Retaw Pty Limited v Crasti
[2016] FCCA 1165
•1 June 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| RETAW PTY LIMITED & ANOR v CRASTI & ORS | [2016] FCCA 1165 |
| Catchwords: PRACTICE AND PROCEDURE – Security for costs – consideration of principles relevant to the imposition of a security requirement – where the financial situation of the applicants is a consequence of the actions of the respondents – relevance of a cross-claim by the respondents considered. |
| Legislation: Australian Consumer Law |
| Equity Access v Westpac Banking Corporation [1989] ATPR 40-972 Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103 Mulhern v Pearce & Anor [2013] FMCA 229 |
| First Applicant: | RETAW PTY LIMITED |
| Second Applicant: | AQUAVEST PTY LTD |
| First Respondent: | LEO ELIO CRASTI |
| Second Respondent: | TIMOTHY ROGERS |
| Third Respondent: | STEPHEN JOHN TAYLOR |
| Fourth Respondent: | ECP GROUP (NSW) PTY LTD |
| File Number: | SYG 2493 of 2015 |
| Judgment of: | Judge Driver |
| Hearing date: | 13 May 2016 |
| Delivered at: | Sydney |
| Delivered on: | 1 June 2016 |
REPRESENTATION
| Counsel for the Applicants: | Mr Cutler |
| Solicitors for the Applicants: | G C Taylor & Son, Solicitors |
| Counsel for the Respondents: | Mr Rickard |
| Solicitors for the Respondents: | Axon Legal |
INTERLOCUTORY ORDERS
The Application in a Case filed on 2 December 2015 is dismissed with costs.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 2493 of 2015
| RETAW PTY LIMITED |
First Applicant
| AQUAVEST PTY LTD |
Second Applicant
And
| LEO ELIO CRASTI |
First Respondent
| TIMOTHY ROGERS |
Second Respondent
| STEPHEN JOHN TAYLOR |
Third Respondent
| ECP GROUP (NSW) PTY LTD |
Fourth Respondent
REASONS FOR JUDGMENT
Introduction and background
By Application in a Case filed on 2 December 2015, the respondents to the principal proceedings seek an order that the applicants provide security for their costs of those proceedings and a further order that the proceedings be stayed until such time as the security is provided. The principal proceedings were commenced by application filed on 10 September 2015 and seek declarations, injunctions and damages for alleged contraventions of the Corporations Act 2001 (Cth) (Corporations Act), the Australian Consumer Law (Consumer Law), Copyright Act 1968 (Cth) (Copyright Act) and the general law.
By a statement of claim filed on 10 September 2015, the applicants allege that the respondents have:
a)failed to repay money advanced from the applicants to the first respondent, Mr Crasti, pursuant to a loan agreement;
b)breached their duties as officers of one or other of the applicants;
c)breached contractor agreements with one or other of the applicants;
d)made representations to the applicants which were misleading and deceptive in breach of the Consumer Law;
e)engaged in misleading and deceptive conduct in developing a competing business;
f)misused confidential information; and
g)breached the applicants’ copyright in certain works.
The respondents deny the claims and filed a defence on 1 March 2016.
The respondents filed a cross-claim on 7 March 2016 in which they allege that the loan agreement entered into by Mr Crasti was unjust and unconscionable and that it should be declared void. They further claim damages for breach of contract in the sums of $582,227.95 to Mr Crasti and $21,650 to the third respondent, Mr Taylor.
On 11 December 2015 I made procedural orders in the matter, including an order pursuant to rule 21.03 of the Federal Circuit Court Rules 2001 (Cth) (Federal Circuit Court Rules) capping costs at $50,000. I also ordered the parties to mediation, pursuant to Part 27 of the Federal Circuit Court Rules but the mediation was unsuccessful.
The applicants (Retaw and Aquavest) were formed in January 2014 for the purpose of acquiring and commercialising stormwater quality improvement device (SQID) technology known at the time as “Tumblemate”. The solicitor for the applicants (Mr Ireland) is the director of both of them and provided seed capital and corporate support. Mr Crasti brought technical expertise, a customer base and management skills. Mr Crasti and Mr Ireland each owned 50 per cent of the shares in Retaw and Aquavest. Mr Ireland became the sole director of both companies and Mr Crasti became the general manager.
At the time Mr Crasti held some pre-existing contracts for the SQID technology.
Mr Taylor was hired to provide bookkeeping and administrative support. The second respondent (Mr Rogers) ran a company (Comclean Pty Ltd) which was engaged as a civil works contractor.
The three individual respondents signed contractor agreements and non disclosure/intellectual property assignment documents with the applicants. Separate contractor agreements set out certain services to be provided and fees payable. Those documents are not currently in evidence. Mr Crasti and Mr Taylor commenced working in 2014, drawing monthly retainers and with Mr Crasti being reimbursed for business expenses. The applicants also provided funds for the purchase of a car in Mr Crasti’s name.
During 2014, Mr Crasti developed a new version of the SQID (potentially replacing the Tumblemate), which required performance testing before it could be commercialised. The parties developed a business plan and Mr Ireland approved a test programme on 31 October 2014 with funding up to $140,000. In the previous months, Mr Ireland had specified that no expenditure was to be incurred without his approval.
In December 2014, Mr Ireland asked Mr Crasti to sign a loan agreement, which he did. Mr Crasti alleges he acted under duress.
In early 2015, Mr Crasti conducted a testing programme for the second generation of the SQID while seeking to generate revenue by completing projects with local government agencies using the existing Tumblemate technology. On 16 March 2015, Mr Crasti sought Mr Ireland’s approval to proceed with three Tumblemate projects. Mr Ireland declined to authorise the projects.
Initial test results for the second generation SQID technology were available in late March 2015. Some aspects were unsatisfactory and Mr Ireland required further testing which was not completed until June 2015. There is a dispute over representations made in relation to the performance of the technology.
Mr Crasti then arranged for works contracts using the Tumblemate technology to be completed through a separate corporate entity associated with Mr Rogers. That entity retained Mr Crasti and Mr Taylor to provide project management services. The work was completed between May and July 2015.
The respondents deny engaging in any SQID business since then.
The evidence and submissions
In addition to the pleadings, for the purposes of this interlocutory application, the parties rely upon an affidavit by Mr Taylor made on 13 November 2015, an affidavit by the respondents’ solicitor (Mr Christopher Taylor) made on 13 November 2015, and an affidavit by Mr Ireland (with numerous annexures) made on 5 May 2016. The respondents also tendered a bundle of documents.
The parties prepared pre-hearing submissions on the interlocutory issue and also presented oral argument over the course of a full day.
Consideration
Relevant principles
The principles relating to security for costs are well known[1]. The principles were considered by the Federal Court relatively recently in Mecrus Pty Ltd v Industrial Energy Pty Ltd[2]. In that case, Murphy J at [18] referred to the discretion conferred by s.56 of the Federal Court Act 1976 (Cth) which is in similar terms to s.80 of the Federal Circuit Court of Australia Act 1999 (Cth). His Honour noted that the discretion is a broad one which must be exercised judicially. The discretion must be exercised according to the particular merits and circumstances of each case without any particular pre-disposition. The weight to be attached to a particular circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed. His Honour referred to well-established guidelines at [19]:
[1] See for example Equity Access v Westpac Banking Corporation [1989] ATPR 40-972 at 50,636 and Mulhern v Pearce & Anor [2013] FMCA 229
[2] [2015] FCA 103
Notwithstanding the broad discretion there are a number of well established guidelines which the Court typically takes into account. In Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50,635 per Hill J, his Honour identified the following six factors:
(a)the chances of success of the applicant;
(b)whether the applicant’s claim is bona fide or a sham;
(c)the quantum of risk that the applicant cannot satisfy a cost order;
(d)whether use of the power would shut out a small company from making a genuine claim against a large company (i.e. whether the power is being used oppressively);
(e)whether the impecuniosity arises out of the act in respect to which relief is sought;
(f)whether there are aspects of public interest which weigh in the balance against the making of an order; and
(g)whether there are any particular discretionary matters peculiar to the circumstances of the case.
His Honour continued at [20] and [21]:
In KP Cable Investments Pty Ltd v Meltglow Pty Ltd and Others [1995] FCA 76; (1995) 56 FCR 189 (“KP Cable”) at 196–198 Beazley J referred to the following additional matters:
(a)security for costs applications should be brought promptly;
(b)having regard to the strength and bona fides of the plaintiff’s case, as a general rule, where a claim is regular on its face and discloses a cause of action, in the absence of evidence to the contrary the Court should proceed on the basis that the claim is bona fide with a reasonable prospect of success;
(c)whether the respondent’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate;
(d)whether there are any persons standing behind the company who are likely to benefit from the litigation. An issue related to this is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking; and
(e)security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate.
The authorities point to two further factors which are relevant in the present case, namely:
(a)whether the respondents voluntarily assumed the risk of a corporate plaintiff’s financial position: see ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) as Trustee for Harrop Family Trust v Beauville Pty Ltd [2014] VSC 298 (“Harrop Engineering”); and
(b)whether there is such a significant overlap between the matters raised by the plaintiff’s claim and the defendant’s counterclaim that it would be unfair to oblige the plaintiff to put up security: see B L O’Shea Pty Ltd v Australian Mutual Provident Society Ltd (Unreported, Supreme Court of Victoria, Hedigan J, 15 February 1994, BC9400983) (“B L O’Shea”).
At [22]-[24] Murphy J dealt with the onus of proof:
Because the purpose of an order for security for costs against a corporate plaintiff is to protect the defendant against the risk of being deprived of the benefit of a costs order made in the defendant’s favour, the plaintiff’s unsatisfactory financial position triggers the Court’s discretion and is also a substantial factor in the exercise of the discretion: Fiduciary Ltd and Others v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 (“Morningstar Research”) at [35] to [36] per Austin J; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 (“Idoport”) at [56] per Einstein J.
Once it appears by credible testimony that there is reason to believe that a corporate plaintiff will be unable to pay the costs of the defendant if successful in its defence, the evidentiary burden shifts to the plaintiff to establish a reason why security should not be granted: Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [30] per Beazley JA; Idoport at [60]-[62]; Morningstar Research at [36].
Even so, the burden rests on the defendant, from first to last, to persuade the court that the order for security should be made: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 at [21] per Maxwell P and Buchanan JA. The plaintiff does not bear the ultimate burden of proof in the application for security but it must raise for consideration the matters that favour it if it wishes them to be taken into account in the determination of the case. The evidential burden to raise such matters is distinct from the legal onus of proving entitlement to an order for security for costs, which rests with the defendant: Cornelius and Others v Global Medical Solutions Australia Pty Ltd and Others [2014] NSWCA 65; (2014) 98 ACSR 301 at [18]–[20] per Macfarlan JA.
Application of the principles
I accept that the respondents have made a timely application. I also accept that the applicants are not trading and have no employees and no income. They may not be insolvent in as much as there do not appear to be any creditors who are pressing for payment of debts but their capacity to meet an adverse costs order would be dependent upon their capacity to borrow, which would probably be limited to a loan from Mr Ireland. Such a hypothetical loan would reflect Mr Ireland’s personal interest in the proceedings. He has, however, offered no undertaking to meet an adverse costs order. I have no confidence that the applicants would be otherwise able to meet an adverse costs order, which would be limited to the costs cap of $50,000 which I have previously imposed.
For their part, the applicants contend that their situation has been brought about because of the conduct of the respondents. They contend that much time and money was invested by Mr Ireland (in his capacity as director of the applicants) including an advance of $63,000 to Mr Crasti and $150,000 for the testing on the second generation SQID. The applicants contend that the testing on the second generation SQID established that it would not perform at levels previously asserted by Mr Crasti and that the applicants were deprived of the revenue from the work undertaken by the respondents without Mr Ireland’s knowledge using the Tumblemate technology from which the fourth respondent, ECP Group, (or another entity related to it) benefitted.
The applicants contend that because the applicants were incorporated for the sole purpose of developing and commercialising the SQID technology, and that business was diverted from them, the respondents are themselves responsible for the financial position of the applicants. The applicants contend that in these circumstances, the imposition of a security order would be unjust and oppressive.
I accept that the applicants’ claim is a bona fide one and that the claim based on the asserted loan agreement has reasonable prospects of success. That in itself is not a federal matter and it could be pursued in any court of competent jurisdiction. The federal matters are the claims under the Australian Consumer Law and the Copyright Act, as well as the Corporations Act (in respect of which there might be a jurisdictional issue).
In my opinion, the claim based upon the Australian Consumer Law is a weak one. The purpose of the testing of the second generation SQID technology was, of course, to test its performance. Any representations made as to the possible or likely performance of the technology prior to testing could not in my opinion be accepted as reliable for any purpose other than undertaking that very testing. The fact that the testing failed to verify opinion as to the possible or likely performance of the technology does not mean that any representations made were misleading or deceptive.
I am not in a position to form any view as to the strength of the claim under the Copyright Act.
The diversion of work from the applicants to ECP Group (or some other entity associated with the respondents) appears to be at the heart of the dispute between the parties. It appears likely that that work was undertaken by Mr Crasti, in association with Mr Rogers and Mr Taylor out of frustration with what they saw as the obstructionist attitude of Mr Ireland. On the other hand, it does not follow that that frustration provides a complete answer to the claim against them for their conduct, having regard to the agreements entered into between the parties. I conclude that the claim by the applicants relating to the diversion of work is arguable. The profit component of that work is in dispute but it would seem likely that it exceeds the $50,000 costs cap.
An additional factor in this case is the cross-claim instituted by the respondents. There is a significant overlap between the claim and the cross-claim, especially in relation to the loan agreement.
Conclusion
In my opinion, it would be unjust in the circumstances to require the applicants to provide security for the respondents’ costs as it is strongly arguable that the diversion of business by the respondents from the applicants deprived them of funds in excess of the current $50,000 costs cap and was the cause of their financial situation. In addition, there is a significant overlap between the applicants’ claim and the respondents’ cross-claim and it would seem inevitable that the cross-claim would be litigated in any event. The imposition of security in respect of the claim, while leaving the cross-claim free to proceed, would in my view be unjust.
I will order that the Application in a Case be dismissed with costs. In accordance with normal practice, the costs of the Application in a Case would not be recoverable until the conclusion of proceedings.
I certify that the preceding thirty (30) paragraphs are a true copy of the reasons for judgment of Judge Driver
Date: 1 June 2016
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