Mt Romance Australia Pty Ltd v Forest Products Commission
[2010] FCA 761
•21 July 2010
FEDERAL COURT OF AUSTRALIA
Mt Romance Australia Pty Ltd v Forest Products Commission [2010] FCA 761
Citation: Mt Romance Australia Pty Ltd v Forest Products Commission [2010] FCA 761 Parties: MT ROMANCE AUSTRALIA PTY LTD (ACN 060 122 698) v FOREST PRODUCTS COMMISSION File number: WAD 69 of 2009 Judge: GILMOUR J Date of judgment: 21 July 2010 Catchwords: PRACTICE & PROCEDURE – application for leave to discontinue proceedings – no reasonable prospect of success – application for leave dismissed – substantive application dismissed.
COSTS – award on solicitor and client or indemnity basis – where applicant seeks leave to discontinue proceedings – whether action commenced or continued where no prospect of success.
TRADE PRACTICES – application for damages and injunctive relief for alleged misuse of market power under s 46 of the Trade Practices Act.
Legislation: Trade Practices Act 1974 (Cth) s 46, 52, 80, 82, 87
Forest Products Act 2000(WA)Cases cited: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 referred to
Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 referred to
Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 cited
Cook v Pasminco Ltd (No 2) (2000) 107 FCR 44 cited
Covell Matthews & Partners v French Wools Ltd [1977] 1 WLR 876 cited
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 applied
Hamod v State of New South Wales (2002) 188 ALR 659 referred to
J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, Western Australian Branch (No 2) (1993) 46 IR 301 cited
O’Neil v Mann [2000] FCA 1680 cited
Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177 referred to
Rural Press Ltd v ACCC (2002) 118 FCR 236 discussed
Szencorp Pty Ltd v Clean Energy Council Limited (No 2) [2009] FCA 196 referred to
Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 131 FCR 529 cited
Vasram v AMP Life Ltd[2002] FCA 1286 cited
Yates Property Corp Pty Ltd v Boland (2000) 179 ALR 664Date of hearing: 18 May and 3 June 2010 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 81 Counsel for the Applicant: Ms R I Lee Solicitor for the Applicant: Wilson & Atkinson Counsel for the Second Respondent: Mr H Robinson Solicitor for the Second Respondent: Haydn Robinson
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
WAD 69 of 2009
BETWEEN: MT ROMANCE AUSTRALIA PTY LTD (ACN 060 122 698)
ApplicantAND: FOREST PRODUCTS COMMISSION
First RespondentWESCORP SANDALWOOD PTY LTD (ACN 064 532 225)
Second Respondent
JUDGE:
GILMOUR J
DATE:
21 JULY 2010
PLACE:
PERTH
REASONS FOR JUDGMENT
Application
The applicant, Mt Romance Australia Pty Ltd (MRA), seeks leave to discontinue proceedings against the second respondent, Westcorp Sandalwood Pty Ltd (Wescorp). Wescorp submits that the proceedings should be dismissed and seeks its costs on an indemnity basis.
Background
MRA commenced proceedings against the first respondent, the Forest Products Commission (the FPC), and Westcorp in early May 2009. MRA’s primary cause of action against each of the respondents was an alleged misuse of market power in contravention of s 46 of the Trade Practices Act 1974 (Cth) (the TPA). There was an alternative claim that Wescorp interfered with the FPC’s performance of its contract with MRA. In the originating application MRA claimed that the respondents misused their market power in the delivery of harvested and processed sandalwood, contrary to the TPA, s 46, resulting in the FPC, by the act of its agent, Wescorp, failing to deliver harvested and processed sandalwood in accordance with the terms of a contract between the FPC and MRA (the Production Contract). This was alleged to have occurred between July 2008 and January 2009 (the Period).
In its originating application MRA sought both interlocutory and final injunctive relief to restrain Wescorp from acting as the agent of the FPC pursuant to s 80; an order that the agency contract between the FPC and Wescorp be terminated pursuant to s 87; and damages from 1 July 2008 to the date when Wescorp ceases to act as the agent of the FPC pursuant to s 82 of the TPA.
In particular MRA sought an interlocutory injunction to restrain Wescorp from acting as agent for the FPC completely or in relation to the Production Contract. Its agency with the FPC provided Wescorp with most of its business. Accordingly, had an injunction as sought been granted, it would likely have put Wescorp out of business.
At a hearing on 6 April 2010 counsel for MRA informed the Court that MRA could not sustain the s 46 claim against Wescorp; that MRA wanted to amend its statement of claim such that no part of this existing statement of claim would survive the proposed amendments; and that none of the relief referred to in the application on 5 May 2009 would be sought.
It transpired in evidence that the apparent reason for MRA not proceeding with its action against Wescorp was because of a deed of settlement between MRA and the FPC which contained a term that MRA would not proceed further against Wescorp. Accordingly, this fact, of itself, is not evidence that MRA considered that it did not have an arguable case against Wescorp.
On 8 April 2010, counsel for MRA informed the Court that in these circumstances MRA proposed to seek leave to file a substituted statement of claim to plead a new cause of action alleging primarily breach by Wescorp of s 52 of the TPA. The application for leave together with Wescorp’s application for indemnity costs was heard on 18 May 2010 which was then adjourned for further hearing on 3 June 2010. However counsel for MRA advised the Court on 3 June 2010 that it no longer pressed this application but rather sought leave to discontinue the proceedings generally.
Wescorp seeks an order that MRA immediately pay Wescorp’s taxed costs on the basis that such costs are to include all costs except in so far as they are of an unreasonable amount or were unreasonably incurred so that subject to such exceptions the respondent will be completely indemnified by MRA for its costs to date. It seeks, in effect, a general indemnity costs order.
MRA accepts that it is liable to Wescorp for the costs of the proceeding up to the date of discontinuance. This will, however, not include the hearings on 6 and 8 April 2010 in respect of which costs orders were made on 8 April 2010. The only issue is whether those costs should be ordered upon an indemnity basis.
Grounds relied on by Wescorp
Wescorp contends that an indemnity costs order should be made because:
(a)the action was commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law;
(b)MRA made allegations which ought never have been made against the Wescorp;
(c)MRA unduly prolonged the case by groundless contentions;
(d)proper advice would have indicated that the action had no prospect of success; and
(e)the conduct of MRA in continuing the action was unreasonable.
These contentions may be collapsed into two, namely that:
(a)The claim against Wescorp was so hopeless that there was no real prospect of success and, was known by MRA to be so; and
(b)MRA instituted and continued the proceeding for a collateral purpose which was to place illegitimate commercial pressure on Wescorp to sell its business to MRA or if not then to damage or destroy its business.
Legal principles
The principles applicable to an order for costs on an indemnity or solicitor and client basis are well established. The observations of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401 are apt to this case:
I believe that it is appropriate to consider awarding “solicitor and client” or “indemnity” costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.
In similar vein in Hamod v State of New South Wales (2002) 188 ALR 659 at [20] a Full Court stated, as to the purpose of indemnity costs orders:
[Indemnity costs] serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.
There are many cases in this court to the same effect including: Cook v Pasminco Ltd (No 2) (2000) 107 FCR 44 at [65]; Vasram v AMP Life Ltd[2002] FCA 1286; Szencorp Pty Ltd v Clean Energy Council Limited (No 2) [2009] FCA 196 at [9]; J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, Western Australian Branch (No 2) (1993) 46 IR 301 at 303. The language used in these cases held to justify an indemnity costs order was that the particular case “had no prospect of success” in Cook; “was seriously flawed” in Vasram and “was hopeless” in J-Corp.
Indemnity costs may also be awarded where a claim has been pursued for some collateral or improper purpose: Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.
In Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194, Hill J set out some of the general principles concerning costs orders where a matter has concluded prior to trial. These include that:
(a)where neither party desires to proceed with litigation, the court should be ready to facilitate the conclusion of the proceedings by making a cost order: JT Stratford & Son Ltd v Lindley (No 2) [1969] 3 A11 ER 1122; South East Queensland Electricity Board v Australian Telecommunications Commission (FCA, Pincus J, 10 February 1989, unreported);
(b)it will rarely, if ever, be appropriate, where there has been no trial on the merits, for a court determining how the costs of the proceedings should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial: JT Stratford & Son Ltd v Lindley (No 2), above. This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue;
(c)in determining the question of costs it would be appropriate, however, for the court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them: South East Queensland Electricity Board v Australian Telecommunications Commission, above.
The above principles were approved and adopted by Goldberg J in Yates Property Corp Pty Ltd v Boland (2000) 179 ALR 664 at [5].
However, it may be that the applicability of a statutory cause of action, such as the claim under s 46 of the TPA, is capable of being determined where the relevant facts on that question are not in issue. Such is the present case.
The pleaded case
MRA, in its amended statement of claim filed on 7 July 2009 broadly alleged that:
(a)MRA is in the business of processing, marketing and selling essential oils and associated products derived from sandalwood;
(b)the FPC sells forest products (para3); It also holds a licence to harvest sandalwood;
(c)Wescorp processes, markets and sells sandalwood;
(d)Alpha Sandalwood Australia Pty Ltd (Alpha) sells sandalwood oil;
(e)Wescorp is a related company to Alpha;
(f)the FPC has a substantial degree of market power in the market for the supply of harvested and processed, or, alternatively harvested, sandalwood;
(g)Wescorp is the agent of the FPC;
(h)Wescorp processes and distributes sandalwood on behalf of the FPC in accordance with an agency contract;
(i)Wescorp has a substantial degree of market power in the processed sandalwood supply market;
(j)MRA and FPC have made a written Agreement for the supply of sandalwood pre-grind;
(k)between July 2008 and January 2009, (the Period) the FPC through its agent, Wescorp, breached the terms of a contract between MRA and the FPC for the supply of sandalwood pre-grind ("the Production Contract") by failing to deliver the agreed quantities of processed sandalwood in accordance with the agreed delivery schedule;
(l)during the Period, the FPC through Wescorp delivered contaminated sandalwood pre-grind to MRA;
(m)during the Period, the FPC exported sandalwood to international purchasers; and
(n)during the Period, the FPC, by its agent Wescorp further or alternatively Wescorp or a company related to it, delivered sandalwood or sandalwood pre-grind to The Paperbark Co Pty Ltd (“Paperbark”) which processed and sold sandalwood oil to Alpha a company half-owned by Wescorp Pacific Sandalwood Pty Ltd or alternatively to another company related to Wescorp: Statement of Claim paragraphs 10 and 36;
The specific allegations in the amended statement of claim that Wescorp had a substantial degree of market power in the market for harvesting or harvesting and processing sandalwood are as follows:
19.In or about 2003 the second respondent agreed with the Commission to act for reward as the agent of the Commission (herein the ‘Agency Contract’).
20.Pursuant to the Agency Contract, the second respondent:
20.1processes sandalwood delivered to it on behalf of the Commission, by grading it according to official sandalwood industry standards and packaging it into 3 groups, being wood, pre-grind and powder for a fee;
20.2distributes the processed sandalwood to parties in accordance with contractual arrangements of the Commission for a fee; and
20.3markets sandalwood and recycled wood domestically and overseas in return for a 5% commission on resultant sales.
21.The second respondent is the only entity to have such a contract with the Commission.
22.The second respondent, of its own accord or alternatively as agent for the Commission, has control over the selection of official sandalwood industry standards and therefore is able to alter the sizing requirements for each of the sandalwood tree segments, such as butts and roots, unclean logs and small green logs.
23.By reason of paragraphs 19-22 above, the second respondent has a substantial degree of market power in the market.
MRA then alleged that the FPC and/or Wescorp took advantage of their substantial degree of market power in the market for the supply of harvested or harvested and processed sandalwood, alternatively in the market of supplying sandalwood oil for the purpose of substantially damaging MRA or for the purpose of deterring or preventing MRA from engaging in competitive conduct in relevant markets in contravention of s 46 of the TPA. MRA alleged that Wescorp did so, put shortly, by delivering not only less processed sandalwood but, significantly, did so in the wrong ratios as between unclean logs, butts and roots, and small green logs from that provided for under the Production Contract. Under the Agreed Annual Delivery Schedule the FPC was, in effect, to provide a ratio of 5.4 (Unclean Logs): 4.2 (Butts and Roots): 1 (Small Green Logs). Based on the actual deliveries made by Wescorp to MRA during the Period, the alleged ratio actually delivered to MRA was 4.8 (Unclean Logs): 5.6 (Butts and Roots): 1 (Small Green Logs). Comparing the actual deliveries made to the Agreed Annual Delivery Schedule the delivery of Unclean Logs was short 44.0 tonnes, the delivery of Small Green Logs was short 4.2 tonnes and the delivery of Butts and Roots was in excess of 28.4 tonnes. Importantly it is alleged, that this under supply during the Period need not have occurred because, on MRA’s calculations, the FPC and Wescorp were in a position to have made full delivery in the correct ratios but, in effect, in furtherance of the alleged unlawful purpose, did not do so.
This under-delivery in the wrong ratios resulted, on MRA’s case, in it not being able to produce a balanced oil for commercial sale. This necessitated MRA sourcing processed sandalwood elsewhere at a greater cost. The additional amount paid by MRA, it says, was approximately $156,000.
Further or alternatively, MRA alleged that Wescorp knowingly, intentionally and unlawfully interfered with the FPC's performance of the Production Contract by delivering to MRA sandalwood pre-grind that was not in accordance with the Production Contract.
The contractual context
It is necessary to understand the contractual relationships which existed between Wescorp and the FPC and between MRA and the FPC during the Period and whether, on the facts alleged in the amended statement of claim, there was any reasonable basis to assert that Wescorp had a relevant market power within the meaning of Part IV of the Trade Practices Act and, if so, to then assert that it misused that power.
The FPC and Wescorp entered into a written ‘Agreement for Processing and Marketing of Sandalwood No CG/385/20/03’ dated 2 April 2004 (The FPC–Wescorp Agreement).
The FPC-Wescorp Agreement provided relevantly as follows:
(a)Wescorp was obliged as agent of FPC, amongst other things, to receive and accept delivery of sandalwood; process and package sandalwood to agreed specifications; arrange shipping, export and delivery (cl 4.1).
(b)Wescorp was prohibited without prior written authorisation from the FPC from:
(i)Processing, marketing, exporting or selling any Santalum species harvested outside Western Australia.
(ii)Selling sandalwood to any related body corporate or to any person having a shareholding or other financial interest in Wescorp.
(iii)Making any profits from Sandalwood other than by the means set out in the agreement.
(c)Wescorp was required to diligently and punctually obey the orders and instructions of FPC (cl 4.6(c)) and in the absence of any such orders or instructions in relation to any particular matter to act in such manner as Wescorp ought reasonably consider to be most beneficial to the FPC.
The FPC-Wescorp Agreement provided in Schedule 3 for the product specification required to be met by Wescorp. Wescorp was prohibited from processing sandalwood other than in accordance with the specifications. These, broadly, involved three categories: Uncleaned Logs; Small Green Logs; and Roots.
By a written agreement dated 1 April 2004 executed by MRA and the FPC, varied by a letter agreement dated 15 December 2006 and amending deed dated 2 July 2008 ("Production Contract") the FPC agreed to sell sandalwood pre-grind to MRA from 1 July 2004 (Commencement Date) to 30 June 2016.
Under the Production Contract, the FPC agreed to provide MRA from the Commencement Date until 30 June 2011, with sandalwood pre-grind sources as follows:
(i) 300 tonnes per annum of unclean logs;
(ii) 200 tonnes per annum of green butts and roots; and
(iii) 50 tonnes per annum small green logs.
and from 1 July 2011 to 30 June 2016, with:
(i)250 tonnes per annum unclean logs;
(ii)140 to 160 tonnes per annum of roots and 40 to 60 tonnes per annum of butts (with the combined total of butts and roots in aggregate not less than 200 tonnes per annum); and
(iii)100 tonnes per annum of small green logs.
Further, under the terms of the Production Contract the FPC agreed to make deliveries in each financial year, in accordance with the delivery schedule for that year as agreed between MRA and the FPC. A delivery schedule was agreed for the financial year ending 30 June 2009 between MRA and the FPC.
Evidence
The following affidavits were filed by the parties in relation to MRA’s application for an interlocutory injunction to restrain Wescorp from acting as agent of the FPC:
MRA
- Affidavit of David Graham Brocklehurst sworn 22 May and 17 June 2009The FPC
- Affidavit of John Andrew Slorach sworn 5 June 2009
- Affidavit of Grant Matthew Pronk sworn 26 May, 5 June and 16 June 2009Wescorp
- Affidavit of Timothy Desmond Coakley sworn 12 June 2009
- Affidavit of Norman Dean Butler sworn 17 June 2009I treated all of these as read by the respective parties for present purposes. Counsel for MRA conceded that, as far as the s 46 claim was concerned, all of the affidavit material thought necessary to support interlocutory injunctive relief had been filed. It is important to recall that this was, in substance, the same relief as the final relief claimed.
Applicability of s 46 TPA
Wescorp submits that the case levelled against it under s 46 was always hopeless. It pointed this out to MRA in the clearest of terms in a letter from its solicitors to MRA’s solicitors dated 15 September 2009. Wescorp submits that MRA’s response through its solicitors dated 17 September 2009 rejected its arguments out of hand. This response made no attempt to confront the main argument of Wescorp that it only ever acted as agent for the FPC and therefore could not have the relevant market power. It is necessary then to consider the provisions of s 46 and their applicability, if any, to this case.
Section 46(1) of the Act provides, relevantly that:
(1)A corporation that has a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of:
(a)eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
(b)preventing the entry of a person into that or any other market; or
(c)deterring or preventing a person from engaging in competitive conduct in that or any other market.
MRA relies on s 46(1)(a) and (c).
It is relevant to this case to appreciate that s 46(1)(c), following an amendment in 2007, provides that a corporation with a substantial degree of power in a market should not take advantage of that power for a proscribed purpose in that market “or any other market”. That amendment was in response to the judgment in Rural Press Ltd v ACCC (2002) 118 FCR 236 where the court suggested that, in order to come within the prohibition as then framed the relevant power had to be used in the market in which the corporation had the power.
In Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374, Gaudron, Gummow and Hayne JJ said at [262]:
Section 46 of the Act poses four issues for determination. Firstly, the court must identify the relevant market in which the conduct occurred. Secondly, the court must determine whether the alleged offender had a substantial degree of market power. Thirdly, the court must determine whether the alleged offender has taken advantage of that market power. Finally, the alleged offender must have engaged in the conduct for one of the proscribed purposes. This is the way in which s 46 is structured, and that is the way courts should apply it.
I will now consider the first two of these elements.
Relevant Market
There are two relevant markets alleged by MRA. The first is the market for harvested or harvested and processed sandalwood. The second is the market for the supply of sandalwood oil. I will assume for present purposes that there were and remain such markets.
Substantial degree of market power
MRA conducts a business of processing, marketing and selling oil and associated products derived from processed sandalwood.
The business of the FPC is partly in selling processed forest products. The functions of the FPC is enshrined in the Forest Products Act 2000(WA).
The primary source of business of Wescorp is, as an agent of the FPC, processing raw sandalwood delivered by the FPC and marketing the pre-grind products. It also delivers processed sandalwood to MRA as agent for the FPC to meet the FPC’s obligations under the Production Contract. Wescorp is paid fees by the FPC for these activities. Wescorp also purchases sandalwood from private property owners and either sells raw sandalwood or processes this sandalwood into either pre-grind or powder. There is no competition between MRA and Wescorp in the purchase of sandalwood from the FPC. Wescorp has not and does not purchase sandalwood from the FPC. Wescorp has no agreement with MRA.
Wescorp Pacific Sandalwood Pty Ltd, a related company of Wescorp, carried on a business of processing sandalwood sourced from the Pacific region into oil and marketing that product, but ceased doing so in June 2008 prior to the commencement of the Period. The sandalwood species sourced from the Pacific is different to the species provided by the FPC.
The oil that was produced by Wescorp Pacific Sandalwood until mid 2008 was small in relative terms, being about 300kgs per annum, compared with 15,000 – 16,000kgs of oil produced by MRA.
In or about October 2008 Wescorp Pacific Sandalwood announced that it was a 50% stakeholder along with Paperbark in Alpha for a proposed venture to process sandalwood sourced from indigenous communities to produce 25% plus Alpha Santalol oil. This oil is different to the oil produced by MRA from sandalwood provided by the FPC. MRA’s oil being 16-18% Alpha Santalol. However, by letter dated 17 April 2009 Wescorp’s solicitors advised MRA’s solicitors that, amongst other things, in the course of negotiations to establish a common business entity being Alpha, those negotiations had come to an end with no agreement. The letter said that “Alpha is already an otiose entity”.
Wescorp Pacific Sandalwood obtained about 300kgs of sandalwood oil from the ceased venture which other than in respect of 2kgs sold in May 2009, at the time of the injunction hearing, remained stock on hand.
Whether or not a corporation has a substantial degree of power in the relevant market requires attention to the whole of the evidence relating to the market and the conduct of its participants. It is not legitimate for a court to base a finding of substantial market power simply upon incidents of abuse of power in that market. Almost all participants in a market have a degree of power, which may on occasions be abused. The power of the abuser may or may not be substantial, within the meaning of s 46(1): Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission (2003) 131 FCR 529 at [150].
A corporation will not have a substantial degree of market power unless it has a considerable or large degree of such power. The court must apply the concept of a substantial degree of market power to the circumstances of each case and in identifying whether the requisite degree of market power exists. It is a relative concept. As the court said in Universal Music Australia Pty Ltd v ACCC at [151] – [152]:
At [415] of his reasons, Hill J referred to the Explanatory Memorandum to the Trade Practices Revision Bill 1986 (Cth), which introduced the present form of s 46 into the Act. That document said the word “substantial” in s 46, was intended to signify “large or weighty” or “considerable, solid or big”. That interpretation was adopted by Lockhart and Gummow JJ in Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) 35 FCR 43 at 63. Their Honours stated:
For a corporation to have a substantial degree of market power it must have a considerable or large degree of such power. The difficulty lies not in defining the word “substantial” but in applying the concept of a substantial degree of market power to the circumstances of each case and in identifying whether the requisite degree of market power exists. This is a relative concept.
We adopt the approach to “substantial” taken in Eastern Express.
It has been said that market power is the power to behave in a market in a manner not constrained by competitors in that market for a sustained period. Mason CJ and Wilson J said in Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177 at 188:
Market power can be defined as the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time, supply cost being the minimum cost an efficient firm would incur in producing the product…
However, this is not the sole indicator of market power. Market power may be demonstrated in other ways such as engaging in predatory pricing persistently or for a sustained period. As Gleeson CJ and Callinan J said in Boral Besser Masonry Ltd v ACCC at [121]:
The essence of power is absence of constraint. Market power in a supplier is absence of constraint from the conduct of competitors or customers. This is reflected in the terms of s 46(3). Matters of degree are involved, but when a question of the degree of market power enjoyed by a supplier arises, the statute directs attention to the extent to which the conduct of the firm is constrained by the conduct of its competitors or its customers.
Kaysen and Turner, in Antitrust Policy (1959) put it this way:
A firm possesses market power when it can behave persistently in a manner different from the behaviour that a competitive market would enforce on a firm facing otherwise similar cost and demand conditions.
This statement was adopted with approval by Dawson J in Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd. His Honour added at 200:
The term “market power” is ordinarily taken to be a reference to the power to raise price by restricting output in a sustainable manner. … But market power has aspects other than influence upon the market price. It may be manifested by practices directed at excluding competition such as exclusive dealing, tying arrangements, predatory pricing or refusing to deal … The ability to engage persistently in these practices may be as indicative of market power as the ability to influence prices.
In my opinion, none of these indicia of the relevant market power is present in this case in respect to Wescorp. The FPC is obliged under the Production Contract to supply pre-grind to MRA. Wescorp is obliged as agent, pursuant to the FPC-Wescorp Agreement, to supply the pre-grind on behalf of the FPC to MRA. Wescorp must obey the directions and instructions from the FPC in this respect. The FPC has no contractual discretion in relation to the specifications to which the sandalwood was to be processed nor as to the quantity or price of pre-grind to be supplied. All these matters were the subject of clear and fixed terms under the Production Contract.
Neither the FPC nor Wescorp can refuse supply or supply at less than the agreed amounts at the agreed times without the FPC being in breach of the Production Contract and possibly Wescorp being in breach of its agreement with the FPC.
Paragraph 20.1 of the amended statement of claim alleges, in effect, that pursuant to the FPC-Wescorp agreement, Wescorp processes sandalwood delivered by the FPC by grading it according to official sandalwood industry standards. This allegation is not borne out by the terms of the FPC-Wescorp agreement. As I observed earlier, cl. 4.14 of that agreement prohibits Wescorp from processing sandalwood delivered by the FPC except in accordance with the Specification in Schedule 3 to the agreement. The Specification is detailed and quite specific as to the relevant lengths and weight of the various categories of sandalwood to be processed.
Nonetheless it is this alleged control over the selection of official sandalwood industry standards leading to Wescorp’s alleged ability to alter the sizing requirements for each of the sandalwood tree segments such as butts and roots, unclean logs and small green logs which is said, amongst other things, to invest in Wescorp a substantial degree of market power in the market for the supply of harvested or harvested and processed sandalwood.
None of these allegations was made out on the evidence. It was pure assertion.
MRA knew this was the contractual position. Mr David Brocklehurst, MRA’s General Manager, was previously employed by Wescorp as a manager between 1999 – 2001 and as a director from 2001 – October 2004. He had seen a copy of the FPA-Wescorp Agreement in April 2004 when employed at Wescorp. It seems it was Mr Brocklehurst who harboured the suspicion that it was Wescorp which must have elected not to supply the processed sandalwood agreed under the delivery schedule. In his affidavit sworn on 22 May 2009 at para 43 he said:
Based on the data contained in the Summary of Sandalwood Received spreadsheet produced by the Commission, I cannot see a reason why Wescorp could not provide the quantities set out in the Agreed Annual Delivery Schedule on behalf of the Commission, other than an election not to do so.
In my opinion, it could never be established that Wescorp had a substantial degree of market power in the market for the supply of harvested or harvested and processed sandalwood. It only ever acted as agent for the FPC and was constrained by the terms of the FPC-Wescorp Agreement. If anyone had such power then it was the FPC.
However, MRA submits that, irrespective of the contractual position, Wescorp in fact exercised a discretion in under supplying processed sandalwood to MRA. It is the case that during the Period there was under supply. The FPC knew about this. It had occurred without complaint from MRA in prior years. Certainly it may have constituted a breach of the Production Contract by the FPC.
Whenever under supply occurred MRA took the matter up directly with the FPC as would be expected. MRA’s Production Contract was with the FPC, not Wescorp. As Mr Brocklehurst said in his affidavit sworn on 22 May 2009:
60.On numerous occasions during the Period, I addressed with the (FPC) that Wescorp was not delivering the required quantities in accordance with the Agreed Annual Delivery Schedule. The (FPC) attempted to appease our concerns by advising (MRA) that the next deliveries would be above the Agreed Annual Delivery Schedule to account for the under delivery in the previous months. However, the (FPC’s) promises were short lived. It was only on those occasions where I expressly complained to the (FPC) that we received the quantities agreed to in the Agreed Annual Delivery Schedule.
Mr Grant Pronk was the FPC’s Manager – Arid Forests Section. Since 2003 he had responsibility within the FPC for its obligations under the Production Contract as well as Wescorp’s obligations under the FPC-Wescorp agreement. Mr Pronk in his affidavit of 26 May 2009, in substance, confirmed what Mr Brocklehurst said:
25.On 23 July 2008 Mr Brocklehurst brought it to my notice that the first two deliveries were short on the Unclean Logs component and I instructed (Wescorp) to increase the Unclean Log component in future deliveries to (MRA).
Mr Pronk in that affidavit went on to explain why under delivery had occurred and what his response was on behalf of the FPC when MRA made these complaints:
26.During the Period and also during the prior financial years (FPC) has had to balance its requirement to supply Unclean Logs to the (MRA) under the Production Contract against the need for it to supply some quantity of Unclean Logs to its overseas customers in order to maintain our overseas markets.
27.…
28.In or about December 2008 I instructed (Wescorp) to direct all Unclean Logs (received from the harvesters) to (MRA) until the annual quota for the 2008/2009 financial year was met under the Production Contract and the Letter Agreement.
In his later affidavit sworn on 5 June 2009 Mr Pronk said at para 39 that since December 2008 he had “regularly given (Wescorp) instructions emphasising or re-iterating the instruction” he had given in December 2008.
Mr Brocklehurst, in his responsive supplementary affidavit did not dispute any of these factual matters deposed to by Mr Pronk.
In these circumstances I do not think it is even arguable that Wescorp had or has substantial market power in so far as that relates to the market for the supply of harvested or harvested and processed sandalwood.
Nor do I think it is arguable that Wescorp has or had a substantial degree of market power in the market for the supply of sandalwood oil. The proposed venture with Paperbark never got off the ground. It remains in possession of about 300kgs of sandalwood oil. Only 2kgs of these were sold. MRA by contrast produces approximately 15,000-16,000 kgs per annum.
It is unnecessary in view of these conclusions to consider either the remaining elements under s 46 or the additional ground as to ulterior purpose. It is also unnecessary to rule on the disputed claim of privilege asserted by MRA in respect of an email sent by Mrs Emma Moss on behalf of Mr Peter Bogue, a legal practitioner to ‘Frank’, who is I was told Mr Frank Wilson CEO of TFS Corporation Ltd, which is MRA’s parent company.
MRA made no submissions as to its alternative pleaded cause of action that Wescorp had committed the tort of interference with the FPC’s performance of the Production Contract.
The evidence does not support, even arguably, such a cause of action.
Relief claimed
Furthermore, in my opinion, there was no basis in s 46 of the TPA or otherwise for MRA to claim relief in the nature of interlocutory and permanent injunctions to restrain Wescorp from acting as agent for the FPC and orders to terminate the FPC-Wescorp Agreement. There was no present or foreshadowed basis for such action. The evidence was that the FPC was up to date with its deliveries to MRA through Wescorp.
There was no arguable basis for MRA to have concerns as to the future. The FPC had made it quite clear that it would attend to strict compliance with the delivery schedules in future. Mr Pronk, in his affidavit of 26 May 2009 said, relevantly, that it was the FPC’s intention to continue to instruct and direct Wescorp to give priority to the FPC’s obligations under the Production Contract. Then, in his supplementary affidavit of 5 June 2009, Mr Pronk said that, pursuant to clause 6.2 of the Production Contract, the delivery schedule for the 2009/2010 year was to be agreed on or before the commencement of the year. He added that he had provided a written direction to Wescorp to introduce and adhere to a system where sandalwood is stockpiled at Wescorp’s premises in sufficient quantities with a view to facilitating the FPC’s delivery obligations under the Production Contract and the Letter Agreement in accordance with the 2009/2010 delivery schedule when it has been finalised. He explained that in the past he had not instructed Wescorp to adhere strictly to the delivery schedule agreed with MRA as it had always been treated as a guide rather than a binding timetable. He said that on the occasions when he had issued a specific instruction or direction in relation to the processing, supply and delivery of pre-grind pursuant to the FPC’s obligations under the Production Contract or the Letter Agreement, Wescorp had never refused or failed to carry it out.
None of these matters deposed to by Mr Pronk were disputed by Mr Brocklehurst in his supplementary affidavit, which was responsive to the affidavits of Mr Pronk amongst others.
For these reasons I also conclude that the principal claims for relief were unreasonably pursued.
The real complaint of MRA and the one which it was open to pursue was a claim for damages against the FPC for breach of the Production Contract by under-supply resulting in alleged damages of approximately $156,000 being the extra costs, over that in the Production Contract, for acquiring the shortfall in logs. This is not to say that such a claim would have ultimately been successful but it was clearly an arguable claim.
For all these reasons I am of the opinion that MRA’s action against Wescorp under s 46 of the TPA was always hopeless such that it had no real prospect of success. It was, at least, unreasonable of MRA to institute and continue with those proceedings. It was particularly unreasonable of MRA to pursue interlocutory relief seeking to restrain Wescorp from acting as agent for the FPC and thereby, to its knowledge, effectively put Wescorp out of business. Properly advised, in my view, MRA could not have concluded that Wescorp had any substantial power in the market for the supply of harvested or harvested and processed sandalwood or in the market for the supply of sandalwood oil. The known and undisputed facts fall well short of being capable of establishing either of these threshold requirements.
The hearing on 18 May 2010 was largely taken up with the question of indemnity costs. Part of the hearing concerned the question of the proposed substituted statement of claim. MRA, by its counsel, conceded that this proposed action, on the material available, had no reasonable prospect of success.
All of this has resulted in significant and wasted cost to Wescorp both directly in legal fees and disbursements as well as the diversion of the time and activities of the company’s personnel.
I would not grant leave to MRA to discontinue these proceedings. Normally the Court will grant leave unless some injustice would be visited on the other party by the grant: Covell Matthews & Partners v French Wools Ltd [1977] 1 WLR 876 at 879, cited with approval by Finn J in O’Neil v Mann [2000] FCA 1680 at [11]. In this case I consider that Wescorp should have the benefit of a positive order of dismissal rather than the somewhat neutral order granting leave to discontinue. In my opinion the proceedings against Wescorp should never have been instituted and should appropriately be dismissed.
For the above reasons there will be an order that the applicant pay the costs of Wescorp Sandalwood on an indemnity basis in relation to the proceedings, except where costs have already been ordered.
I will invite the parties to bring in a minute of orders to reflect these reasons.
I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour. Associate:
Dated: 21 July 2010
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