SIRTEX MEDICAL LTD Formerly Known As PARAGON MEDICAL LTD (ACN 078 166 122)

Practice and procedure - Costs - Whether costs should follow the event - Turns on own facts

Declaration - Whether court should declare clauses of employment contract of no force and effect - Turns on own facts

Supreme Court Act 1935 (WA), s 37(1)

The defendant pay the plaintiff's costs of the action and counterclaim and of the interlocutory application for an injunction

Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564

Bass v Permanent Trustee Company Ltd [1999] HCA 9; (1999) 198 CLR 334

C E Heath Casualty & General Insurance Ltd v Pyramid Building Society (in liquidation) [1997] 2 VR 256

Forster v Jododex [1972] HCA 61; (1972) 127 CLR 421

Minister for Immigration and Ethnic Affairs, Ex Parte Lai In [1997] HCA 6; (1997) 186 CLR 622

Naidoo v Williamson [2008] WASCA 179

Norwegian American Cruises A/S (formerly Norwegian American Lines A/S) v Paul Mundy Ltd [1988] 2 Lloyd's Rep 343

Russian Commercial and Industrial Bank v British Bank For Foreign Trade Ltd [1921] 2 AC 438

University of Western Australia v Gray [No 2] [2008] FCA 498; (2008) 246 ALR 603

1 At the commencement of the trial of this action the principal issue was whether the restraints in an agreement were enforceable or were unenforceable restraints of trade. On the third day of the trial the plaintiff, Dr Gray, amended his statement of claim to plead that the restraint clauses in the agreement had terminated and ceased to have effect at law. The defendant conceded that if a condition had been satisfied then the restraint clauses had ceased to have effect. The condition was that the shareholders of the defendant passed certain resolutions. Senior counsel for the defendant stated that if the resolutions had been passed then the defendant would no longer seek to agitate any issue concerning the restraint clause and would concede the case. The trial continued for the rest of that day to complete the cross-examination of Dr Gray and was then adjourned for the defendant to investigate whether the shareholder resolutions had been passed. Subsequently the defendant informed the court that it admitted that the shareholders resolutions had been passed and hence that the restraint clauses in the agreement no longer had any force or effect. The remaining issues between the parties are what orders should be made to conclude the proceedings and what costs orders should be made.

2 Dr Gray is an eminent surgeon. He has an international reputation as a leader in research and treatment of cancer, particularly liver cancer. In 1985 Dr Gray was appointed Professor of Surgery at the University of Western Australia (UWA). Dr Gray was a fulltime Professor of Surgery at UWA from 1985 to 1997, after which he was engaged on a fractional appointment until 1999. Under his employment contract, Dr Gray was obliged to teach and to research.

3 For some years before his appointment Dr Gray had been engaged in researching the treatment of liver cancer by using microspheres injected into the blood vessels of the liver to deliver anti-cancer therapies to the sites of tumours. After his appointment by UWA Dr Gray continued his research work.

4 Three microsphere technologies are important in this case. The first is known as SIR-Spheres. The acronym SIR stands for Selective Internal Radiation. It was designed to transport a short lived radio isotope to irradiate cancerous tissue. The second technology, known as DOX-Spheres, was designed to transport and release, in a controlled way, anti-cancer drugs, particularly doxorubicin. A third technology, thermo-spheres, involves the delivery of microspheres of magnetic material into the cancerous tissue and heating them by the external application of an alternating or rotating magnetic field.

5 Provisional applications for various patents and international applications under the Patent Co-operation Treaty were made in respect of inventions said to have been developed in relation to the various technologies.

6 Paragon Medical Ltd (Old Paragon) was incorporated in April 1995. Dr Gray, Mr Kevin Karlson and Mr Peter Jones became its first directors. The initial shareholders were Dr Gray, Mr Karlson and Mr Jones together with Fairburn Investments Pty Ltd and Pine Reach Holdings Pty Ltd, both companies related to Dr Gray. Old Paragon developed the new technologies.

7 On 13 January 1991 the Friends of the Cancer Institute Inc was incorporated under the Associations Incorporation Act. On 28 October 1993 the name of the Friends of the Cancer Institute Inc was changed to Cancer Research Institute Inc (CRI). CRI provided funds to support research into the targeted microsphere technology which was the subject of the work being done by Dr Gray and his group. Old Paragon acquired from CRI an option to purchase intellectual property relating to the DOX-Spheres.

8 In 1996 a venture capital investment company, Nomura/JAFCO Investments (Asia) Ltd (Nomura/JAFCO) discussed investing in Old Paragon. Nomura/JAFCO agreed to proceed with the investment. The investment transaction between Old Paragon and Nomura/JAFCO was effected by various agreements executed on 1 May 1997. The transaction involved the creation of a new corporate entity which would have the name Paragon Medical Ltd transferred to it. This company later changed its name to Sirtex Medical Ltd, the defendant (Sirtex). Old Paragon changed its name to Australian Surgical Products Ltd (ASPL).

9 The various agreements by which the investment was given effect included a subscription and shareholders agreement entered into between Sirtex, CRI, Dr Gray, Mr Jones, Mr Karlson and Nomura/JAFCO (Subscription and Shareholders Agreement). The Subscription and Shareholders Agreement contemplated the transfer of intellectual property from Dr Gray, CRI and Old Paragon, now ASPL, into the new company, Sirtex. Dr Gray, CRI, Jones, Karlson and Nomura/JAFCO all agreed to subscribe for shares in Sirtex. Clause 18 of the Subscription and Shareholders Agreement contained covenants by Dr Gray, CRI, Mr Jones and Mr Karlson restraining them from, amongst other things, competing with Sirtex. The Subscription and Shareholders Agreement provided by cl 20 that it shall terminate upon the listing of Sirtex. However, cl 29.3 relevantly provided that cl 18 survives termination of the Subscription and Shareholders Agreement.

10 On 17 July 2000 Dr Gray, Sirtex and others entered into a Supplemental Subscription and Shareholders Deed (the Supplemental Deed). The Supplemental Deed provided that cl 29.3 of the Subscription and Shareholders Agreement would be varied relevantly so as to provide that, subject to the Board of Directors of Sirtex passing resolutions set out in sch 2 of the Supplemental Deed (the Directors' Resolutions) and the shareholders of Sirtex passing resolutions as set out in sch 3 of the Supplemental Deed (the Shareholders' Resolutions), cl 18 of the Subscription and Shareholders Agreement survives termination of the Subscription and Shareholders Agreement except in the case of a termination on listing. Listing meant the time immediately prior to the quotation of unclassified ordinary shares on a stock exchange.

11 In or about August 2000 the Shareholders' Resolutions and the Directors' Resolutions, or resolutions substantially to that effect, were passed. On 23 August 2000 the Subscription and Shareholders Agreement terminated on listing. The effect of those matters is that the restraint in cl 18 of the Subscription and Shareholders Agreement ceased to have effect at law. The importance of this will become apparent later in these reasons. However, up until the third day of the trial the parties, in ignorance of the terms or effect of the Supplemental Deed, proceeded on the assumption that cl 18 of the Subscription and Shareholders Agreement continued to have effect at law.

12 Dr Gray entered into an employment agreement with Sirtex on 1 May 1997 (the First Employment Agreement). Under the First Employment Agreement Dr Gray was to serve the company as executive managing director. The agreement contained a clause restraining Dr Gray from competing with Sirtex.

13 In January 2000 Sirtex commenced preparation for a public float. The float was intended at the time of the 1997 transactions. On 17 July 2000 Sirtex issued a prospectus. The prospectus included statements about intellectual property rights and said that while the directors could not exclude the possibility of claims they were not aware from their investigations of any such claims having been made. The prospectus said, in effect, that Dr Gray's involvement with the company was important to its future.

14 On 7 July 2000 Dr Gray and Sirtex entered into a further employment agreement (Second Employment Agreement). The term of the Second Employment Agreement was three years from the date that Sirtex's shares were first quoted on a public stock exchange, which was 23 August 2000. By cl 13.5(a) of the Second Employment Agreement Dr Gray agreed not to carry on or be concerned with, or interested in, any business which is competitive with any part of the business of Sirtex within certain areas for certain periods, the greatest of which was three years after termination of the agreement. The effect of the Second Employment Agreement is that the restraint in cl 13.5 ceased to have effect on 1 October 2008. The First Employment Agreement was superseded by the Second Employment Agreement or in any event expired on 22 August 2003.

15 On 26 October 2004 UWA's solicitors sent a letter to Sirtex. UWA alleged that during his employment with UWA Dr Gray had breached obligations owed by him to UWA by applying for patents without the permission or knowledge of UWA and had made applications seeking protection of inventions developed during his employment without the knowledge of UWA. UWA alleged that all of the property in the SIR-Spheres, DOX-Spheres and thermo-spheres and the patents or patent applications in relation to them belonged to UWA.

16 On 21 December 2004 UWA commenced proceedings in the Federal Court against Dr Gray, Sirtex and CRI (the UWA proceedings). UWA sought a declaration that Dr Gray had held his shares and options in Sirtex on trust for UWA. It also sought orders that he transfer them and that he account to UWA in respect of any benefits obtained by him by reason of those shares and options. UWA sought a declaration against Sirtex that all the rights, title and interest in the relevant patent applications, patents and inventions were held on trust by Sirtex for UWA. It sought an order that Sirtex transfer that right, title and interest to UWA. Dr Gray and Sirtex each cross-claimed against UWA. Sirtex cross-claimed against Dr Gray alleging that he breached his duty as a director of the company and engaged in misleading and deceptive conduct by failing, in 2000, to disclose to Sirtex correspondence between himself and UWA that would have alerted Sirtex to the risk of a claim against its intellectual property rights by UWA.

17 The trial of the UWA proceedings lasted some 50 days, having commenced on 15 March 2007 and concluded on 27 July 2007. On 17 April 2008 French J (as he then was) delivered judgment: University of Western Australia v Gray [No 2] [2008] FCA 498; (2008) 246 ALR 603. UWA's claims failed. The cross-claims by Dr Gray and Sirtex against UWA were also dismissed. The cross-claim by Sirtex against Dr Gray in so far as it alleged that he breached his duty as a director of the company and engaged in misleading or deceptive conduct in relation to the correspondence between himself and UWA was upheld. UWA has appealed against the decision. The appeal is pending.

18 The parties filed an agreed statement of facts which consists of extracts from the judgment of French J. Much of my narration of the facts is based upon those facts extracted from the judgment of French J.

19 On 8 February 2007, that is about a month before the trial of the UWA proceedings began, Sirtex's solicitors wrote to Dr Gray's solicitors requesting that Dr Gray consent to an order in the UWA proceedings restraining him from carrying on or being concerned with or interested in, any business which is similar to, or competitive with, Sirtex's business anywhere in the world for three years after Dr Gray ceases to hold shares in Sirtex or alternatively giving an undertaking that he will not engage in such conduct. The letter stated that the source of Dr Gray's obligation not to engage in such conduct was cl 18.1 of the Subscription and Shareholders Agreement. Dr Gray's solicitors replied on 9 February 2007 and asked, amongst other things, why Sirtex contended in the light of cl 20 of the Subscription and Shareholders Agreement (which provides that the agreement terminates upon listing of the company) that the agreement still has any force and effect. The letter said that the Subscription and Shareholders Agreement does not provide that any covenant contained in cl 18 survives termination of the agreement.

20 On 9 February 2007 Sirtex's solicitors replied stating, amongst other things, that cl 18 survives termination by reason of cl 29.3 of the Subscription and Shareholders Agreement.

21 Sirtex brought a notice of motion in the UWA proceedings seeking an order that until further order Dr Gray be restrained from carrying on or being concerned with or interested in any business which is similar to or competitive with any part of the business of Sirtex. The matter was resolved by Dr Gray giving an undertaking (the February 2007 undertaking) on 22 February 2007 in these terms:

Without conceding the enforceability or currency of the Subscription and Shareholders Agreement made 1 May 1997, Dr Gray undertakes to refrain from directly or indirectly carrying on (whether alone or in partnership or joint venture with anyone else) or otherwise being concerned with or interested in (whether as trustee, principal agent shareholder unit holder or in any other capacity) any business which is similar to or competitive with any part of the present business of Sirtex Medical Limited.

22 Dr Gray commenced this action by writ of summons filed on 21 September 2007, that is after the trial of the UWA action had concluded but before judgment had been delivered. At that time the February 2007 undertaking given by Dr Gray remained on foot.

23 The indorsement of claim stated that Dr Gray's claim arose in respect of the First Employment Agreement. Dr Gray sought a declaration that cl 10.6 of the First Employment Agreement is unenforceable as an unreasonable restraint of trade.

24 On 23 October 2007 Dr Gray amended his writ of summons. The amended indorsement said that Dr Gray's claim arose in respect of the First Employment Agreement, the Second Employment Agreement and the Subscription and Shareholders Agreement. Dr Gray claimed a declaration that each of cl 10.6 of the First Employment Agreement, cl 13.4 of the Second Employment Agreement and cl 18.1(a) of the Subscription and Shareholders Agreement were unenforceable as an unreasonable restraint of trade.

25 Dr Gray filed a statement of claim on 23 October 2007, that is the same day on which he amended his writ of summons.

26 Dr Gray pleaded that he was an employee of Sirtex from 1 May 1987 pursuant to the First Employment Agreement and thereafter pursuant to the Second Employment Agreement until 23 January 2007. The plaintiff pleaded the terms of cl 10.6(a) of the First Employment Agreement and cl 13.5(a) of the Second Employment Agreement which are clauses restraining Dr Gray from carrying on, being concerned with, or interested in, any business which is competitive with any part of the business of Sirtex. Dr Gray then pleaded cl 18.1(a) of the Subscription and Shareholders Agreement. Clause 18.1(a) of the Subscription and Shareholders Agreement provides, in effect, that Dr Gray must not carry on, or be concerned with, or interested, in any business which is similar to or competitive with any part of the business of Sirtex within specified geographical locations for specified periods of time. The periods of time vary from one year after Dr Gray ceases to hold any shares in the issued capital of Sirtex to three years after Dr Gray ceases to hold any shares in the issued capital of Sirtex. Dr Gray pleaded that the restraint contained in each of cl 10.6(a) of the First Employment Agreement, cl 13.5(a) of the Second Employment Agreement and cl 18.1(a) of the Subscription and Shareholders Agreement is unreasonable and void as being contrary to public policy. Dr Gray claimed a declaration that each of cl 10.6(a) of the First Employment Agreement, cl 13.5(a) of the Second Employment Agreement and cl 18.1(a) of the Subscription and Shareholders Agreement is unenforceable as an unreasonable restraint of trade.

Defence 12 December 2007 and amended defence 4 January 2008

27 By its defence Sirtex pleaded that by reason of the commencement of the Second Employment Agreement the restrictions under cl 10.6 of the First Employment Agreement were superseded by the Second Employment Agreement or expired on 22 August 2003. Sirtex pleaded that by reason of the termination of the Second Employment Agreement on 1 October 2005 the restrictions under cl 13.4 of the Second Employment Agreement would expire on 1 October 2008. Sirtex denied that each of cl 18.1(a) of the Subscription and Shareholders Agreement and cl 13.4(a) of the Second Employment Agreement was unreasonable and denied that the plaintiff was entitled to the relief sought or any relief.

28 On 4 January 2008 Sirtex made minor amendments to its defence.

29 By his reply Dr Gray pleaded that if the restraints of trade in the Second Employment Agreement were reasonably necessary to protect Sirtex's rights in relation to certain information then in 2000 it was anticipated that such restraints of trade were only reasonably necessary for a period of two or three years and such restraints are no longer reasonably necessary to protect Sirtex.

30 On 31 July 2008, that is about three months after French J delivered judgment in the UWA proceedings, Dr Gray revoked the undertaking he had given on 22 February 2007.

31 On 21 August 2008 the defendant brought a summons for an interlocutory injunction restraining Dr Gray until three years after he ceased to hold any shares in Sirtex, or until trial, or further order from doing any of the things referred to in cl 18.1(a), cl 18.1(b), cl 18.1(c) and cl 18.1(d) of the Shareholders and Subscription Agreement. To enable the application to be dealt with properly Dr Gray continued the undertaking that he had given on 22 February 2007 upon Sirtex giving an undertaking to pay compensation for any damages caused by Dr Gray's undertaking.

32 The application for interlocutory injunction was heard on 11 September 2008. The defendant's application was for an injunction to enforce the contractual restraints under the Subscription and Shareholders Agreement. It did not seek to enforce the restraints upon Dr Gray under the Second Employment Agreement.

33 I reserved my decision on the interlocutory injunction and that decision remained reserved when the trial of the action commenced on 1 December 2008.

34 Dr Gray further amended his statement of claim on 29 August 2008. Dr Gray pleaded that the restrictions under cl 10.6(a) of the First Employment Agreement were superseded by the Second Employment Agreement or expired on 1 May 2005. Dr Gray further pleaded that the restrictions under cl 13.5(a) of the Second Employment Agreement expired on 1 May 2005.

35 Dr Gray continued to plead cl 18.1(a) of the Subscription and Shareholders Agreement. Dr Gray then introduced into his statement of claim cl 18.1(b), cl 18.1(c) and cl 18.1(d) of the Subscription and Shareholders Agreement. Clause 18.1(b) is a restriction upon Dr Gray soliciting or persuading customers to cease or reduce their business with Sirtex. Clause 18.1(c) restricts Dr Gray from accepting business from customers of Sirtex. Clause 18.1(d) restricts Dr Gray from inducing employees of Sirtex to terminate their employment with Sirtex. Clause 18.2 enables Dr Gray to acquire not more than 5% of the shares of a company listed on the stock exchange of which he is not an employee. Dr Gray pleaded that each of the restraints was unreasonable and void as being contrary to public policy. Dr Gray claimed a declaration that each of cl 10.6(a) of the First Employment Agreement, cl 13.5(a) of the Second Employment Agreement and cl 18.1 and cl 18.2 of the Subscription and Shareholders Agreement are unenforceable as an unreasonable restraint of trade.

Further amended statement of claim 15 September 2008

36 This amendment to the statement of claim followed the transfer by Dr Gray of shares he held in Sirtex to ACN 132 442 114 Pty Ltd (ACN), a company of which he is the sole shareholder. Dr Gray withdrew the pleading that he is a shareholder of issued shares in the defendant and pleaded instead that he was a shareholder of issued shares in Sirtex from on or about 27 April 1997 until on or about 27 April 2008.

Further amended defence and counterclaim 30 September 2008

37 On 30 September 2008 Sirtex filed a counterclaim, together with a further amended defence, pursuant to leave granted on 23 September 2008. In this amended defence Sirtex pleaded that there was no current justiciable controversy between Dr Gray and Sirtex in respect of cl 10.6(a) of the First Employment Agreement and that as from 1 October 2008 there will be no justiciable controversy between Dr Gray and Sirtex in respect of cl 13.4(a) of the Second Employment Agreement. The counterclaim repeated parts of the statement of claim and the defence. The counterclaim then pleaded matters relevant to the geographical scope of the restraint clauses and matters showing, or from which it might be inferred, that Dr Gray has threatened to breach, and Sirtex has reason to believe that Dr Gray will not comply with, cl 18.1 of the Subscription and Shareholders Agreement. Sirtex then pleaded that Dr Gray had transferred all of his shares in Sirtex to ACN, a company in which Dr Gray is the sole shareholder and director, but that Dr Gray remains the beneficial owner of those shares in Sirtex and continues to hold the shares within the meaning of cl 18.1 of the Subscription and Shareholders Agreement. In its counterclaim Sirtex claimed an injunction restraining Dr Gray from doing the things specified in cl 18.1(a), cl 18.1(b) and cl 18.1(c) and cl 18.1(d) of the Shareholders and Subscription Agreement until three years after Dr Gray ceased to hold any shares in Sirtex or alternatively until 27 August 2001, being three years from the transfer by Dr Gray of his shares in Sirtex to ACN.

38 Dr Gray amended his reply on 14 October 2008. Dr Gray admitted that he had transferred his shares in Sirtex to ACN but denied that he remained the beneficial owner of the shares or that he continued to hold shares in Sirtex within the meaning of cl 18.1 of the Subscription and Shareholders Agreement. Dr Gray denied that Sirtex was entitled to the relief claimed in the counterclaim or any relief.

Second further amended defence and amended counterclaim

39 Sirtex amended its defence and counterclaim pursuant to my order of 1 December 2008 in the terms of a document dated 28 November 2008 and filed on 3 December 2008. In that amended defence and counterclaim Sirtex made further claims concerning the relationship between ACN and Dr Gray in support of its plea that Dr Gray continues to hold shares in Sirtex for the purposes of, or within the meaning of, cl 18.1 of the Subscription and Shareholders Agreement.

40 Counsel for Dr Gray, Mr Bennett, opened the plaintiff's case. Counsel outlined the issues in the action. The principal issue is whether the restraints in cl 18 of the Subscription and Shareholders Agreement are reasonable and must still be complied with by Dr Gray, or alternatively, are an unreasonable restraint of trade and unenforceable. A second issue, if any restraints are upheld and reasonable, is whether time has started running in respect of those restraints as a result of Dr Gray transferring his shares in the capital of Sirtex to ACN.

41 Dr Gray gave his evidence-in-chief and was cross-examined for over a day. On the morning of the third day of the trial, whilst Dr Gray was still in the course of cross-examination, counsel for the plaintiff successfully obtained leave to amend the statement of claim. The plaintiff pleaded the relevant terms of the Supplemental Deed, that the shareholder resolutions and the director's resolutions had been passed and that in or about August 2000 the Subscription and Shareholders Agreement terminated on listing. The plaintiff pleaded that by reason of those matters the restraint in cl 18 of the Subscription and Shareholders Agreement ceased to have effect at law. Dr Gray pleaded that notwithstanding those matters Sirtex has continued to assert that Dr Gray is bound to comply with the terms of cl 18 of the Subscription and shareholders Agreement. By way of particulars of that allegation Dr Gray referred to Sirtex's defence and counterclaim and its application for an interlocutory injunction.

42 Counsel for Sirtex, Mr Elliott SC, stated that the effect of the Supplemental Deed is that cl 18 of the Subscription and Shareholders Agreement terminated on listing if what counsel described as conditions subsequent were fulfilled. The conditions subsequent are the passing of the directors' resolutions and shareholders' resolutions. Counsel said that Sirtex accepted that the directors' resolutions had been passed but could not tell the court whether the shareholders' resolutions had been passed. Mr Elliott said that if, as a result of its inquiries, Sirtex accepted that the shareholders' resolutions were passed then it would not seek to agitate any further issue before the court in relation to cl 18 of the Subscription and Shareholders Agreement. I then directed that the trial should continue for the rest of that day for the purpose of concluding the cross-examination of Dr Gray. The cross-examination of Dr Gray proceeded and was concluded that day.

43 At the conclusion of the day's hearing counsel for both parties adverted to the undertaking given by Dr Gray pending the resolution of Sirtex's application for an interlocutory application. Mr Elliott stated that in the circumstances Sirtex did not press for that undertaking to be maintained. Mr Bennett stated that whilst Sirtex's counterclaim remained on foot Dr Gray did not withdraw his undertaking and observed that it was protected by a cross-undertaking as to damages by Sirtex. Mr Elliott SC then sought to withdraw Sirtex's undertaking in relation to damages. Mr Bennett resisted that. In response Mr Elliott SC withdrew Sirtex's motion for the interlocutory injunction. Thereupon the court ordered that Sirtex's application for an interlocutory injunction be dismissed with costs reserved.

44 On 10 December 2008 the solicitors for Sirtex wrote to the court and stated that Sirtex admits each of the matters pleaded by Dr Gray in relation to the Supplemental Deed and that as a result Sirtex no longer proceeds with its counterclaim.

45 Each of the parties then filed submissions in relation to costs. Dr Gray submitted that the court should make orders that judgment be entered in his favour in respect of the proceedings and that Sirtex pay his costs of the proceedings. Sirtex submitted that the court should make orders that Dr Gray pay Sirtex's costs of the proceedings, except the costs of the counterclaim, that there be no order as to costs in respect of the counterclaim and Dr Gray should pay Sirtex's costs of its application for an interlocutory injunction.

46 There was a further hearing on 19 December 2008. As I have said, there are two outstanding issues. The first is whether the court should make a declaration that cl 18.1 and cl 18.2 of the Subscription and Shareholders Agreement are of no force and effect. The second is what costs orders should be made.

Should the court declare cl 18.1 and cl 18.2 of no force and effect?

47 Sirtex submitted that the court does not have jurisdiction to make the declaration sought by Dr Gray. Sirtex submitted that there must be a legal controversy that the court has to determine before the court has jurisdiction to make a declaration. Counsel submitted that every factual element relied upon by Dr Gray to support the declaration he seeks is admitted by Sirtex and there is no legal controversy for the court to determine.

48 In Forster v Jododex [1972] HCA 61; (1972) 127 CLR 421 the respondent brought a suit in the Supreme Court of New South Wales in Equity under the Equity Act 1901 (NSW) for a declaration that it was the holder of a valid exploration licence and a declaration was made accordingly. The appellant appealed to the High Court. The High Court held that the power of the Supreme Court of New South Wales in Equity to make a declaration of right was as wide as that given to the High Court in England by O 25 r 5 of the Rules of the Supreme Court 1883 (UK). The jurisdiction is a very wide one although it may be ousted by statute [435]. At 437 Gibbs J, with whom Stephen and Mason JJ agreed on this point, said that it 'is neither possible nor desirable to fetter the broad discretion given by s 10 [of the Equity Act] by laying down rules as to the manner of its exercise' but 'the Scottish rules summarised by Lord Dunedin in Russian Commercial and Industrial Bank v British Bank For Foreign Trade Ltd [1921] 2 AC 438 at 448 should in general be satisfied before the discretion is exercised in favour of making a declaration'. In the Russian Bank case Lord Dunedin summarised rules that have been elucidated by a long course of decisions in the Scottish Courts thus:

The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor, that is to say, someone presently existing who has a true interest to oppose the declaration sought (448).

49 In Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564 the appellants claimed that their business reputation had been damaged by matters contained in a report of the Queensland Criminal Justice Commission and no opportunity had been afforded them to be made aware of the matters adverse to them in the report or to answer those matters. The appellant sought by mandamus to compel the Commission to inform them of the evidence held against them and to permit them to test that evidence and put a contrary case and certiorari to quash the Commission's findings against them. The High Court held that mandamus and certiorari were inappropriate remedies but granted declaratory relief declaring that the Commission, in reporting adversely to the appellants, had failed to observe the requirements of procedural fairness. At 581 Mason CJ, Dawson, Toohey and Gaudron JJ said:

It is now accepted that superior courts have inherent power to grant declaratory relief. It is a discretionary power which '[i]t is neither possible nor desirable to fetter ... by laying down rules as to the manner of its exercise' (Forster v Jododex at 437 per Gibbs J). However, it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions ...The person seeking relief must have 'a real interest' (Forster v Jododex at 437 per Gibbs J; Russian Bank at 448 per Lord Dunedin) and relief will not be granted if the question 'is purely hypothetical', if relief is 'claimed in relation to circumstances that [have] not occurred and might never happen' ... or if 'the court's declaration will produce no foreseeable consequences for the parties' ...

50 Mr Elliott SC referred to the decision of the Court of Appeal of Victoria in C E Heath Casualty & General Insurance Ltd v Pyramid Building Society (in liquidation) [1997] 2 VR 256. In that case the respondent brought proceedings against its auditors, a firm of accountants, for damages for negligence and other breaches of duty in the preparation of the respondent's accounts. The appellants were the auditors' insurers and were conducting the defence. The relevant insurance policies limited the insurer's liability to a maximum amount in respect of any one claim. The respondent sought confirmation from the appellants that they would indemnify the auditors and that the claims made by it in the proceeding, and by related entities in related proceedings, would be regarded under the insurance policies as separate claims for the purposes of the limits. The appellants neither admitted nor denied liability to indemnify and declined to commit themselves about the interpretation of the policies. The respondent sought leave to join the appellants as defendants to the action and amend the statement of claim to seek declarations against the appellants as to the application of the policies of insurance. The trial judge granted leave for joinder and amendment. The appellants appealed. Ormiston JA, with whom Tadgell JA agreed, said:

I have set out rather more than is ordinarily desirable from the relevant passages in three of the four most recent leading cases on declaratory relief in order to demonstrate that the respondent's contention that the jurisdiction to grant declarations is unlimited (except by statute) cannot be accepted. The 'boundaries of judicial power' do place a sensible limit on what the courts may be asked to declare. It is perhaps of no great consequence whether certain aspects of the tests as to what is theoretical or hypothetical may lead to a denial of jurisdiction or whether they go only to a discretionary ground to refuse relief. If there is no real 'legal controversy' then the courts will not embark upon a hearing which will certainly lead to the refusal of declaratory or any other relief. If it is a controversy which is not 'fit for determination by judicial declaration' then I see no reason why the litigation should not be immediately resolved.

It is harder to be satisfied that a case goes outside the boundaries of judicial power for this purpose. For example, merely because relief is sought upon what might in certain respects be described as hypothetical facts does not necessarily lead to the conclusion that the case will not be heard or relief refused. But there must be a true legal controversy, defining the rights of two or more parties, and there must be both an appropriate plaintiff and an appropriate defendant to enable a justiciable issue to be resolved (262).

Having considered what was said in these cases, I should have thought it clear enough that, at least in Australia, the power of the court to grant declaratory relief will rarely if ever fall to be denied as a matter of jurisdiction, rather than in the exercise of discretion in the circumstances of the case. Usually, at least, it will suffice (as I think it will here) to treat those matters said to deny jurisdiction as going to the exercise of discretion, even if going so far as to require, in substance, that the discretion be exercised against the making of the declarations being sought (284).

Phillips JA then referred to the appellant's contention to the contrary and then continued:

For my own part, I would be content to adopt with respect what was said by Gibbs J (as he then was) in Forster as providing proper guidance when declaratory relief is sought. In particular, I agree with what his Honour said at 435 in reference to Salmar Holdings at 202 per Mason JA and at 437-8 by reference to Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 at 448 per Lord Dunedin and Ibeneweka v Egbuna [1964] 1 WLR 219 at 225 per Lord Radcliffe. I refer also to the following statement by King CJ in J N Taylor Holdings Ltd v Bond (1993) 59 SASR 432 at 436 as reflecting what is nowadays the position:

'I can find no warrant for the imposition by the courts of a self-denying restriction on their jurisdiction to grant declaratory relief. In my opinion there is no jurisdictional limit. The court's power to grant such relief is "only limited by its own discretion" (Hanson v Radcliffe (supra) at 507) and the boundaries of judicial power: Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564 at 581 - 582. The settled practice of the courts may indicate the manner in which the discretion will be exercised in given circumstances.'

The learned Chief Justice went on to add that 'there are circumstances which are so contra-indicative to the exercise of the discretion in favour of the grant of declaratory relief that the existence of those circumstances would lead almost inevitably to the exercise of the discretion against the making of a declaration' and his Honour gave examples. Yet it was clear that the matter was treated as one of discretion, not jurisdiction (284) - (285).

51 In my view the court has jurisdiction to grant the declaration sought by Dr Gray. The matters raised by Sirtex go to the exercise of that discretion rather than its existence.

52 In Bass v Permanent Trustee Company Ltd [1999] HCA 9; (1999) 198 CLR 334 the appellants were participants in a housing assistance scheme in New South Wales who alleged in proceedings in the Federal Court that the State of New South Wales had engaged in conduct in relation to the scheme which contravened s 51AB and s 52 of the Trade Practices Act and that the state was also a person involved in a contravention of those provisions by others. The primary judge referred six preliminary questions of law to a Full Court of the Federal Court. The Full Court answered two of the questions in the affirmative subject to a qualification and made a declaration to that effect.

53 The High Court held that it was not appropriate for the court to give a declaratory judgment and to answer preliminary questions because they were not based on facts found or agreed. In a joint judgment Gleeson CJ, Gaudron, McHugh, Gummow, Hayne and Callinan JJ said:

Because the object of the judicial process is the final determination of the rights of the parties to an action, courts have traditionally refused to provide answers to hypothetical questions (Luna Park Ltd v The Commonwealth [1923] HCA 49; (1923) 32 CLR 596 at 600 per Knox CJ; Australian Commonwealth Shipping Board v Federated Seamen's Union of Australasia [1925] HCA 27; (1925) 36 CLR 442 at 451 per Isaacs J; University of New South Wales v Moorhouse [1975] HCA 26; (1975) 133 CLR 1 at 10 per Gibbs J) or to give advisory opinions. The jurisdiction with respect to declaratory relief has developed with an awareness of that traditional attitude. In In Re F (Mental Patient: Sterilisation) [1991] UKHL 1; [1990] 2 AC 1 at 82 Lord Goff of Chieveley said that:

'A declaration will not be granted where the question under consideration is not a real question, nor where the person seeking the declaration has no real interest in it, nor where the declaration is sought without proper argument, eg in default of defence or on admissions or by consent.'

By 'not a real question', his Lordship was identifying what he called the 'hypothetical or academic' (In Re F [1991] UKHL 1; [1990] 2 AC 1 at 82. The New South Wales Court of Appeal (Mason P, Sheller and Powell JJA) in Sanderson Computers Pty Ltd v Urica Library Systems BV (1998) 44 NSWLR 73 set aside a declaration on the ground that it dealt with a hypothetical question). The jurisdiction includes the power to declare that conduct which has not yet taken place will not be in breach of a contract or a law and such a declaration will not be hypothetical in the relevant sense [47].

The court said that as the answers given by the Full Court and the declaration it made were not based on facts, found or agreed, they were purely hypothetical. At [56] their Honours said that it is contrary to the judicial process and no part of judicial power to effect a determination of rights by applying the law to facts which are neither agreed nor determined by reference to the evidence in the case.

54 The declaration sought by Dr Gray is not hypothetical in the relevant sense. It is based on facts either established by the evidence or admitted by Sirtex.

55 In Bass v Permanent Trustee Co Ltd their Honours said that it is central to the purpose of judicial determination that there 'is the notion that [a judicial] determination includes a conclusive or final decision based on a concrete and established or agreed situation which aims to quell a controversy' [45]. Sirtex submits that there is no longer any controversy whether or not cl 18 of the Subscription and Shareholders Agreement has effect and hence there is no controversy to quell.

56 When this action commenced there was a controversy whether or not Dr Gray was bound by cl 18.1 of the Subscription and Shareholders Agreement to restrain from competing with the business of Sirtex as described in that clause. In their letter of 8 February 2007 Sirtex's solicitors asserted that he was and sought from Dr Gray an undertaking that he would not engage in any conduct which competes with the business of Sirtex. By their letter of 9 February 2007 Dr Gray's solicitors asked why Sirtex contended that the agreement still had any force and effect. By their letter of 9 February 2007 Sirtex's solicitors asserted that cl 18 continued to have effect because it survived termination of the Subscription and Shareholders Agreement by reason of cl 29.3 of that agreement. Thereafter Dr Gray maintained that he was not bound by the restraints of cl 18.1. Dr Gray based his claim on the argument that the restraints in cl 18.1 were unreasonable restraints of trade - not on the ground that cl 18.1 had ceased to have effect because of the provisions of the Supplemental Deed. Nonetheless, the substantial issue between the parties was whether or not Dr Gray was bound by the restraints in cl 18.1 of the Shareholder and Subscription Agreement. That controversy remained alive until the third day of the trial. At the commencement of the trial Sirtex continued to counterclaim for an injunction to restrain Dr Gray from engaging in conduct contrary to the terms of cl 18.1 of the Subscription and Shareholders Agreement.

57 It is appropriate to resolve the controversy which gave rise to this action by making the declaration sought by Dr Gray.

58 In Young P W, Declaratory Orders (2nd ed, 1984) the learned author says:

If, when litigation commenced, there was a live dispute before the court, then the court may well decide it even though at the time of hearing there was no dispute on the matter between the parties [709].

59 The court may exercise its discretion to refuse relief if the result of the proceedings will be of little practical value: Young op cit [703]. Utility does not mean that it is imperative that the court give the plaintiff relief. It is sufficient that the declaration is of some value or benefit to the plaintiff. The court may make a declaration when it will serve a useful purpose in settling the legal question at issue and when it will terminate any uncertainty, insecurity and controversy giving rise to the proceeding.

60 Making the declaration sought by Dr Gray will serve a useful purpose. It will put to an end once and for all the controversy whether or not Dr Gray is bound by the restraints in cl 18 of the Subscription and Shareholders Agreement. The declaration will formally and conclusively resolve that issue so that, except in the case of fraud or possibly some other exceptional circumstance, it cannot again be raised by Sirtex. It is appropriate that the declaration be made.

Legal principles in relation to costs orders

61 The power to make a costs order comes from s 37(1) of the Supreme Court Act 1935 (WA) (the Act) which provides relevantly that subject to the provisions of the Act and to the rules of court the costs of and incidental to all proceedings in the court shall be in the discretion of the court or judge and the court or judge shall have full power to determine by whom and to what extent such costs are to be paid. Order 66 r 1(1) of the Rules of the Supreme Court 1971 (WA) provides that subject to the express provisions of any statute and of the rules the costs of and incidental to all proceedings shall be in the discretion of the court but, without limiting the general discretion conferred on the court by the Act, and subject to O 66, the court will generally order that the successful party to any action or matter recover his costs. The discretion is very wide. The only fetters are those provided elsewhere in the Act and the rules, or any other Act and the fact that the discretion must be exercised judicially: Naidoo v Williamson [2008] WASCA 179 [39], Steytler P.

62 Although the court has a wide discretion to make what order as to costs the justice of the case requires, a proper and judicial exercise of that discretion will generally, although not always, involve applying, although not uncritically, the usual rule that costs follow the event. Ordinarily this is a just outcome because the party who turns out to have unjustifiably either brought another party before the court, or given another party cause to have recourse to the court to obtain his rights, should be required to recompense that other party in costs: Dal Pont G E, Law of Costs (2003) [7.2].

63 The rule that costs follow the event means that the party who on the whole succeeds in the action gets the general costs of the action. However, O 66 r 1(3) provides that 'where a party though generally successful in an action has, by the introduction of some issue or issues on which he has failed, increased the costs the court may order such party to pay the costs of such issue or issues'.

64 There may be circumstances that warrant departure from the usual rule that costs follow the event. One such circumstance is where the party that has succeeded has succeeded due to an amendment late in the proceedings: see for example Norwegian American Cruises A/S (formerly Norwegian American Lines A/S) v Paul Mundy Ltd [1988] 2 Lloyd's Rep 343.

65 In this case the principal issue at the commencement of the trial was whether or not the restraints contained in cl 18.1 of the Subscription and Shareholders Agreement were an unreasonable restraint of trade and unenforceable for that reason. That issue was never resolved because of the course the proceedings took.

66 Although Dr Gray succeeded in substance in obtaining the relief that he sought there has been no determination by the court whether the restraints in cl 18.1 and cl 18.2 are unenforceable as unreasonable restraints of trade.

67 Where proceedings are concluded without a determination on the merits of what was the principal issue for most of the proceedings, the question may arise as to how the court should exercise its discretion as to costs. In Minister for Immigration and Ethnic Affairs, Ex Parte Lai In [1997] HCA 6; (1997) 186 CLR 622 McHugh J said (omitting citations):

In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs: Latoudis v Casey. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order: Latoudis v Casey. When there has been no hearing on the merits, however, the court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between parties: Australian Securities Commission v Aust-Home Investments Ltd. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action: Australian Securities Commission v Aust-Home Investments. ...

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. ...

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the costs discretion will usually mean that the court will make no order as to the cost of the proceedings (624) - (625).

68 Dr Gray on the whole succeeded in the action. Prior to the amendment of the statement of claim on 3 December 2008 the principal relief claimed by Dr Gray was a declaration that cl 18.1 and cl 18.2 of the Subscription and Shareholders Agreement are unenforceable as an unreasonable restraint of trade. However, in substance the issue between the parties was whether Dr Gray was bound by the restraints in cl 18.1 and cl 18.2. The relief sought by Sirtex in its counterclaim was an injunction to enforce the restraints in cl 18.1 and cl 18.2.

69 In its written closing submissions Sirtex submitted that, from the commencement of this action until 1 October 2008, the enforceability of the restraint clause in the Second Employment Agreement was a justiciable pleaded issue between the parties. Sirtex submitted that the court ought to hold that the restraint clause in the Second Employment Agreement was valid and enforceable until 1 October 2008 and costs should follow the event with the result that Dr Gray ought to pay Sirtex's costs of his claim.

70 At the hearing on 19 December I raised with senior counsel for Sirtex, Mr Elliott, whether it was appropriate for the court to determine whether the restraint clause of the Second Employment Agreement was valid and enforceable until 1 October 2008. Mr Elliott did not press the argument put forward in Sirtex's written submissions. Mr Elliott accepted that it was reasonably arguable that the restraint clause in the Second Employment Agreement was valid and enforceable until 1 October 2008 and it was also reasonably arguable that the restraint clause in the Second Employment Agreement was unenforceable as an unreasonable restraint of trade. Mr Elliott accepted that Dr Gray acted reasonably in commencing these proceedings.

71 The appropriate order is that Sirtex should pay Dr Gray's costs of the action and of the counterclaim. In substance Dr Gray was successful in obtaining the relief he sought. On 3 December 2008 Mr Elliott stated that if Sirtex accepted that the shareholders' resolution had been passed 'it would no longer seek to agitate any issue concerning cl 18, which effectively means concede the case'. In my view, that statement reflects the outcome of the case.

72 Sirtex gave Dr Gray cause to come to the court to obtain a judicial determination that he was free to pursue his professional and business interests free of the restraints contained in cl 18.1 and cl 18.2 of the Subscription and Shareholders Agreement. Sirtex did so by effectively asserting in its letters of 8 and 9 February 2007 that cl 18.1 of the Subscription and Shareholders Agreement continued to have force and effect and required that Dr Gray comply with the restraints in that clause.

73 Sirtex should pay Dr Gray's costs of the interlocutory application for an injunction. Sirtex was wholly unsuccessful in its application. Sirtex withdrew its application after hearing but before decision. Mr Elliott submits that the restraint clause in the Second Employment Agreement was in effect at the time that the application was heard and remained in effect until 1 October 2008. However, the application was based solely on cl 18.1 of the Subscription and Shareholders Agreement. Sirtex now concedes that cl 18.1 had ceased to have effect at the time it applied for interlocutory relief.