Irrewarra Estate Pty Ltd v A and S Arnott Pty Ltd
[2011] FMCA 188
•31 March 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| IRREWARRA ESTATE PTY LTD v A & S ARNOTT PTY LTD & ANOR | [2011] FMCA 188 |
| PRACTICE & PROCEDURE – Application for transfer to Federal Court – proceeding brought by trustee – application for security for costs. |
| Trade Practices Act 1974, s.80 Fair Trading Act 1987 (NSW), item 16 of sch.5 Competition & Consumer Act 2010, s.232 of sch.2 Trade Practices Amendment (Australian Consumer Law) Act (No. 2) 2010, items 6 & 7 of sch.7 Corporations Act 2001, s.1335 Federal Magistrates Act 1999, ss.39, 80 Federal Magistrates Court Rules 2001, rr.1.03, 8.02, 21.01, 21.10 |
| KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584 Citi Nominees Pty Ltd v Fenny [2006] WASC 97 Instyle Contract Textiles Pty Ltd v Good Environmental Choice Services Pty Ltd (2009) 181 FCR 360 Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 Karl Suleman Enterprizes Pty Ltd (in liquidation) v Pham [2010] NSWSC 886 |
| Applicant: | IRREWARRA ESTATE PTY LTD (ACN 090 419 355) (TRADING AS IRREWARRA SOURDOUGH) |
| First Respondent: | A & S ARNOTT PTY LTD (ACN 104 534 894) (TRADING AS MORPETH SOURDOUGH) |
| Second Respondent: | ALLISON ARNOTT |
| File Number: | MLG 635 of 2010 |
| Judgment of: | Cameron FM |
| Hearing date: | 3 March 2011 |
| Date of Last Submission: | 3 March 2011 |
| Delivered at: | Sydney |
| Delivered on: | 31 March 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr D. Crennan |
| Solicitors for the Applicant: | Brand Partners |
| Counsel for the Respondents: | Mr A. Fox |
| Solicitors for the Respondents: | Bartier Perry |
ORDERS
The application for transfer of the proceeding to the Federal Court of Australia be dismissed.
The matter stand over for further submissions on the terms of the order for security for costs to be made in favour of the respondents.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
MLG 635 of 2010
| IRREWARRA ESTATE PTY LTD (ACN 090 419 355) (TRADING AS IRREWARRA SOURDOUGH) |
Applicant
And
| A & S ARNOTT PTY LTD (ACN 104 534 894) (TRADING AS MORPETH SOURDOUGH) |
First Respondent
| ALLISON ARNOTT |
Second Respondent
REASONS FOR JUDGMENT
Introduction
The applicant sells a product known as “Irrewarra Sourdough, all natural handmade granola” (“Irrewarra granola”). It alleges that products sold by the first respondent have been misleading and deceptively similar in get up to its product and that, as a result, the first respondent has breached the Trade Practices Act 1974 and the second respondent has breached the Fair Trading Act 1987 (NSW). It also alleges that both respondents engaged in passing off the first respondent’s products as the applicant’s. The applicant further alleges that the second respondent has accessorial liability for the first respondent’s breaches of the Trade Practices Act and also that she sent emails to third parties by reason of which she contravened the Fair Trading Act in an additional respect.
Recent legislative changes which have transformed the Trade Practices Act into the Competition & Consumer Act 2010 and which have replaced pt.5 of the Fair Trading Act with the Australian Consumer Law might be mentioned at this point.
As far as the claims in the Court’s express jurisdiction are concerned, items 6 and 7 of sch.7 to the Trade Practices Amendment (Australian Consumer Law) Act (No. 2) 2010 provide:
6 Acts or omissions that occurred before commencement
(1)The Trade Practices Act 1974 as in force immediately before the commencement of this item continues to apply, after that commencement, in relation to acts or omissions that occurred before that commencement.
(2)Without limiting subitem (1), action may be taken, under or in relation to Part VC or VI of that Act as so in force, in relation to those acts or omissions.
7 Proceedings already commenced
(1)The Trade Practices Act 1974 as in force immediately before the commencement of this item continues to apply to or in relation to any proceedings, under or in relation to that Act, that were commenced, but not concluded, before that commencement.
(2)However, to the extent that any such proceeding [sic] are proceedings for an injunction under section 80 of that Act as so in force, the proceedings are taken, after that commencement, to be proceedings for an injunction under section 232 of the Australian Consumer Law.
As the events the subject of this proceeding are alleged to have occurred before the commencement of the legislative reform on 1 January 2011 and as the proceeding itself was commenced before that date, the matter remains governed by the Trade Practices Act as it was before the reform, subject to one point. The applicant seeks permanent injunctions against the respondents pursuant to s.80 of the Trade Practices Act. That relief is now taken to be sought pursuant to s.232 of the Australian Consumer Law.
As far as the statutory claims in the Court’s accrued jurisdiction under the Fair Trading Act are concerned, item 16 of sch.5 to the Fair Trading Act provides that the Fair Trading Act, as in force before the commencement of the Australian Consumer Law, continues to apply to acts or omissions that occurred before that commencement.
The present interlocutory application
By an application in a case filed on 1 February 2011 the respondents seek orders that the proceeding be transferred to the Federal Court and that the applicant give security for costs. The applicant opposes the respondents’ application. An alternative order originally sought in the application in a case, that the costs of the proceeding be calculated in accordance with the Federal Court scale, was not pressed.
For the reasons that follow, the proceeding will not be transferred to the Federal Court but the application for security for costs will be granted.
Background
The essence of the proceeding has been summarised in paras.7-12 of the affidavit of the respondents’ solicitor, Mr Creais. I adopt and repeat that summary:
7. In general terms, the applicant alleges that:
a.the get up of the [first respondent’s] Morpeth muesli products is substantially identical and deceptively similar to the get up of a granola produced by the applicant in Victoria and offered for sale in Victoria and New South Wales (“Irrewarra granola”) because:
i. the materials used in the packaging of the Morpeth muesli products are substantially identical and deceptively similar to those used in the packaging of Irrewarra granola;
ii. the shape and size of the packaging of the Morpeth muesli products is substantially identical and deceptively similar to those used in the packaging of Irrewarra granola;
iii. the labelling on the packaging of the Morpeth muesli products is substantially identical and deceptively similar to those used in the packaging of Irrewarra granola; and
iv. the content of the Morpeth muesli products is substantially identical and deceptively similar to those used in the packaging of Irrewarra granola.
b.the text accompanying the entry of one of the Morpeth muesli products in a February 2010 catalogue produced by a distributor of the Morpeth muesli products was substantially identical and deceptively similar to the text accompanying the entry for Irrewarra granola in the distributor’s July 2009 catalogue; and
c.the respondents have breached an interlocutory order of this Court made on 27 May 2010 by Magistrate Riley restraining the respondents from selling one of the Morpeth muesli products in packaging with a label that has certain specified characteristics.
8. The applicant claims that by reason of the conduct alleged:
a.The first respondent has contravened sections 52 and 53 of the Trade Practices Act 1974 (Cth);
b.The first respondent has committed the tort of passing off;
c.The second respondent has contravened sections 42 and 44 of the Fair Trading Act 1987 (NSW); and
d.The second respondent has been knowingly concerned in the first respondent’s breaches of the Trade Practices Act 1974 (Cth).
9.The applicant seeks damages, interest and orders that the respondents be permanently restrained from selling, or by trade offering for sale, the Morpeth muesli products and that all Morpeth muesli products in the possession or control of the respondents be delivered up for destruction.
Emails
10.On 10 December 2010 the applicant further amended its statement of claim by adding a new cause of action arising from allegations that the second respondent has sent two different emails (“the emails”) to two people, one to each, which contain the allegedly false statement that the applicant’s use of the word “Granola” to promote and sell its product is a breach of a trademark registered by Australian Health & Nutrition Association Limited t/as “Sanitarium Health Food Company”.
11.The applicant alleges that the emails are false and that consumers of the applicant are likely to be misled or deceived by the emails. The applicant claims that that [sic] by reason of the alleged conduct as outlined in paragraph 10 above, the second respondent has breached sections 42 and 44 of the Fair Trading Act (1987) NSW.
12.The applicant seeks damages, interest and an order permanently restraining the second defendant from sending, drafting or otherwise being concerned with the drafting or sending of any communication in the form or substance of the emails by herself, her servants, agents or otherwise.
The applicant’s allegations concern three of the first respondent’s products. One was sold in or about February 2010 (“first Morpeth product”). The second was sold in or about April 2010 (“second Morpeth product”). The third is alleged to be a repackaged version of the second Morpeth product (“third Morpeth product”). It is the sale of the third Morpeth product which is said to contravene the injunction ordered last May.
The proceeding was initiated by an application filed on 3 May 2010 with which was filed a statement of claim in which the allegations concerning the first Morpeth product were made. The allegations concerning the contravention of this Court’s injunction in relation to the third Morpeth product were made in an amended statement of claim filed on 10 September 2010. The allegations concerning the second Morpeth product and the emails were made in the further amended statement of claim filed on 10 December 2010.
The respondents say that they ceased offering the first Morpeth product for sale in about March 2010 and in any event deny that the first Morpeth product was substantially identical or deceptively similar to Irrewarra granola. As to the second Morpeth product, the respondents admit that it was offered for sale from about March 2010 to 25 June 2010 but deny that its get up was substantially identical or deceptively similar to the get up of Irrewarra granola. The respondents do not deny that the first respondent sold the third Morpeth product in the period following the making of the injunction but say that it did not amount to a breach of that order and was packed in a way which was not substantially identical to the packaging of the second Morpeth product.
The respondents deny that they represented that the Morpeth products had a connection with the applicant, that those products originated from the applicant or that consumers of Irrewarra granola were likely to be misled, deceived or confused in that regard. The second respondent denies the allegation of accessorial liability under the Trade Practices Act and both respondents deny the allegation of passing off.
The second respondent admits sending the first of the emails referred to in the further amended statement of claim but denies sending the second one.
Application in a case
Respondents – applicants on the application in a case
In his affidavit sworn 1 February 2011 Mr Creais expresses the view that the proceeding will involve the determination of numerous matters of legal and factual complexity including:
Morpeth Muesli Products
a.Whether the market for the Morpeth muesli products and Irrewarra granola extends across Victoria and New South Wales or whether each State constitutes a separate market;
b.Whether the Morpeth muesli products and Irrewarra granola are offered for sale in the same market;
c.Which of the Morpeth muesli products and the Irrewarra granola established the earlier reputation in the relevant market;
d.Whether the materials used in the packaging, the shape and size of the packaging, the labelling on the packaging and the content of the Morpeth muesli products are substantially identical and deceptively similar to those of Irrewarra granola;
e.Whether the get up of the Morpeth muesli products is so similar or identical to that of Irrewarra granola that the public is confused or is like [sic] to be confused or mislead [sic] as to the origin of the Morpeth muesli products;
f.Whether the respondents are responsible for the acts of any third party distributor;
g.Whether the further amended statement of claim discloses a cause of action against the first respondent in respect of the third Morpeth Muesli product;
h.Whether the first respondent has breached the Trade Practices Act 1974 (Cth) (now known as the Competition & Consumer Act 2010 (Cth)) or has committed passing off;
i.Whether the further amended statement of claim discloses a cause of action against the second defendant in respect of any of the Morpeth muesli products;
j.Whether the acts of the second respondent amount to being knowingly concerned in the first respondent’s alleged breaches of the Trade Practices Act 1974 (Cth));
k.Whether the respondents have breached an interlocutory order of this Court;
l.Whether the mere breach of an order of this Court can constitute conduct in contravention of the Trade Practices Act 1974 (Cth), Fair Trading Act 1987 (NSW), or passing off;
m.Whether the applicant is entitled to an order restraining the sale of the Morpeth products no matter in what get up they are marketed and what distributor’s catalogue text accompanies the relevant entry;
n.Whether, insofar as a claim in respect of the Morpeth muesli products is concerned, the applicant has suffered damage, including damage to its reputation, and the quantum of that damages;
Emails
o.Whether the second respondent sent, or was responsible for sending, one or both of the emails;
p.Whether the content of the emails is false;
q.Whether the content of the emails is either misleading or deceptive or is likely to mislead or deceive;
r.Whether consumers of the applicant’s products have been misled or deceived by the emails or are likely to be misled or deceived;
s.Whether the further amended statement of claim discloses a sufficient cause of action against the second defendant in respect of the emails;
t.Whether this Court has jurisdiction to hear the claim arising from the emails; and
u.Whether, insofar as a claim in respect of the emails is concerned, the applicant has suffered damage, including damage to its reputation, and the quantum of that damage.
Mr Creais estimated that the case will take a minimum of eight days to hear. In relation to the preparation of the case for hearing he deposed that:
a)the applicant has served thirteen affidavits from six witnesses who will all be required for cross-examination;
b)the respondents will rely on at least two affidavits already served together with additional evidence once the applicant’s evidence-in-chief is served;
c)expert evidence may be required in relation to the assessment of damages;
d)the respondents have briefed senior and junior counsel; and
e)the parties seek discovery and interlocutory applications may be made in relation to discovery and related issues.
Mr Creais deposed that as at 31 December 2010 the respondents’ solicitor and client costs were $97,000 exclusive of GST. He deposed that the application presently before the Court is likely to cost the respondents $24,050 exclusive of GST, that the preparation of the evidence for the final hearing would involve the respondents incurring further costs of about $49,450 exclusive of GST and that the costs of and incidental to the hearing itself, including preparation, would be in the order of $131,980 exclusive of GST. To these figures were to be added an amount of $25,500 for disbursements other than counsels’ fees.
Mr Creais estimated that upon taxation those costs would be likely to be reduced to $273,973. He also estimated that were this Court’s fixed scale of fees to apply, the respondents, if successful, would be likely to be awarded $15,310 for solicitors’ fees, $21,120 for counsels’ fees and disbursements.
In support of the application for security for costs Mr Creais annexed to his affidavit copies of four fixed charges over assets of the applicant registered with ASIC. All were in favour of CBFC Ltd. One, dated 9 August 2007, is in respect of an equipment loan whose last instalment is due in July 2011. The second charge, dated 30 January 2001, was in respect of a chattel mortgage of five years’ duration. The third charge, dated 30 November 2006, is in respect of an equipment loan whose last instalment is due in October 2011. The final charge, dated 21 June 2005, was in respect of another equipment loan whose last instalment was due in June 2009.
Mr Creais also deposed that searches of the Victorian and New South Wales real property records indicated that the applicant did not own any real property in either state. He further deposed that the applicant appeared to be the trustee of the Irrewarra Estate Trust and was not bringing the proceeding for its own benefit but for the benefit of the beneficiaries of the trust.
He also deposed to the fact that the Sanitarium Health Food Company has brought a proceeding against the applicant and its directors claiming infringement of the registered trademark “granola” and that that proceeding is pending.
The burden of the respondents’ submissions is that the applicant has minimal assets and has not disclosed whether it is bringing the proceeding in its capacity as trustee of the Irrewarra Estate Trust and for the benefit of the trust. They submit that there is reason to believe that the applicant would be unable to pay the respondents’ costs of the proceeding if ordered to do so.
Mr Creais explains the delay in seeking an application for transfer of the proceeding to the Federal Court as arising out of the two amendments to the statement of claim which had the result that the scope of the proceeding was not identified until the most recent iteration of the statement of claim was filed and served.
The respondents tendered a recent bank statement of the applicant, an unredacted copy of its balance sheet as at June 2010 and a copy of the trust’s 2009 tax return. They also tendered copies of the application and statement of claim in the Sanitarium Health Food Company proceeding and a letter from their solicitors to the applicant’s solicitors requesting statutory declarations from Mr and Mrs Calvert, the principal beneficiaries of the Irrewarra Estate Trust, detailing their assets, liabilities, income and expenditure.
Applicant – respondent on the application in a case
In her affidavit affirmed 25 February 2011 the applicant’s solicitor, Ms Good, deposed that the applicant proposed to rely on the affidavits of five witnesses, some of whom have sworn more than one affidavit. She estimated that the matter would require four to five days of hearing. Ms Good agreed that the parties will have to give discovery but deposed that most of the relevant documents have been annexed to the affidavits already filed.
Further, she deposed that the dispute is not a substantial one and, based on an affidavit sworn by the second respondent on 6 May 2010, estimated the quantum of likely damages to be less than $20,000.
As to the charges over the assets of the applicant, Ms Good deposed that two of the four facilities have already expired and in respect of the two which are outstanding, less than $23,000 remains in total to be paid. Annexed to Ms Good’s affidavit are the applicant’s profit and loss statement and balance sheet for the year ending 30 June 2010. The profit and loss statement discloses a net profit of slightly more than $401,000 and the balance sheet discloses a net asset position of more than $437,000. Also annexed to Ms Good’s affidavit is a copy of the deed appointing the applicant trustee of the Irrewarra Estate Trust. The relevant effect of clause 14 of that deed is that the applicant would be entitled to be indemnified out of the trust fund for any costs awarded against it in this proceeding.
The applicant also filed an affidavit of Catherine Mary Dealehr sworn 21 February 2011. Ms Dealehr is a Victorian legal practitioner who practises as a specialist costs lawyer. She deposed to her experience in this area and I accept her to be an expert in relation to the costs which might be awarded under the Federal Court scale. The assumptions upon which Ms Dealehr prepared her affidavit were that:
(a)the hearing of this matter is estimated to take 2 – 3 days and not a minimum of 8 days as estimated at paragraph 15 of the Creais Affidavit;
(b) the Applicant has filed 13 affidavits in relation to the injunction application and the matter generally. The Applicant intends to file one further affidavit and to rely on the following affidavits already filed for the final hearing of this matter:
(i)Bronwynne Calvert sworn 28 April 2010, 4 May 2010, 7 May 2010 and 22 October 2010;
(ii)Alicia Diane Trevelyan sworn 29 April 2010 and 22 October 2010;
(iii)Lydia Morgan sworn 22 October 2010; and
(iv)John Wigley sworn 22 October.
(c) the affidavits filed by the Respondent that are relevant to the final hearing of this matter are the Affidavits of Allison Arnott sworn 6 May 2010 and 11 May 2010.
(d) Ms Good does not believe that the parties will need to obtain expert evidence referred to in paragraph 20 of the Creais Affidavit in relation to the assessment of damages. This is because the anticipated quantum of damages is relatively smaller in light of injunctive relief obtained by the Applicant early in these proceedings;
(e) the matter does not warrant the engagement of senior counsel as this matter is not complex in law or in fact and the Applicant has engaged only one counsel (not being senior counsel);
(f) if the matter warrants discovery, it will not change the claim amount recoverable on a party-party basis; and
(g) the Applicant opposes any application by the Respondents to transfer the matter to the Federal Court of Australia.
Ms Dealehr also proceeded on the bases that the quantification of costs based on a party’s solicitor and client costs was inappropriate where the Court provided for a scale and that security of costs applications are normally calculated in relation to future, not past, costs and up to and including the first day of the final hearing. Ms Dealehr estimated that, including counsels’ fees, the respondents’ party and party costs claimable on this Court’s scale for future costs up to and including the first day of the final hearing was $12,340.
Ms Dealehr deposed she was not confident that the respondents’ methodology in calculating its costs and disbursements was accurate, verifiable or reasonable. She deposed that it was inappropriate to use solicitor and client costs as a basis from which to extrapolate on a percentage basis the amount likely to be achieved on a taxation.
Ms Dealehr swore a second affidavit on 1 March 2011. She recorded her revised instructions that Ms Good estimated that the matter would require four to five hearing days. She also further addressed the issue of the costs which the respondents might recover under the Federal Court scale. Ms Dealehr observed that Mr Creais based his estimate of the costs likely to be achieved by the respondents upon taxation on the hourly rates charged by the solicitors in question rather than by reference to the relevant item of the Federal Court scale plus any appropriate loading. Ms Dealehr expressed the view that the hourly rate inclusive of GST provided by the Federal Court scale, $304, together with what she considered to be an appropriate loading of twenty-five percent, provided an hourly rate of $380 including GST. She stated that the respondents’ “executive lawyers” charged 141.8% of the Court’s scale and their “senior lawyers” charged 98% of the Court’s scale. Ms Dealehr undertook a similar calculation in relation to the scale allowance for time engaged by the respondents’ solicitors’ paralegals and stated that the professional fees charged in relation to them were 314.3% of the scale amount.
Ms Dealehr also referred to the disallowance, on taxation, of costs incurred which are of a purely solicitor and client nature.
Ms Dealehr estimated the costs which might be awarded to the respondents under the Federal Court scale, having excluded from her consideration the following matters:
a)costs incurred for work already performed;
b)costs associated with this application in a case;
c)costs associated with the engagement of an expert, on the basis that she had been instructed that an expert would not be necessary; and
d)costs beyond the first day of hearing.
Ms Dealehr also assumed that discovery would not be substantial and that the parties’ solicitors had already considered the majority of documents. Ms Dealehr estimated that the respondents’ future costs on a party and party basis would be taxed at $29,993.
The affidavit of service of Lydia Morgan affirmed 21 February 2011 discloses that the applicant’s solicitors wrote to the respondents’ solicitors on 10 February 2011 advising that the applicant offered to deposit $36,430 into the applicant’s solicitors’ trust account to be held as security for any costs order which might be made in the respondents’ favour. This amount was expressly derived from the costs which Mr Creais estimated would be available to the respondents pursuant to this Court’s scale of costs, were they to be successful. The offer expired on 14 February 2011.
The applicant also relied on the 2 March 2011 affidavit of
Mark Lipshutz, a solicitor in the employ of its solicitors. Annexed to Mr Lipshutz’s affidavit is a letter from the applicant’s solicitors to the respondents’ solicitors recording an offer made by Mr and Mrs Calvert to provide personal guarantees “for the payment of any adverse costs order that may be made against” the applicant. The letter also indicated that the beneficiaries were prepared to provide the respondents with evidence of their ability to meet any reasonably foreseeable adverse costs order which might be made against the applicant. Annexed to Mr Lipshutz’s affidavit was a statement signed by Mr and Mrs Calvert identifying their net assets as being comfortably in excess of one million dollars. Mr Lipshutz also annexed copies of land title searches in respect of seven properties registered in the name of Mr and Mrs Calvert. Six of those properties were mortgaged.
The applicant also tendered photographs of packs of Irrewarra granola and the second and third Morpeth products and a bank statement of the applicant.
The applicant referred to the profit and loss statement and the balance sheet annexed to Ms Good’s affidavit and submitted that these showed no impecuniosity or inability to satisfy a costs order. It also pointed to the trust deed annexed to Ms Good’s affidavit which empowered the applicant to bring these proceedings for the trust and entitled it to be indemnified out of trust assets.
The applicant also referred to that part of the trust deed which identified Mr and Mrs Calvert as the trust’s primary beneficiaries and to their offer to provide the guarantees referred to above at [34]. The applicant submitted that the real question was its capacity to pay and that the Court had discretion under s.1335 of the Corporations Act 2001 to take into account the fact that guarantees had been offered. In this regard, reference was made to KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 where Beazley J said:
Once the statements in Mantaray and Gentry are considered in context, it is clear that no more was being said than that the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made. In my opinion, this is the correct approach to take when such an offer has been made. (at 204)
It was submitted that the personal statement of assets and liabilities annexed to Mr Lipshutz’s affidavit substantiated Mr and Mrs Calvert’s ability to pay a costs order. The applicant submitted that there was no risk that it would not have the capacity to pay a costs order and that, in any event, there was an offer of guarantees from individuals who also had the capacity to pay.
Consideration
Transfer to the Federal Court
Were the matter to be transferred to the Federal Court, the application for security for costs would be more appropriately dealt with by a judge of that court. Consequently, it is necessary, as a preliminary issue, to determine whether or not this proceeding should be transferred to that court. Transfers of matters from this Court to the Federal Court are governed by s.39 of the Federal Magistrates Act 1999 and, relevantly, the Court is required to have regard to the interests of the administration of justice and to whether its resources are sufficient to hear and determine the proceeding. Rule 8.02(4) of the Federal Magistrates Court Rules 2001 also requires the Court to consider:
(a)whether the proceeding is likely to involve questions of general importance, such that it would be desirable for there to be a decision of the Federal Court or the Family Court on one or more of the points in issue;
(b) whether, if the proceeding is transferred, it is likely to be heard and determined at less cost and more convenience to the parties than if the proceeding is not transferred;
(c) whether the proceeding will be heard earlier in the Federal Magistrates Court;
(d) the availability of particular procedures appropriate for the class of proceeding;
(e) the wishes of the parties.
The respondents submitted that the matter is best suited to be conducted in the Federal Court because it is one of legal and factual complexity, the trial is likely to be lengthy, discovery is sought and there are likely to be interlocutory applications. Further, the respondents submitted that the work involved in preparing the matter for hearing and presenting it at trial will be significant and cost in the order of the amounts referred to earlier in these reasons. They are of the view that discovery will involve more work than the applicant believes.
The respondents submitted that although the claim against them may be small, they are contesting it vigorously and it is clear that they have already incurred $100,000 in costs. They submitted that their costs were rapidly escalating. They acknowledged that the cases did not indicate that this Court has previously ordered, before the conclusion of a proceeding, that the costs of a proceeding be determined in accordance with the Federal Court scale. They submitted that this meant that if the proceeding was not transferred they were at risk of the Court not ordering, at the conclusion of the proceeding, that costs be determined on a basis more generous than the Court’s lump sum scale provided in sch.1 of the Rules. They also pointed to earlier cases in this Court where lump sum costs orders had been made on the basis of estimates of costs likely to be achieved on a taxation, less a substantial discount. The respondents submitted that a transfer to the Federal Court would give them certainty in relation to their costs.
The respondents submitted that Mr and Mrs Calvert’s offer of guarantees was hollow as the form of the proposed undertakings had not been provided. They also referred to the amount which Ms Dealehr had estimated would be available to the respondents on a taxation and submitted that her methodology underlined the risk undertaken by the respondents if their costs were to be assessed according to the Court’s scale.
The applicant submitted that the trial will not be as lengthy as the respondents apprehend, that there is relatively little additional evidence likely to be put on by the applicant and that it has not briefed senior counsel. It also submitted that the case was not sufficiently complex to warrant transfer and that the quantum of damages was not likely to be large, the case principally being concerned with a claim for injunctive relief in circumstances where the parties are direct trade rivals.
On the quantum of costs which might be awarded, the applicant submitted that there was no reason to depart from this Court’s scale and that the amount spent by the respondents was a matter for them.
It is not apparent that the proceeding raises questions of general importance which it would be desirable for the Federal Court to decide. Nor am I satisfied that, if transferred, the proceeding is likely to be heard and determined at a lesser cost and with more convenience to the parties than if it were to remain in this Court. A transfer would necessarily involve some delay and thus additional cost to the parties. It is not apparent to me why it would be more convenient to the parties to have the matter in the docket of a Federal Court judge than it would be for it to remain in a docket in this Court. Were the matter to be transferred, it is unlikely that a hearing date would be set at the first directions hearing but, even if it were, I apprehend that the hearing is likely to take place more quickly in this Court than it would in the Federal Court, even if an eight day listing were to be sought.
Other than a reference to the need for discovery, it has not been suggested that the procedures available in the Federal Court are more particularly appropriate to this proceeding than this Court’s procedures. However, the need to make an application for discovery is not a strong basis to conclude that the matter should be transferred to the Federal Court, particularly as leave is required in the Federal Court before a notice for discovery may be served.
This matter does not present novel legal questions or particularly complex factual issues and the likely length of the hearing, even as estimated by the respondents, while not commonplace in this Court is not unknown in its lists. Further, the volume of evidence so far filed is not so great as to support a conclusion that this Court would be unable to deal with it. Although the respondents submitted that the Federal Court is set up to deal with cases of the size which this one may assume, it might be noted that in general federal law matters this Court’s registry services are provided by the Federal Court. In all the circumstances, I am satisfied that the Court has the resources to hear and determine the proceeding.
But, in any event, the principal basis of the application to transfer is that costs which might be awarded in the Federal Court, were the respondents to be successful, would be greater than the costs available in this Court. Certainly that is so if the respondents intend to incur costs of the magnitude referred to in Mr Creais’s affidavit and the Court’s standard scale of costs were to apply. However, the respondents’ argument depends on an important assumption, that the costs they are likely to incur would be incurred reasonably. It is too early to say whether the matter is one of such difficulty that it justifies the devotion of resources to the extent foreshadowed by Mr Creais. Although he deposes that the respondents have briefed two counsel because of the complexity of the issues presenting in the matter and because of the extent of the potential detrimental consequences which an adverse result would have on the business of the first respondent and on the life of the second respondent, it remains to be seen whether the matter is, indeed, as complex as the respondents perceive. Also, expenses incurred because of a party’s concerns about a possible adverse outcome appear to be more in the nature of a solicitor and client cost than a party and party one.
Further, although the usual position is that this Court’s scale of costs applies to a proceeding, the Court’s rules specifically recognise the possibility that costs may be referred for taxation in accordance with the Federal Court scale. At this point it is not possible to say whether the costs of this proceeding would be appropriately dealt with by the making of such an order. If I cannot conclude that costs should be determined in this Court in accordance with the Federal Court scale of costs then I cannot conclude that the matter should be transferred to the Federal Court for the purpose of achieving that very outcome.
I am not of the view that the interests of the administration of justice or any other consideration require that the matter be transferred to the Federal Court.
Security for costs
The application for security for costs was brought pursuant to s.1335 of the Corporations Act and r.21.01 of the Rules. Reference was also made to s.80 of the Federal Magistrates Act. Section 1335 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.
(1A) Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation
(2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.
Rule 21.01 provides that the Court may order an applicant to give such security for costs as the Court considers appropriate.
The Court’s discretion is unfettered but principles guiding its exercise can be found in the cases. In particular, in Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 Hill J identified the following to be among the matters appropriate for consideration on such an application:
· the chances of success of the applicant; whether the applicant’s claim is bona fide or a sham;
· the quantum of risk that the applicant cannot satisfy a cost order;
· whether use of the power would shut out a small company from making a genuine claim against a large company, i.e. is the power being used oppressively;
· whether the impecuniosity arises out of the Act [sic] in respect to which relief is sought;
· whether there are aspects of public interest which weigh in the balance against the making of an order;
· whether there are any particular discretionary matters peculiar to the circumstances of the case.
The first, second and last of these considerations are relevant to this proceeding.
The chances of success of the applicant; whether the applicant’s claim is bona fide or a sham
The photographs of the parties’ products which became an exhibit on the application in a case satisfy me that the claim is not a sham. The respondents conceded that the applicant has sufficient basis for bringing a bona fide claim although they submitted that the email claim was a very minor one in pecuniary terms and had aspects which did not seem very strong. In the circumstances, I am entitled to assume that the claim has reasonable prospects of success: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497; KP Cable Investments Pty Ltd v Meltglow Pty Ltd.
The quantum of risk that the applicant cannot satisfy a cost order
As noted earlier, the applicant is a company which is trustee of the Irrewarra Estate Trust whose principal beneficiaries are Mr and Mrs Calvert. The applicant’s financial documents indicate a balance in its bank account as at 31 January 2011 which is not conspicuously large. The 2010 balance sheet and profit and loss statement disclose the figures referred to earlier and the 2009 balance sheet, which became an exhibit, indicates a net asset position of $365,871.01. The trust’s tax return for 30 June 2009 discloses proprietors’ funds of $100 but I note that this was the amount settled on the trust at its inception and infer that the remainder of the trust’s assets are ultimately intended for and allocated to distributions to the beneficiaries, even if those distributions are not intended to occur in the near term.
No evidence was adduced which indicated the net asset position of the applicant other than in its role as trustee of the Irrewarra Estate Trust. It may be assumed that it has few assets of its own. Although the applicant is entitled to be indemnified out of the trust assets for the costs of the proceeding, to say that is to acknowledge that it is not the beneficial owner of the assets which might be used to meet a costs order made against it. As a consequence, I conclude that the applicant should be considered to be impecunious and unable, from its own resources, to pay the respondents’ future costs of the proceeding were they to be awarded those costs: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584.
Whether there are any particular discretionary matters peculiar to the circumstances of the case
Although the applicant is bringing the proceeding on behalf of a trust which is obliged to indemnify it and appears currently to have assets sufficient to satisfy a costs order, the Court should have regard to the difficulties which the respondents would face were they to seek to execute in respect of an order for costs: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd; Citi Nominees Pty Ltd v Fenny [2006] WASC 97. Further, the fact that the proceeding is really being brought in the interests of the trust’s beneficiaries is a matter of some importance. The interposition of the trustee means that although the beneficiaries will enjoy the benefits of a successful outcome, they will not bear the burden of personal liability for a costs order if the claim is not successful. In circumstances where the costs risk may fall unfairly on the respondents, the claim for security for costs is much strengthened. In this regard, the guarantee offered by Mr and Mrs Calvert is not unimportant but its principal significance lies with the nature of any order which is to be made, not whether an order should be made. In my view, the respondents have made out their claim for an order for security for costs.
Form of security for costs to be ordered
As the respondents have made out a case in favour of security, the question arises as to the form which the security should take. In my view, a guarantee provided by Mr and Mrs Calvert would be the most appropriate form of security as they are the persons in whose interest the proceeding is principally being bought. However, they are not parties to the proceeding and thus the Court cannot make an order requiring them to give security for the applicant: Instyle Contract Textiles Pty Ltd v Good Environmental Choice Services Pty Ltd (2009) 181 FCR 360.
The respondents’ position is that the Calverts’ offer of a guarantee was a hollow one as they did not also undertake to not encumber or dispose of their assets pending the determination of this proceeding. They submitted that the offer of personal guarantees did not adequately protect them against the risk that the applicant would be unable to satisfy a costs order. However, it seems to me that this submission indicates a lack of perspective. The letter from the applicant’s solicitors to the respondents’ solicitors of 2 March 2011 records that “your clients have actually attended our clients’ home” and bakery premises, which suggests that they had some idea of whether Mr and Mrs Calvert’s guarantees were likely to be of any value. This is not a very large case and even if the respondents were to obtain a costs order of the magnitude of the one estimated by Mr Creais, it seems implausible that Mr and Mrs Calvert would divest themselves of their assets to the extent they had less than $250,000 left. No basis for this concern was advanced and, in particular, no evidence was adduced to suggest that Mr and Mrs Calvert might behave in such a way. In any event, an order can be framed to address such concerns.
Quantum of security
Defining an amount which might be secured presents the Court with the choice of its own scale found in sch.1 to the Rules or the Federal Court scale as the basis of the calculation. As observed earlier in these reasons, it is too early to make that choice. However, r.21.10 provides that this Court’s scale is to apply unless the Court orders otherwise. As a result, absent any basis at this point to order that costs be assessed on a different basis, it must be taken that this Court’s scale should apply when determining the quantum of costs to be secured.
Nevertheless, even were costs to be assessed in accordance with the Federal Court scale, although I acknowledge Mr Creais’s experience I prefer the methodology articulated in Ms Dealehr’s affidavits. In circumstances where the hourly rates of the respondents’ legal advisers appear often to be significantly in excess of the hourly rate which may be derived from the Federal Court scale, even with a 25% loading, it is not at all likely, were they to be successful in the proceeding, that the respondents would be able to restrict the discounting of their solicitors’ professional fees on a taxation to the percentage identified by Mr Creais. Consequently, although this Court’s scale would appear to be less generous than the Federal Court’s, the latter would not, in my view, be likely to produce a taxed amount of the order estimated by Mr Creais.
Also relevant to the quantum of costs involved is the issue of whether any security which might be ordered should be in respect of all the costs of the proceeding or only the costs yet to be incurred, a matter raised in Ms Dealehr’s first affidavit. Although costs of the whole proceeding may be ordered, the delay in bringing the application for security has an impact on whether this would be an appropriate course to take: Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114; Karl Suleman Enterprizes Pty Ltd (in liquidation) v Pham [2010] NSWSC 886. By not applying for security at an earlier date, as they should have, the respondents have permitted the applicant to incur costs which, if security were to be ordered and not given, would be wasted. In the circumstances, I consider that the costs potentially the subject of an order for security should be future costs only.
Although I have preferred Ms Dealehr’s methodology for the assessment of costs on an hourly basis, I do not agree that security should not include the costs of hearing days after the first day. It is unrealistic to restrict costs to one day of hearing when all parties acknowledge that the matter will run longer than that. The costs of the hearing will be real enough once they are incurred and an order for security should reflect the real estimated length of the hearing and not an artificially reduced figure. It can be noted that in the Equity Access case, Hill J was prepared to order security for the costs of more than two further hearing days. I am willing to accept the applicant’s five day estimate as the more realistic of the parties’ estimates, particularly having regard to r.1.03(4) of the Rules.
As to the question of disbursements, I consider that the cost of a transcript should be included. I also accept Mr Creais’s estimation of photocopying expenses and accept as reasonable the respondents’ proposal to adduce expert evidence on damages.
Having determined the basis on which the costs to be secured should be calculated, I now set out the calculation:
a)Application for discovery
Lump sum for preparation $1,465
Half day hearing – solicitor $ 880
Half day hearing – counsel $1,320 $3,665
b)Preparation for hearing
Lump sum – 2 days $7,940
Lump sum – 3 further days $5,010 $12,950
c)Hearing
Counsel – 5 days $13,200
Solicitor – 5 days $ 8800 $22,000
d)Taking judgment $ 240
e)Disbursements
Transcript – 5 days at $1818 (excl GST) $9,090
Photocopying $2,500
Expert $7,000 $18,590
Total $57,445
I therefore conclude that the appropriate amount to secure is $57,445.
Conclusion
As the Court is not in a position to order Mr and Mrs Calvert to provide the security to which I have concluded the respondents are entitled, nor to specify the nature of such security were they willing to provide it, the matter will stand over for further submissions on the terms of the order to be made. I will also hear the parties on the question of costs, including the question of the costs of the recently contested subpoena for production.
I certify that the preceding sixty-seven (67) paragraphs are a true copy of the reasons for judgment of Cameron FM
Associate:
Date: 31 March 2011
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