ThoughtWeb Systems Pty Limited v Loughnan (No. 1) - [2006] FCA 218

FEDERAL COURT OF AUSTRALIA
ThoughtWeb Systems Pty Limited v Loughnan (No. 1) [2006] FCA 218
PRACTICE & PROCEDURE – security for costs – turns on own facts.
THOUGHTWEB SYSTEMS PTY LIMITED and THOUGHTWEB PTY LIMITED v ANTHONY MARK LOUGHNAN, DAVID JOHN MCFARLANE, AMIT SULE, DALSIX PTY LIMITED, THOUGHTWEB FINANCIAL LIMITED, THOUGHTWEB LIMITED and JOHN SKINNER WILSON
NSD 1830 OF 2004
EDMONDS J
15 MARCH 2006
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1830 OF 2004

BETWEEN:

THOUGHTWEB SYSTEMS PTY LIMITED
FIRST APPLICANT

THOUGHTWEB PTY LIMITED
SECOND APPLICANT

AND:

ANTHONY MARK LOUGHNAN
FIRST RESPONDENT

DAVID JOHN MCFARLANE
SECOND RESPONDENT

AMIT SULE
THIRD RESPONDENT

DALSIX PTY LIMITED
FOURTH RESPONDENT

THOUGHTWEB FINANCIAL LIMITED
FIFTH RESPONDENT

THOUGHTWEB LIMITED
SIXTH RESPONDENT

JOHN SKINNER WILSON
SEVENTH RESPONDENT

AND BETWEEN:

THOUGHTWEB FINANCIAL LIMITED
CROSS-CLAIMANT ON THE FIRST CROSS-CLAIM

AND

THOUGHTWEB PTY LIMITED
FIRST CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM

THOUGHTWEB INC
SECOND CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM

ASSUREX ESCROW PTY LIMITED
THIRD CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM

AND BETWEEN:

ANTHONY MARK LOUGHNAN
FIRST CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM

DAVID JOHN MCFARLANE
SECOND CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM

AMIT SULE
THIRD CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM

DALSIX PTY LIMITED
FOURTH CROSS-CLAIMANT ON THE SECOND CROSS‑ CLAIM

AND:

THOUGHTWEB FINANCIAL LIMITED
CROSS-RESPONDENT ON THE SECOND CROSS‑CLAIM

JUDGE:

EDMONDS J

DATE OF ORDER:

15 MARCH 2006

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1.The applicants provide security for costs to the first, second, third and fourth respondents in the amount of $180,000.00 in such tranches as agreed or, in default of agreement, as ordered by the Court.
2.The applicants pay the costs of the motion of the first, second, third and fourth respondents.
3.The motion of the fifth, sixth and seventh respondents for an order for security for costs against the applicants be stood over generally.

4.        The costs of the motion of the fifth, sixth and seventh respondents be reserved.
5.        Each party has liberty to restore the matter for directions on three days’ notice.
Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1830 OF 2004

BETWEEN:

THOUGHTWEB SYSTEMS PTY LIMITED
FIRST APPLICANT

THOUGHTWEB PTY LIMITED
SECOND APPLICANT

AND:

ANTHONY MARK LOUGHNAN
FIRST RESPONDENT

DAVID JOHN MCFARLANE
SECOND RESPONDENT

AMIT SULE
THIRD RESPONDENT

DALSIX PTY LIMITED
FOURTH RESPONDENT

THOUGHTWEB FINANCIAL LIMITED
FIFTH RESPONDENT

THOUGHTWEB LIMITED
SIXTH RESPONDENT

JOHN SKINNER WILSON
SEVENTH RESPONDENT

AND BETWEEN:

THOUGHTWEB FINANCIAL LIMITED
CROSS-CLAIMANT ON THE FIRST CROSS CLAIM

AND

THOUGHTWEB PTY LIMITED
FIRST CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM

THOUGHTWEB INC
SECOND CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM

ASSUREX ESCROW PTY LIMITED
THIRD CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM

AND BETWEEN:

ANTHONY MARK LOUGHNAN
FIRST CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM

DAVID JOHN MCFARLANE
SECOND CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM

AMIT SULE
THIRD CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM

DALSIX PTY LIMITED
FOURTH CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM

AND:

THOUGHTWEB FINANCIAL LIMITED
CROSS-RESPONDENT ON THE SECOND CROSS‑CLAIM

JUDGE:

EDMONDS J

DATE:

15 MARCH 2006

PLACE:

SYDNEY

REASONS FOR JUDGMENT
(MOTIONS FOR ORDERS FOR SECURITY FOR COSTS)
EDMONDS J:
INTRODUCTION

By Notice of Motion dated 23 February 2005 and filed the following day, the first, second, third and fourth respondents moved the Court for orders that pursuant to s 1335 of the Corporations Act 2001 (Cth) and/or s 56 of the Federal Court Act 1976 (Cth), the first and second applicants provide, within seven days, security for costs to the first to fourth respondents in the amount of $240,000.00, or such other amount as the Court thinks fit.
By Notice of Motion filed 21 February 2005, the fifth, sixth and seventh respondents moved the Court for orders that the first and second applicants provide, within seven days, security for costs to the fifth to seventh respondents in the amount of $250,000.00, or such other amount as the Court thinks fit.
I heard both motions together, although I hasten to add that both sets of respondents eschewed any suggestion that their interests were conterminous such that the respective amounts of security should be assessed on common representation. On the contrary, each strongly advocated that the Court should approach the matter on the basis that, owing to actual or potential conflicts between them, separate representation was necessary. Indeed, on the second day of the hearing, I granted leave to the first to fourth respondents to file a cross-claim (‘the Second Cross-Claim’) against the fifth respondent.
BACKGROUND
Parties and Brief History
The first applicant, ThoughtWeb Systems Pty Limited (‘ThoughtWeb Systems’), is the owner of certain intellectual property rights – copyright, patent and confidential information – in relation to computer software that it has developed and marketed (‘the Software’) with the second applicant, ThoughtWeb Pty Limited (‘ThoughtWeb’), (ThoughtWeb Systems and ThoughtWeb being hereinafter together called ‘the ThoughtWeb Companies’).
The first to third respondents, Anthony Mark Loughnan, David John McFarlane and Amit Sule (together ‘the Employees’), were employees of ThoughtWeb Systems respectively from 1986, 1989 and 2001 until August 2004 and worked as software developers of the Software during that time.
Since late August 2004, the Employees have provided software consulting services to the fourth respondent, Dalsix Pty Limited (‘Dalsix’), which in turn has provided those services to the fifth respondent, ThoughtWeb Financial Limited (‘TWF’). TWF is a company incorporated in the United Kingdom that develops and markets software.
In July and September 2002, ThoughtWeb entered into three agreements with TWF, the ThoughtWeb Partner Licence Agreement (‘the PLA’), the Marketing Partner Agreement (‘the MPA’) and the Industry Business Partner Addendum (‘the IBPA’) (collectively ‘the Licence Agreements’) pursuant to which, in general terms, TWF was licensed by ThoughtWeb to develop and distribute the Software within a defined industry and defined geographical locations.
On 20 August 2004, each of the Employees gave notice of termination of his employment with ThoughtWeb Systems, effective immediately and thereafter entered into employment agreements with Dalsix.
On 25 August 2004, TWF accepted an offer from Dalsix whereby each of the Employees would work for TWF utilising technology then licensed by ThoughtWeb to TWF.
On 8 December 2004, ThoughtWeb purported to terminate the Licence Agreements, thereby terminating TWF’s entitlement to use the Software.
On the same date, the ThoughtWeb Companies commenced these proceedings. At that time the only respondents were the Employees.
On 15 December 2004, TWF commenced proceedings in the Supreme Court of New South Wales against the ThoughtWeb Companies in which it sought, inter alia, a declaration that the purported termination by ThoughtWeb of the Licence Agreements was invalid and of no effect, and related interlocutory relief.
Various consent orders were made in both sets of proceedings on 20 December 2004, the practical affect of which was to have TWF and the sixth respondent, ThoughtWeb Limited (‘TWL’), also incorporated in the United Kingdom, and a related company of TWF, joined as respondents in these proceedings and to have all the issues raised in both sets of proceedings determined in these proceedings. The seventh respondent, John Skinner Wilson (‘Wilson’), is a director of TWF and TWL.
TWF has filed a cross-claim (‘the First Cross-Claim’) against ThoughtWeb and two other companies, ThoughtWeb Inc and Assurex Escrow Pty Limited.
In the First Cross-Claim, TWF denies the validity of the purported termination of the Licence Agreements and contends that it was ineffective. TWF is currently conducting itself as if it is still licensed to use the Software. TWF also seeks rectification of a Software Escrow Agreement dated 10 February 2004 between TWF, ThoughtWeb Inc and Assurex Escrow Pty Limited.
Since the purported termination of the Licence Agreements, the Employees have continued to provide services to TWF through Dalsix which involve working on and with the Software.
The Employees and Dalsix maintain that they are working for TWF within the ‘framework’ of the arrangements represented by the Licence Agreements.
On 23 December 2004, ThoughtWeb and TWF consented to certain orders being made which, inter alia, provided for certain moneys to be paid into a jointly controlled account, subject to ThoughtWeb complying with an undertaking as a condition precedent to payment. The Employees and Dalsix were not asked to, and did not, consent to that arrangement.
Claims made in the Substantive Proceedings
By their Further Amended Application and Statement of Claim, filed on 11 February 2005, the ThoughtWeb Companies assert, inter alia, that by providing services to TWF, the Employees have breached the terms of their employment with ThoughtWeb Systems, equitable obligations of confidence and various statutory provisions. The ThoughtWeb Companies seek against the Employees (and Dalsix) declaratory and injunctive relief as well as orders for damages/compensation and for delivery up of certain documents and materials.
As against TWF, TWL and Wilson (together ‘the English respondents’), the ThoughtWeb Companies assert that:
·ThoughtWeb did, on 8 December 2004, lawfully terminate the Licence Agreements for breaches of those agreements by TWF.
·TWF and/or Wilson were knowingly concerned in the alleged breaches by one of the Employees, Mr Loughnan, of s 42 of the Fair Trading Act 1987 (NSW).
·TWF and/or TWL has engaged in misleading and deceptive conduct and has breached an equitable obligation of confidence owed to the ThoughtWeb Companies and has engaged in passing-off.
The ThoughtWeb Companies seek against the English respondents primarily injunctive relief and, in the alternative, damages.
Motions for Security for Costs
In support of their motion, the Employees and Dalsix rely on the affidavit of Ian Alexander McKnight sworn 24 February 2005.
In support of their motion, the English respondents rely on the affidavits of Michael David Bradley affirmed 21 February 2005, Dr Geoff Whale sworn 7 March 2005 and Nathan Thomas Mattock sworn 15 August 2005.
In response, the ThoughtWeb Companies rely on the affidavits of Dale James Kemp sworn 11 August 2005, together with Exhibit DJK1, which was tendered on the hearing, Peter Colin Gregg sworn 15 August 2005 for which I gave leave to be filed in Court, Graham Christopher Oxland Murray sworn 8 March 2005, together with Exhibit GCOM4, for which I gave leave to be filed in Court and a further affidavit of Graham Christopher Oxland Murray sworn 16 August 2005 for which I gave leave to be filed in Court. The affidavit of Peter Colin Gregg and the affidavits of Graham Christopher Oxland Murray were only read against the motion of the English respondents.
THE HEARING OF THE MOTIONS
On the hearing of the motions, the ThoughtWeb Companies conceded that the respondents (the Employees and Dalsix as one sub-set and the English respondents as another sub-set) did not need to establish the threshold requirement of impecuniosity pursuant to s 1335 of the Corporations Act.
Additionally, the assessment of likely future costs to be incurred by the Employees and Dalsix, assuming separate representation, was agreed at $180,000.00. Moreover, having regard to the Second Cross-Claim of the Employees and Dalsix against TWF, it cannot be seriously suggested that this figure should be discounted on the basis that separate representation of the two sets of respondents was not necessary. Clearly, separate representation is necessary. Nor do I think it should be discounted, at least at the stage of an order for security for costs, on account of duplication. That is a matter for taxation.
Accordingly, I propose that the ThoughtWeb Companies should pay or provide for the payment of a total amount of $180,000.00 by way of security for costs of the Employees and Dalsix in such tranches as agreed or, in default of agreement, as ordered by the Court.
On the other hand, the motion by the English respondents is brought in a more difficult context. This motion has been ‘tainted’ from the outset by orders made on 23 December 2004, by consent, tying certain undertakings of TFL, one of the English respondents, including an undertaking to provide interim security for the costs of any of the ThoughtWeb Companies and ThoughtWeb Inc in respect of the First Cross-Claim in the sum of $A40,000.00, to compliance with an undertaking by ThoughtWeb to deposit with Deloittes certain information to be held in escrow pending the agreement of the parties or further order of the Court (‘the par 2.3 undertaking’). A dispute has arisen between TFL, on the one hand, and ThoughtWeb on the other, as to whether the par 2.3 undertaking has been fully complied with, TFL claiming the information deposited with Deloittes does not go far enough, ThoughtWeb claiming such information does. Following the first day’s hearing of the motions and before the hearing resumed, the English respondents filed a notice of motion that they would move the Court for orders that ThoughtWeb be declared to be in contempt of court by reason of having failed to comply with the par 2.3 undertaking given to the Court on 23 December 2004 and filed a Statement of Charge charging ThoughtWeb with contempt of court for the same failure. The motion has not been moved on.
What all this means is that TFL does not regard itself as bound to comply with the undertakings it gave the Court on 23 December 2004 which were expressed to be subject to ThoughtWeb complying with the par 2.3 undertaking. In other words, TFL does not regard itself bound in terms of its undertakings:
1. To pay all royalties and fees payable to ThoughtWeb by TFL as if the IBPA and the MPA were on foot; and
2. to provide interim security for the costs of any of the ThoughtWeb Companies and ThoughtWeb Inc in respect of the First Cross-Claim in the sum of $A40,000.00, until it is satisfied that the par 2.3 undertaking has been complied with.
It is not surprising then that the applicants submit that if any order is to be made against them to provide security for costs to the fifth to seventh respondents, it should be tied, as to amount and/or form, to the conditional obligations of the fifth to seventh respondents arising out of the consent orders made on 24 December 2004. Various alternatives as to how it should be tied were put forward although, because of the conclusion I have come to on this motion, I do not think any constructive purpose is served by canvassing their respective merits; suffice it is to say that they all carry the potentiality for problems depending on the outcome of certain, if not all, of the issues between the parties in the substantive proceedings.
In any event, I am not persuaded that an order for security for costs should be so tied, whether it be to performance of some non-pecuniary obligation, conditional or otherwise, of the party taking the benefit of the order for security, or whether it be to a fund, source of money or other conditional pecuniary obligation which that party is required to pay into, meet or otherwise provide for.
In short, I have concluded that it would be premature, at this stage, to make an order that the ThoughtWeb Companies provide security for costs to the English respondents and that would continue to be so, at least until such time as the undertakings of TFL are untied from the par 2.3 undertaking by ThoughtWeb. That untying may occur by agreement of the relevant parties, dismissal of the contempt motion because there has been compliance with the par 2.3 undertaking by ThoughtWeb or subsequent compliance with the par 2.3 undertaking by ThoughtWeb in the face of the contempt motion, or in consequence of a finding of contempt. However the untying occurs does not really matter. On the other hand, until it occurs I propose to stand over the motion of the English respondents for an order for security for costs against the first and second applicants.
The Employees and Dalsix should have the costs of their motion paid by the ThoughtWeb Companies. The costs of the motion of the English respondents should be reserved.

I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.
Associate:
Dated: 15 March 2006

Counsel for the Applicants:

Mr S Burley

Ms C Cochrane

Solicitor for the Applicants:

Dibbs Barker Gosling

Counsel for the First to Fourth Respondents:

Dr J Renwick

Mr A Harding

Solicitor for the First to Fourth Respondents:

Norman Waterhouse

Counsel for the Fifth to Seventh Respondents:

Mr F Kunc

Solicitor for the Fifth to Seventh Respondents:

Gadens Lawyers

Dates of Hearing:

16 August 2005, 22 September 2005

Date of Judgment:

15 March 2006

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1830 OF 2004

BETWEEN:	THOUGHTWEB SYSTEMS PTY LIMITED FIRST APPLICANT THOUGHTWEB PTY LIMITED SECOND APPLICANT
AND:	ANTHONY MARK LOUGHNAN FIRST RESPONDENT DAVID JOHN MCFARLANE SECOND RESPONDENT AMIT SULE THIRD RESPONDENT DALSIX PTY LIMITED FOURTH RESPONDENT THOUGHTWEB FINANCIAL LIMITED FIFTH RESPONDENT THOUGHTWEB LIMITED SIXTH RESPONDENT JOHN SKINNER WILSON SEVENTH RESPONDENT
AND BETWEEN:	THOUGHTWEB FINANCIAL LIMITED CROSS-CLAIMANT ON THE FIRST CROSS-CLAIM
AND	THOUGHTWEB PTY LIMITED FIRST CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM THOUGHTWEB INC SECOND CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM ASSUREX ESCROW PTY LIMITED THIRD CROSS-RESPONDENT ON THE FIRST CROSS‑CLAIM
AND BETWEEN:	ANTHONY MARK LOUGHNAN FIRST CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM DAVID JOHN MCFARLANE SECOND CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM AMIT SULE THIRD CROSS-CLAIMANT ON THE SECOND CROSS‑CLAIM DALSIX PTY LIMITED FOURTH CROSS-CLAIMANT ON THE SECOND CROSS‑ CLAIM
AND:	THOUGHTWEB FINANCIAL LIMITED CROSS-RESPONDENT ON THE SECOND CROSS‑CLAIM
JUDGE:	EDMONDS J
DATE OF ORDER:	15 MARCH 2006
WHERE MADE:	SYDNEY

JUDGE:	EDMONDS J
DATE:	15 MARCH 2006
PLACE:	SYDNEY

Counsel for the Applicants:	Mr S Burley Ms C Cochrane
Solicitor for the Applicants:	Dibbs Barker Gosling
Counsel for the First to Fourth Respondents:	Dr J Renwick Mr A Harding
Solicitor for the First to Fourth Respondents:	Norman Waterhouse
Counsel for the Fifth to Seventh Respondents:	Mr F Kunc
Solicitor for the Fifth to Seventh Respondents:	Gadens Lawyers
Dates of Hearing:	16 August 2005, 22 September 2005
Date of Judgment:	15 March 2006