Driwater Inc v Perre

[2001] FCA 1264

FEDERAL COURT OF AUSTRALIA

Driwater Inc v Perre [2001] FCA 1264

SECURITY FOR COSTS – application for security for costs against company incorporated in foreign jurisdiction – factors to be considered in assessing whether to make an order for security and in what form and amount.

Federal Court of Australia Act 1976 (Cth) s 56

Corporations Law s 1335

DRIWATER INC v DOMINIC PERRE & DRIWATER AUST PTY LTD
(ACN 059 811 862)

NO WG 148 OF 1998

O’LOUGHLIN J
ADELAIDE
15 MAY 2001

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	WG 148 OF 1998

BETWEEN:

DRIWATER INC
APPLICANT

AND:

DOMINIC PERRE
FIRST RESPONDENT

DRIWATER AUST PTY LTD (ACN 059 811 862)
SECOND RESPONDENT

JUDGE:

O’LOUGHLIN J

DATE OF ORDER:

15 MAY 2001

WHERE MADE:

ADELAIDE

THE COURT ORDERS THAT:

1.The applicant is to place the amount of $25,000 up by way of security for costs in one of the following manners:

(a)Cash deposit in court to be held in an interest-bearing deposit to await the outcome of the of the trial;

(b)In the form of a bank guarantee acceptable to the respondents or, in the event of a dispute, as fixed by the Court;

(c)In such other nature advanced by the applicant found acceptable by the respondent or, in default of agreement, by the Court.

2.The parties are free to address the Court as to the form the security is to take.

3.Pending the granting of that security there will be an order staying the further prosecution of these proceedings.

4.Liberty to apply.

5.The applicant is to pay half of the respondents’ costs of and incidental to this application and order.

6.The respondent to have drawn up, entered and sealed the orders of the Court this day with liberty to the parties to speak to the minutes.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	WG 148 OF 1998

BETWEEN:

DRIWATER INC
APPLICANT

AND:

DOMINIC PERRE
FIRST RESPONDENT

DRIWATER AUST PTY LTD (ACN 059 811 862)
SECOND RESPONDENT

JUDGE:	O’LOUGHLIN J
DATE:	15 MAY 2001
PLACE:	ADELAIDE

EX TEMPORE REASONS FOR JUDGMENT

1. This matter is an application for security for costs.  The parties in the substantive proceedings are Driwater Inc, a company incorporated in the state of California in the United States of America (“the American company”).  The respondents are a Mr Domenic Perre and an Australian company Driwater Australia Pty Ltd (“the Australian company”).

2. It is an agreed fact that the American company carries on the business of the manufacturing and distributing a slow-release water product under the name and style of Driwater.  It is also agreed that on 14 January 1993 the American company and Mr Perre agreed that Mr Perre would not disclose certain confidential information concerning the American company’s product, and that he would not use the confidential information concerning the American company’s product for the benefit of any party other than the applicant.

3. It would seem that the matter progressed further in that the American company supplied information, material and knowledge to the Australian company, and what is in dispute between the parties is that the American Company claims that what was supplied was of a confidential nature, a fact that is denied by the respondents.  That is what caused the institution of proceedings at the suit of the American Company, in which it claims a variety of relief, including injunctive relief.

4. The respondents filed a defence denying any form of liability and counterclaiming.  The nature of the counterclaim is quite unusual and extensive.  It extends to allegations of misleading and deceptive conduct.  It even goes so far as to accuse the American company of fraud in the presentation of the alleged confidential information to the Australian company.  I am told that there is no information on the court file to substantiate the fact that this matter went to mediation, and that explains to some extent the delay which has been occasioned in the prosecution of these proceedings.

5. The application was filed in court on 29 September 1998, accompanied by the statement of claim.  The defence and cross-claim were filed within a reasonably short period of time; namely, 12 November 1998, and within a few days, on 18 November 1998, a notice of motion seeking security for costs was filed on behalf of the respondents.  Apart from affidavits supporting that application the matter then seemed to go off until it was relisted on 2 March 2001 and, as I understand it, it was in that period of time that the parties were in negotiations in an attempt to see if they could find a settlement to their respective claims.  That was an unsuccessful exercise and hence the application for security for costs has been re-agitated and comes before me today.

6. There is no argument that the Applicant in these proceedings is a foreign company.  It is a Californian company with no assets in Australia.  Those two factors do, of course, militate in favour of a grant of security, although it is not to be taken that companies in such a position must automatically face an order for security.  They are two important factors to be borne in mind in the discretionary exercise which is reposed in the court in considering applications of this nature.

7. The Australian company makes a further claim that the American company is either insolvent, or at least there is a substantial risk that it would be unable to meet an order for costs in the event of the Australians being successful in the ultimate litigation. Section 1335 of the Corporations Law states:

   “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.”

8. Section 56 of the Federal Court of Australia 1976, unlike the Corporations Law, makes no reference to the financial stability of the applicant company.  It says in subsection (1):

   “The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him or her.”

9. Then it states that the security shall be in such amount and given at such time and in such manner and form as the court or a judge directs, but it makes no reference to the financial stability or instability of the substantive applicant.  In this particular case the chief executive officer of the American company, Mr Joseph Paternoster, has filed an affidavit dated 10 April 2001, annexing to it what he calls “a true copy of Driwater’s balance sheet as at 28 February 2001”.  He continues in his affidavit:

   “The balance sheet shows the total assets of the company of (US) $1,400,322.21, with an equity of over (US)$380,000.”

10. I have considered the contents of this so-called balance sheet.  It is quite a remarkable document, the like of which I have never seen before.  If it had been prepared by a first year accountancy student, the student would have failed his or her examination.  It is childish in the extreme.  Its very contents refutes any suggestion that it was prepared by a person with any accounting knowledge.  I mention only three items to signify the point I am making.

11. Under the heading of Current Liabilities there is the acronym DEF – standing for “deferred”.  I will read it with the full words, “Deferred salary Glen” – and the figure is $57,652.25.  The next entry, “Deferred salary Joe $228,652.25.”  Then there is, “Deferred compensation Harold $5239”.  The language that has been used in the preparation of this document suggests it was prepared by a person without any or, at least, very limited, accounting knowledge.

12. Other aspects of the balance sheet which cause concern are, first, an entry under the heading of Other Current Assets, “Middle East territory $630,021.01.”  There is no information about that current asset.  Is it readily realisable?  What is its location?  “Middle East” suggests non-American and, presumably, the Mediterranean area.  That is fortified by another entry in the balance sheet under the heading of “Other Assets”.  It is called “Driwater Egypt $240,000”.

13. There is other material in the file to which I need not refer, which indicates that the American company does have an investment in Egypt and, presumably, the entry in the balance sheet is intended to refer to that investment.  If that is the case then it is an investment which is outside the jurisdiction of the United States, and its availability to meet a successful judgment and costs order is open to some speculation at the least.

14. The balance sheet shows an overall equity of shareholders’ funds of $US380,000, but here we have a company which relies on strange assets of an unspecified nature of $630,000 and $240,000.  Questionable assets of that size exceeding by far the alleged net equity, give grave cause for concern.  When, on top of that, you have two employees who are owed salaries of almost $300,000 and poor Harold – whoever he is – suffering deferred compensation of $5,000, one starts to wonder about this company.

15. I have no confidence in the balance sheet.  Lacking confidence in the balance sheet means I lack confidence in the financial stability of the applicant.  That may be the fault of the applicant’s advisers back in America in the compilation of a document such as they have prepared, and I would not want to see the applicant punished for that error.  There is, however, enough information before me to warrant an order for security for costs.

16. The order, however, should not be made upon the premise that this is an insolvent company which has no hope of paying a costs order.  It should be made to protect the respondents to a limited degree, reserving to the applicant the right to come forth with further and better information, proving its financial worth.  Before I come to the actual quantification of the amount that I propose to order I should say something about the nature of the claim that has been made by the Australian company.  It is the sum of $108,000, a figure which caused me to say during the course of argument that it was “a Rolls Royce treatment”.

17. The calculations have been made in part by Mr Duncan Hart, who was, at one stage, the solicitor for the Australian company and, in part, by Mr Timothy Cogan, a well-known Adelaide legal practitioner specialising in costs calculations.  Between them they came up with this figure of $108,000, but I regard it as far too extensive.  Mr Cogan has relied in his calculations on information supplied by Mr Hart.  Mr Hart, in turn, has made statements of likely hours without justifying them in any sense whatsoever.

18. I will mention two by way of examples.  In paragraph 5.1.5 of Mr Cogan’s affidavit he states:

    “Attendances on client and witnesses.  I have been informed by my instructing solicitors that they expect to spend a further 80 hours attending on their clients and witnesses before trial.”

    5.1.6:

    “Attendances on counsel on conference.  I have been informed by my instructing solicitors that they expect to spend about 40 hours conferring with counsel in preparation for trial.”

19. Mr Cogan has not validated those two periods of time.  He has not said he regards them as reasonable, as practical, as necessary or the like.  Mr Hart, for his part, has not endeavoured to explain why those periods of time would be necessary.  To my untutored eye they seem grossly excessive.  Lacking any form of particularity, I must mark them down and I propose to do so.  I propose to mark down the amount sought for another reason and that is one which has been strongly urged by Mr Hoile of counsel for the American company.  It is to this effect:  the costs of $108,000 have been prepared and calculated without making any attempt to differentiate between the fact that there is a strong and detailed cross-claim in this matter.  It is a cross-claim which, because of its allegations of misleading and deceptive conduct and fraud, is likely to expend far more time in the trial than the substantive claim by the American company.

20. It is very hard at this stage to break down the trial into the amount required for the claim as distinct from the amount required for the cross-claim but, if Mr Cogan’s suggestion of five days for the trial is accurate, I would go so far as to say that the cross-claim would take at least three days.  There are therefore four reasons why I am marking down the figure of $108,000.

21. The first reason is the standard reason which applies in any claim for security for costs and, that is, that the court very rarely, if ever, accepts that the amount of security should be that which has been competently calculated to be the ultimate amount of costs.  There is always a discounting to allow for the possibility of matters settling, the substantive applicant winning the case and not having to pay costs, or the risk of over-assessment of time or of quantum.

22. The second reason is the question of the counterclaim.  The third is the unsubstantiated calculations to which I have referred.  The fourth is the reason which I first mentioned and, that is, the opportunity to give to the American company an opportunity to better explain its financial position.  Bearing all of those factors in mind I am still left with the unenviable task of fixing upon a sum of money.  It has to be an untutored sum, based more on experience and previous contact with matters of this nature.  The figure I fix upon is $25,000.

23. That is a sum of money which is to be put up by way of security for costs by the American company.  It can be in the form of a cash deposit in court, in which case it will be placed in an interest-bearing deposit to await the outcome of the trial.  It can be in the nature of a bank guarantee in a form which is satisfactory to the Australian respondents or, in the event of dispute as to the terms, as fixed by the court.  It can be in a third alternative of a nature advanced by the American company and found acceptable to the Australian company or, in default, by the court.  I will leave the parties free to address the court on the form the security is to take.  Pending the granting of the security however there will be an order staying the further prosecution of these proceedings.  There will be a further order that Driwater Inc is to pay 50 per cent of the costs of and incidental to this application and order.  Liberty to apply.  I will order that the orders of the court this day be drawn up, entered and sealed by the respondents with liberty to the parties to speak to the minutes.

I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O’Loughlin

Associate:
Dated:             15 May 2001

Counsel for the Applicant:	Mr Martin Hoile
Solicitor for the Applicant:	Kelly & Co.
Counsel for the Respondent:	Mr Stephen Kenny
Solicitor for the Respondent:	Camatta Lempens
Date of Hearing:	15 May 2001
Date of Judgment:	15 May 2001