November 2010, K2M3 filed and served its defence in this proceeding.
Thereafter, K2M3 continued with its application for a temporary injunction in the Texas proceeding. The Texas District Court refused to grant such an injunction and made orders accordingly on 22 November 2010.
On 15 December 2010, the Texas District Court granted Cocoon’s motion to dismiss the Texas proceeding for forum non conveniens.
At a hearing in this proceeding on 17 December 2010, counsel representing K2M3 said that he had been briefed the previous afternoon and had no instructions as to why there had been or appeared to have been a breach of the previous restraining orders that had been made in this proceeding.
On 7 January 2011, K2M3 applied to the Texas District Court for a new trial of the motion to dismiss for forum non conveniens. The result of this application is not disclosed in the material before the Court. In any event, on 14 March 2011, K2M3 gave notice of appeal from the order of the Texas District Court of 15 December 2010 granting the motion to dismiss for forum non conveniens.
K2M3’s solicitors in this proceeding, filed a Notice of Ceasing to Act on 14 March 2011. Leave to file that notice was required under r 20.03(3) of the Supreme Court (General Civil Procedure) Rules 2005, but leave was not sought.
In May 2011, Australian Cocoon made application to strike out K2M3’s defence in this proceeding and to have judgment entered in its favour. The application was returnable before me on 20 May 2011. K2M3 was not represented on that occasion. I expressed concern about making the orders sought without a further opportunity being given to K2M3 to explain why the orders for the anti-suit injunction had been breached or appeared to have been breached. The application was adjourned. The solicitors for Australian Cocoon then sent an explanatory letter together with copies of the orders that had been sought and the transcript of the hearing on 20 May 2011 to K2M3 and one of its officers in the United States and also to the Australian lawyers for K2M3 and its lawyers in the United States. When the date for the return of the hearing of the application was altered and when Australian Cocoon wanted to rely on a further affidavit at the adjourned hearing, its solicitors informed K2M3 of the change of date for the hearing and subsequently served the affidavit by the same method as it had adopted in respect of the transcript and proposed form of order. The only response to the correspondence that was sent by Australian Cocoon’s solicitors came from K2M3’s lawyer in the United States who said that his firm had never represented any party in the proceeding in this Court and that they had never been authorized to accept any pleading or other document with respect to such action. Australian Cocoon’s application came on again before me for hearing on 29 July 2011.
Should the Court exercise its inherent jurisdiction to strike out the defence and enter judgment?
In Slaveski v State of Victoria & Ors,[1] Kyrou J summarised some of the circumstances in which the Court might exercise its inherent jurisdiction to dismiss or stay a proceeding without any adjudication on the merits of the case, as follows:
[1](2009) 25 VR 160 at 172 (citations omitted).
(a) where the proceeding is an abuse of process;
(b)where the plaintiff repeatedly and deliberately fails to comply with court orders without an acceptable explanation;
(c)where the plaintiff’s conduct is such as to prevent the court from effectively exercising the jurisdiction which it has to dispose of the proceeding or would thwart the court’s processes;
(d)where this is necessary to maintain the authority of the court and the integrity of its processes;
(e) where a fair trial is not possible; and
(f) where the plaintiff has dishonestly misled the court.
His Honour noted the reluctance of courts to take the step of dismissing or staying a proceeding without an adjudication on the merits – ordinarily, such a step is taken as a last resort where a less drastic alternative is not available.[2] Such orders are made to protect the administration of justice, rather than to punish a party.[3]
[2]Ibid at 173.
[3]Ibid.
Similar considerations apply when, as here, orders are sought to strike out a defence and enter judgment in favour of a plaintiff.
Many of the authorities deal with situations where a party has failed to comply with procedural orders such as orders for discovery or has been dilatory in taking steps in the action.[4] In Derby & Co Ltd & Ors v Weldon & Ors[5] the Court of Appeal considered whether it was appropriate to make an order freezing foreign assets of one of the defendants who had no assets within the jurisdiction. In considering that issue, Lord Donaldson of Lymington MR said:
Courts assume, rightly, that those who are subject to its jurisdiction will obey its orders …. It is only if there is doubt about whether the order will be obeyed and if, should that occur, no real sanction would exist, that the court should refrain from making an order which the justice of the case requires.
This consideration led the Vice-Chancellor to examine the extent to which a Mareva injunction could be enforced against [the defendant] in Luxembourg …. This certainly is deserving of examination but, in the context of the grant of the Mareva injunction, I think that a sufficient sanction exists in the fact that, in the event of disobedience, the court could bar the defendant’s right to defend. This is not a consequence which it could contemplate lightly as it would become a fugitive from a final judgment given against it without its explanations having been heard and which might well be enforced against it by other courts.
[4]For example, see Mariotti v Wanneroo North Pty [2008] WASCA 243 and Freeman v Rabinov [1981] VR 539 where orders were made that unless a supplementary affidavit of documents was filed by a specified date the proceeding would be dismissed.
[5][1990] 1 Ch 65 at 81 (citations omitted).
It is clear that the circumstances in which it will be appropriate to dismiss a proceeding or strike out a defence are not limited to a failure to comply with procedural orders. Each case must be considered on its own facts and a determination made in the circumstances of the individual case as to whether such drastic orders are merited.
Australian Cocoon submitted that, with knowledge of this Court’s orders, K2M3 has deliberately and repeatedly refused to comply with those orders by continuing to prosecute the Texas proceeding, including by way of appeal of orders in that proceeding unfavourable to it. It was submitted that K2M3 should not be permitted to do so, while at the same time maintaining its defence in this Court and putting Australian Cocoon to the expense of conducting both proceedings at once.
Australian Cocoon submitted that although contempt proceedings might be brought against K2M3 as a method of enforcement of this Court’s orders, the remedies would be of no utility as K2M3 is a company which thus cannot be imprisoned and K2M3 does not appear to have any assets within Australia. Therefore, it was submitted, in the exceptional circumstances of this case, the only suitable means of enforcement is to strike out the defence and give judgment in favour of Australian Cocoon.
Non compliance with an anti-suit injunction is a grave matter. There must be compliance with such orders. If there is not, and no proper explanation for their breach is given, then severe sanctions may be warranted. Any such sanctions which are imposed are not aimed at punishing a defaulting party but rather are necessary to safeguard the administration of justice.
Whilst the remedy sought by Australian Cocoon is drastic, in the circumstances, it is appropriate for orders to be made striking out the defence of K2M3. No practical alternative course is available. Such orders are necessary to maintain the authority of the Court. On the evidence before me, K2M3 has deliberately breached the terms of the orders on multiple occasions without explanation, despite opportunities being given to it to provide an explanation. It did so in circumstances where it had chosen to submit to the jurisdiction of this Court; it had taken steps in this proceeding by filing an unconditional appearance and defence; it had been represented by counsel on the application when the first anti-suit injunction was granted; it did not appeal from any of the orders made in the proceeding; after breaching the orders, it instructed counsel to appear on a further hearing but failed to instruct counsel as to the reason(s) for non-compliance with the orders; it has had notice of this application and chose not to be represented on either this occasion or when the application first came on for hearing.
As to the entry of judgment, Australian Cocoon relied on an affidavit of its chief executive officer, Trent Telford, to establish its entitlement to damages and the declaratory relief that was sought. Mr Telford deposed to the ownership of the encryption technology by Australian Cocoon. On 31 March 2011, it obtained an Australian patent in relation to the technology with patents pending in more than ten countries, including the United States of America and all countries in the European Union. Australian Cocoon has attracted investment by Australian investors of approximately AUD 8 million. Australian Cocoon still wishes to market the encryption technology in the United States.
The joint development agreement imposed obligations on Cocoon to make payments to the joint venture company. The payments were to be used for salaries, marketing and other expenses properly incurred by the joint venture company in accordance with a budget approved by Cocoon. K2M3 was obliged to establish a bank account for the joint venture company into which the funds were to be deposited. Australian Cocoon made payments totalling approximately $222,821 as it was required to do under the agreement. At the request of K2M3, those funds were paid into an account associated with one of the officers of K2M3. When K2M3 established an account purportedly for the joint venture company, the account was in the name of US Cocoon, not Military Resources. Further, one of the signatories to that account was a person who was not authorized by Australian Cocoon, but rather was the mother of the K2M3 officer who had caused the account to be established.
Despite numerous requests by Mr Telford, Australian Cocoon received no documents to explain what use had been made of the funds it had transferred, K2M3 had not produced a satisfactory budget and the unauthorized signatory to the bank account had not been changed. By the time these proceedings were commenced, Australian Cocoon had decided that it no longer wanted to have commercial dealings with K2M3 because it considered that K2M3 had failed to fulfil its obligations under the joint development agreement. For this reason, Australian Cocoon instituted these proceedings to establish that the joint development agreement was no longer in force to give it certainty to deal with the technology. As part of the relief it seeks a declaration that the agreement was validly terminated on the date that these proceedings were filed.
The governing law of the joint development agreement is the law of Texas, United States. No evidence was given as to that law. In the absence of that evidence, counsel submitted that I should assume that the law of Texas is to the same effect as the law of this jurisdiction.
In Koompahtoo Local Aboriginal Land Council & Anor v Sanpine Pty Ltd and Anor,[6] the majority in the High Court, when considering the legal principles as to termination for breach, noted that the term repudiation is used in different senses. The majority stated:
First, it may refer to conduct which evinces an unwillingness or an inability to render substantial performance of the contract. This is sometimes described as conduct of a party which evinces an intention no longer to be bound by the contract or to fulfil it only in a manner substantially inconsistent with the party's obligations. It may be termed renunciation. The test is whether the conduct of one party is such as to convey to a reasonable person, in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it…. Secondly, it may refer to any breach of contract which justifies termination by the other party.
[6](2007) 233 CLR 115 at 135.
Counsel submitted that the conduct of K2M3 satisfied the test for renunciation. I accept that submission. Australian Cocoon is also entitled to damages, being the amount paid by it under the joint development agreement, together with interest on that amount.
Conclusion
I will make the orders sought striking out the defence and entering judgment for the plaintiffs.
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